Why would you buy a house with cash?

If you have a stable income and can earn more by investing your money, why would you use all your cash to buy a house?

Assumptions:
- You were able to finance your house with a low rate of 2-5%
- You can earn 6-10% each year investing your money

For a $1M house you could put 200k down and invest the other 800k instead of using all your cash on the house?

Not to mention the liquidity aspect of tying up all of your cash in a house.

So why do people buy a house with cash?

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Comments (35)

May 1, 2022 - 6:01pm
theATL, what's your opinion? Comment below:

Rarely are people doing this with "all their cash", it happens more when you have a lot of liquidity. There are small benefits, mainly: 1) saving on small fees (loan origination, appraisal, mortgage recording tax if in nyc) and 2) in a competitive market it allows you to close quickly and sellers tend to prefer all cash deals (sometimes you can get a deal too). Outside of that it is usually a peace of mind type thing. Many people enjoy living debt free (I am one of those) and it allows you to have financial freedom (although so does saving a bunch in the markets). 

Array
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May 3, 2022 - 4:46pm
Deal Team Six, what's your opinion? Comment below:

No. 2 is a huge factor in the current market. Right now prime real estate is selling in an hour, above list, with multiple offers. An all cash offer sweetens the deal a bit. There is such a shortage in prime real estate on the market that people will do anything they can do buy the place they want. This includes all cash offers and paying above asking. 

May 1, 2022 - 7:39pm
CashBuffer, what's your opinion? Comment below:

The calculation is easy. For your own personal home, there is no reason to risk a default risk. If everything goes wrong (e.g., market crashes, job lost, and big time medical bills), you still have a fully paid off home. A fully paid off home unlocks financial freedom. 
 

Your big assumption is you can earn 6-10% each year investing your money. That's not always true and certainly not true at certain time horizons. 

May 3, 2022 - 12:45am
Kevin25, what's your opinion? Comment below:

fully paid off home still requires property taxes which can be ~2.5% of the property value, insurance, and HOA fees which can be outrageous. it's really not much more expensive to rent than to pay property taxes and HOA fees and pay for insurance and all repairs and maintenance yourself. plus you can literally live in a new neighborhood every year, or even new city or country if you work at an international company with easy mobility.

May 3, 2022 - 10:47am
Shockattack11, what's your opinion? Comment below:

Very few people on this Earth find the idea of moving every year attractive. Moving is one of the most stressful things ever, and being a nomad is 100% not gonna fly if you have a wife and/or kids. Also, the math has been done. If you're going to move within 5-7 years, it is cheaper to rent, else it is cheaper to buy. Also, you can write off the mortgage interest and depreciation and other costs on taxes

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May 3, 2022 - 11:15am
theATL, what's your opinion? Comment below:

This isn't true I almost all areas I've lived in, HOA and taxes does not add up to rent (at least not in nyc where I live, and there are some high HOA properties out there). We have fully paid off our condo and HOA + taxes + insurance are ~30% of the cost of renting (and are more stable). HOA generally covers most repairs/maintenance (although not all). Not saying buying is always the right call, but I prefer not to have rent increases, not to have to move, and have low monthly carry costs. 

Array
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May 4, 2022 - 10:48am
NudnikShpilkes, what's your opinion? Comment below:

If you live in a large city HOA fees can definitely be significant but for most of the country there either aren't any HOA fees or they are minimal, same goes for property tax, most of the country is around 1%, not 2.5%. If your home is fully paid off your monthly HOA and property taxes would be maybe half of what you would be paying in rent for the equivalent home. I actually have a model that I built for this exact purpose, to see at what point renting outweighs the sunk cost of HOA, property tax, insurance, etc.. Don't get me wrong there are benefits to renting and a threshold where renting is more advantageous from a cost and mobility standpoint, but there is definitely a line where buying is the better route.

The biggest benefit of owning though, whether you have a mortgage or not is that at a certain point you have an asset worth hundreds of thousands or millions of dollars and no longer have to shell out thousands of dollars every month which you would still need to do as a perpetual renter.

May 1, 2022 - 7:45pm
2rigged2fail, what's your opinion? Comment below:

you live mortgage free and invest your income

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May 4, 2022 - 2:26pm
UFOinsider, what's your opinion? Comment below:

Very curious to learn more...

Get busy living
Most Helpful
May 2, 2022 - 9:56am
MonkeyNoise, what's your opinion? Comment below:

Spend enough time in white collar circles and you see that the actual majority of people are financially smart but not financially wise. Sure they might be able to explain that it makes sense to put as little down as possible due to opportunity cost of interest rates and how mathematically that is the best decision. But, again the MAJORITY of people, that say 'put little down as possible on a house or car so I can invest the rest' ultimately:

- use that as an excuse to buy more house or car than they can afford. If you are comfortable paying for 10% of it instead of 100% then the equation changes. 

