Convince Me Why Buying All Cash Is Beneficial

98 Replies

Hey Guys,

The name of the game has always been leverage for me. Building wealth can absolutely be accomplished by using credit, OPM, etc.

Every now and then, I come across that investor who buys his properties all cash and I can’t help but ask, WHY!?

I’m an investor-friendly agent in NYC so some clients tell me they prefer not to have the interest as an extra expense, some clients prefer the instant equity, some clients prefer the easy liquidation, etc.

Why do YOU prefer buying all cash? Im looking more for subjective reasoning why you prefer all cash because I’m sure people in different circumstances have different reasonings.

I’ll always be a leverage guy but I would love to hear why cash is king to your investing careers. Thanks in advance for any responses!

@Francois G. First I must say I completely agree that using leverage is a great way to build wealth over time, especially given the interest rates we have seen this year. Money is fairly cheap to borrow.

But, I work with many clients that pay all cash for investment properties. There are multiple reasons and it comes down to your individual goals. In the competitive market of the Bay Area, cash offers have a big advantage when buying properties that get multiple offers. Not having the loan and appraisal contingency helps an offer look more attractive. Also, some investors pay cash because the increase in cash-flow from having no loan benefits their day-to-day life... granted you could also borrow from the equity in the properties if needed.

We use leverage most of the time, but over the last 6 weeks we have made two all cash purchases.  Advantages of using cash: (1) speed & simplicity:  in both of the deals, we were getting a great price but our lender was bogged down with everything related to Covid19; we had the cash, instead of 12 calendar day process we closed in 2 days.  (2) small deals:  we try to do small deals in cash, because the fees associated with any loan have a disproportionate impact on our bottom line in small deals.  As an example, all hard money lenders have a flat rate inspection fee; if is see that fee is greater than 1% of my purchase price that is an indication that I should be doing the deal in cash.  

The pandemic forced us to do some things that we did not necessarily plan on doing, but once we did them it opened our minds to different possibilities.  After having made two of our last three purchases in cash, we see some really big advantages and plan to do more of it.

...easy, because all cash buys:

1 - ...increases how much the property costs the investor,

2 - ...if the property is negative cf with leverage, you can pay for all of your negative cash flow upfront

3 - ...It increases the risk you have in the property

4 - ...it limits the amount of properties you can gain control over

5 - ...it reduces the value of your equity

6 - ...it eliminates all of the free equity you get from appreciation and the tenant's rent

7 - ...it eliminates the power of compounding from your REI

8 - ...it dramatically slows down your ability to quit your job and replace it with rental cash flow

9 - ...it takes you longer buy your next property

10 - ...it delays the date of profit since your accumulated cash flow has to equal what you paid for the property out of pocket bore you can record any profits

11 - ...it,...wait a minute,..., you were asking for the reasons where buying all cash was a GOOD idea.  Sorry.  Forget what I said, sorry...my bad.

Some reasons that come to mind:

1: As mentioned above, easier and more favorable closing.

2: If the buyer is seeking cashflow from the start (e.g. for passive income in retirement).

3: If the buyer is already leveraged elsewhere (perhaps overly) and wants to reduce their overall leverage risk.

4: If the buyer has already exceeded the amount their bank will lend and doesn’t have time or inclination to shop around.

5: If the ownership timeline doesn’t support leverage as a strategy (perhaps the fees and effort exceed the opportunity, maybe a fix and flip).

At a certain age, there is a psychological bump you get from owning a valuable asset "free and clear."  Although property taxes, insurance and maintenance are forever, owning rental real estate free and clear "feels" like owning an annuity.  

@Francois G. ,

Cash is king.    We only buy using cash deals, because when properties are so low valued, no bank will take a risk or want to be involved with something under $40K. Banks don't like risk.

The cash deals work when the seller wants an easy out (ex: inherited a house, needs a lot of work), no problems, no hiccups or someone backing out, and the buyer is okay with that because of such a heavy discount to the price.  Mortgage wouldn't work on this, because the bank might not back it if it has too many possible problems.    I'm not talking a few thousand off, I'm talking a much wider spread that compensates the cash buyer for taking on the risk.  


If you are in a hot market, buying cash and then financing after the close would strengthen offers; however, this means you have to have a lot of money for many markets.  I agree paying interest is bad, but when it is <3% you can do a lot more with your money if you buy and get a mortgage.

Originally posted by @Theresa Harris :

If you are in a hot market, buying cash and then financing after the close would strengthen offers; however, this means you have to have a lot of money for many markets.  I agree paying interest is bad, but when it is <3% you can do a lot more with your money if you buy and get a mortgage.

 You're not paying the interest.  The only thing you should be paying is the DP

Originally posted by @Kevin McGuire :

Some reasons that come to mind:

1: As mentioned above, easier and more favorable closing.

2: If the buyer is seeking cashflow from the start (e.g. for passive income in retirement).

