As the owner of several rental villas in Italy, Lisa Byrne is no stranger to investment properties. So when the San Franciscan saw a growing vacation market in her own backyard, she snapped up a fixer-upper for under $2 million. Though remodeling costs are bound to set her back, she's not worried about recouping the money. Why? She paid in cash a sizeable sum but one that eliminated pesky mortgage payments and will let her keep more of the rental income.
Though investment properties have struggled in the down economy, real estate agents in destinations like Palm Springs and Palm Beach are starting to see bursts of activity again, with a common thread in many second-home markets: Cash is king. After sitting on the sidelines for two years, buyers with discretionary income those who don't have to choose between, say, helping send Johnny to college and nabbing that lakeside cottage are becoming card-carrying members of the mortgage-free crowd. Indeed, almost 60 percent of investment-home buyers bought with cash last year, up from 48 percent in 2009.
The cash craze isn't surprising. After all, trying to get a mortgage these days particularly on a second home is harder than trying to get a raise. According to data firm CoreLogic, the number of second-home mortgages issued in 2010 is down 73 percent from its peak, in 2005. At the same time, the median price among investment properties has fallen three years in a row, making even waterfront manors more affordable. Some stubborn sellers are even demanding cash-only deals. "It's the expectation in the higher end of the market," says Bill Yahn, a senior vice president of the Corcoran Group in Palm Beach, Fla.
Of course, the biggest advantage of paying in cash aside from not having debt, obviously is the increased likelihood that the deal will go through. A cash offer almost guarantees a smoother transaction, since people don't have to wait on financing or pay higher closing costs. That gives buyers an upper hand in price negotiations, says Jack McCabe, a real estate consultant in Florida. For investors who plan to rent out the home, paying cash leads to no mortgage payments and thus more take-home pay an average $35,000 a year, based on HomeAway.com user stats. And should money get tight, cash buyers can refinance at another time, brokers say.
But with mortgage rates at historical lows, some experts say paying cash is, as adviser Matthew Tuttle puts it, "an awful idea." For one, it diminishes a homeowner's liquidity: It's much easier to get money out of, say, stocks than a house. Also, some pros say returns on other investments are better than being mortgage-free. These notions rang true for Margaret and Bob Early, who could afford to pay for their three-bedroom Hilton Head, S.C., home with cash but opted for a loan. It just didn't make sense, Margaret says, "to let go of that lump sum of cash."