Buying Rental Property with Cash or Mortgage: Pros and Cons
Whether you are buying your first rental property or adding to your already established real estate portfolio, one of the major questions you must ask is if you should buy a rental property with cash or a mortgage.
Both purchase methods come with undeniable benefits for real estate investors. However, it solely depends on your financial situation and investment goals.
In this article, we will go through the pros and cons of buying a rental property in cash or with a mortgage to help you decide which method is right for you.
They attribute this spike in cash payments to the increased mortgage rates, averaging 6.79% in the third quarter of 2023.
Benefits of Buying a Rental Property in Cash
Quite a long list of benefits comes with buying a rental property in cash. If you have the capital, you could take advantage of them.
100% Equity – Buying a rental property in cash means you own 100% of the property. The bank does not own a single brick or shingle. Therefore, there is virtually no risk of facing foreclosure since you don’t have a monthly mortgage payment.
Save on Closing Costs – You will save hundreds, if not thousands, of dollars on closing costs when you buy a rental property in cash. You can avoid lender fees, which tend to add up one after the other.
Quicker Closing Time – When purchasing in cash, you can go to settlement in just 30 days. There is no delay in having an appraisal of the property done, confirming the financing, and reviewing your personal information. You can go straight to the table.
Opportunity to Negotiate – As a cash buyer, you have more room to negotiate a fair price with the seller. Sellers favor cash buyers due to the simplicity of the transaction, so they may be willing to negotiate better.
Maximized Cash Flow – From day one, cash rental property buyers can begin earning income on their investments. You’ll experience higher levels of cash flow and maximize your ROI.
Lower Vacancy Stress – When a rental property owner has a vacancy and a mortgage to pay, they lose money on their investment. However, vacancies are less stressful when you buy in cash and don’t have a monthly mortgage payment. While you aren’t generating income, you definitely are not losing as much.
Downfalls of Buying a Rental Property in Cash
There are two sides to every story, including when you purchase a rental property in cash. While the list is shorter, there are some downfalls you should consider before pulling out your wallet.
Capital Required – Buying a rental property in cash requires a lot of upfront capital. To have $150,000 or more sitting in the bank ready to spend on a rental property isn’t a common situation for many investors. It truly comes down to whether you have the cash to buy or not.
No Tax Deductible Interest – With a mortgage, property owners can deduct the interest they pay each month from their taxes. Therefore, they can fall into a lower income tax bracket and save on their tax returns. When you pay in cash, you cannot take advantage of this deductible.
Not for First-Time Investors – It’s a rare occasion when a first-time investor buys a rental property in cash, but it isn’t unheard of. For the common investor, cash purchases typically come later in their careers.
Buying a Rental Property with a Mortgage
The traditional route for purchasing a rental property is to obtain financing from a mortgage lender. A mortgage can provide the boost you need to build your real estate portfolio and investment venture.
Benefits of Buying a Rental Property with a Mortgage
While some real estate investors may shy away from adding debt to their financial situation, there are surprisingly some handy benefits that come with a mortgage.
Low Down Payment – You can purchase a rental property with a minimal down payment, depending on the mortgage you qualify for. A decreased down payment makes it easier than ever for first-time investors to start building their real estate portfolio.
Tax Deduction Advantage – We mentioned this tax deduction as a downfall of paying cash. With a mortgage, property owners can deduct the interest they paid on their mortgage when they file their tax returns, possibly bumping them down to a lower tax bracket.
Rainy Day Fund – Buying a rental property with a mortgage means all of your money, or at least a good portion of it, isn’t tied up in your property. You’ll have savings to rely on in case of emergency maintenance or additional costs.
Great for First-Time Investors – With affordable down payments and tax deductions, buying a rental property with a mortgage makes it easier than ever to start investing in real estate. You have the chance to build equity and wealth without spending hundreds of thousands of dollars.
Downfalls to Buying a Rental Property with a Mortgage
To every bright side, there is a little grayer side of the cons to consider before buying a rental property with a mortgage.
Private Mortgage Insurance (PMI) – If your down payment is less than 20%, then you will end up paying private mortgage insurance each month. However, this insurance fee will end once you have built 20% equity.
Higher Closing Costs – When buying a rental property with a mortgage, you can expect additional closing costs from the lender. One of these costs includes a loan origination fee.
Qualification Requirements – Not everyone qualifies for a mortgage. You must meet requirements for your credit score and debt-to-income ratio. Additionally, the property must pass an appraisal for the loan to be approved.
Cash or Mortgage: Which is Better?
As you can see, there are pros and cons for both options when considering buying a rental property with cash or a mortgage.
The ultimate decision is up to your financial situation, investment goals, and personal preference. There is no right or wrong method!
While a mortgage is ideal for first-time real estate investors, it could be beneficial to experienced investors who want to save a rainy day fund. But buying in cash could actually save you money and time.
Maximize Your ROI with Lotus Property Services in Burbank, CA
Whether you’re still deciding to buy a rental property or already have a real estate portfolio, you can start maximizing your ROI with Lotus Property Services.
As the leading property management company in Burbank, our real estate experts take care of the day-to-day tasks, so you can focus on expanding your investments. From tenant acquisition to maintenance coordination to financial reporting, we’ve got you covered!