Texas is home to a wide variety of real estate investment opportunities, whether you’re interested in residential, commercial, or hybrid properties. Real estate can be expensive, so many investors use mortgages to increase their buying power and make up for cash shortfalls.
At the same time, some real estate investors prioritize buying real estate in cash whenever possible. But why would an investor do this? What are the advantages and disadvantages? And when is it a good idea to purchase investment properties in Texas in cash?
The Advantages of Paying Cash
The buyer has many advantages when paying in cash, such as:
- Speed. Arguably the greatest benefit of paying in cash is accelerating the speed of the transaction. As you likely know, deals can sometimes move smoothly, especially if you have to work with a bank to finalize the details of your mortgage. If you pay in cash, you can skip a lot of steps and finish the deal much faster.
- Competitive advantages. Real estate buying competition can be fierce. Cash is one of the best ways to stand out. Many sellers appreciate seeing cash offers because they know cash offers are more likely to close and are likely to close faster; in fact, these advantages are so strong that many sellers are motivated to drop their sale price if it means getting a cash offer. If you’re making a competitive bid on a property, making it in cash could make that offer much more enticing.
- Potentially lower pricing. On the other hand, paying in cash could be a strategic move to support a lower bid. You might get away with a much better deal simply because you were willing to pay in cash.
- No interest or additional closing costs. If you take out a loan for your investment property, you’ll have multiple additional closing costs to contend with. After that, you’ll have to pay interest on whatever principal you borrowed. If you pay in cash, you’ll be able to eliminate these extra costs entirely.
- Less due diligence. Buyers often spend a lot of time shopping around for mortgages, reviewing the details of their prospective loans, and dealing with things on the banking side. Although you’ll still need to do your due diligence for the property you purchased, you’ll need to spend far less time before making the offer.
- More flexibility. If you take out a mortgage, the bank will likely require you to go through a number of steps, including getting the home appraised and purchasing insurance. Savvy property investors typically still invest in these items, but if you don’t have a lending institution to call the shots, you can do whatever you want. If you want a cheaper insurance policy, or if you’re willing to risk having no insurance policy at all, paying in cash can give you that flexibility.
- Access to equity. Another potential advantage of paying in cash is having immediate access to equity. Paying in cash means you’ll own the home outright, and you’ll be able to tap into financial instruments like home equity lines of credit (HELOCs).
The Disadvantages of Paying Cash
There are some major disadvantages of paying cash, however.
- Cash requirements. Obviously, the biggest one is the requirement of cash. Many property investors take out loans simply because they don’t have enough cash on hand to buy these expensive properties. Getting access to that cash may require a long period of savings or the sacrifice of one of your other assets.
- Less purchasing power. Mortgages also increase your purchasing power, regardless of how much cash you currently have on hand. If you have $1m in the bank, you can hypothetically buy a single, $1m property in cash. But if you’re willing to take out loans, putting a down payment of 10 percent down for each property, you can buy 10 different $1m properties. For this reason alone, many property investors refuse to pay in cash.
- No financial leverage. Financial leverage is a powerful advantage that allows you to make money through borrowed money. It’s a way of making your existing assets go further, like we described above, and it’s also a way to snowball your earnings faster. It’s essentially a technique that allows you to stack your returns multiplicatively, as long as you do this responsibly, with appropriate risk management.
- Less cash for other purposes. Dumping your cash into a property also means it won’t be available for other purposes. For example, you may not be able to invest it in the stock market, which often yields an average return higher than average mortgage interest rates.
When Should You Consider Paying Cash?
When exactly should you consider paying cash for a Texas property?
- You have the money. You can definitely consider paying in cash if you’re comfortably flush with cash. If you can buy the property outright without sacrificing your financial standing or selling important assets in the process, it’s certainly viable.
- Interest rates are high. Making cash offers is much more favorable to the buyer when interest rates are high. If the interest rates are low enough, mortgages are essentially free money, but you can save a lot of money by buying in cash when the interest rates might eat you alive.
- The market is competitive. Competitive markets also put pressure on buyers to make cash offers. It’s an easy way to make your offer stand out.
- You want speed and efficiency. You should also consider cash offers if your motivation is to close this transaction quickly and efficiently.
- You need the additional flexibility. If you want to be free from the requirements your lender will impose on you, making a cash offer also becomes more attractive.
Working With the Experts
It’s not always easy to tell when it’s a good idea to pay in cash for a Texas property. In fact, there are innumerable property management and real estate investing decisions that simply aren’t simple to make.
That’s why we’ve built a team of real estate agents, property managers, and other experts to help investors like you make better decisions and ultimately earn higher returns.
Are you ready to start the conversation? Contact us today!
Tiffany is the Director of Operations at Green Residential.She has been in the multifamily property management industry for 7 years, serving most recently as an Area Manager in Nashville, TN. Tiffany specializes in all aspects of the property management process.
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