3: If the buyer is already leveraged elsewhere (perhaps overly) and wants to reduce their overall leverage risk.

4: If the buyer has already exceeded the amount their bank will lend and doesn’t have time or inclination to shop around.

5: If the ownership timeline doesn’t support leverage as a strategy (perhaps the fees and effort exceed the opportunity, maybe a fix and flip).

 As I read your list, I don't see any reasons to buy all cash.  What I do see, are reasons to NOT buy that specific property

Originally posted by @Joe Villeneuve :
Originally posted by @Theresa Harris:

If you are in a hot market, buying cash and then financing after the close would strengthen offers; however, this means you have to have a lot of money for many markets.  I agree paying interest is bad, but when it is <3% you can do a lot more with your money if you buy and get a mortgage.

 You're not paying the interest.  The only thing you should be paying is the DP

 I guess the interest is a tax write off. 

"Why do YOU prefer buying all cash?"

1) You should ask and get a discount for cash.

2) Quick close without a financing contingency

3) Some properties won't qual for financing due to things like CapEx needed and you can buy those.

4) Prop had operational issues which you can fix and stabilize and then do a cashout refi with a lot better terms.

Originally posted by @Theresa Harris :
Originally posted by @Joe Villeneuve:
Originally posted by @Theresa Harris:

If you are in a hot market, buying cash and then financing after the close would strengthen offers; however, this means you have to have a lot of money for many markets.  I agree paying interest is bad, but when it is <3% you can do a lot more with your money if you buy and get a mortgage.

 You're not paying the interest.  The only thing you should be paying is the DP

 I guess the interest is a tax write off. 

 Yes, but that's a bonus...a reward at the end of the year.  However, you don't get it all back, you only get part of it back based on your tax bracket.

What I meant is the tenant is paying at for you from the rent.

@Francois G. I don't get why you need convincing? Its a free country. You use leverage, cool beans. Other people don't. Also cool beans. Different doesn't mean worse.  

Here are the reasons I can think of for buying all cash: 

Strategic acquisition reasons: 

-Cash offers by their nature don't have financing contingencies and thus are more likely to be accepted. Useful in hot markets. 

-Cash can command a discount to asking 

*for both of these I've usually seen people refi later. 

Financing reasons

-Getting loans for under $75-100k is hard in some areas, thus cash makes the deal easier to close. 

- Highly levered in other areas/unable to get loans for various reasons. 

-They plan to use a more difficult loan product (VA, FHA, USDA). They come in all cash and then go through the loan process at their convenience.

Psychological Reasons

-Some people simply don't like debt. 

Investment Strategy

-Most people in this forum are using RE as a means to make money. Another group exists whose money making skills lie in other areas and need a place to store it. RE also is great at storing value and using leverage is counter productive. Say someone has liquid assets of $2.5M and they want to put $250k into a non correlated investment that gets 3-5% cash flow, but mainly they want an stable inflation hedge. Bonds don't get them there right now. If they invest in RE it makes way more sense to buy one SFR rather than get the five that would come if they used leverage.

I have no doubt more reasons exist for buying all cash, but those come easily to mind. 

@Joe Villeneuve Personally, I’ve always used leverage. But the original poster asked why someone would, and these are all reasons I’ve heard and I find all are valid depending on the circumstances of the individual. I know of a very successful real estate investor who retired in her 40’s with over $5M net and paid off the bulk of her debt to have the cash flow. Debt and risk go hand in hand and I can’t make blanket statements of what people *should* do without understanding their overall risk exposure and personal risk tolerance.

As for the notion that the tenant pays the interest, I think that confuses the issue: the tenancy generates income, the property has expenses, one of which may be interest (and which may have tax advantages). It’s like saying the tenant pays for upgrades, but that doesn’t alone mean I should make them. As a business, you optimize according to your goals.

Bill F. covered pretty much all the reasons we buy with cash.

  • We get good deals with cash offers & fast closings.
  • We don't like debt.
  • We like having control of our assets. (We aren't stock market lovers)
  • We got into REI looking for a place to put our cash that would give us better returns than keeping it in the bank. Our houses are now our bank.
  • We aren't interested in building an empire, so "limiting" our purchasing power by using cash is not an issue. 
  • We buy what we want, when we want, so why should we care if someone else thinks we're doing it "wrong"?
Originally posted by @Kevin McGuire :

@Joe Villeneuve Personally, I’ve always used leverage. But the original poster asked why someone would, and these are all reasons I’ve heard and I find all are valid depending on the circumstances of the individual. I know of a very successful real estate investor who retired in her 40’s with over $5M net and paid off the bulk of her debt to have the cash flow. Debt and risk go hand in hand and I can’t make blanket statements of what people *should* do without understanding their overall risk exposure and personal risk tolerance.

As for the notion that the tenant pays the interest, I think that confuses the issue: the tenancy generates income, the property has expenses, one of which may be interest (and which may have tax advantages). It’s like saying the tenant pays for upgrades, but that doesn’t alone mean I should make them. As a business, you optimize according to your goals.

