It’s essential to discuss the pros and cons of using all cash in real estate investing. Trust us, you wouldn’t think this would even be an issue, but it is. Cash is king in investing because you can invest more without worrying about taxes and other costs that come along with being a legal entity. However, there are plenty of other things to think about before diving into all-cash deals. Here are the pros and cons of using all-cash values:
The pros of paying all cash
- Faster closing
Cash deals are more accessible to close than loans, and many times it’s possible to close within a few days. The lack of paperwork and the closing speed is great for those who want to get into real estate investing as quickly as possible. With investing, time is money, so getting in quickly could save you thousands of dollars at closing.
- Save on mortgage interest
It’s no secret that buying a home with cash saves you money on your mortgage. However, it’s not the only thing you can save on. You won’t pay any interest out of pocket when you buy all cash. This is a huge saving because many other costs are associated with purchasing a home.
- Waiving contingencies
All-cash deals are typically done on a contingency basis, meaning the buyer must make all the repairs and improvements before closing. This means that if the buyer falls through, you’re stuck with a problem. The seller will not be responsible for anything. Many sellers don’t want to deal with contingencies because they can be time-consuming.
- Lower taxes
If you’re investing in a property with all cash, you’ll be able to take advantage of a lower capital gains tax rate. This is because you won’t have to report the money on your taxes. Several states have capital gains taxes that range from 0% to 15%. The lower the tax rate, the better.
The cons of paying all cash
- Losing out on better investments.
When you use all cash, you are not able to invest more than the amount of cash you have. This can be a negative if you find yourself in a situation with more profit potential than the cash available. For example, if you had $100,000 to invest and wanted to purchase two properties but only had $50,000 in cash, that would be a problem. You would be able to invest only $50,000 into two properties because that is all the money you could put into an investment without having any leftover for taxes or other costs.
- Lower cash-on-cash return
This is another negative of using all cash. When you use all cash, your cash-on-cash return will be lower because you pay for the closing costs with your investment money. This will mean that you may not make as much money as if you had invested in another property. Losing out on better investments is also a negative, but losing out on the cash-on-cash return can be a bigger deal.
- Tied up money
All-cash deals are typically done on a contingency basis, meaning the buyer must make all the repairs and improvements before closing. If the buyer falls through, you’re stuck with a problem. The seller will not be responsible for anything. These added expenses can be a significant amount of money.
It is important to keep in mind that many different types of financing are available for buyers. Therefore, it is important to compare these types of financing to determine which one would work best for you.