There are both advantages and disadvantages to being a cash buyer when purchasing an investment opportunity; but is it better to be a cash buyer in the long run, or better to look at the possibility of getting a mortgage?
The advantages that can come from being a cash purchaser on an investment property both cover your own personal advantages in your position as a buyer, and the advantages that you could reap in the long-term - from capital gains especially. One of the most obvious advantages of purchasing without a loan is the lack of interest that you will have to pay. The property in 100% yours from the outset, and you won't have to worry about paying an average of 3 - 4% interest on your borrowed amount for a number of years.
"A cash buyer has less risk, faster turn around and more control" - 365 Property Buyer
If you're an investor who is lucky enough to have saved or gained enough money to be a cash buyer on a property, the long-term saving you will make on interest could be better spent on other properties or refurbishments to your current portfolio. Some of the main advantages include:
No interest payments - you will not have any interest to pay back, as you won't have any borrowed funds.
Increased equity from your purchase - as you will own your property outright, you will have more money to spend on improvements in the long-term, which can enable you to either rent or sell at a higher price.
You will be more appealing to sellers - sellers and their agents look more favourably on cash buyers for a number of reasons - they will be able to get a quicker sale, they won't have to deal with mortgage brokers or lenders, and they will be able to know that their buyer won't come into any loan issues. If you are purchasing an off-plan property, sellers and investment companies will prefer cash buyers over those with a mortgage as they will be able to get higher deposits to help complete their projects.
It's easier to put your money to work for you - with investment properties, achieving sufficient cash flow on a monthly basis is not always possible. With a mortgage, you are relying on having tenants (or at least enough months with occupiers throughout the year) to cover the cost of the mortgage - this isn't a concern for cash buyers. This can also help when looking for tenants, as you will be able to be more selective with the renters you choose as you aren't working on a time constraint to remain profitable.
There could also be an added advantage in being a cash buyer due to the lack of current cash buyers in the country. "In late 2017, the HM Land Registry revealed that property cash sales account for between 30 and 40% of all purchases. By 2019, this figure has fallen slightly to 29.6%" (This Is Money).
Security is also a major benefit to being a cash buyer. Knowing that you have paid 100% in cash, and the property is 100% yours can be a lot less stressful than having to pay back a mortgage, or go through the process of finding a good lender. However, it's important to consider that when purchasing for buy-to-let purposes, the field can be slightly different due to the deals and options available with buy-to-let mortgages specifically designed for this type of purchase.
Our CMAP certified mortgage advisor has broken it down for us as to why, if you're looking at buy-to-let mortgages specifically, it may be more beneficial in the long run to look at investing with a mortgage rather than as a cash buyer. Let's work through an example and the figures will be self-explanatory:
Suppose you wish to invest £100,000 into an investment property with an annual return of 8%. Without a mortgage, you will simply purchase the property for £100,000 and gain an annual income of £8,000. However, with a mortgage your £100,000 investment can go further, and allow you to purchase more properties. Let's suppose you purchase two properties, with a 60% mortgage at an interest rate for 4% - you still have £20,000 of your investment fund remaining.
In this second scenario, you will have double the income at £16,000; less interest payments on the mortgage of £4,800, leaving your available income at £11,200. With a mortgage you will have twice the purchase costs and maintenance fees, but also double the capital appreciation.
Let's now assume that five-to-ten-years down the line, you wish to sell your investment for potential capital gains. With current trends, let's assume that the properties purchased double in value over a 20-year period. With no mortgage in place your £100,000 investment will be worth £200,000. However, with a mortgage, both properties will be worth £400,000, minus the approximate £120,000 interest you have paid, leaving you with an overall net gain of £280,000.
As you can see, there are many advantages to being a cash buyer, as well as advantages to purchasing with a mortgage. It's important to consider, when deciding to purchase with 100% cash or not, what your long-term goals are for your investment. How will the investment fit into your current portfolio? Would you rather purchase one property with cash, or a number of properties with mortgages - how many properties do you think you can manage?
If you would like any advice on property investment and whether purchasing with cash or a mortgage is best for you, your portfolio, and your long-term goals, give our sales team a call on +44 (0)161 302 6733.