Just how common is it to purchase a home with cash? It happens about a third of the time, according to industry statistics released late last year. And those stats indicate that cash purchases are on the rise, reaching their highest level in nearly a decade.
As these types of purchases trend, it certainly begs the question of whether the cash purchase of a luxury home is a good or a bad move. The answer is multi-faceted. As with most situations, there are pros and cons to purchasing a luxury home with cash.
A cash purchase avoids a loan, which avoids interest, and allows for a more expeditious close with lower closing costs. But, come tax season, those who paid cash for their properties won’t be able to utilize a mortgage interest deduction (which applies to the first $750,000 of your home loan).
There are always two sides to every story, so let’s dig into the upside and the drawback of paying cash for a luxury home.
Pro: Balances a portfolio. If the cash purchase of a luxury home is viewed as a reallocation of an individual’s assets, real estate acts as a safe haven against inflation, which is a very real concern at the moment. Real estate has historically been a safe bet for long-term investment gains, and during an inflationary period, it could serve as a more conservative allocation.
Con: Loss on market investments. If a buyer pulls cash from a market investment to pay for the purchase of a luxury home, there is a chance that the individual could lose out on the potential appreciation of that market asset. It’s important to weigh this consideration carefully before making any moves.
Pro: Competitive advantage. When real estate markets are tight, experiencing demand that outstrips supply (such as our Phoenix market right now), cash buyers often have a competitive advantage in the pool of other potential buyers. Cash transactions often move quicker and can be viewed as more desirable to motivated sellers as they remove risk for the seller by eliminating the financing and appraisal contingencies in the contract.
Con: Overexposure. Balance is the key to just about everything in life, including investments. It is important that buyers analyze their individual portfolio for its unique composition to ensure that it isn’t overexposed to the risks associated with investing in real estate — from negative cash flow to vacancies to market downturns.
Pro: Availability of equity. Purchasing a luxury home with cash does not necessarily mean the money is forever locked into that property. Owners have options for tapping into a property’s equity, which includes refinancing options allowing for up to 80% of that cash to be pulled back out. A home equity line of credit, known as a HELOC, also allows buyers to access cash when needed.
Con: Liquidity challenges. The relative illiquidity of a real estate investment could negatively impact an investor’s ability to quickly respond to or invest in new ventures, particularly if too much cash has been allocated to real estate investments.
At Halpern Residential, we understand that cash purchases have their advantages and disadvantages. As a rule, real estate should be viewed as part of an overall asset diversification strategy to ensure that any given portfolio is not overexposed to risky investments. And when approaching a cash purchase transaction for a luxury home, it’s important to remember that financing after the purchase is an option. Known as “delayed financing,” a cash-out refinance following the purchase of a property could offer buyers the benefits of a cash purchase without tying up cash for a long period of time.
If you’re considering a home purchase or sale, the team at Halpern Residential is ready to help. We keep an eye on market trends so you don’t have to. Moving or investing in real estate is an exciting time of transition, and we’re ready to help you with it. Contact us today so we can learn more about how we can support your needs.