Pros and Cons to paying cash for a house?

Question

I'm looking for my first SFH to buy ans rent out. I'm looking for houses around 90-100K. Is there a reason not to pay cash for a house if I can? I know it will take longer to get my return on money in my pocket. Anything else? Thanks

Russell Brazil · Answer

Pro: Leverage creates better returns. It is as simple as that.

Con:Leverage creates more risk.

Michael Noto · Answer

@Heather Ippolito I think the answer to this is all based on your investing strategy and tolerance for risk. Personally, the strategy I use is very similar to @Joe Villeneuve and if you are thinking of building a sizable portfolio I would recommend looking into that strategy more.

However, if you just want to own 1 or 2 rentals and have them paid off in the next 10-15 years than paying cash may not be a bad idea.

The way I look at things is "how long is it going to take me to get my cash back on this deal"

Joe Villeneuve · Answer

Do you need another reason for not paying cash...and leaving it in the house?

Let's do some simple math:

If you put 100k in cash in a house you are 100k behind. Now, you get 1300/month...or 15,600/year back. That means, it will take you 6.5 years before you will break even...assuming nothing goes wrong.

Put all 100k into the house, refinance, and get it all back, do it again, refi again, invest it again, refi again, etc...and your cash lives forever.

Chris Stromdahl · Answer

That's pretty much it.

For me, I could use 100K to buy one house and produce approximately $1300/month in cashflow.

OR

I could use the 100K to put down payments on 5-6 houses, each of which will generate approximately 500-700/month cash flow. Thats $2500-3500/month that I use to payoff the $500-600K in debt, and move forward from there.

There is alot I can do with 100K that will produce more the 1300/month.

Wilson Churchill · Answer

Pro: Paying cash can command a discount. The seller may accept an all cash offer below their asking price rather than an offer tied to a mortgage at full price, knowing that the buyer will be able to close and close quickly.

Adam Bartomeo · Answer

There is a cost called "Opportunity Cost". This means that when you use your money, time or resources in an are and are unable to take advantage of other opportunities. RE is not a liquid asset and it takes time to get your money out of the investment.

I would suggest using financing to not only leverage your investment but to also have cash on hand to take advantage of other opportunities that arise.

Life happens, cash on hand helps with the unforeseen future.

Ron S. · Answer

Its all about your risk tolerance. If your long term goals are to own multiple properties then dont pay cash. If you just want one or a couple then cash would be fine. Not everyone wants to buy property after property and keep getting farther into debt.

Heather Ippolito · Answer

Very helpful. Thank you @Trevor Ewen!

Heather Ippolito · Answer

I still have so much to learn so the refinancing, etc is all foreign to me but thank you!!

Trevor Ewen · Answer

@Heather Ippolito

Other People's Money is core to the strategies of many investors on the forums. I think what a lot of people get wrong is that it doesn't have to be... it's just a way to get some more momentum.

@Chris Stromdahl summed it up simply. I would only add: I think everyone should borrow up to their risk tolerance. If you are very a-risk, go for higher downpayment non-recourse loans. My wife and I routinely pay 25% down. It usually results in a weaker cash-on-cash, but it gives us a nicer ceiling and better interest rates. Obviously, your ceiling is very good with all cash, and interest rates are nonexistent.

Go with what makes sense for your strategy, try not to get bullied into 'doing the right thing.' Also there is a great Ask BP #27 from @Brandon Turner on the topic here.

Pros and Cons to paying cash for a house?

Pros and Cons to paying cash for a house?

Most Popular Reply

10 Replies