Cash in On Your Next Deal – Why You Might Need It Now More than Ever

Posted by Scott Jacobs, Broker on Monday, July 17, 2023 at 11:24:09 AM By Scott Jacobs, Broker / July 17, 2023 Comment

Cash in On Your Next Deal – Why You Might Need It Now More than Ever

When it comes to real estate, logic tells us that cash is king. Being able to pay for a property upfront in full can give you more bargaining power when negotiating with the seller—and often get the deal done faster and easier than if you had to apply for financing. But understanding just why having cash on hand could be important for your next purchase goes beyond “simple” financial logic; there are several strategies involving creative funding solutions and well-timed investments that will ensure maximal ROI (return on investment) while minimizing risk of loss.

The dream of owning a home has been a challenge for many in recent years, and the road to homeownership has only gotten bumpier. With interest rates on the rise, decreasing purchasing power, and a shortage in available homes, buyers already face several obstacles. However, the cherry on top for many people is the increasing amount of cash buyers. According to Redfin, nearly a third of U.S. home purchases in April were made with cash, a nine-year high. The trend started during the pandemic, and February saw even higher numbers with 33.5% of purchases being made with cash. With so many cash buyers in the market, it's no wonder hopeful homeowners are finding it harder to turn their property aspirations into reality.

In this blog post, we'll discuss how being ready and armed with available funds can help make bigger deals possible, potentially save you money through better returns or tax advantages, and open up opportunities previously not possible without access to extra money. Read ahead to find out exactly why having plenty of readily accessible funds makes perfect sense when considering major real estate investments — aside from simply making one look more attractive than the competition to sellers!

Get Ready for the Rise: How Interest Rates are Set to Soar

Real estate markets have seen a major shift in recent years as cash buyers become a larger portion of overall buyers. The reason for this trend can be largely attributed to the rising interest rates found in mortgages thanks to inflation. Although there was a slight decrease in interest rates in June, they still remain considerably higher than they were a year ago. The weekly average of 30-year mortgages at the end of June was 6.67%, which is close to its highest level in the last 15 years. These increasing rates are making it harder for buyers to gain approval for a mortgage, which has further driven the shift towards cash buyers.

The current housing market presents an interesting dilemma for potential buyers. They have two options: pay with cash and avoid the monthly payments, or take out a loan with high interest rates. For those who can't afford to pay in cash, they are left with a tough choice. They must either withdraw from the market completely or accept the higher interest rates. Redfin Senior Economist Sheharyar Bokhari notes that this is precisely why there has been a surge in all-cash transactions among affluent buyers. Being able to pay in cash instead of taking out a loan gives these buyers the competitive edge needed to secure their desired property. It's a difficult situation for those without endless funds, but it's important to remember that there's no one-size-fits-all solution here.

With rates increasing, investing in other attractive assets such as bonds has become a more enticing option for potential buyers. However, this doesn't only mean that those buying with cash are less interested in homes, but it's also created a noticeable drop in home sales overall. In fact, compared to a decline of 35% in all-cash sales, home sales have taken an even harder hit, down 41% from a year earlier. It's a tough time for the real estate market, but as rates continue to fluctuate, it's a waiting game to see how it'll affect future sales.

Out of Stock: The Great Inventory Hunt

Cash buyers are proving to be quite powerful in the current housing market due to intense competition for available properties. In certain metropolitan areas, a shortage of housing means that all-cash buyers have the upper hand and have started to price out some potential homebuyers who need to take out a mortgage. The market has plenty of willing buyers, but fewer properties are available for sale, causing would-be sellers to hesitate before listing their homes. The housing inventory is currently down by 6.1% in May compared to the prior year, and it remains at around half the level it was before the pandemic. As a result, it's not surprising to see cash buyers jump at every opportunity to secure the home they desire, and sellers who accept their offers should understand that they hold all the power in these market conditions.

Ways to Come Up With Cash

In the current housing market, cash buyers have quite the advantage. With more demand than homes available and interest rates on the rise, paying for a home in cash can give you a serious edge in a bidding war. However, not everyone has the financial means to purchase a home outright. But don't despair just yet - there are options available. One such option is opening a self-directed individual retirement account (SDIRA) or taking out a Home Equity Line of Credit (HELOC). These avenues can provide you with the necessary funds to make a cash offer on a home, and in turn, save money in the long run. Regardless of your financial situation, it's important to explore all of your options in order to make the most informed decision for your unique circumstance.

Self-directed IRA

When it comes to planning for retirement, most people think of stocks and bonds as their go-to investment options. However, did you know that owning real estate in your individual retirement account is a possibility? That’s right. With a self-directed IRA, you can invest in property solely for investment purposes. This option gives you the flexibility to choose what you invest in and can result in significant tax savings. One thing to keep in mind is that you cannot use the property as a vacation home or primary residence, as the IRA itself acts as the property owner. Nonetheless, owning real estate in your IRA is a unique and exciting option to diversify your retirement portfolio.

HELOC

A HELOC is a powerful tool for homeowners who are looking to make large purchases, but it's important to understand the risks involved. Essentially, this type of loan allows you to use your home as collateral in exchange for a revolving line of credit. While it may seem similar to a mortgage, HELOCs are different in some key ways. To qualify, you already need to own a home. And if you default on your payments, you risk losing both your home and any other property invested with the HELOC. Overall, a HELOC can be a great option for those looking to make a significant investment, but it's important to understand the risks before diving in.

When it comes to building wealth through real estate investment, working with the right professionals can make all the difference. Financial advisors, specialized real estate accountants, and tax strategists are the three key types of experts that you need on your team. While all three are important, it's essential to understand the difference between a tax strategist and an accountant. The accountant will support a defensive approach to taxes, ensuring that you follow all applicable rules and laws. On the other hand, a tax strategist will take a more proactive, offensive approach, helping you find ways to optimize your portfolio for better tax outcomes. With these experts by your side, you'll be well-positioned to make smart, strategic decisions that will help you achieve long-term financial success.

Final Thoughts

Owning a home is often considered a financial milestone, but sometimes putting cash up front for a house isn't feasible. However, that doesn't mean you can't invest in real estate altogether. There are countless ways to build your real estate portfolio, and the key is to conduct thorough research to find a method that aligns with your budget and financial goals. Whether it's investing in a REIT, buying a rental property, or partnering with other investors, the possibilities are endless. By taking the time to explore your options, you can grow your investments and potentially reap the rewards of real estate ownership.

SCOTT JACOBS

(703) 346-5855

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scottjacobsbroker.jacobsandco.com