After spending time researching the rental market, real-estate values and the economy, you've decided to make the leap into buying investment properties. The next step is to determine how you will finance your investments. Choosing between a non-owner occupied mortgage and paying cash depends on your financial situation. Not carrying a loan on your investment real estate offers advantages. If you have enough cash for the purchase and can keep an adequate reserve for repairs, vacancies and other expenses, paying cash can be right for you.
No Interest Payments
Even at a time when interest rates are low, you are still paying more in the long run for a property with a loan than if you paid cash. Since the majority of a mortgage payment is for the interest portion during the first part of the loan, you will not build equity unless prices appreciate, which isn't always guaranteed. In addition, origination fees and interest rate buy-down points on loans make it hard to break even on your investment in the first year.
Owning a property outright by paying cash allows you to make improvements on it while it's vacant, and either sell or rent it directly after completion. Although you will be spending money on repairs, you won't have a mortgage payment to worry about as you increase the house's value. Once you're ready to market the property for rent or sale, it will be worth more than it was in its original condition. Also, your equity is 100 percent of the home's value. Later on, if you need to pull some money out of the house and your credit is good, you may be approved for a loan and use the cash to buy another investment or for any other reason.
Attractive to Sellers
Cash buyers have more leverage with sellers and their agents. If you possess financial statements to prove you have the funds to move forward, you might be able to negotiate a lower sales price and other terms that are favorable to you. Many times, closing the sale is delayed because of a pending mortgage or the buyer's inability to be approved. This situation wastes the seller's time and keeps the property from being marketed for sale. With a cash buyer, there are no concerns about the loan, and the transaction can be completed quickly and with few, if any, issues.
Investors buy real estate with various goals in mind. You might want an investment that increases in value so you can sell for a profit. If you are serious about your money working for you, the return on investment from your initial outlay can be the only factor you consider. With investment properties, achieving adequate monthly cash flow is not always possible. If you pay cash for real estate, however, and rent to responsible tenants, you can realize a cash flow right away because you won't have to make a mortgage payment, which can eat up a large portion of the rent check.
Carol Deeb has been an editor and writer since 1988. Her work has appeared in magazines, newspapers and online publications, as well as a book on education. Deeb is a real-estate investor and business owner with professional experience in human resources. She holds a Bachelor of Arts in English from San Diego State University.