You’ve decided that turnkey real estate investing is right for you and you’re ready to take the plunge. Congratulations! Once you’ve chosen the perfect property, the only question left is this: should you finance or pay cash? Which is more advantageous to your bottom line?
The simple answer is that there are advantages and disadvantages to both. Let’s outline some of the pros and cons for you to keep in mind while you decide whether to finance a property or pay for it outright.
The Pros of Financing...
The biggest argument for taking out a mortgage in the great “finance or pay cash” debate is that you put less down when you take out a mortgage on a property. You’ll use much less cash to start generating monthly rental income on your turnkey property.
Another big plus to financing? It frees up your money to purchase multiple properties in different cities or even different states, helping you diversify your real estate portfolio and minimize risks.
…And the Cons
If you’re financing turnkey real estate for the purpose of purchasing multiple investments, it’s important that you’re well-versed on the housing market in each area you plan to buy or are working with an investment company that can guide you. Investing in areas in which you aren’t familiar could lead to financing properties that depreciate in value, leaving you owing more than your investment is worth.
The Benefits of Paying in Cash
On the flip side, cash buyers don’t have to suffer through a time-consuming and intensive mortgage application process, making the deal sail through much faster. A cash deal is incredibly attractive to sellers, as well, because it removes the hurdle of waiting for a buyer’s financing to be approved (a common reason why real estate contracts fall through).
Another plus? Cash buyers don’t pay interest. Investors have to weigh the risk/reward factor of having additional cash to invest elsewhere versus avoiding finance fees.
When deciding whether to finance or pay cash, investors often opt to pay cash for turnkey properties if they expect that the market will roller-coaster upwards rather quickly. If you pay $500,000 in cash for a home and the value increases to $600,000 over a few years, you’ve profited $100,000 without having to pay the bank a dime.
Why Some Warn Against Cash Real Estate Investments
The thing that makes investors most nervous about paying cash for turnkey real estate properties is that it ties up a large portion (if not all) of their liquid assets. This prevents them from having the ability to purchase additional real estate investments or branch out and invest in other areas such as starting a business or buying stocks. Should you need the cash in case of a financial emergency, you’ll have to sell your investment in order to free it up.
Finance or Pay Cash? Which is Best for You?
For investors seeking to purchase a small amount of turnkey real estate for the purpose of making passive rental income as they watch their property appreciate over time, it may be that financing is the best and safest strategy.
Investors who are hoping to purchase multiple properties will need to consider their financial situation, the housing market, and their overall goals. There is no one right answer when it comes to real estate purchasing strategy, just as there isn’t one type of investor. If you’re working with an experienced turnkey real estate advisor, talk with them and have them present you with all of the potential outcomes so that you can make an educated decision and better mitigate any potential risks.
Smartland is Northeast Ohio's largest real estate investment firm, specializing in turnkey properties. Our team combines financial savvy with expertise in property management to help clients identify and invest in alternative investment vehicles that have strong growth potential.