Paying for a house in cash has its perks, but it’s not all sunshine and rainbows. Sure, it can give you an edge in a bidding war and might even score you a hefty discount. I did this back in 2019 and saved a cool $150,000 off the market price. But, there are some downsides to consider.
Firstly, you’ll have to deal with capital gains tax if you sell assets to raise the cash. The longer you’ve held your investments, the bigger the gains, and the bigger the tax. You might be able to dodge this if you use uninvested cash to buy the house, but eventually, you’ll have to pay up.
Secondly, you could miss out on further gains. The S&P 500’s annual return is about 10%, while real estate’s is only 4.6%. So, if you sell the S&P 500 index to buy a house in cash, you might end up with less in the long run.
Thirdly, paying in cash can reduce your potential return on your home. If you pay all cash and the prices go up by 5% in a year, you get a 5% return. But if you only put down 20%, your return on your cash increases by 25%.
Fourthly, you could lose a lot of risk-free income and security. If you can afford to pay cash for a house, you could also earn a hefty amount of risk-free income. For example, if you have $2 million and invest it in a 5%-yielding money market fund, you’d earn $100,000 a year risk-free. But if you use that $2 million to buy a house, that income disappears.
Fifthly, you might still feel anxious even after paying in cash. You might constantly wonder if there were better uses for your cash. This anxiety could affect your mood and relationships.
Sixthly, if you already own a home, you’ll have to figure out what to do with it. Will you sell it or rent it out?
Lastly, you might be tempted to skip getting home insurance. This could save you money, but it could also cost you a lot if something disastrous happens.
So, if you’re thinking about buying a house in cash, make sure you consider all these factors. It’s not a decision to be taken lightly.
