The rise of remote work during the COVID pandemic led to a considerable migration among workers whose employers gave them permission to move out-of-state without jeopardizing their jobs. This led to higher property prices in certain markets, prices that were driven up by all-cash offers. Looking back on that period of time raises an interesting question: should investors mortgage new properties or pay cash?
Obviously, it is a different situation for investors. COVID migrants were flushed with cash after selling their homes. When they arrived at their destination cities, they wanted the best money could buy. Remaining competitive in a market flush with buyers required getting the edge. And the best way to do that was to offer cash on the barrelhead.
Property investors often find themselves in an equally competitive situation. However, all-cash deals are not necessarily as attractive to sellers. Why? Because sellers often need to accept a lower price in order to get cash. When they know multiple investors are interested in their properties, they would rather get the higher price – even if that means having to wait on a buyer to finance.
Why Cash Might Not Be the Best Choice
An all-cash offer can be a good choice for a residential home buyer. But it might not be the best choice for a real estate investor. Why? Because an investor needs to protect his cash reserves. Every dollar he ties up in a new acquisition is one less dollar he cannot put toward a future purchase. But if he finances each property he acquires, he is able to spread his cash further.
Let’s say an investor has built up a nice cash reserve and is ready to spend. Imagine he spends 75% of it to acquire a new property in an all-cash deal. There are other properties in which he is also interested. But now he only has 25% of his cash reserve remaining.
On the other hand, let us say he finances the new acquisition. He only needs to use 10% of his cash reserve to make a down payment. He still has 90% remaining. If he can find nine similar properties, he can increase his portfolio a lot faster with the same amount of cash.
Maintenance and Upkeep
Even if an investor isn’t looking to stretch his cash further in order to pursue other deals, he still has maintenance and upkeep to worry about. Tying up the majority of his cash to purchase a new property could mean not having enough to put into maintenance and upgrades. It could take longer to get the new property up to standard, which could impact rental rates in the meantime.
Hard Money as a Financing Option
Most property investors are going to preserve their cash by financing new acquisitions. In addition, hard money is the preferred financing option for most deals. Why? Because lenders like Salt Lake City’s Actium Partners offer fast underwriting and funding, limited paperwork requirements, and asset-based approval.
Hard money loans also make investors more competitive because they are not waiting on a bank. When all other things are equal, an investor who gets to closing faster almost always wins the deal. So the speed at which hard money lenders work is a genuine advantage to investors.
Paying cash to acquire a new property was a benefit to residential buyers in the aftermath of the COVID pandemic. Yet it is not the wisest option for investors. Instead, investors tend to finance their purchases so as to maximize the value of their cash reserves. They make it work. They must know what they are doing.
