Why you should always buy a property on loan

in #busy2 years ago

Buying property is in no doubt one of the best investment strategies around. Some of the reasons:

  • They are relatively stable in prices and usually go up in value.
  • If you invest right, they are always net cash flow positive.
  • You can depreciate their value over a period of 27.5 yrs to save on short term capital gains and then only pay a long term capital gain when u sell them.

But one thing that some investors do that really bothers me is buy property in cash. This, in my opinions is one the worst strategies. Reason is quite simple. When you use cash, you lose on opportunity cost.

Opportunity cost is what you could have made on that money if you hadn't used it up to pay for the home. For ex. If you buy a home for 125k and pay all cash, surely you wont be paying any interest but you won't have access to this capital any more. Instead if you paid 25k down payment and instead loaned remaining 100k at around 4.5%, and invested your 100k in index fund that pay 7 to 10% lond term, you would be making a profit of atleast 2.5% on the same money while maintaining your liquidity.

Loans have some other benefits that I will discuss in one of the future posts but this is something that's very important to grasp if you want to invest your money smart.

Hope someone finds this information useful.



I respectfully disagree on a couple of points.

  • When you pay cash you do not completely lose access to the liquidity. Because you start with a clear title you have many more options for using the property as collateral, providing cash that you can spend or invest.
  • In a cash transaction it's essentially just you and the seller at the table. Lenders often insist on standard terms. A cash buyer has much more flexibility.
  • Cash transactions are faster.
  • Lenders often insist on additional expenses: such as mortgage insurance, appraisals, inspections and other layers of bureaucracy.

Finally, I'd note that just because it looks to the seller like I'm paying cash doesn't mean I didn't borrow the money. Because the seller is walking away with cash there's comparatively little examination of my finances. This can be important for privacy reasons.

If you take line of credit on cash bought property, then you are essentially taking a loan on higher rate of interest.
I always buy on loan and still close in a month. You just need to find a good lender to work with.

Lenders often insist on additional expenses: such as mortgage insurance, appraisals, inspections and other layers of bureaucracy.

Mortgage insurance is always required when u pay less than 20% down, otherwise you dont need it. Appraisals is something that helps u determine actual worth of a property and helps with price negotiations.
Inspection has always saved me money. I usually pay 350$ for inspection and they find enough stuff wrong with the house that i make seller pay for it.

I'm not a fan of debt although I might be losing money not having a mortgage.

At cheaper interest, dept is good. When u get a loan at 4.5% its essentially means u 0%. U save 1.5% in tax and 3% inflation.

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 2 years ago Reveal Comment