Q&A

Cash purchase a good strategy?

Question:

Given that interest rates are so low, does it make sense to buy real estate for cash? We have the ability to do that; we have no other debts but wonder if an all-cash purchase is a good strategy. Answer:

There have been several reasons which have traditionally made all-cash financing attractive.

First, you don’t have to worry about lender qualification standards. If you have the dollars, you can simply buy a property outright.

Second, without a lender, you can avoid many loan-related closing costs.

Third, you may be able to get a better price and terms with a cash offer because the seller can be certain of your ability to close the deal.

Fourth, you can avoid monthly mortgage payments.

Fifth, you can avoid mortgage interest costs that add up to big money. For example, if you borrow $250,000 at 3%, the total interest cost after 10 years will be $66,531.

Sixth, it used to be that financing real estate was effectively encouraged by federal tax rules. Mortgage interest costs within certain limits have generally been tax-deductible. This means that tax benefits can offset interest costs. However, under the Tax Cuts and Jobs Act of 2017 – the 2017 tax reform measure – larger standard deductions became available while itemized deductions were capped. For most borrowers, it now makes more sense to take the standard deduction, and that means while mortgage interest can be deducted, in theory, it’s not a practical choice for most taxpayers. For details, speak with a tax professional.

Seventh, inflation has generally been the friend of mortgage borrowers, allowing them to pay off fixedrate loans with cheaper and cheaper dollars over time. However, in late 2020 the inflation rate was running at 1.2%, according to Trading Economics, a low level.

The National Association of Realtors (NAR) says the typical first-time buyer purchases with 7% down, but 17% of all first-timers manage to buy with allcash. According to NAR, the typical purchase is made with 16% upfront among repeat buyers, but 12% of all existing home buyers purchased with no money down.

While there are several advantages to all-cash purchases, there are also negatives.

If you have the dollars, it’s easy enough to put cash into a home but not so easy to get it out unless you sell or finance. If you have higher-cost debt such as credit card bills, the money might be better used to eliminate such obligations. Lastly, the money might be better spent to start a business, buy additional property, pay for college, etc., depending on your personal preferences.

There’s no answer that works for everyone. For that reason, it can make sense to review the pros and cons of an all-cash purchase with a fee-only financial planner, someone who can look at your overall individual situation.

Email your real estate questions for Mr. Miller to peter@ctwfeatures.com.

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By Peter G. Miller