- Doesnt acutually 'invest the rest'. They still want to go on those multiple nice trips, still want to buy nice things, private school for kids, keeping up with joneses, etc.

- instead of building equity long term use HELOCs as play money, but hey that interest rate so it doesnt matter

- ends up convincing themselves that bathroom remodel, kitchen remodel, etc. is an actual 'investment' despite the ROI being negative unless it's a complete DIY job (in white collar circles, it usually isnt). When you can justify in your head anything as an investment then it becomes easier to open the pocket books

and ends up being in a situation where the house owns them as much as they own the house. 

Im not talking about the 50+ year old who has the assets to write a check for the house today and is choosing to just put a small amount down though, but more the 25-50 year old who is just starting out. Personal finance is as much behavior as it is math, and often times the paid off house individual will be more financially independent/higher net worth just because they have that frugal muscle that the other guy likely lacks. Just my two cents from observations

May 3, 2022 - 12:10pm
IcedxTaro, what's your opinion? Comment below:

I see a lot of people who make a little over six figures live in 2m+ dollar houses in the Southern California area.  

When I started touring areas, many places where home values were 1m+ had like 30+ bids for it.  In fact, it is encouraged to stretch the budget as far as you can to get the house you want.  


What would be a good layout to be financially wise?

Also - thoughts on this thebrofessor? (Sorry in advance to tag you in this thread).

May 3, 2022 - 12:38pm
MonkeyNoise, what's your opinion? Comment below:

The older I got the more I realized the importance of financial 'wisdom' vs just math. It's not as hardcore as Dave Ramsey , but by setting guard rails (ex: we are only buying a house we can pay for today in cash whether or not we do is up to us) or (I'm only buying a car in cash) then you prevent yourself from making financially 'smart' decisions aka interest rate math.

In terms of unnecessary features for a house. Landscapping, # of rooms (seriously - a guest bedroom is used 2x a year and I have friends with 3-4), neighborhood, comically absurd sq ft (McMansion) are all where people get burned. I cant speak to California, know it's very expensive there, but elsewhere it's just people being entitled to thinking they can afford something they really cant.

And for the rent v mortgage debate remember - rent is the most you will ever pay per month. Mortgage is the least. You need to set aside 2% of the homes value PER YEAR for repairs, the larger the house the more expensive the maintenance, and oh yea - taxes can and will go up. Have some money left over? Well you just had dinner with Tom and Sally and your wife is raving about their kitchen and thinks you all need something similar. There goes another 20 grand. Dont worry, you just got a bonus so no sweat. But now the HVAC is making noise and there's a leak in the roof and... well you can see where the average person gets burned. But hey you are the genius for locking in that 3% rate!!!

May 3, 2022 - 12:50pm
Troy McClure, what's your opinion? Comment below:
IcedxTaro

  
What would be a good layout to be financially wise?

If you also make little over 6 figures, going to another area would be the wisest choice 

Array

May 4, 2022 - 10:07am
ironman32, what's your opinion? Comment below:

I agree with everything you said. 

- Ultimately, owning a house for most people is way to "trick" themselves into saving, because people will miss paying a lot of debt, but they wouldn't miss house payments unless they severely lack the capital. It's a mindset of people saying "I'll spend this paycheck and invest the next one" for months/years on end that leads to death by 1,000 cuts (similar to the way we consume social media, or the way we eat). 

- On buying more house than people can afford, I know lots of friends/family would have bought a house that has a feature that they will use once every ~2/3 years. Meaning, people house shop with the idea they need a "guest bedroom for when they host a holiday", yet they rotate host every 3 years. So they bought a house with an extra bedroom for the in-laws that they use 1 out of every 3 Christmas. Makes home buying more emotional than logical; but go watch every home buyer on HGTV. 

May 4, 2022 - 10:27am
MonkeyNoise, what's your opinion? Comment below:

Yep yep yep. "we need a second guest bedroom that has it's own bathroom for when my parents visit" well that happens a few days a year and will cost you $50k+ in the long run for what is ultimately an empty room. Or have a finished basement, finished patio, and living room all with big couch, flat screen TV, etc. again - why?

You see this logic with cars as well. "I like to do projects so I need to buy this new F150". Well congrats you are making monthly payments on a $70,000 vehicle for the next half decade when you couldve just rented transportation or hell rented a truck on days you go to home depot/lowes and come out substantially better off.