The tenant pays the interest because the source of the funds for payment is the rent. If the property had negative CF, the amount that was negative would be the amount that was paid for by the REI...because they would be the source of the funds.

Debt and risk do go hand in hand.  In the case of a homeowner's own home, the homeowner is two of the three parts to risk.  The homeowner is "at risk" and is "the risk", but that risk is shared with the bank.  The cash (and equity) that is in the house is the "what is at risk"...the third part of the Risk formula.  The part of the cash/equity that is contributed by each person involved (bank, homeowner), is directly proportional to the size of their risk.

Rental properties follow the same Risk Formula. The difference is the size of "what is at risk" decreases instead of increases with each month because of the cash flow. When the accumulated CF is =/> the DP (the cash contributed by the REI), the REI has no more cash "at risk". The increase in equity (cash input from the tenant's rent and appreciation) is free to the REI since they are NOT the source that pays for them.

In addition, as the equity (free) increases, it dilutes the REI's equity contribution too since the free equity has a 1 to 1 ratio of cost to value. The DP on the other hand had a 1 to 5 ratio of cost to value. As the two are combined, the REI's "ratio" is reduced with each increase in the "free" equity.

@Francois G.

Usual hot market... more appealing to seller... can refi later at my own leisure (especially when rented... may be the only way “good” way to buy a property to reno/flip (you know to qualify for a mortgage you need a “functional” house, not necessarily pretty, right?)... opportunity cost so low better to deploy the cash than pay interest for money you don’t need (yes, you need to be “wealthy” to afford not to borrow/leverage)

Like everyone else, my reasons are personal. I buy dilapidated or just trashed houses fix them and then rent them. Banks are not too keen to lend on these types of properties. Some of these purchases require cash-court house step auctions, on-line auctions. Others, like bank REO, will sell to me for cash at a lower price point than someone hoping to get a loan, so I save on the purchase price, and do not have the hassle of getting a loan. For example I bought a 4 unit apartment building with 20+ storage units for $132k. County just completed its reassessment. They placed the value at $335k. The County assessment values here are generally at or lower than the selling price so folks don't appeal. Another buyer bid the same amount on this property, but with a loan. I got it. Freddy MAC foreclosure. And I know about the other bidder as he stopped by and asked what I paid...and we talked. Cash got me $200k in equity in less than 2 years. And not many folks could compete with me as they did not have $132k to throw at the contract.

I also invest in property for a balance with my other investments.  I look at the big picture--is the income from rent, equity increase beating the stock/bond market?  IF is I am happy.  I make more money with cash purchase by much lower closing costs by not having a loan, and paying interest.  The rent pays me instead of a loan's interest.

I also am older than most here on BP. I have 5 adopted kids. The oldest is 37 and special needs, then I have two teens and a 7 week old baby I just adopted. So, if something would happen to me, I do not want to leave these kids with a huge debt hanging over their inheritance/Trusts. With rentals if something goes wrong, one can loose the investment to foreclosure or be overwhelmed with repair or CAP EX costs pretty easily when there is only a small margin of cash flow. So, I feel much better having the rentals paid off.

I am not concerned about hiding the assets, or their ownership.  In fact where I invest, by state law, the owner and contact for the owner must be declared to each tenant in the lease or rental contract.  I reduce risk by keeping the houses in good shape and having excellent insurance.  So not owning anything but a tiny bit of equity to prevent being sued is not a concern to me.

And lastly, because I can!  Most folks saying to borrow money, then refinance to take out the equity to start buying the next property can not afford to buy a bunch of houses for cash.  They have to use other peoples money or they have no way to buy.   I'm not putting anyone down in that situation, everyone has to start somewhere, but as life goes on, if you can pay cash, many do.

@Francois G.

1. More likely to get a discount on the purchase price

2. No drama dealing with banks, etc

3. Possibly a better sleep schedule

4. Less pressure to fill a vacancy leading to better tenant selection

5. Less chance of deferred maintenance on longterm holds as you have plenty of cash

6. Much lower likelihood of foreclosure

7. Quick exit as you can sell at whatever price you choose giving added flexibility for 1031 exchange

8. Option to sell with seller financing

9. You can get a refi or Heloc at any time since you have 100% equity

10. You can get a private money loan secured by your free and clear property to strip equity

The #1 thing with cash transactions is that I think you have more room to negotiate, because your offer eliminates some risks for the seller. I have never done an all cash deal myself, but I am friends with someone who does all cash, or uses private / hard money lenders, and offers a 10 day escrow. He gets more deals done, and often is able to low ball more often, because he has reduced the uncertainty about not closing the deal. A lot of sellers will take less money to have greater certainty of a closing, and this gives him an advantage. 

I should add, this guy, like many cash investors, does refi after rehabbing the property and improving rents. So yes, he's using debt also - but acquiring in cash can make closing at a good price much much easier.