When you think about real estate, do you think buying real estate with cash? Thinking about a strategic way to purchase a property is by far my favorite subject, right after finding a great deal!
When it comes to buying a property, we have a few options:
That’s it! Simple and straight forward, at least to start.
Because of fear of debt, some may choose to buy a house all cash. And while there are benefits, such as closing faster, perhaps getting a discount (mostly for closing faster), and not having to pay loan costs, there are also risks with it.
How can there be risks with buying real estate with cash?!
There is always risk with everything, especially when it comes to investing. And while we all do our best to mitigate those risks, they cannot be always eliminated.
There is an opportunity cost risk when buying a property for all cash. An opportunity loss cost is the trade off cost of not being able to purchase another investment because you spent your money on the first one.
Say you have $250,000 to invest and you buy a house all cash.
But now another property showed up, that makes good investing sense. Except, you don’t have money to buy it, since you spent it all on the first place. If this property could yield $300 per month of positive cash flow, you are missing on it and that’s your opportunity cost. The missed income.
Second reason there is risk is that you have locked your money away, which is called “dead money” in the world of finance. Dead because it’s not doing anything.
Our money is called currency. And there is a reason for that name. It is meant to flow like a river current and the faster it flows, more can be generated. That is, if you direct the flow of cash towards you.
In the grand scheme, when money flow slows down or stops, we experience liquidity crisis which can lead to deflation.
Probably the most famous deflation period in recent history was great depression. Money froze up, wasn’t flowing and everything shut down.
This of course is large global picture of dead money and no, you locking it up won’t cause deflation around the world, but it slows down your ability to generate wealth faster.
Because real estate is an illiquid asset, having all your money in it locks it up. Even though on paper you can see that you have wealth, in reality, you don’t.
You can’t finance your daily living expenses with money on the paper. To access the cash, you will have to sell the asset or borrow against it.
Most of the cash buyers rely on the asset appreciating in value. We all know that there are no guarantees that this will ever happen.
For us (at least me), while we welcome the appreciation, our overall goal is cash flow. And you can achieve it by short term strategy of flipping or long term strategy of renting.
Final risk of all cash has to do with litigious society we find ourselves in.
Property ownership is public data and anyone can find who owns what, unless you put legal protections over your asset. Setting up legal entities can often achieve this.
Say Bob owns house free and clear, valued at $500,000. And let’s also assume that Bob has a son who happens to get into a car accident and injures another driver. They find an attorney to sue junior, who is still a dependent of Bob. Attorney learns that Bob has $500K locked up in a property and moves forward. Because junior was at fault, the other party wins the lawsuit. Judge and the jury decide to award $250K in damages to the other party. Since Bob doesn’t have that cash, the courts order a judgement that the house must be sold and other party paid.
While just an example, it is quite possible and in speaking with attorneys, it happens quite a bit.
Having a property all cash is almost like putting a bulls eye on your wealth and saying “aim here”.
And while legal shields will help protect an average Joe from finding what you own, it won’t protect a court order to look into everything under your name. Even though financing the property won’t prevent an accident or you being sued, having a loan on your property can limit how deep the legal arm can reach into your pocket.
As you can see, I’m not a huge fan of cash purchase. And I must admit that it took me a very long time to start being comfortable with debt. Very long time!!!
But learning about money (which is basically debt) and finance has helped me change my view point.
There might be times where cash purchase makes sense, but there has to be a strategy behind it and next steps.
Now, I’m curious to understand where you stand, how you feel about it… basically opening a discussion as we all have feelings about this topic and we learn the most when we discuss.
If you like this topics and want to learn more about investing in real estate and making solid choices when you think buying real estate with cash or otherwise, I invite you to join my Real Estate Investing Secrets Facebook Group. It’s free and available and you’ll get to meet some cool folks.
Until next time, stay forever money blessed and remember, you are only 1 Deal Away!