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Here's Why Using Cash to Buy a Property Could Be a Financial Mistake

Here's Why Using Cash to Buy a Property Could Be a Financial Mistake

Mia E – March 16, 2022

Overview

You often hear that it's bad to carry debt. After all, buying a property with cash sounds more logical. So naturally, you could think that buying a home with cash is the smart choice for your financial health.

But is putting all your funds into just one (1) illiquid asset really the smartest move? It's hard to know without taking the time to fully consider whether it's the right choice for you.

PROs and CONs

Using Cash to Buy a Property in the Philippines

So let's look at the pro's and con's of buying a property with cash verses using a housing loan and leveraging 'other peoples money' (OPM).

PRO's of Using Cash to Buy a Property in the Philippines

  • You'll Be Debt and Rent Free

    You won't have to pay rent to someone else. And you won't have the monthly debt of a mortgage.

  • You'll Have a Sense of Ownership

    There is that intangible sense of ownership that the property is yours.

CON's of Using Cash to Buy a Property in the Philippines

  • You'll Probably Have No Spare Cash

    You're no longer liquid (meaning, there isn't much cash left over that you may need some day for an emergency).

  • You Have Put All 'Your Eggs in One Basket'

    All your cash is tied up in only one asset. If that investment falls in value, your entire net worth has fallen in value.

  • You Have Not Used 'Leverage'

    Debt is a great way to leverage other peoples money to buy things for yourself. Cash is leveraging only your money.

  • You'll Have to Save for Years

    You would have to wait years to get into the property market (or buy your next property). It's a waiting game.

  • Property Prices Increase While You Save

    The longer you wait, the more property prices could increase. You then have to save harder and harder to catch up.

  • Importantly: Alternative investments

    Using your cash in other investment types could provide a higher rate of return, allowing you to leverage debt to buy a property while earning a higher rate of return to cover the monthly repayments in another investment.

PRO's of Using Cash to Buy a Property in the Philippines

  • You'll Be Debt and Rent Free

    You won't have to pay rent to someone else. And you won't have the monthly debt of a mortgage.

  • You'll Have a Sense of Ownership

    There is that intangible sense of ownership that the property is yours.

CON's of Using Cash to Buy a Property in the Philippines

  • You'll Probably Have No Spare Cash

    You're no longer liquid (meaning, there isn't much cash left over that you may need some day for an emergency).

  • You Have Put All 'Your Eggs in One Basket'

    All your cash is tied up in only one asset. If that investment falls in value, your entire net worth has fallen in value.

  • You Have Not Used 'Leverage'

    Debt is a great way to leverage other peoples money to buy things for yourself. Cash is leveraging only your money.

  • You'll Have to Save for Years

    You would have to wait years to get into the property market (or buy your next property). It's a waiting game.

  • Property Prices Increase While You Save

    The longer you wait, the more property prices could increase. You then have to save harder and harder to catch up.

  • Importantly: Alternative investments

    Using your cash in other investment types could provide a higher rate of return, allowing you to leverage debt to buy a property while earning a higher rate of return to cover the monthly repayments in another investment.

Alternative Investment Options

The Philippines Stockmarket has been growing at an average rate of about 7.5% since 1988. Meaning, if you invested your cash in the market you would receive growth on those funds of 7.5% annually.

If you were able to secure a home loan at a lower interest rate, say 6%, then it may make more sense to leverage debt to buy the property and invest your cash in an asset producing a higher return than the cost of the loan.

In the above example, you would generally be 1.5% better off each year leveraging a home loan to buy a property than tying up all your savings in one asset (property).

The other advantage of alternative investments like share is that they are far more liquid - meaning, you can draw down (sell off shares) whenever you like. In the case of emergency and you need some funds, you can simply sell some of your share.

You cannot do that with a property as it is an illiquid asset. You cannot sell some of it. You either keep it or sell it.

Summary

At the end of the day, you have to weigh up what's right for you. But the important thing is this - you have to fully weigh up your options and not just jumped into a home loan or cash choice.

The best advice when considering whether cash or housing loan makes the most sense is to opt for the choice that gives you the bigger bang for your buck.

And of course, it's best to seek the advice of a financial professional such as your accountant before making any large financial commitments.