is it a smart move to buy a house for cash money? it seems like a smart move-but im not sure.
Of course it is, if you know what you’re doing! That question is very vague and can be answered in a multiple amount of ways. What do you plan on doing with said purchased home? Quick profit or long term gains?
You can often get better price for all cash, because the seller doesn’t have to worry about your actually obtaining the loan you applied for.
With cash, you can also purchase homes that the banks don’t want to finance. It might be a fixer, or it might be a house with some problem that you can fix and turn it into a finance-able home.
If the banks don’t want to finance a home and you have all cash, you are in the position to drive a very hard bargain.
If you are buyiing and holding, there is notig wrong with having a property that is fully paid for. If it is a rental, it will have very good cash flow, and if it is your own home, there is real comfort in knowing that, no matter what, the bank can’t take it away from you.
Real estate is no better than any other investment except for leverage. If you buy a house for $100,000 cash and it goes up 10% then the house is now worth $110,000 and you have just made 10% on the money you have in the house (about the same as the stock market goes up on average every year). If you had bought the same house and put 10% down on the $100,000 house you have $10,000 in the house and borrow $90,000 and the value of the house went went up 10%. It is still worth $110,000 but since you only have $10,000 in the house and it went up $10,000 you made 100% on your money.
You also will likely run out of money before you run out of deals. Leverage is what will make you rich. A while back Donald Trump bought the land under the Empire State building for a billion dollars. He didn’t write a check for a billion dollars, he borrowed a billion dollars. The rent from that property funded his lifestyle of Lear jets and mega yachts. And when he sold it he made a pretty profit on the other side also. What he did is control a billion dollars in real estate and lived the lifestyle of a person that controlled a billion dollar property through the magic of leverage.
OR…
You can buy the houses all cash then refi after you fix up and get a tenant in it. Just did one that way, I bought it so far under market value that I had no problem getting my purchase plus rehab plus closing costs both times out of the deal. The first closing is very cheap when no banks are involved(I always use attorneys) That way, you can use the same $$$ to buy many houses over and over again. At an extreme discount that is. I just started doing this, can’t say it is a winner yet, but the first one sure went well. I had a huge advantage with this house, I really doubt anyone would have financed it the way it was(total cosmetic disaster), so an all cash offer with no financing contingencies won.
Bluemoon beat me to it. No sense tying up every last cent in one project if you can do 10 projects with the same funds.
While the math is correct, the only advantage of doing so is buying multiple houses at the same time not one at a time. 100% return or 10% return, if he buys one house only then he only made $10k regardless of the amount invested.
Buying cash increase the profit margin by reducing holding costs on a single transaction, but reduces the purchasing power and limits him to the number of houses he can buy.
Buying on financing decrease the profit margin per transaction, but allows him to do more deals.
Ps- Fadi, It’s a she not a he. :smile
on the internet, everyone is unisex to me! 
The name tipped me off. 
I can’t tell you what is right and what is wrong, buying with cash can save you alot of money for short term deals, I have beat out offers that were 15% higher than mine by paying with cash. So on a 100,000 purchase I saved 15,000 by offering cash, not to mention the lending fees that I would have paid, plus if you plan to sell quickly and were borrowing you may run into a prepayment penalty issue.
Am I the only one who buys all cash then refi’s?? Doesn’t anyone else see the benefits?
jb,
The last couple I bought for all cash, rehabbed, then added to my rental portfolio. The lenders are telling me that I need at least six months title seasoning before they will do a cash out refinance so I get my money back out.
Are you running into this too?
I have bought a few investment properties cash and just planned on keeping them with no mortgage,enjoying the added cashflow…The savings is enormous on closing cash…I have properties with mortgages as well and it sickens me when I figure out what I spent between all the fees,closing costs etc…I know most here love to do the no money down thing and leverage to the sky but it has alot of risk…I for one do not like being over leveraged because as we are seeing now it’s impossible to simply sell the property and settle that debt…If you are managing yourself then I guess I would view it different…I’m very happy getting %15-%20 ROI annually when I buy with no mortgage…I know I can get double that or more going the almost nothing down route…But you have to ask yourself if you have this money in the bank in a money market fund getting %5 a year then why should I not buy these rental properties all cash…
Well things change daily, the one I did, I had no problem getting purchase plus rehab out of it, now to get more out based off appraisal, yes, I would need 6 months.
Risk is relative. I don’t know if it is lot of risk. I guess I don’t understand what risk there is to taking out a mortgage. I guess the risk is that the house will burn down and you have this mortgage to pay. You have insurance for that. If the risk is that the tenant will move out and it will sit empty with nobody to pay the mortgage? That would be the same if you have all cash you just don’t leave houses empty. Is the risk that there will be no appreciation on the house and you will owe more than the house is worth? Since the mortgage is paid by the tenant’s rent, you don’t really care if the value goes up or down.
Actually you have less risk if the house in mortgaged than paid off in full. If you cause a mosquito to enter the house and bites your tenant and he wants to sue you most lawyers will look to see if there is anything that they can recover if they win even before they decide if the case has merit or not. Because a judgment takes a subordinate position to the mortgage holder the paid off house is a lot more attractive than one that is leveraged to the rafters. You only give them a target of the amount of insurance you have on the house.
I guess I don’t understand what risk there is to taking out a mortgage
The risks are many…Its all relevant but there are certain people like myself who don’t like to be leveraged heavily…I don’t mind using mortgages by any means because I know in the event I have to I would pay off the mortgage…But many do not go into real estate deals with this same mentality…They simply jot down the numbers and add in all the expenses ,mortgage the house to the hill and then the boiler goes,the roof needs changing,tenants move out or don’t pay or both and damage the property,taxes come due,water bill comes due,the bank is escrowing for next years taxes and insurance…And then you still have that note due no matter what…See what I mean…And as for liability, I have insurance for that and multiple LLC’s…In business you cannot avoid liability,there is simply no way…So if you want to make yourself believe that by having a mortgage you are somehow sidestepping an attorney’s wrath, you are sorely mistaken…I have seperate corporations for all my business assets and all seperate LLC’s for my properties that have no mortgages…So to say that I have more risk by having my investment properties completely free and clear in comparison to having %100 mortgages…I say take a look at what’s going on around you in the real estate world now…You think 1 trillion dollars in bad debt is better…I would have to disagree…Keep in mind if you are using leverage properly and I mean by having that amount in cash for back up then I say you are right,but %95 of investors overextend themselves and have no backup plan but to sell…
Just in case someone is interested…
Buying all cash cost the seller 12 percent… I am going to mitigate the cost of money every step of the way… And keep in mind that even if you have the money it still cost you to use it…
Not certain why you would pay all cash when you can just buy Sub2…
BTW… Fadi… I am not unisex…
Michael Quarles
There is nothing wrong with buying with cash. My father bought all his rental property when I was growing up with cash. But if you want to understand how to deal with all those “risks” that you mentioned I will be glad to help you out.
I’ve done everything from all cash to 100% financing. Depends on the situation. Short-term and/or small deals under 100k is all cash; long term and bigger deals (typically, 500k+) financing as much as possible.
Its a business decision and understanding the cost of each scenario.