The following is a post I replied on at a popular property forum.
The answer from one member illustrates just how dangerous it is to take advice from places such as forums.
Aidan1
Very basic question here – I realise leverage is a big component in property investing but just wondering if it makes financial sense at all to buy an investment property with 100% cash down?
background:
I do not have any property investments apart from my own home
I own my own house outright
I have perhaps enough savings to buy another house – that equity is currently in shares, term deposits, bank
Anne
Hi there,If you are very risk averse, you could buy two properties with 50% deposit, but three homes
with 33% deposit would be better, and very safe.You wouldn’t lie awake at night worrying, and if you gradually pay off the mortgages, you
would have three properties bringing in enough income for you to retire.You couldn’t do that with shares.
You have done well to save such a large amount, and you need to save the money and expand it to bring in a passive income without risk – which, I gather, is what your aim is.
All the best,
Anne
I’m sorry Anne but that is incorrect on so many levels.
Yes you can do that with shares, most people just choose not to.
Why would 3 properties with 33% deposit be better and safe?
If Aidan1 looses his ability to repay the debt at the same time that the market looses ground he could easily loose 33% of of the value of the property he purchased.
There are plenty of example of people buying in 07 who lost their jobs and this occurred.
And what assumption are you making that indicates 3 rental properties are enough to retire on? What if aidan1 earns 200,000 per annum now, do you think he /she would be happy living on the income of 3 average properties or about 1000 per week before tax?
Not only that but no one seems to have answered his/her question
I highlighted your question Aidan1 as this is what I think is the crux of what you are asking.
I don’t see a question “should I leverage” the question is “does it make financial sense to buy a property with Cash”
The answer to that will depend on the property and what your goal is.
Do you want a property to provide you with income and the potential for capital growth, thereby inflation proofing your investment or are you looking for property that could achieve a lot of capital growth at the expense of yield. (Income and Growth are typically inversely proportional to each other except in extenuating circumstances)
Lets say you want an investment that will provide you with a better return income than what you get at the bank, this is pretty easy, most property whether it is weighted towards growth or income will provide that.
So in that instance the answer would be yes.
Lets say you want an investment that provides you with a higher income than what you get from the bank….(remember income and return are two different things) , if you bought a property at say Piha for example, where you will get a terrible rental return then the answer would be no.
I have chosen to use an extreme to provide my answer but in reality it is quite simple…you know what you are getting from your existing investments. If the property you are looking at provides you with a better overall return or potential return (and no one has a crystal ball) then the simple answer is yes it makes financial sense.
Now for every who likes to advise Aidan1 that that he should leverage into his property investments I would like to point out that unless a property makes sense to buy for cash then you shouldn’t be leveraging against it anyway.
Yes Aidan1 will be able to increase his return on investment through leverage however leverage is merely a strategy and it is a strategy that should only be undertaken if needed and if appropriate.
Perhaps Aidan1 does not need to leverage to reach his financial goals. None of us know that.