Purchasing a rental property is a great financial decision. Rentals are a surefire way to build wealth, create passive income, and secure a comfortable retirement. However, real estate investments come with a high startup cost. Luckily, there are many ways to finance a rental property, from traditional mortgage loans to alternatives like home equity loans.
But is financing always the right choice? Some investors believe that it’s best to pay all out in cash. After all, this ensures you don’t have to pay thousands of dollars in interest alone. But, of course, saving up to buy a rental property in cash can take longer.
If you’re considering purchasing rental properties but don’t know what’s the best course of action, we’ve got you covered! The experts at Rockbridge Real Estate have written this guide to help you determine whether to buy or to finance a rental property. Don't make the mistake of guessing! Keep reading to learn the pros and cons of both options!
Pros and Cons of Financing a Rental Property
Financing investment properties involves taking out a mortgage or another kind of loan to pay for your down payment on your investment. Many perks come with opting for financing your investment property, such as:
• Higher leverage. When you finance rental properties, you only use a small amount of money to cover the down payment and other additional costs. Your returns will amplify if the investment property value goes up.
• Diversification opportunities. Since the initial investment is lower, you can use the money left to invest across multiple properties or other types of assets. This can highly reduce the risks associated with having all your money tied up in a single investment.
• Higher liquidity. Finance rental properties allow you to reserve some of your capital for further investments or emergencies.
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• Growing opportunities. With financing, you can buy more properties faster, as you can pay for each investment property over time. This can significantly help you grow your portfolio in a short period.
• Tax deductions. Mortgage interest and other property-related expenses are often tax-deductible. This can significantly reduce your taxable income and tax liability.
• Potential for higher returns. If the rental income from the investment property exceeds your monthly payments, you can earn a positive cash flow every month. You’ll get the best return on your investment in no time!
• Protection against inflation. Property prices rise along with inflation. Financing your investment property can serve as a hedge against inflation since the value of your investment will increase over time.
Despite the ample benefits, financing options also have some drawbacks. Firstly, you must fulfill the necessary credit and qualification requirements to get approved for a loan or mortgage to invest in Columbia real estate.
It’s also important to remember that taking out a loan doesn’t come without risks. Monthly mortgage payments can be a high long-term cost, and unless you have a fixed-rate mortgage, fluctuations in interest rates can increase your payments at any time.
This can significantly affect your finances and lifestyle. Plus, real estate investors run the risk of foreclosure if they’re unable to meet your mortgage loan obligations.
Pros and Cons of Buying a Rental Property in Cash
Purchasing a rental property outright without taking out a mortgage might take longer, but it has many perks, such as:
• No monthly payments. By buying a rental property in cash, you avoid monthly payments. This can save you a substantial amount of money in the long run.
• Easier purchase process. Buying a property with cash eliminates the risk of the deal falling through because the mortgage was not approved.
• Increased negotiation opportunities. Most sellers prefer cash offers. This gives you a better stand for negotiating the price of the property, as sellers are often more likely to accept a lower price if they’re paid outright in cash.
• Stable cash flow. The monthly cash flow will be higher if you don’t have to worry about mortgage payments. You can then use this money to grow your real estate portfolio.
• Money savings. When you buy your rental outright, you won’t have to pay a mortgage, saving you a lot of money in interest rates. Additionally, you will save thousands of dollars in lender fees.
• More control. You’ll have full ownership and control of the property from day one. You can make decisions about repairs, renovations, and tenant selection without lender restrictions.
• Tax benefits. Rental property owners can deduct property taxes, maintenance costs, and repairs, among other expenses. This can significantly reduce your overall tax liability.
• Fewer risks. When you buy a rental property outright, you avoid many of the risks of taking out a loan. You won’t get a negative cash flow because you won’t have to pay a mortgage. Plus, you won’t have to worry about late payments or foreclosure.
The drawbacks of purchasing a rental property in cash include lost opportunities and lack of diversification. Putting all your money in one investment can be risky, and it closes the doors to other investment opportunities.
Additionally, you face the risk of a lack of liquidity in case of emergencies. Plus, there’s always the risk of depreciation, which will mean a loss of the money you initially invested.
Bottom Line
Ultimately, deciding whether to buy outright or finance a rental property is up to you and your unique circumstances. Both options have their perks and drawbacks. Buying a rental property in cash reduces the chances of the deal falling through but also reduces your liquid assets.
On the other hand, financing your rental investment allows you to invest in more than one property or asset type simultaneously. Still, you run the risk of late payments, which can negatively affect your credit score.
With this information, you are better prepared to take the next steps in buying your rental property!
Are you looking to buy a rental property in Columbia, Missouri? Contact Rockbridge Real Estate! Our team of experts can help you find the right property for your investment goals. We want to make sure that the home-buying process is free of stress for you!