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When Does It Make Sense to Pay Cash for a NW Arkansas Investment Property?

Most people buying their first property take out a mortgage. And most real estate investors rely on mortgages to snowball their investing potential.

Though we can sometimes complain about the approval process or interest rates, mortgages are a powerful financial tool. But at the same time, mortgages aren’t always the best move when purchasing a property.

If you have cash on hand, you might consider using it to pay for your next NW Arkansas property.

But when does such a financial move make sense?

The Benefits of Paying for a NW Arkansas Property in Cash

There are several advantages of paying for an Arkansas property in cash, such as:

  •         Appeal to the seller. One of the greatest advantages of paying in cash is that it’s appealing to the seller. When a traditional prospective buyer makes an offer, it’s usually contingent on their ability to attain a mortgage. If the loan falls through, so will the deal. On top of that, it can take weeks for the mortgage paperwork to close and for the seller to get the money from the purchase. On the other hand, if a prospective buyer offers cash, the seller is much more likely to receive the proceeds, and the process is probably going to be much faster and smoother. If you’re dealing in a highly competitive environment, this can be a critical advantage.
  •         Convenience and speed. If you’re trying to break into a growing neighborhood as quickly as possible, it’s important to strike quickly. You may not have the patience or the time to get multiple preapproval letters or go through the loan application process, nor will you want to be held up by weeks of final approval and other transactional details. Paying for a property in cash is highly convenient and fast for prospective buyers in the Arkansas region.
  •         A potentially lower price. Remember that paying in cash is advantageous to the seller. You can think of it as a significant component of your offer. Accordingly, you might be able to get away with offering a lower price for the property in question. If a property is being listed at $200,000, and you’re considering making an offer of $195,000, you might have equivalent appeal if you offer $190,000 in cash, or even lower. While this discount isn’t massive, it can help you score properties for lower prices overall.
  •         Mortgage interest avoidance. There are advantages to taking out a mortgage, but there are also disadvantages. A mortgage allows you to borrow the principal now, but in exchange, you’ll be forced to pay interest on that principal. Depending on our economic environment at the time, this may be a high interest rate, a low interest rate, or something in between. But no matter what, you’ll be paying interest as a fee to the bank on a consistent basis for as long as you continue holding the property and as long as the mortgage is still active. If you have a mortgage with a 30-year term, this can add up to tens of thousands or even hundreds of thousands of dollars over the duration of your loan.
  •         Insurance flexibility. When you take out a mortgage, your lender will likely require you to have a property insurance policy as a way of shielding them from liability. It’s generally a good practice to have insurance policies on your properties, but if you want to take the risk, or if you simply want more flexibility on the terms of your insurance policies, you may prefer to pay for your properties in cash.
  •         Access to equity. Some NW Arkansas real estate investors like to pay for properties in cash because it gives them immediate access to equity in the home. If you pay for a property with a mortgage, you’ll have at least some equity, roughly equivalent to your down payment. But this amount of equity is small, and you’ll already have a loan on the property, so your options for utilizing that equity are constrained. After paying cash for a property, you can almost immediately take out a home equity line of credit (HELOC) or leverage the power of similar financial tools to fund other endeavors.
  •         Debt limitations. A bit more than a third of your credit score is calculated based on your debt. If you already have significant debt from other real estate investments, such that you’re running the risk of over leveraging yourself, paying for properties in cash is a suitable alternative. This can help keep your debt ratio low without necessarily preventing you from investing in new properties.

What You Lose by Paying Cash

However, paying cash for a NW Arkansas property also forces you to give up certain advantages.

For example:

What you lose By Paying Cash

  •         The cash (and other opportunities). Obviously, when you pay for a property in cash, you’ll no longer have that cash available to you. Depending on how much other cash you have on hand, this can limit your liquidity and therefore your financial flexibility. This is going to limit your ability to invest in other assets, and in some cases, might even put strain on your personal finances.
  •         Financial leverage. Financial leverage is one of the greatest advantages of using mortgage is to invest in properties. Put simply, financial leverage allows you to invest with other people’s money. It’s a way of multiplying your investment dollars, marginally increasing your risk in exchange for potentially much bigger returns.
  •         Inflation negation. Similarly, when mortgage interest rates are favorable, mortgage debt can serve as a kind of hedge against inflation. Economic inflation weakens the buying power of the dollar, so while the nominal value of your debt remains consistent, the real value of your debt goes down. In short, inflation can be valuable to debt holders, and if you pay for Arkansas properties in cash, you won’t be able to capitalize on this benefit.
  •         Total buying power. Finally, in some ways, you can think about your total buying power as a combination of the total amount of cash you have and the total amount of debt you can take on. If you’re not fully drawing from both these categories, you’ll be artificially limiting your total buying power. This may force you to give up certain opportunities or deal with diminished portfolio value.

When Is It Right to Buy an Arkansas Property in Cash?

So when is it right to purchase a NW Arkansas property in cash?

  •         The environment is highly competitive. If the real estate investment market is hotly competitive – in other words, if there are many purchasers competing to buy homes – making offers in cash could help set you apart without forcing you to increase your offer prices. The NW Arkansas real estate market fluctuates like any other, so this is only going to be in play some of the time.
  •         You have the cash to burn. You may also consider investing in cash if you have plenty of cash to burn. If you have ample cash to fund your own personal endeavors and you’re satisfied with your non-real estate investments, you might as well pay for your new properties in cash.
  •         You have a good reason to act (and close) quickly. Some real estate investors in Arkansas choose to pay in cash because they have a good reason to act quickly and/or close quickly. If you’re motivated to secure this deal as quickly as possible, or if any kind of delay might compromise other opportunities on your plate, paying cash can accelerate the process.
  •         You don’t care about financial leverage in this instance. Every real estate investor should consider and harness the power of financial leverage in their strategy. However, this doesn’t mean that you should try to integrate financial leverage into every deal or every investment you make. If you’re already taking advantage of financial leverage, or if for some reason you don’t care about financial leverage in this instance, cash becomes much more appealing.
  •         You don’t want to be bound by the bank’s rules. Banks are excellent resources for Arkansas real estate investors, but they can also be somewhat limiting. If you want to borrow money from a major financial institution, you’ll need to deal with their due diligence, providing a seemingly endless supply of documentation and going through weeks of ongoing communication with your lender. You may also be subject to certain requirements, such as needing certain property insurance terms in place. If you don’t want to be bound or annoyed by the bank’s rules, you might consider paying in cash.
  •         You can’t tolerate the risk of additional debt. Debt is a powerful tool for the smart NW Arkansas real estate investor. However, there’s a limit to how much debt you can take on and how powerful these advantages can be. If you’re in a position where additional debt poses more of a risk than a financial advantage, it doesn’t make sense to take out a new mortgage. If you want to continue growing your real estate portfolio in spite of this, paying in cash is practically your only alternative option.
  •         It feels like the right move, considering all the circumstances. If you want to be a successful real estate investor in northwest Arkansas, you need to consider the totality of your circumstances. That means you need to consider your personal financial position, the amount of cash you have, the amount of debt you have and the amount of debt you can tolerate, the nature of this deal, the Arkansas real estate market, and dozens of other factors. If, collectively, it seems like cash is more favorable than taking out a loan, don’t hesitate to make a cash offer – especially if you’re already harnessing the power of mortgages elsewhere.

Note that these are just some of the situations in which it makes sense to make a cash offer. Much of your decision depends on your personal priorities, your risk tolerance, your access to cash, and other factors unique to you.

Need help finding the right investment property in Arkansas?

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Reach out today!

 

Derek Bryan
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