Should I buy a UK investment property with cash or a mortgage?
May 12, 2023
Should I buy a UK investment property with cash or a mortgage?
This is a question we are asked on a regular basis, and our first response is that it depends on your financial circumstances and what you’re aiming to achieve. Let’s look at the pros and cons...
Buying in Cash
The major – and obvious – pro of buying in cash is that you don’t need a mortgage. You don’t have to go through the rigmarole of applying and you don’t have to worry about making monthly payments; the rental income goes straight into your pocket (subject to any repairs and lettings fees of course). Not having a mortgage also means not paying any interest, therefore in the long-term, buying in cash may save you a significant amount of money (presuming your asset doesn’t decrease in value).
As to the cons of cash (yes, there are some) – you have to ask yourself, are you happy tying up a large amount of cash in a single asset? Would this leave you unable to take advantage of other good investment opportunities? You’re also less diversified if you invest all your cash in one asset which, generally, increases your overall investment risk.
What about leveraging instead?
A wise man once said, why spend your own money when you can spend someone else’s? Thus begin the benefits of leveraged finance – of which a mortgage is one example. By using a mortgage you’re able to amplify your potential returns.
Let’s say we buy a property for £100k using an 70% mortgage of £70k and in five years the property increases in value to £130k. Very simply (and without an reference to costs/tax) our return on investment is 100% - but if we’d bought it in cash, our ROI would only be 30%. This is what is known as the 'Power of Leverage'.
On the flip side, if you default on your mortgage payments and the property gets repossessed, your ROI would be zero.
So, mortgages enable you to drastically increase your buying power, giving you the potential for higher returns and enabling you to diversify your investment portfolio by not sucking up all your cash in one asset, which also better preserves your cashflow. There may also be deductible tax perks for a leveraged investment.
There must be SOME advantages to buying in cash, no?
Well yes. There are advantages, but you have to mitigate them against the risk. If you’re a HNWI then spending the cash may not be a problem. But there are perks to buying in cash for an entry level investor. For example, being a cash buyer may well increase your negotiating power. Subject to the UK’s AML screening (anti money laundering checks), you’ll be able to close a deal faster, which is an appealing prospect to a seller or developer and they’re more likely to offer you a discount – increasing your overall return on investment.
So, what’s the answer?
As you’ve read, the answer depends highly on what you want to achieve and also the solidity of the property as a reliable investment. Here at the RPA Group we work with clients who invest both in cash and with finance. Our experienced consultants run the financials of a deal, delivering detailed cash flows over five and ten year periods and modeling the potential ROIs from a property with both long term and short term lets, to give you the complete picture.
Take a look at our current developments for sale, and we can advise you of the best way to proceed, FOR YOU.
GEORGE RADFORD
about the AUTHOR
George is the co-founder of RPA Group and Managing Director of the business in the UK and Africa. A qualified Chartered Surveyor (MRICS) with almost 20 years of property investment experience, George has helped his clients to successfully grow and strengthen residential property portfolios over multiple markets and territories. Active in building and advising upon his client’s investments, George is now focusing on procuring UK investments exclusively for RPA Group clients and investors, providing insightful and strategic advice and opportunities.