Why Buying A PROPERTY WITH CASH IS NOT A GOOD USE OF FUNDS

When it comes to purchasing a home, paying in cash might seem like a smart financial decision. You avoid mortgage interest, bypass lenders, and simplify the transaction. However, from an investment standpoint, using cash to buy a house can significantly lower your return on investment (ROI). By not leveraging your capital, you could be missing out on opportunities to grow your wealth.

The Power of Leverage in Real Estate
Leverage refers to using borrowed capital (a mortgage) to increase the potential return of an investment. Real estate investors often use leverage to maximize their ROI, as it allows them to control a large asset with a relatively small upfront investment.

​Example: Cash Purchase vs. Mortgage Financing
Let’s compare two investors purchasing the same $300,000 home—one with cash and the other with financing.

• Investor A (Cash Buyer): Buys the home outright with $300,000.
• Investor B (Leveraged Buyer): Makes a 20% down payment ($60,000) and finances the remaining $240,000 at 6% interest.

Assume both investors hold the property for five years, rent it out with a 7% annual appreciation rate, and earn $1,500 per month in rental income.
Cash Buyer ROI Calculation

• Property Value after 5 Years: $421,000
• Rental Income: $90,000 (before expenses)
• Total Gain: $211,000 ($121,000 appreciation + $90,000 rental income)
• ROI: $211,000 / $300,000 = 70.3%

Leveraged Buyer ROI Calculation

• Property Value after 5 Years: $421,000
• Rental Income: $90,000 (before expenses)
• Mortgage Payments (Interest + Principal): ~$86,000 over 5 years
• Equity Gained from Payments: ~$30,000
• Total Gain: $151,000 ($121,000 appreciation + $30,000 equity gained)
• ROI on Initial $60,000 Investment: $151,000 / $60,000 = 251.7%

Comparing Returns
Investor B, who used leverage, achieved a significantly higher ROI (251.7%) compared to Investor A (70.3%). The ability to invest less upfront while benefiting from the appreciation and rental income of a larger asset dramatically boosts investment returns.

Opportunity Cost of Using Cash
​By tying up all your cash into one property, you lose the ability to invest elsewhere. Instead of putting $300,000 into a single house, you could have:

• Used $60,000 for a down payment and invested the remaining $240,000 in stocks or other real estate properties.
• Diversified your investments to reduce risk.
• Maintained liquidity for emergencies or other opportunities.

The Bottom Line
While buying a house in cash may provide peace of mind and savings on interest payments, it limits your investment potential. By leveraging a mortgage, you can amplify your returns, maintain liquidity, and better diversify your portfolio. For most investors, financing a property is the smarter financial move.