Purchasing property with cash

by Readers Question

18:35 PM, 12th August 2014
About 4 years ago

Purchasing property with cash

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Purchasing property with cash

Hi, I am in the process of purchasing my second buy to let property with cash. My first has a part interest only and part repayment mortgage on it to about 45% LTV. Purchasing property with cash

This second one I intend to purchase with savings. I would still have about the equivalent of 30% of the purchase price in cash in the bank.

Everything I read about Buy to Let advocates mortgaging as much as possible. But if I can afford to buy cash, should I do this? Is the only risk the drop in property values?

Thanks

Claire



Comments

Mark Alexander

18:43 PM, 12th August 2014
About 4 years ago

Hi Claire

To answer this question I think you really need to consider why you are buying property for investment. There can only really be three fundamental reasons:-

1) For a better cashflow return that you can get elsewhere

2) For a better capital return that you can get elsewhere

3) Because you think rents will increase

You may be able to increase all three of these by utilising cheap finance. Please see my strategy here >>> http://www.property118.com/how-to-become-a-respected-profitable-landlord/60765/

The only real risk you run by buying for cash only is the risk of missed opportunities. You may be able to buy 4 properties with mortgages instead of one for cash. If rents fall and mortgage rates sky rocket then you will breath a sigh of relief that you didn't take on any mortgages. However, if rent and property values rise quickly then you will only benefit from a quarter of the returns you would have otherwise got.

The key to success is finding the right balance. I help people to achieve this by providing a one-to-one consultancy service - see >>> http://www.property118.com/consultancy-mark-alexander/61522/
.

Claire Oswald

10:59 AM, 13th August 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "12/08/2014 - 18:43":

Hi Mark, thanks for your reply. I think the main reason is to get a better return on my money than it sitting in the bank with the current dismal interest rates. Myself and my partner both work full time so don't need it to take up too much time and have had some terrible experiences with agents so do all the dealings ourselves.

I have read your strategy, that's partly what made me ask the question as you do advocate mortgages to free up capital for further deposits on further properties but I'm not sure we are at that point yet. I suppose in the future we can always get a mortgage to release some equity if we did want to further expand.

Thanks

Claire

LVW4

14:55 PM, 13th August 2014
About 4 years ago

I am in a similar situation. I am re-mortgaging to release equity, and want to maximise what I can buy with the cash available, to deliver income. Appreciation is secondary, as the taxman will only take a big chunk anyway. I would prefer to use the same lender, but my only concern is I am only just re-mortgaging, and the lender may not have the appetite for further BTLs. I may need to look elsewhere, which means more time and paperwork.

I will seek advice here over the coming weeks.

Jeremy Edwards

15:33 PM, 13th August 2014
About 4 years ago

Buying with a mortgage is a form of gearing, in that it will magnifiy your successes or failures. Gearing within investments is a risk multiplier, so is frowned on in conventional investment advice, but is the norm within BTL circles.

Buying with cash will cap your expense for holding the property, but it will reduce the cash you have for other purposes and effectively reduce the overall return you might get on your property portfolio. If you are borrowing at 3% and getting a return of 7%, then you are letting some profit slip through your fingers.

Conversely, when times are hard a mortgage repo could cost you more than just money. Over borrowing could make it impossible for you to keep your property portolio ticking over while you wait for the market to improve.

A lot of landlords lost their shirts in the last property crash and most commentators expect the cost of mortgages to rise in the medium term. If you have tested your business plan with a mortgage rate of about double today's rate, then you ought to be fine, but not everyone is in that happy place and not all rents can be put up quickly.

Claire Oswald

16:38 PM, 13th August 2014
About 4 years ago

Reply to the comment left by "Jeremy Edwards" at "13/08/2014 - 15:33":

Thanks Jeremy. I think the upshot of this appears to be that there are pros and cons to this depending on what you want to get out of the investment.

I think at the moment I'm fairly happy going the cash route and will look to borrow if we expand in the future. We have a couple of endowments that are due to mature in the next couple of years (been paying off capital on 2 other mortgages so not needed for that) so may look at buying something with a mortgage attached when that happens.

Thanks for your advice.


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