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Cash is king in homebuying

By Judy Martel · Bankrate.com
Sunday, June 12, 2011
Posted: 11 am ET

The market for investment homes is picking up, and more than half the buyers these days are coming to the table with cash.

Rock-bottom prices are attracting investors who want to diversify their portfolio with real estate. For those who have a choice of paying by mortgage or cash, which is the better option? The scarcity of home loans these days means that paying cash not only leaves more room for negotiation with the seller, but a smoother and cleaner buying transaction. And if the goal is to rent out the property, the absence of debt means more income in the investors' pockets.

Investment real estate on the rise

Investment real estate on the rise

But some experts say that paying for a home with cash, even if you have it, is a bad idea when mortgage rates are so low. It's possible to earn a higher rate of return with stock investments and easier to get your cash out in an emergency in some cases. Real estate is illiquid, so investors would have to plan to have their cash tied up for the long term.

There's another option, for those who don't want the bricks-and-mortar investment of real estate but still want to diversify. Real estate investment trusts, or REITs, invest in commercial and residential real estate and pay out 90 percent of their income to investors in the form of dividends.

Do you think it's smarter to pay cash or take out a mortgage for a second home or investment property?

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2 Comments
Joe
July 23, 2011 at 11:04 am

You're right,the last 2 homes I owned have been mortgage free,it's a great feeling to know you can't lose it to mortgage default!

Homeless
June 15, 2011 at 9:04 am

If I could afford it and the money was specifially put aside for it, I would rather own my home outright. For someone that was hard hit and lost a home, I don't EVER want to owe someone for the place I call home. It is GUT-WRENCHING to have your home ripped away from you and lose all the money that you did put into it, due to circumstances outside your control (TWO YEAR job loss which meant 50% cut in income on top of home values crashing not allowing room for refinancing at lower rates to get payments more manageable and inability to sell the house and cover the payoff).

Because we had a mortgage the bank had the power to take everything we worked for and built up away. We were left with nothing but shattered dreams and having to move 900 miles away from everyone and everything us and our two girls under 3 knew and loved. We can't even afford to visit easily!!

I also guess the difference is whether this is your home or an income property. Having a mortgage on an income property helps offset the income for better tax costs...but for a home that I want LIVE in and spend the rest of my life with my family in, I would like to skip a mortgage.