These days, the average American would be mighty grateful if he could cough up enough cash for a 15% downpayment for a real estate property. However, you, as a reader of Bizzvenue, you have cash. You worked hard when everyone else was fooling around and now your hard work is paying its dividends. You could buy your home with 100% cash down if you wanted to. The big question though is – should you? Even if you have the money in hand, could it still be a better idea to take a loan? Each option has its pros and cons. We are going to cover the main points you need to consider before making that big purchase.
Why you should use cash?
1. It makes you an attractive buyer
It doesn’t take a genius to figure this one out. If you have cash in hand the seller is going to take you seriously. If you don’t need to apply for a loan you can theoretically close the deal on the spot and the seller is well aware of this. If the seller closes with someone that needs to get loan, they can sign the contract do all the paper work only for the loan to be denied and the entire process will need to start over. Most sellers want to sell and will be willing to pay a premium for a cash in hand buyer. The premium translates into a discount in the asking price.
2. Cash will get you a better deal
As stated above, having cash in hand makes you a very attractive buyer. It effectively gives you the upper had in the negotiating process. Even people who know nothing about the present and future value of money, taxes and inflation know intuitively that gettiang $400,000 today is better than getting $400,000 in six months time. They want your money and you have it. Use this to your advantage and get a better deal.
3. It saves you time and hassle
Even if you are eligible for a loan, it’s a real hassle. Paperwork, meetings, emails, faxes and phone calls. On top of that you need to consider that after the sub prime crisis, all the banks have significantly tightened their standards when it comes to handing out money. This is another consideration you should take into account.
Why you should take a loan?
1. Do you want to tie up all your money in one asset?
If buying the home in cash means that the vast majority of your cash is locked into this one asset, you may want to rethink this idea. The golden rule of investing and finance is diversification. By putting all your money in one basket you are violating the number one rule.
2. Do you want to sacrifice liquidity?
In case you’re not familiar with the term liquidity, liquidity refers to how quickly you can turn an asset back into cash. For instance you bank account is completely liquid. You can withdraw 100% of your money in a few seconds with modern day smartphone banking apps. It’s a similar story with most stocks. Property though resides on the other end of the scale. It can take months to sell your home. So if you think you might need to get your cash out of the investment in a hurry, you may be better off getting a loan for buying the house, and keep your money on a stable stock.
3. Can you beat the system?
If you can get your hands on “cheap money” it probably makes sense to get a loan. Let us explain. If you are looking for $100 and you can get this loan at an interest rate of 4%, that means that you will need to pay back $104. However, if you can make more that the interest rate, thus more than 4%, getting a loan is a no brainer. You take a loan, now you have your “own” $100 and the $100 you loaned. You use $100 to buy the property. Now you invest the other $100 with a return of say, 6% and you are essentially eating the cake while keeping it whole.
The Bottom line?
The bottom line is that there is no bottom line. We have shared the pros and cons of each option. You must now make an informed decision based on your circumstances. There is no one size fits all solution. What works for one individual could be a disaster for another.
