Many investors are often caught in an unusual dilemma, unable to decide between cash upfront or the financing route. Paying cash and securing 100% equity on an investment property seems straightforward. However, getting a mortgage also offers unique benefits you must consider before venturing into the market.

In this post, we’ll share a simple cash vs. mortgage comparison and the pros and cons of each option to help simplify your decision.

Pros & Cons of Paying Cash Upfront for an Investment Property

Pros

Buying an investment property with cash gives you 100% ownership right away, along with the following benefits:

1. More Negotiating Power

Offering cash upfront is the best way to score a bargain in the real estate industry. Yes, every buyer aims to get the best value for their property. However, the prospect of completing 100% payment quickly can entice them to reduce their asking price and negotiate a win-win deal.

2. No Monthly Payments

By opting for cash payment, you don’t have to secure a mortgage and pay monthly installments for 5-30 years. Many borrowers experience income disruptions or other financial issues, resulting in delayed or failed payments and even foreclosure. According to Experian, mortgage payments account for 33% of an American household’s monthly spending.

3. No Interest or Closing Fees

Purchasing a rental apartment, house, or other property on cash can avoid interest and fees. In 2023, the average 30-year mortgage interest rate is 6.42%. So, if you purchase a property for $200,000 today, you’d have to pay over $450,000 to secure ownership. This cost will include taxes, closing fees, and other essential expenses.

Cons

Below are some of the key drawbacks of purchasing an investment property on cash:

1. Expensive

Buying an investment property is not an option for most investors. You must have access to liquid cash to complete such a huge transaction.

2. No Tax Deductions

The IRS doesn’t allow buyers to itemize their taxes if they opt for cash transactions. In other words, you’d have to pay more taxes for your property.

Pros & Cons of Buying an Investment Property With a Mortgage

Pros

Here are a few reasons you should consider getting a mortgage for an investment property:

1. Higher Return

Getting a mortgage for a residential property means securing ownership in the long run with little out-of-pocket expenses. Depending on your loan type, you can skip the downpayment or put down as little as 3.5%. After completing the closing fees and other expenses, you can enjoy a much higher ROI from rental income or a future sale.

2. Liquidity

You can save your cash for other expenses, investments, and financial goals by opting for a mortgage. Paying cash offers 100% equity. However, it also reduces your liquidity. You can purchase multiple investment properties and diversify your portfolio by getting loans.

3. Opportunity Costs

By paying cash upfront for 100% equity, you forego the chance to invest in other high-yield investments, such as stocks, REITs, mutual funds, etc. These financial instruments offer an average of 10.67%, higher than real estate.

Cons

1. Interest

Interest is the biggest disadvantage of getting a mortgage for an investment property. As an investor, you’re looking to maximize returns. However, you’ll pay a significant amount on top of your loan principal during your tenure.

2. Mortgage Insurance

If you don’t put down 20% initially, your lender may ask you to get mortgage insurance until you reach 20% equity. This will increase your cost of ownership further.

3. Foreclosure Risk

You’ll likely have to use your investment property as collateral to secure a mortgage. Hence, in the event of a foreclosure, you’ll have to forfeit ownership and incur substantial credit damage that will impact your ability to secure a future loan.

 

Wrapping Up

Paying cash vs. getting a mortgage has been an ongoing debate in the real estate industry. Cash upfront offers security to investors without the hassle of interest, monthly payments, and closing costs. Conversely, financing helps maintain liquidity at the price of interest, allowing you to use your money for other investments and purposes.

Therefore, it’s your decision. So, consider your needs, preferences, and financial situation to set your goals accordingly.

For more interesting reads related to real estate investing, tune into CHRE immediately. You can also explore our vast options of investment properties in Rio Grande Valley.