1) Real Estate: Buying with cash gives you a competitive edge if you are going up against other bidders, as long as your offer price is reasonable. If your agent is aggressive, you may also be able to negotiate a discount on the asking price for a cash offer that closes quickly (3 weeks or less).
2) Financial: Most people have a financial life that is multi-dimensional. You may need to hold back some of your cash for more than just emergency savings. There might be middle ground that helps you buy a home but still keep some non-emergency cash on hand for other things, such as fixing up or furnishing the home. A mortgage of about 50% might fit you best. Regardless, there is no magic formula that a real estate agent can run to tell you if all cash or a mortgage is right for you. You should consider meeting with a professional financial planner to look at every aspect of your financial picture.
Morever, It’s usually better to buy a home with a mortgage and not pay cash. This is assuming prices will go up, and your cap rate is higher than the interest rate on the mortgage.
I have made a spreadsheet to illustrate the power of financing property.
In this example, if you had $250,000 to spend on property, you could buy four homes with mortgages, or buy one home with cash.
If you chose to buy four homes, your annual profit would be $46,000. If you chose to buy one home, your annual profit would be “only” $19,000. As you can see, you can achieve a whopping 22.45% ROI with these very conservative estimates, as long as you finance the property. You can also achieve an 8.61% ROI if you buy the property with cash. Not too shabby!
One important point that is commonly overlooked is the tax benefit of depreciation. You can get a rough idea of what your depreciation benefit will be by dividing your purchase price by 27.5 years, which is the amount of time the IRS will let you depreciate a property over, and multiplying that number by your tax rate. In the example above, you can clearly see that by buying more property, you will have a greater tax benefit. Please keep in mind, if you ever sell the property, you will have to recapture your depreciation, reversing your tax benefit.
This example also assumes the rent collected is about 10% of the value of the property. There are many markets where you can do better than this, or you can do worse. 10% is a good rule of thumb. It’s not overly ambitious. You can definitely do better.
Next, I calculated property taxes to be 1.25% of the purchase price. You can make your own calculation based on the property taxes in your area. It’s common to see tax rates near 1.25% in California, so that’s what I used for this example.
Insurance has been calculated to be .25% of the property value. This estimate has been based on what my insurance costs me. I’m sure insurance rates vary by area. You can run this calculation with a different number if you please.
Normally, I keep my maintenance expenses below 10% of gross receipts. However, with older homes, or bad tenants, the maintenance expenses can be much higher. I used 20% for my calculation because I didn’t want the final ROI to be overly ambitious. This is not a best-case-scenario calculation.
My mortgage rates are around 4%, and it’s very possible to get mortgages around 4% in today’s environment. You can always run your own calculation with your own mortgage rate.
It’s also important to consider risk when you’re taking out debt. If property prices decline, your losses will be compounded. On the contrary, if we experience an inflationary environment, or an environment where property prices and rents increase quickly, your gains will be amplified. Leverage tends to make your net worth more volatile to the upside and downside.
Disclaimer: I’m just a bozo on the internet. Always consult with a professional before making investment decisions.
In my opinion, All the answers above address plenty of important points. However, one critical issue is whether you qualify for a mortgage to buy that house, given that your "income is low compared to a mortgage cost".
Banks use several simple qualifying formulas, one of which is DtI (debt to income ratio). It means that they want your total monthly expenses toward house ownership (mortgage + insurance + taxes + common charges) to be less than 40% of your monthly income. Check your calculations now if you still qualify for a 20% down mortgage.
If not, perhaps you qualify for a smaller mortgage, instead of a more traditional 20% down.
Whatever mortgage you qualify for, it is not just typical to purchase property using mortgage. It also makes sense financially, at least in most cases. You get a chance to borrow money at one of the lowest rates of your entire life (compare mortgage rates of 4% to a typical credit card rate of about 13%), and, normally, attain the highest leverage / borrowing capacity. When you pledge your house as a collateral you can normally lever 5 to 1, while when you pledge your portfolio of stocks for example you can normally lever up upto only 3 to 1.
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