Financial Facts: Shall you buy with cash or credit?
Special to the Daily
There is a four-letter word to a loan officer and that word is cash. Buying a home with cash may be a good thing, especially if the cash is from the sale of another piece of real estate. If the cash is from your bank or stock account it may a lousy idea. So read on and see what I think about cash real estate deals.
Most of the cash deals that I hear about are called 1031 Exchanges. This is where a person has sold a piece of real estate and to avoid capital gain taxes they are reinvesting into another piece of real estate. The sale can be from an investment property or a second home and the proceeds from that sale are used as part or all of the costs involved in buying another property. This is a good way to avoid taxes and I am always for legally avoiding taxes.
Then there are those buyers who have the cash in the bank or stock account and they have decided to use it to buy real estate. Now as a lender I know there are these types of cash deals going on all the time, but I make my living getting buyers mortgages. So I like those who need a loan to get the deal closed.
First, if you have the cash in the bank I will ask if the cash is drawing interest. In these days of extremely low interest rates anyone with enough cash in the bank to buy the real estate without a loan should be receiving over 2 percent interest on their money. If the buyer is making a good deal on the property being purchased they should also see a 2 percent appreciation on the real estate too. So those are somewhat equal.
Then if the property is going to be a rental, the buyer needs to determine if the property is going to make money, break even or loose money. Hopefully the property will break even and the tax accountant will deduct all the expenses and the property will show a break even for tax purposes. If the property is making a nice profit, a mortgage can offset that profit and that is not a bad thing. Keep in mind that if you have a mortgage that means that you have cash in the bank making money too. So a break even on the rental property can really mean that you have cash in the bank, you are seeing the property appreciate in value and one of the most important things that goes along with having a vacation/investment property is that you too use it too.
So if you are considering the purchase of a piece of the High Country you should sit down with your mortgage professional, your tax accountant and your tax attorney prior to making a quick decision on paying cash for the property. That may seem the easiest way to buy the property, but it may not be the best way to buy the property. Explore all options and then you will know for sure that cash or credit is the best way to buy that property.
For answers to your mortgage related questions call Bob Kieber at (970) 262-1199 or email him at firstname.lastname@example.org. Bob is a local mortgage lender and principal of Resort Lending. He has 30-plus years of professional experience in real estate, finance and investments and is a longtime resident of the High Country.
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