For home buyers and investors, deciding to finance a real estate purchase or pay cash in full is a major decision. Each strategy has its own advantages and risks. Knowing these factors may help you figure out which approach best coheres with your financial goals and timeline for investment growth.

Cash

Immediate Equity
With cash, you own the property outright from the get-go. This is to say that equity is going, 100%, into your corner–no monthly mortgage payments or interest costs here!

Negotiating Power
Cash buyers are often more powerful buyers. Sellers want to be sure that the deal will close, so a bid without financing provisions may well be enough to tip the scales toward success. This can mean lower purchase prices or easier negotiation.

Lower Closing Costs
Purchasing with cash can earn you a pass on a number of loan-related fees, like origination or appraisal charges. Buyers who take out a mortgage will still need to pay for certain closing costs (such as title, inspection and property taxes), but overall expenses should be less than what they would have using lending.

Opportunity Cost
Concentrating a large sum of money in one property means missing out on the potential to invest that capital elsewhere. If you have other high-yield investments available, using all your cash on a single property may limit your overall returns.

Financing (Leveraging)

Increased Buying Power
Financing can let you buy a property with only a portion of the money needed, which leaves part of your resources open for other investments or opportunities. By putting leverage behind your dollars, you might acquire more properties or widen the scope of your investment portfolio.

Tax Benefits
Mortgage interest is often tax-deductible. Such help at the federal level may offset some or all of your borrowing costs and it can lower how much tax you owe in total.

Liquidity and Flexibility
One advantage of keeping your cash instead of putting everything into a single investment is that it gives you greater flexibility. You can hold the funds for emergencies or diversify your investments by buying a second property, or jump on new opportunities when they come along.

Risk of Debt
Financing means you have to pay a monthly mortgage and interest charges. This can eat into your cash flow and potentially expose you to risk if market conditions suddenly change or rents fall. One key step in your annual or semi-annual budget planning and cash analysis is to allow for these payments.

Making the Right Choice

The choice between paying cash and financing hinges on your personal financial situation and investment strategy. Here are some points to consider — —

• Tolerance for Risk: If you feel comfortable with monthly mortgage payments and prefer to keep cash on hand, then financing can be attractive.
• Liquidity Demands: If you want to use your funds for other investments, it makes sense to borrow. If instead you like paying off debts and seeing things clearly–to have immediate ownership–the cash method is attractive.
• Market Situation: In a seller’s market, cash offers put you at an advantage. Leverage, on the other hand, may let you diversify and buy more properties at favorable prices in a buyer’s market.

Bottom Line

Both paying cash and leveraging with financing can be successful real estate investment strategies. Consider the pros and cons of each method in the light of your financial goals, long-term strategy, and willingness to take risks. Ultimately, the way that works best for you is most likely to give you ongoing returns while sustainably reaching your overall financial goal(s). Contact us today to learn more about real estate investments!

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as financial, legal, or real estate advice. Every real estate transaction is unique, and readers are encouraged to seek professional advice tailored to their individual circumstances. We strive to keep the information accurate and up-to-date, but we make no warranties or guarantees regarding the completeness, accuracy, or reliability of the content. For specific guidance, please consult a licensed real estate professional or legal advisor.