Buying a house with cash may sound like an impossible task to those who are unfamiliar with how the real estate industry works. After all, the average home is too expensive for most people to even consider making an all-cash purchase.
However, there are alternative sources of funding that supply investors with the cash they need to buy a subject property: private and hard money lenders. Thanks to these lenders, investors may secure deals with cash while simultaneously taking advantage of several other benefits.
A cash real estate purchase is the act of buying physical property with cash. Whereas most people associate real estate transactions with acquiring a bank loan, cash real estate deals are inherently void of credit. Investors, in particular, stand to benefit from buying a house with cash, as the process is less convoluted than that of the mortgage underwriting and approval process. Additionally, the buying a house with cash process has become synonymous with several benefits, which begs the question: Is it a good idea to buy a house with cash? The simple answer is yes, but let’s take a look at why.
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The concept of paying cash for a home has managed to escape far too many real estate investors for far too long. Through no fault of their own, there’s an entire contingent of investors who subscribe to conventional wisdom which credit buying a home with the acquisition of a mortgage. At first glance it makes sense: mortgage providers offer a service that awards borrowers with the means to buy their dream home. Most investors, for that matter, can’t afford to buy a home with their own money, which is why they must revert to borrowing. It is worth noting, however, that investors don’t need to borrow from banks; they can enlist the services of private and hard money lenders who will give them something no bank will ever be able to: the ability to buy a house with cash.
Private and hard money lenders, as their names suggest, are traditionally lenders without affiliations to lending institutions. Hard money lenders are typically licensed and organized lenders who specialize in lending to rehabbers. Private money lenders, on the other hand, are just about anyone with a little extra cash and a penchant for making sound investments; both, however, serve as a great alternative to traditional banks for today’s investors.
Private and hard money lenders are asset-based lenders, meaning they are more interested in the property’s potential than the individual’s credit credentials. That means an investor with bad credit may be able to secure a loan if they propose the acquisition of a property with potential.
Due, in large part, to their easier lending guidelines, these lenders will require investors to pay a higher interest rate than their institutionalized counterparts (oftentimes upwards of 12 to 15%). The average interest rate on a 30-year fixed-rate mortgage is now somewhere between 4% and 5%. That said, it’s often worth it for investors to pay the higher interest rates that have become synonymous with private and hard money lenders for two reasons: For starters, these lenders offer short-term loans. While their rates may be higher, the rate is only in play for about a year at most—not 30. The second reason borrowers shouldn’t worry about the higher interest rates associated with these lenders is the ability to make a purchase with cash. Private and hard money lenders will give borrowers cash to buy the subject property free and clear, which coincides with several benefits, in and of itself.
The buying a house with cash process has become the preferred method of acquisition for today’s real estate investors; not because it offers a single benefit, but rather because it offers several benefits over just about every other source of funding. Here are some of the most convincing reasons investors should use cash to buy a house in today’s competitive marketplace:
Speed Of Implementation: The single most beneficial aspect of using cash to buy a house is the speed in which a transaction may be carried out. Whereas traditional loans through institutionalized banks can take anywhere from a month or two to come to fruition, access to cash awards buyers with immediate access to the money they need. As a result, cash buyers will be able to take action a lot sooner than their counterparts using loans. To that end, cash real estate offers will be placed in front of sellers first, and ultimately take priority over borrowed money.
Immediate Access To Higher Cash Flow: A cash real estate purchase may prove incredibly beneficial to rental property investors. In the event buyers are able to purchase a rental property free and clear with cash, they’ll benefit from a maximized cash flow. Without a mortgage to pay, a rental property will be able to realize its full potential. The money being brought in may then be applied to future investments and help grow an even greater cash-flowing portfolio.
Higher Offer Acceptance Rate: Understanding how to buy a house with cash and no Realtor are two skills that can ultimately save investors a lot of time and money. However, there’s another benefit that’s often overlooked: seller preference. Almost every seller will prefer a cash offer over one that’s burdened by a third-party lender. Borrowed money, for what it’s worth, comes with a lot of “red tape,” which means there’s significantly more ways for things to go wrong. There’s always the possibility the borrower doesn’t get the loan or something happens in the eleventh hour to prevent funding. Cash, on the other hand, is a lot less complicated and much more predictable. Therefore, all things being equal, most buyers will choose cash offers over borrowed money.
Tap Into Equity Instantly: Buying a house with cash grants new homeowners with immediate equity. What’s more, owners may tap into that equity to grow their investing careers faster. A home equity line of credit (HELOC), for example, may be used to fund any number of purchase to further investment endeavors.
Eliminate Interest Payments: Cash transactions may actually reduce the cost of the home, at least when they are compared to borrowed money. When cash is used to buy a home free and clear, there is no need to pay interest, which may amount to thousands and thousands of dollars over the course of a loan.
Discount Pricing: While not always the case, some sellers are so motivated to sell their properties that they are willing to offer a discount to anyone willing to pay in cash. That way, they will be able to close the deal sooner rather than later.
Buying a house with cash has all but replaced the need for real estate investors to use traditional banks to fund their purchases. At the very least, cash real estate transactions are a lot less complicated and much more efficient. At their pinnacle, however, cash real estate purchases are perhaps an investor’s greatest tool. Using cash could be the single greatest reason investors are able to close deals in the first place. When used correctly, there’s no reason a cash offer shouldn’t place an investor’s offer ahead of everyone else using a bank loan.