Cash is king, right?
When making an offer on a buy to let property, many people believe that if you have the ability to, buying in cash puts you at a major advantage above other potential buyers.
But is this really the case?
The answer is… sometimes, yes, but it depends on your investment strategy.
In today’s blog post, we explain the key advantages and disadvantages of purchasing a buy to let property in cash and why many of our clients prefer to invest using a buy to let mortgage.
What is a cash buyer?
A cash buyer is someone who can purchase a property without the need for a mortgage. It means that the buyer has access to the full amount of money required to purchase the property, including all associated costs.
The advantages of being a cash buyer
No risk of mortgage issues
According to This Is Money, 306,198 property sales fell through in 2020, with mortgage problems being a common reason. Even if a buyer has an Agreement In Principle (AIP) for a mortgage, the lender can still decide not to offer the mortgage. If the sale falls through, the vendor has to look for a new buyer, and the whole process has to begin again. A cash buyer does not need to rely on getting a mortgage with a third-party lender and so the sale is more guaranteed.
The process is much faster
Because the buyer does not have to satisfy a third-party lender that they are worthy of the credit, a cash sale can complete much quicker, sometimes in a matter of weeks. This is a significant advantage to the seller if they need access to funds quickly.
Greater certainty of the sale completing
A quicker sales process also reduces the risk of the sale falling through because of a change in heart or circumstance on either side.
Increased bargaining power
As a result of a greater speed and certainty of sale, you can sometimes negotiate a better deal with the estate agents and vendor, whether that is in terms of price or terms of the sale, e.g., delayed completion.
All this helps to convince a seller that you are the right buyer and in a market with multiple people offering on any particular property, it can help to secure the property you want at the best possible price.
However, there are equally some disadvantages to be aware of.
The disadvantages of being a cash buyer
Lack of leverage
Put simply, leveraging is the ability to multiply your money using finance from a bank or other institution. While leveraging increases your risk, leveraging to purchase a UK property is a well-practiced trick and the risk is usually offset by the additional reward of increasing property prices across multiple properties.
By getting mortgages, a typical £150,000 cash purchase can be turned into 3 x £50,000 mortgage purchases.
The rent that the tenants pay more than cover the costs of the mortgage interest payments, and leaves more total net profit, than if you settled for just purchasing 1 property in cash.
As well as this, instead of just having 1 property increasing in value over time, you now have 3!
The image below helps to demonstrate the numbers more clearly.
You can see that purchasing a property in cash gives an annual rental profit of £7,715.
Over 20 years, that totals £154,300 and assuming a capital growth rate of 5% p.a, the capital gain is £150,000. The total gain is then £304,300
But if you purchase 3 properties with mortgages, the annual rental profit would be £4,340 per property, totalling £13,020pa. Over 20 years, this would add up to £260,400, with the capital gain of £150,000 per property, accumulating to £710,400 in total.
So, leveraging effectively boosts your overall returns and allows you to grow your portfolio much quicker.
So, should you buy in cash if you have the money?
There is no one size fits all answer, but if you are looking to maximise your returns, it may be beneficial to leverage your funds with a mortgage. The main advantages are around becoming a better buyer, in the eyes of the seller, but it limits your growth potential and reduces your return.
At Lifestyle property People our relationships with the agents and our credibility of purchasing over 200 properties in the Leeds market over the last few years, help us negotiate the best prices and the best terms. So, in effect, we get the advantages of a cash purchase without having to give up the return! Now, that is something worth sharing!
If you have any questions about this article or property investment in general, please feel free to get in touch and one of our team will be happy to help.
Disclaimer: We are not qualified financial consultants or mortgage advisors and any views expressed in this article are our own opinions. We recommend you speak to a qualified professional before making your purchasing decision.