Why A Cash Investment Is The Best Investment
Every successful investor has a story about how he or she made it in the big leagues. Whether they started with a hefty trust fund, or they got two jobs in college to save up for their first property, expert investors come from a variety of backgrounds. They all have different opinions about the best strategy, plans, advice, and rules that they’ve learned from over the years. But there is one thing that all ultra-successful investors can agree on: Cash Is King. As we discussed in our most recent cash is king podcast, skipping the whole financing process and offering cold hard cash for an investment has countless benefits.
Paying cash makes your offer instantly more desirable to sellers and can almost always give you extra leverage to negotiate the purchase price. Cash investments put the buyer in the driver’s seat of a real estate transaction, and there are four reasons why you should consider paying cash for your investment properties. Leveraging and using other people’s money to create a higher ROI has traditionally been the way to go when it comes to investing, and there is nothing inherently wrong with that approach. However, paying cash comes with a multitude of benefits that investors may find appealing.
The top four reasons why buyers should pay in cash are:
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It makes your offer stronger
By paying cash you have much more pull when it comes to deals, discounts, and negotiations. Your cash offer will seem appealing to a seller because a faster closing period can take place. Sellers will be more willing to accommodate your contractual caveats and compromise if you’re bringing cash to the table. A seller will almost always choose a cash offer that is ready to go over an offer that is contingent on financing, even if the cash offer is slightly below asking price.
It broadens your options
Banks typically have a minimum loan value, so if you find a great fixer-upper for under that minimum, the bank probably won’t approve your loan. Being tied to the rules and restrictions of the bank can limit your options for what you can purchase. When using cash, you can buy what you want when you want without having to abide by the limitations of the bank.
It’s easier to refinance
When you own a property outright and are ready to refinance, paying in cash gives you the leverage you need to pull 70-80% of the money you put into it back out in cash. When you put in cash first, you have the option of creating a lucrative ROI on the backside.
There’s no risk when the market changes
When people borrow more than they can pay back, disaster happens. When you pay cash, banks are never going to come knocking at your door looking for their money. If your investment property has a dry spell and you’re not earning a rent check, it could be a slight inconvenience, but it’s not going to cause you to fall behind in paying back your loan.
So how do find the cash to invest?
Being a successful investor requires being resourceful. There are many smart and creative ways to find the cash to use to buy investment properties, including selling stocks, taking out a HELOC, refinance an existing property or asking local business owners for private money to get more deals. The cash is out there to be found, and an entrepreneurial mindset is what separates the typical cash investors from those who truly succeed. You don’t have to work three jobs and eat cheese sandwiches for five years to save up for a cash investment. All you have to do is be patient, smart, and proactive in finding the funds.
Along with being resourceful, smart investors are also patient. Setting your real estate investment strategy has the potential for major rewards, but also comes with risks. If you rush into the process with limited funds, or worse, with the final reserves of your bank account, you’re asking for trouble. Don’t be so anxious to get in the game that you make brash decisions and lose the only money you’ve got left. Patience is a virtue.
And finally, don’t be worried about losing the write off of the interest that comes with financing if you pay in cash. There’s a loophole: Some expert real estate investors buy properties in cash, then write a high-interest note to themselves that they pay every month, and use an attorney to move funds, so it’s technically done by a third party, making the properties 100% leveraged. This way, they get the write off for the interest expense and the depreciation of the property. Another benefit of doing it this way is that it serves as a security measure for high profile cash investors to protect themselves if someone ever tries to go after them. Doing it this way not only creates a long paper trail for people who want to cause trouble to follow, but is also ideal for asset protection.
The golden rule of real estate still stands: Those who have the gold make the rules. Investing with cash not only makes you a strong contender in any real estate deal, but also opens up countless opportunities for growth and profit, and that’s what real estate investing is all about.
