The Business of Real Estate
Is CASH King?
Our League City home prices have been rising. Finding great deals can be a challenge! With investors back in the market buying up properties and multiple offers being a current common practice for a“ truly good deal”, cash is“ King” for quickly getting an offer accepted. Consider this though- are you perhaps financially better off getting a mortgage – even knowing you may not land as good a deal up front?
With interest rates incredibly low, it’ s not difficult to make a profit on the spread between a monthly mortgage payment and the rental income an investor can realize for a home.
All that said, getting a home loan for an investment does have its challenges. There is less risk involved for the banks to lend money for an owner-occupied home, than when loaning for investment homes. As an investment buyer, this can make it harder to get the money you need from a lender.
Consequently, some folks are making the decision to pay cash for their real estate investments. While this sounds like a good bullet-proof solution on the surface, there are a number of reasons why it is not always so.
First of all, savvy investors try never to use their own money. There is huge flexibility for investors who maintain large cash reserves. Have you ever heard the acronym OPM,( Other People’ s Money)? There are lots of great and mathematically sound reasons for this practice. It keeps options open for all sorts of opportunities. When all your cash is converted to hard assets, it must be converted back to usable cash. When you buy“ all cash”, that money is truly tied down, turned into brick and mortar, until you sell the property.
Secondly, by tying up your own money in an investment property, you’ re basically loaning it to yourself at 0 % interest. You wouldn’ t loan it to someone else at 0 % would you? Further, you are limiting yourself to much smaller and fewer investment opportunities. Sure, you can acquire a single property quickly by committing your money. But what if the same, or a lesser cash commitment, will procure several properties? That pay their own expenses? Let’ s check two scenarios with the same $ 200K max cash budget limit.
By Deb Bly, RE / MAX Space Center, The Bly Team
Plan A = All cash purchase vs. Plan B = Financing a home purchase
Each investment property is unique, so typical example numbers are used to calculate anticipated rent, taxes, insurance costs and expenses.
$ 200,000 Total House Purchase Price- Use of Cash Vs. Mortgage
Plan A $ 200,000 All Cash Investment( Full investment budget is committed)
Monthly Rent
$ 2,100 rent- $ 500 taxes- $ 200 insurance = $ 1,400 net per month
Net per Year $ 1,400 x 12 =$ 16,800
15 Year net( rental income)
16,800 x 15 = $ 252,000- $ 30K repairs / maintenance = 222,000 / 15 year net
$ 200,000 property appreciation @ 3 % Yearly compound growth = $ 311,000 Total profit from $ 200,000 investment = $ 311,000 + $ 222,000 = $ 533,000 Total 15 year Profit.
Plan B Financing $ 200,000 25 % down payment =$ 50k * P & I Principle & Interest( 5 % @ 15 year loan)
( 1 / 4 investment budget committed, $ 150K remains in cash reserve)
Monthly Rent
$ 2,100 rent- $ 500 taxes- $ 200 insur.- $ 1,186( P & I) = $ 214 net per month
Net per Year $ 214 x 12 =$ 2,568
15 Year net $ 2,568 x 15 = $ 38,520- $ 30K repairs / maintenance = 8,520 / 15 year net
$ 200,000 property investment @ 3 % Yearly compound growth = $ 311,000 Total profit from $ 50,000 = $ 311,000 + $ 8,520 = $ 319,520 Total 15 year Profit.
32 MOMENTUM / Summer 2017