Why Buying With Cash Isn't Better

[Virata Gamany]

It never ceases to amaze me how many professional investors I hear telling their clients why it’s smart to use as much cash as possible to fund a real estate investment purchase. “After all,” they say, “Paying as much as you can down in cash is going to allow you to recognize the greatest amount of monthly revenue.” True. But false.

I say this is false because while you will be recognizing a greater profit each month from the nice spread between mortgage payment and rental revenue, you are locking yourself into two potential problems: 1) you now have much less cash for emergencies and repairs, and 2) by investing that large sum of cash, you now have fewer options for further investments.

What I continuously and fervently recommend is the use of a low interest mortgage with a reasonable down payment. What’s reasonable? These days, most investors need at least 20% down to qualify. By paying this amount, you also eliminate Private Mortgage Insurance (PMI), which decreases the monthly mortgage payment amount.

What you need to do is figure what you can realistically charge for rent that will keep the right tenant in place for a long time. Then you take a historical figure for repairs, operations and emergencies, and you either put that aside from your cash fund or you plan to put back some each month. Next, you determine your down payment by calculating the absolute minimum you can put down in order to achieve your desired monthly revenue between the new mortgage and your set rental rate.

Taking out a low interest mortgage will allow you a reasonable way to finance the purchase while earning a monthly income. This approach also should leave you with cash in hand. With those funds, you can then turn around and choose either another property or another asset class in which to invest—increasing chances for success the way savvy real estate investors have being doing it for some time now. And, as an added bonus, you'll also realize the tax benefit since interest on mortgages are deductible.

Virata Gamany is a guru in capital acquisition and financial modeling, with an inside edge on the real estate industry.