Having a healthy bank account can allow you to buy your new home outright , without taking out a mortgage . Often perceived as debt in the negative sense of the word, using a loan is actually not without merit. Quite the contrary! There are, in fact, advantages to both approaches. In specific cases, one will be more suitable than the other. Let's explore all of this in this article.
PURCHASE IN CASH: NO LOAN SUSPENSIVE CLAUSE
This is an undeniable advantage for a buyer making an offer on a property. Paying in cash effectively eliminates any financing contingency clause. Indeed, when a buyer takes out a mortgage, this clause is almost always included in the preliminary sales agreement.
There is a risk that the seller's sale could be cancelled because the buyer's loan applications may be rejected. This is especially true if the buyer has not taken the necessary steps to assess their borrowing capacity .
Therefore, buying a property with cash can make a significant difference, especially in areas with high housing demand. Faced with two equivalent offers, one for cash and the other conditional on obtaining a loan, the seller will almost always choose the former. This option provides the security of seeing the transaction completed without uncertainty.
BUYING IN CASH: A REDUCED TOTAL COST
When you borrow money from your bank to buy a property (or even for anything else), there are inevitably additional fees. Between the interest rate, insurance, and other charges, you will inevitably end up paying more than the initial loan amount.
That's why buying a house outright will allow you to save money on all these additional expenses.
There's a well-known technique among wealth managers: opportunity cost . This involves comparing what you could have earned if you had invested your borrowed sum (and therefore what you don't gain by using your capital in cash for a real estate purchase). This provides a significant benchmark when choosing between paying in cash and taking out a mortgage.
MORTGAGE CREDIT: THE CONCEPT OF CASHFLOW
Investing in real estate is different from buying your primary residence. In fact, you will receive rent every month by letting out your property.
When you decide to invest in real estate, your goal is likely to acquire multiple properties to build a portfolio where each asset is self-financing (income exceeding expenses). If you finance your investments with cash, you'll likely find yourself stuck once you've used up all your savings.
A partial or full mortgage would therefore be a wise choice in this specific case. Indeed, banks generally only accept applications where the debt-to-income ratio is less than 33%. Borrowing will thus allow you to make several investments. In fact, the income generated by your properties will directly and positively impact your debt-to-income ratio. Unless you have very substantial savings, a mortgage is the most effective way to expand your real estate portfolio and preserve your capital.
MORTGAGE LOANS: A POWERFUL LEVERAGE EFFECT
Still within the context of rental property investment, borrowing allows you to benefit from what is known as the leverage effect of real estate credit . Since borrowing allows you to make multiple acquisitions, your overall profitability will be improved.
EXAMPLE :
You have savings of 100,000,000 FCFA. These savings could, for example, be used to make four down payments of 25 million FCFA each. Let's assume these down payments allow you to borrow 75,000,000 FCFA per property. You would then have the capacity to finance four properties at 100,000,000 FCFA each, for a total of 400,000,000 FCFA. In other words, savings of 100,000,000 FCFA allow you to finance real estate investments totaling 400,000,000 FCFA.
If the return is 5% annually, you will earn: 400,000,000 x 0.05 = 20,000,000 FCFA. That's an annual return of 20,000,000 / 400,000,000 x 100 = 20%. Not bad, right?
If you had invested all of your savings in real estate by paying cash, you would have earned "only" 100,000,000 x 0.05 = 5,000,000 FCFA.
By using your savings wisely and provided that your investments generate regular income, borrowing remains the best option.
Our opinion: While every savings plan is different and every situation unique, you will have understood from this article that the choice of financing is paramount in your wealth management strategy. Buying your primary residence outright may seem like the obvious psychological choice when you have the means. However, for real estate investments, financing remains the safest option for maximizing profitability.
Do you also want to invest in real estate? Here are all the real estate listings for sale in Senegal .