Why Buying Turnkey Investment Property With Cash Is Better Than Financing
As the cliché goes, “cash is king.” It’s true in almost every financial investment and business endeavor. For a turnkey real estate investor, there are some large benefits to using cash for purchases rather than financing. The biggest pro of turnkey real estate investing is cash flow; the single biggest drain on your bottom line with a turnkey property very well could be a mortgage. But cash purchases offer other big advantages as well in terms of security, flexibility and more.
No Risk Of Foreclosure
When you purchase in cash, the property is yours free and clear. No banks, no lenders, no mortgage. If your investment were to hit a rut at any point in ownership, you would avoid the risk of foreclosure that you most certainly would endure with a loan. If the property happened to be in your personal name, along with the mortgage, this could impact your personal credit long-term.
Not Paying Any Interest
Ideally, the amount of incoming rent covers your mortgage and other expenses. However, the amount of interest you can pay on a loan is astounding. Over the course of a 30-year loan on a $100,000 purchase, with a 4.25% interest rate, you’re going to pay over $77,000 in interest alone. Some may argue that you aren’t likely to keep a rental property for the full 30 years — a fair statement. But if you plan to sell in 10 years, you will still owe about 80% of the principal because many payments in the beginning go mainly toward interest.
Own The Property Free And Clear Immediately
Beyond the pride of owning a piece of property, there are a few other advantages here. One, if you needed to sell the property soon after your purchase, you will likely be able to recoup most of (if not more than) what you originally invested. You also don’t have any mortgage payments to worry about. Second is the ability to do a cash-out refinance. Yes, this would mean you have a mortgage now. However, with cash, you have the ability to take up to 75% of the value of your property out in cash.
Vacancies Won’t Hurt As Much (And Can Even Be Positive)
The dreaded vacancy is a pain for almost any rental property owner. However, if you bought your property with cash, it won’t hurt your wallet quite as hard. Why? No mortgage payment. If you have a mortgage and the property is vacant, the bank doesn’t care — they still want their payment. But if you don’t owe the bank, you won’t notice that much of a pain, just the lack of cash flow for a month. Plus, if you need to make upgrades to the property, you can take the time you need and not be rushed trying to get a new tenant in to cover your mortgage payment. In addition to that, you are able to spend a bit more time finding the perfect tenant and not just any tenant who may or may not pay their rent on time every month.
Qualifying For Loan As An Investor Isn’t Always Easy
To qualify for a loan, an investor needs an excellent credit score, reserves for mortgage payments, possibly thousands of dollars in tangible assets and more qualifiers. Investors are held to a higher standard than any conventional buyer and it may prove to be too strict for certain individuals. Requirements for a cash purchase? Just have the cash, no credit check required.
Appreciation Is Appreciated
If you own a property free and clear, any appreciation the property receives is yours. If you have a mortgage, the appreciation is yours as well — sort of. As discussed earlier, the interest eats away at the actual value you’re seeing in your property. If you decided to sell in 10 years, remember, you likely still owe 80% of the principal balance. With a cash purchase, all appreciation is yours to pocket.
You Get First Pick At Turnkey Properties
Many turnkey providers will offer up their properties to cash buyers before finance buyers. Why? Cash buyers don’t require an appraisal like finance buyers do. With a financed purchase, turnkey providers have to be sure the property has been completely rehabbed before an appraiser steps foot in the door. With cash, you can buy the property while it is still in rehab. The pro here is that cash buyers get first pick at the properties. Often, properties that have really great returns go to cash buyers first because they’re too awesome to pass up.
There are many pros to buying with cash. But how do you get that much cash to purchase a property outright? Great question. Two options for those who don’t have coffers of cash sitting around are a self-directed IRA (SDIRA) and a home equity line of credit (HELOC). A SDIRA allows you to invest your funds in many things, one being real estate. You can purchase a property completely through your SDIRA. With a HELOC, you’re taking out a line of credit on your personal home. Yes, this is somewhat using financing. However, many HELOCs offer flexible terms and can get you the cash quickly to purchase a turnkey investment property. Plus, don’t forget, you can do a cash-out refinance on your investment property (after you see some appreciation) and pay off the HELOC.
Financing certainly has its place in turnkey investing. For those who don’t have cash readily available, it’s a good resource, but the power of cash is undeniable. From getting the best properties before anyone else to long-term wealth through owning tangible real estate outright, you simply cannot deny that cash is truly king.