A frequently asked question by so many property investors is how to finance investment property. There are many ways to finance a real estate investment property. You can choose to either finance property using all cash or a mortgage.
Of course, deciding which one to choose has always been a controversial topic among many real estate investors. When you weigh cash vs mortgage financing, there are some important factors you need to understand before you make any decisions. Ask yourself, would you rather make an outright payment or would you rather follow a mortgage plan?
To make the picture clearer, we’ve dedicated this blog to real estate investors who are always stuck between mortgage vs. cash and figuring out which one is the better option for property financing. Let’s start by looking at what it means to buy a house with cash as well as the pros and cons of this option. The same will be done for mortgage financing as well.
Related: Buying an Investment Property: Cash or Mortgage?
How to finance investment property using CASH
When you buy an investment property using all cash, you pay the owner of the property cash to cover the entire cost of the house. For this financing method, you don’t need to raise funds through a bank or stress yourself with the headache of repaying a loan. Every financing method depends on your financial situation. If you have enough cash saved up, then buying an investment property with all cash is a suitable option for you.
How to finance investment property: The pros of using CASH
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Property Owners Take You Seriously
When the owner of the investment property sees that you are ready and come bearing cash, they will take you more seriously than if you were applying for a mortgage loan to pay off the house. This is simply because the process becomes quicker for them and there is no possibility of you being rejected for a loan and ruining the real estate deal. This leads to our next two points.
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The Power of Negotiation
As many would say: “MONEY TALKS.” When you plan on buying an investment property using all cash, you have the advantage of negotiating a better deal with the seller.
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Lodging Complaints
As a potential buyer who is willing to pay cash to purchase an investment property, you can lodge complaints on things you want to be repaired or upgraded before you make any payments.
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A Sense of Security
If by any chance you lose your job or find yourself in a financial mess, you don’t have to panic if you purchase your property with cash. If you own your house completely, you don’t have to worry about facing foreclosed homes. Foreclosure happens when you are no longer able to pay off your mortgage payments. This is definitely a scenario that everyone should try to avoid.
Read Also: Foreclosed Homes: A Good or Bad Investment?
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You Own 100% of the Equity
When you purchase your investment property using cash, this means that your equity is 100% of the home’s value. If in the future you go through some financial issues, you can pull out some money from the property by getting a bank loan.
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Produce Cash Flow Immediately
The great thing about purchasing a property using all cash is that you can start generating a positive cash flow immediately since you won’t be paying monthly mortgage payments. Property investors who buy a rental property using a mortgage loan have to pay off this loan from their property’s rental income.
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No Interest Payments
Not having to pay interest on your mortgage payments is a very big deal for real estate investors when buying an investment property. Paying interest affects your equity unless the property’s price appreciates over time. However, this is not always guaranteed since not every property appreciates greatly.
How to finance investment property: The cons of using CASH
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Stuck Cash
Paying a very large amount of money for an investment property can cost you a lot of cash on hand. That is why you should NEVER go for this type of financing method unless you have a large amount of extra money laying around.
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You Miss Out on Tax Benefits
Unlike financing using a mortgage loan, when you finance your investment property using cash, you potentially miss out on tax benefits. This means that you have to pay tax on all your rental income. With mortgage financing, you can deduct interest payments from your taxable rental income.
How to finance investment property using a MORTGAGE
A mortgage is simply borrowing money from a bank or similar organization in order to purchase a property. Unlike those who have extra cash lying around to buy an investment property, a lot of potential homebuyers end up missing opportunities to own a property because they feel they can easily raise money without the help of the bank. It can take years to save up the money to purchase a property, which is why there is an alternative. Mortgage financing is a commonly used method all over the country that comes with many advantages as well as disadvantages. Let’s take a closer look.
Related: All You Need to Know About a Mortgage for Rental Property
How to finance investment property: the pros of using a MORTGAGE
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Tax Benefits
As I previously mentioned, mortgage interest can be deducted from taxable income. This is an advantage to real estate investors to lower cost of investment.
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Easy to Repay
A mortgage is repaid on a monthly basis and is done little by little depending on the interest rate. The key is the amount of rental income. What you pay back every month should be lower than what you receive for rent. So many investors fear that having a mortgage loan means that it’s impossible to repay it back but this is a misconception. It just depends on your skills for finding the right rental property.
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Leaves Room for Other Projects and Investments
When you purchase your investment property using a mortgage loan, you can still invest in other types of properties using the rental income you’re receiving from your rental property. You can also use the rental income generated from your property to pay off debts or mortgage payments or reinvest in something else.
Alternatively, if you do actually have a large sum saved up, you can use it for multiple down payments rather than just buying one investment property.
How to finance investment property: The cons of using a MORTGAGE
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Risk of Foreclosure
This is the dreadful nightmare that every real estate investor fears. Defaulting on a loan puts you at risk of losing the investment property to the lender. So unless you’re confident that you will be able to pay off your mortgage payments, then stay away from this financing method.
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Having a Vacant Property
When you are using mortgage financing, you rely on tenants to pay off the mortgage, which makes vacancies your main concern and threat to your investment due to the risk of negative cash flow. It’s not always guaranteed that your property will constantly have a high occupancy rate which is why vacancy is bound to happen.
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Mortgage Process
Opting for this strategy requires you to go through the mortgage process. Many banks have become stricter with issuing mortgages which is why so many investors fear to choose this type of financing strategy. However, if you have a good credit score and can pay mortgage payments, then you’re ok!
Related: Rental Property Mortgage: The Ultimate Guide to Getting Approved
A final thought
How to finance investment property is a never-ending discussion in the real estate investing world. There are so many financing options to choose from; all you have to do is make sure that it fits your current financial situation.
How will you finance your investment property? Let us know in the comments below.