It's why I dont really buy into the renting is throwing away money argument. Most people end up spending far far more on their home owning expenses than renting expenses. You own a house and the first time stuff starts to go wrong (wont take long) all your home owning friends and family will laugh and say "welcome to the joys of homeownership". You have company over and get ideas on how you should landscape your yard, or make some other massive change. It can be a massive money pit if you arent on it 100%

May 3, 2022 - 12:41am
Kevin25, what's your opinion? Comment below:

that's what a lot of people do, which is why you see so many foreclosures and mortgage collapses, because once there's a downturn, you'll be in the red instead of making "6-10%" and there will be a big chance of you getting fired cause banking job is cyclical (if you were a doctor or auditor, then it's a different conversation). so you'll end up with no source of income and with big debt payments that you have to sell your investments at a loss to pay.

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May 3, 2022 - 11:52am
Anonymous Monkey, what's your opinion? Comment below:

Just because something makes the most financial sense doesn't mean you have to do it. Some people have an aversion to debt, or having a big mortgage would be a big weight over them all the time, etc. You don't always have to do what is most optimal…personally I like the idea of buying all cash and being done. I understand your rationale but sometimes preferences > most "optimal" thing to do. 

May 3, 2022 - 12:22pm
Big Banker Brand, what's your opinion? Comment below:

The 30 year is 5.75%. I'm making all cash offers. Places are still getting multiple bids and I can close faster with all cash. Sellers will take lower offers because of the assurance of cash vs having to deal with financing and appraisal contingent offers. I'll take a HELOC out when I need that money after I close

Array

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May 3, 2022 - 12:55pm
MD Step Dad, what's your opinion? Comment below:

3 observations:

  • Your example assumes that everyone starts with $1M (which isn't the case), the reality is that people pay rent until they have such net worth.  So, assuming you reach $200.000, would you pay rent (throwing money away) until you reach $1M? Or it would be better to put the $200.000 down and instead of paying rent for the following 10 years, the payment will go for the house? It would be financial wise to do the later.
  • If you live with your parents and you don't pay rent, you wouldn't put $200.000 for a house when you can simply put everything into the market until you reach $1M.
  • If you inherit $1M, then yes, what you propose would be optimal but if the stock market goes down and you can't meet your yearly interest payment you may incur in penalties (credit scoring, additional payments, legal actions, etc.) so paying it all is mostly to avoid stress in the future. If you sell some stocks to cover the payments, you would sell them at a discount, so you may even get into negative compared with putting all cash.

Your scenario is a nice classroom example to understand opportunity cost but wouldn't put too much faith on it in the real world

May 3, 2022 - 1:49pm
IcedxTaro, what's your opinion? Comment below:
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This is utopic because it assumes that everyone starts with $1M. Assuming you reach $200.000, would you pay rent (throwing money away) until you reach $1M? You will get directly a house and approximately you would be paying a little more than rent but it will go into your house.

What do you mean? 

Are you saying purely saving cash to the point of purchase is a deficit in comparison to purchasing a house with a down payment as the cash is going towards an asset?

May 4, 2022 - 9:59am
Masterz57, what's your opinion? Comment below:
Gucci Loafers

3 observations:

  •  would you pay rent (throwing money away)

Why this lie gets repeated so often on a finance site confuses me.  

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May 4, 2022 - 10:16am
GoingToBeAnMD, what's your opinion? Comment below:

This may be the biggest lie of them all across all personal finance advice. 

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May 4, 2022 - 1:49pm
GoLiftSomeWeightsBro, what's your opinion? Comment below:

If I don't, all the money goes into cycling gear and carbon bikes. Few of those S-Works and Im 100k short on my savings. Putting it into property also takes the psychological  pressure of having to pay some monthly rate for the 10 years off my back.  

May 4, 2022 - 2:32pm
UFOinsider, what's your opinion? Comment below:

Very few people buy a residential property in cash to just live in it.  A few do it because that's their personal preference but far more often when you see a cash purchase it's one of the following:

* Russian/Saudi/Chinese/etc money they're looking to park in the west, with almost no concern for the actual market price

* Property flippers who borrow from hard money lenders, use the cash to buy and renovate the house, then sell

* Wealthy people who pay cash for a property so they can borrow against the value to get tax free spending money and write off the interest payments

* Institutional investors that turn standard SFH into rentals....which is actually a huge fucking problem on a civilizational level

Get busy living
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May 4, 2022 - 3:45pm
ex-Detroiter, what's your opinion? Comment below:

All cash buyer = faster close + less likely for a bidding war since many sellers are in process of buying a new house and closing quick is important so you don't have to carry to mortgages at once. Basically, you get a discount in competitive markets. That and it's also a status thing among older adults to have a paid off house.

May 4, 2022 - 3:58pm
rickle, what's your opinion? Comment below:

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