The following is a guest post from Derek Sall at LifeAndMyFinances.com. Derek’s motto: “Get out of Debt, Save Money, and Be Rich!”
Am I a millionaire?
Do I earn more than $100k a year and have tons of cash at my disposal?
But I absolutely LOVE to buy my real estate with cash. And even though I’m not swimming in my excess cash like Uncle Scrooge (yet), I still think it’s the absolute best way to buy a property.
Why We’re Investing in Real Estate With Cash…Again
My wife and I got married just over two years ago. Our first mission together? Buying a rental property with cash.
…Before we move on, let’s answer all those questions that you’ve got brewing in your head…
- “How in the heck did you save up enough to buy a house with cash?”
- Liz and I both owned homes when we met. She sold hers, which had $40k in equity, and I had about $30k saved up because I had already paid off my house a year before…and money tends to pile up when you have absolutely no debt (yeah, I know we’re weird, but it’s working out for us!!).
- “And how much is property in your area? It must be pretty cheap!”
- It is. Houses can still be found for less than $100k. It’s not easy, but they’re out there just waiting for us to find them!! 🙂
Alright, back to the root of this post – why we’re investing in real estate with cash.
While everyone else and their brothers are spewing the millions of benefits of buying a rental home with OPM (Other People’s Money, ie. the bank’s), I still don’t buy it. To me, mortgage loans are unacceptable and I’ll avoid them at all costs until the day I die.
Why, you ask? I’ve got 7 solid reasons.
1) Interest Savings
Let’s say I tracked down a $100,000 house and borrowed $90,000 to buy it. How much interest would I pay with just a 4% loan over 30 years?
That’s $100,000 steal of a deal turned into $162,132… Ummm, that’s suddenly not so much of a deal.
If I pay cash, you know what I would pay? $100,000….or less… (read on my friend, read on…)
2) Get a Deal
When you’re buying a car from a private seller and they have $5,000 written on the windshield, do you think they’ll take just $4,500 if you have it held out right under their nose?
Yup, probably 90% of the time. Money talks, and quite often scores you a deal.
Buying a house is no different. Walk up to the owners and give them a cash offer, and they’ll likely take your definite $95,000 before they accept the possible $100,000 offer from the dead-beats that still need to be pre-approved for the loan. (What do the old-timers say? A bird in the hand is worth two in the bush? Yeah – pretty sure that applies here. 😉 )
3) Avoid the Bank
Oh man I hate banks so much… They’re in the business of making money off of everyone that walks through their doors, and yet we all flock there in droves and ask them for money now so we can pay them a whack-load later (whack-load is the technical term for “almost double”).
In addition to their blatant thievery of my money, they also annoy me by:
- making me provide dozens of documents and numbers that prove my income and character as a person
- forcing me to sign over 100 pages of documents at closing so they can take my house away if I don’t pay them
- messing up my escrow accounts and withholding WAY too much money each year
- taking money out of my pocket every. single. month … for 360 months.
- forcing me to keep track of all this again and again and again.
Working with the bank can be freaking exhausting…and can really burn a ton of time! Probably an average of 2-3 hours a month. Do you know what I do with those 2-3 hours now that I don’t mess with the banks? I play with my one year-old daughter and chat with my amazing wife. BOOM. Mic drop.
4) No Appraisal Needed
This is basically another fiasco put on by the bank. They don’t want to give you $100,000 for a house, have you make absolutely no monthly payments, and then find out they have to sell the house for $70,000 because it was never worth $100,000 in the first place.
So what do they do? They charge YOU to get an appraisal so they can cover their own butts (did I mention that I hate banks?? ;)).
When you’re buying with cash, there’s absolutely no need for an appraisal. After your months’ worth of house searching, you know the value of homes in the market, so why not just pocket that $400 and avoid the hassle altogether?
5) Insanely Low Closing Costs
I honestly didn’t expect this one when we bought our first rental property with cash, but it makes sense since there’s no bank processing fees or appraisal charges! When we closed on our $81,000 single family home, the total closing costs were $532. Ha, I laughed when I saw it.
Do you know what this would have been if I borrowed the money? At least $2,500. Probably something closer to $3,000.
6) Fewer Rental Houses = Easier Manageability
My friend often walks up to me at work and says, “You know Derek, there’s really nothing wrong with using a little leverage once in a while.” What he means is this — ‘If you’d just take out a few loans, you could have five times the properties and probably earn double the income.’
This sounds great and all and it honestly looks pretty good on paper, but with five times the properties comes five times the work…for only double the income.
If I just take my time and invest (with cash) in one property at a time, I can make double the income with just two properties…or twice the amount of work. And quite honestly, since there’s no bank involvement, the work-load is practically nothing.
Fewer rentals means easier management, and an amazing cash flow on each unit.
7) Peace of Mind
Remember when I said that the bank does everything they possibly can to make sure they can take your house if you don’t pay? It’s the absolute truth, and it happens to people every day. Well I decided a few years ago that it’s never going to happen to us. By paying cash for my homes, the bank has absolutely no right to take them. They’re mine, they’re mine forever.
For some, they don’t really care about this peace of mind. For me (and my wife and daughter), peace of mind means everything.
What About You?
So what’s your take? Are you still going to puff out your chest and call yourself a “wise investor” for leveraging your investments? Or, are you ready to start buying real estate with cash and actually enjoying your life on the way to wealth?
I’ve already made my decision. What’s yours?