Some entrepreneurs have enough money that they can consider forgoing a financial loan and simply pay for a rental property with cash. This is an option that might yield some benefits, but like any financial decision, there are pros and cons depending on your situation and your priorities for the future.
The Motley Fool breaks down the positives and negatives of paying with cash for a rental property as opposed to seeking a financial loan.
The benefits of cash payments
When you buy a rental property, your main goal is to secure a cash flow through the revenue of your tenants. However, a slow economy may reduce your number of renters. This could be a problem if you took out a mortgage to pay off the property. Without enough revenue to service your loan, you would have to tap your reserves to make mortgage payments, which could put you in financial trouble if things do not improve.
Paying with cash also eliminates some of the costs involved with a mortgage. You will not have to worry about loan origination fees or closing costs. Also, a lack of a mortgage eliminates interest payments on the loan. A cash payment can also speed up the purchase of the property since there are no financing steps involved.
The negatives of cash payments
One of the downsides of a cash payment is that you have spent much more of your own money on your property. This would leave you with less money that you could use for other endeavors. A cash payment could also leave you with less of a return on your initial investment since you have paid more out of your pocket to buy the property instead of using the rental property revenue to service the mortgage payments.
Consider your priorities
Though a cash payment has its benefits, some entrepreneurs find that they benefit more from taking out a loan to finance a rental property. Weighing your current finances, the profit potential of a rental property and the financial risk you want to take may help you arrive at a decision that best benefits you.