Top 11 Reasons to Pay Cash for Rental Property

Should you pay cash for a turnkey rental property or use financing? This is a long-debated question with pros and cons on both sides. While we aren’t going to answer the cash vs. leverage question here, largely because there’s no blueprint for successful real estate investing, we will share our top reasons for paying cash for a rental property and why. We’ll also cover the risks of paying cash, strategies to minimize them, and other helpful resources.

Want to see the trade-off in real numbers? We compared both paths in five RealWealth markets: should you pay off your rental property or invest in another?

One perk of buying a house outright with cash is that it significantly reduces closing costs. Paying cash for a rental property will avoid costs associated with getting a mortgage. You won’t have to pay lender fees, origination fees, mortgage insurance, title insurance, and other fees associated with financing a rental property. 

Buying an investment property in cash will undoubtedly produce higher cash flow. This is because you won’t have to pay a mortgage on the property every month. A rental property purchased with cash should start generating cash flow as soon as a tenant moves in. 

Calculate the cash-on-cash return to determine your potential return on investment. This figure is the most helpful for understanding the cash flow or return on your investment.

Another reason to pay cash for rental property is that it expedites the buying process. Cash investors can buy faster instead of waiting on the mortgage process. A typical mortgage process can take anywhere from 30 to 45 days to close. 

Additionally, you don’t have to worry about qualifying for a loan. Your credit score and income are irrelevant if you pay cash for a rental property or home.

If given the choice between debt and no debt, it’s hard to imagine a single person choosing to have debt. Obviously, it’s nice to be completely debt-free. And if you are, congratulations! You’re in a small percentage. If you have the financial capacity to pay cash for a rental property, avoid debt and start seeing monthly cash flow sooner. 

As with any debt, a mortgage comes at a price. Financing a rental property means paying interest on the borrowed money. Your interest rate depends on your credit score, liquid assets, down payment, and loan term. 

Paying for a rental property in cash lets investors avoid interest payments entirely, saving thousands of dollars. Although mortgage interest is tax-deductible, it can significantly impact your cash flow. If your rental income is the same as your mortgage payment, you won’t be making anything on your investment. 

Buying a rental property outright by paying cash gives you 100 percent equity in the home. We can’t talk about equity without also talking about appreciation. Real estate appreciation is how an investment property’s value increases over time. Appreciation is why we strongly encourage a buy-and-hold strategy in real estate investing. 

Let’s use an easy example. You buy a rental property for $100,000 and see a $15,000 equity increase due to appreciation. That gives you 100 percent equity in a $115,000 property plus monthly cash flow from rental income. 

Most of the time, sellers will take a cash offer over all other offers. Some sellers will even give a small discount if buyers pay cash, as it helps them avoid the financing process and close quickly. There’s also less risk of the deal falling through if the buyer doesn’t get approved for financing. Cash buyers simplify the process for both buyers and sellers. 

Going the cash route to buy a rental property will significantly lower your monthly expenses. Of course, you won’t be paying a mortgage, but you will also cut out loan interest, mortgage insurance (if necessary), and title insurance. 

Paying cash for a rental property allows a real estate investor complete ownership of the property. Because you own the property outright, there is no risk of foreclosure or losing the property. 

Another reason to pay cash for rental property is that you’re less likely to lose your entire investment. Even if the market takes a downturn, you still have 100 percent equity. And as with any market, the real estate market fluctuates. Once again, holding onto an investment property long-term is our favorite investment strategy.

A constant concern for real estate investors is vacancy. When a property is left vacant, the investor loses money. Vacancies are less scary when a rental property is bought with cash because you don’t have to stress about rental income covering your upcoming mortgage payment. If a property purchased with cash is vacant, you aren’t going to lose as much. 

Not being at the mercy of monthly mortgage payments and interest gives you more control over your investment property. Almost all of your rental income will be profit, minus related expenses like management and property taxes. All appreciation gains are tied directly to the property with no interest.

Please keep in mind that every investment comes with risk. Buying rental property in cash requires a large amount of disposable income, not only to purchase the property outright but also to have enough cash reserves to maintain the rental. With that in mind, here are a few risks of paying cash for rental property and how to minimize them.

Tying up all or most of your liquid assets in one investment can be risky. One of the hard-and-fast rules of investing is diversification. In finance, diversification is the process of allocating capital in a way that reduces exposure to any one particular asset or risk. You can reduce risk and volatility by investing in a variety of assets. 

Putting most of your liquid assets into one investment can be risky because it limits your ability to diversify your portfolio. However, if you feel comfortable financially putting a large amount of money into a real estate investment, go for it. 

Depending on your tax bracket, the mortgage interest deduction can save you a lot of money. Because you can write off a certain percentage of your mortgage interest, investors who pay in cash won’t see the same tax benefits.

However, some of these tax deductions are not as beneficial if you are in a lower tax bracket. For example, if you borrowed $200,000 at 4.5 percent, you will pay almost $9,000 of interest in the first year. In the lower tax bracket, you could deduct about $1,350, but that would mean you would still be paying around $7,650 in interest. 

(Please note: These figures are estimates. I am not a tax expert.)

Pouring a good chunk of your liquid assets (cash) into one property may be considered risky, especially if you practice diversification in your investing. Another strategy to minimize risk (and diversify) is to use the same amount of money to buy multiple properties with a mortgage. While you will be investing a large amount of money in real estate, your entire investment won’t depend on a single property. Instead, buying several properties through leverage may seem less risky to some investors.

Whether you are looking for reasons to pay cash for rental property, researching different real estate investment strategies, or simply trying to expand your investing knowledge, our team at RealWealth is here to help. When you become a RealWealth investor, you’ll have full access to free real estate investing webinars, investor resources, and the support of an investment counselor who is also a seasoned investor. They can help you build a real estate investing strategy based on your goals and help you find turnkey rental properties for sale in top markets with professionally managed turnkey properties. Start diversifying your investments and join RealWealth today!