Pay cash or finance STR?

Question

I am in a multiple offer situation and offered cash with proof of funds for a beach STR property.  I told the agent I may decide to finance (depending what accountant advises tomorrow) and what information I learn here.   I will not have a lot of funds remaining if I pay cash, but wanted to win this contract.   What are the benefits and / or disadvantages of cash vs financing.   Interest deduction, what else?   It is a 525K purchase price, 25% down.   My premium savings would earn about 1.5% -2% less than mortgage rate .  I hope to buy another property this year, either at the beach or locally in Triad NC for either another STR, flip or mid term rental.   Thanks for any advice!

Brittany Minocchi · Answer

If you want to make a cash offer to win a deal, you could do delayed financing - it's similar to a cash out refi, but it's based on the purchase price and loan costs, not appraised value. So you could turn around and pull out 75% right after closing, leaving 25% equity in the property.

AJ Exner · Answer

Wanted to second this, the clients I have clients who leverage the benefit of 'cash closings' (speed and offer acceptance) but don't want to tie up their capital to wait on seasoning periods of most long term lenders (6 months or more). It does require two closings but definitely helps on the acquisition side of things.

Make sure to be up front with any lender that you work with that it is the intended goal, as some lenders do not allow delayed financing.

Good luck! Happy to help where I can.

Andrew Steffens · Answer

Personally I would finance if you can pull off the financing in the time to close.  If not, ask your lender the seasoning requirement to cash out refi.  Make sure to compare the terms.

Karen Bolyard · Answer

Thank you for your input! Yes, I did an escalation clause and a local mortgage lender and won the deal with option to finance.   It’s actually probably closer to 2.5% difference of my mortgage rate and my savings, but I am still leaning toward financing. I can always pay it off early or hopefully refinance.   I would like to get another property by third quarter.

JD Martin · Answer

Well, within reason, having available liquidity is almost always preferable to being house rich and cash poor. So if the delta on your savings versus interest costs is only 2%, and it appears you're a RE professional, your tax advantages will probably make that a wash meaning there's no advantage at all to spending all your cash unless you are just afraid of making a payment.

Given what you've said, I'd definitely finance. As long as you can make it happen in the window that won't lose the deal. Assuming you're using a lender in the same state/area you should have at least a 30 day closing window to be safe.

Pay cash or finance STR?

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