Should You Pay Cash for Rental Property?
When you are considering purchasing a rental property, you may have to make a decision between paying cash for it or financing it through a traditional mortgage. Depending on your situation, paying cash might make more sense because it lowers your financial risk. At the same time, you are throwing away tax benefits by paying cash for the house.
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Lower Risk
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One of the reasons that you might want to consider paying cash for a rental property is because it lowers your risk as an investor. When you finance a property through a mortgage, you always have to worry about making your payment. If you are unable to keep the property rented for an extended period of time, it could lead to serious financial strain. When you have the property paid off, you do not have to worry about any large expenses even if you do not have a tenant.
Selling the Property
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If your situation changes and you decide that you want to sell the rental property quickly, you might be in trouble if you own it with the help of a mortgage. If you have a mortgage on the property, you most likely have to keep it rented so that you can make your payments. Renters could damage the property, making it harder to find a potential buyer when it comes time to sell. It would be much easier to find a buyer if you did not have to worry about tenants tearing up the property for the sake of you being able to make your mortgage payments. You could simply put the vacant property on the market.
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Tax Breaks
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If you use a mortgage to finance the rental property, it can work to your advantage when it comes to paying taxes. The money that you pay in interest on your mortgage can be deducted against the income from the property. This could help offset much of the money that you make from rent. Depending on how much money you pay in interest, you may not have much tax liability at all after the deduction is taken.
Investments
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When setting aside enough money to buy a rental house, you also have to think about the opportunity cost involved. If you use a mortgage to purchase the house, you could potentially use that money to invest in many different things. If you could invest in something that would pay you a higher return than what you are paying in interest for the mortgage, you might be better off financing the rental property through a mortgage rather than purchasing the property with cash.
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