15 Reasons You Should -- and Shouldn't -- Buy an Income Property With Cash

Investing in an income property is a move that could really pay off in the long run. And if you're sitting on a large pile of cash, you may be tempted to buy that rental property outright rather than finance it. But is that a good idea? Here's why it is -- but also isn't.

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From mid-2020 through the start of 2022, homebuyers and real estate investors alike got to enjoy lower-than-average mortgage rates. But the days of inexpensive borrowing are now well behind us. And because you're apt to pay a fair amount of interest on a mortgage today, it could pay to purchase your home using cash if you have the money available.

Even when mortgage rates are lower, signing a home loan means paying some amount of interest. Granted, you might recoup that money easily if there's enough demand for the income property you buy and you're able to charge a lot of rent. But if you'd rather avoid paying interest entirely, cash is the way to go.

ALSO READ: Is Mortgage Interest Still Deductible After Tax Reform?

Applying for a mortgage isn't a five-minute task. You have to provide a host of financial documentation and go back and forth with your lender until your loan is able to close. Paying cash for an income property helps you avoid that hassle.

When you sign a mortgage, you're generally required to pay closing costs on that loan. Those can amount to 2% to 5% of your loan amount. If you'd rather save yourself those fees, you can pay cash for an income property instead.

ALSO READ: How Much Should You Budget for Closing Costs?

Although housing inventory has been picking up in recent months, the market still lacks enough homes to meet buyer demand. That means you might struggle to get an offer of yours accepted. Paying cash, however, could give you a serious edge.

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You may already have various debts, whether an existing mortgage or a home equity line of credit. You won't add to your debt if you buy an income property in cash. And that could make it more manageable.

The more money you put down on an income property, the more equity you get. Buying a home in cash gives you instant equity you can use to your advantage. You may, for example, decide to borrow against that equity to renovate.

ALSO READ: How to Finance Home Renovations

If your credit score isn't great, mortgage financing could be expensive. And that's on top of the higher rates buyers are seeing in general. As such, if you have cash on hand to purchase a home outright, you may want to do so.

Tempting as it may be to buy an income property in cash, one downside is tying up a large chunk of money. Homes are harder to sell than assets like stocks and bonds. If you make a cash purchase and then a need for money arises, you could end up in a tough financial situation.

ALSO READ: What Is Liquidity?

The more money you tie up in an income property, the less you'll have available for other investments. You never know what opportunities, like a low-cost fix and flip, might hit your radar. So you may want to finance your next income property and keep your options open.

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You may need to renovate the income property you buy before renting it out. But if you buy that home in cash, your renovation budget may be tight or nonexistent. That could mean having to market your home as is -- and getting less rent.

Although mortgage rates are higher these days than they were a year ago, they can sometimes drop drastically overnight. That doesn't mean you'll snag a 30-year loan at 3% anytime soon. But you might manage to sign a 30-year loan at closer to the 5% mark if rates plummet.

ALSO READ: 3 Things You Can Do to Snag a Lower Mortgage Rate

Paying cash for a home gives you instant equity. And that's a good thing to have. But if you have plenty of equity in other investment properties you own, you may not need it in a new one. And so you may decide to finance your next purchase and just build up equity over time.

Making a cash offer on a home could give you an edge over the competition. But that may not happen. You could still end up in a bidding war if other buyers are willing to pay cash as well, so don't skip the financing purely to give yourself an advantage in a tight housing market.

ALSO READ: Bidding Wars Are Down but Not Gone. Here's How to Win One

The higher your credit score, the lower an interest rate you're likely to get on a mortgage. If your credit is great, it could pay to finance your income property and conserve your cash for other purposes. That gives you more flexibility on the whole.

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Paying cash for an income property could make sense. Or it could backfire. Be sure to weigh the pros and cons before making your decision.

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