A lot of people prefer to pay cash for everything they buy. This seems like a good idea because you know you can afford what you are purchasing. But there are also huge downsides to paying cash for everything. I am a real estate agent and real estate investor and have seen many people run into problems because they use cash to buy everything. I believe one of the best ways to invest money is by leveraging the cash you have. That means you invest a little but use a loan to invest even more money. This strategy works great for real estate, and it is fairly easy to get a loan on real estate as well. If you pay cash for everything, it can make it very tough to get a loan. Even if you are not looking to invest your money, getting a loan to buy a house to live in can be tough if you are always paying cash. There are other disadvantages to paying cash for everything as well.
Why is it hard to buy a house when you pay cash for everything?
A lot of gurus teach people to get out of debt, and the best way to do that is to pay cash for everything. If you cannot control your spending, that could be a good strategy to gain back control of your finances. However, if you have always paid cash for everything and never gotten a credit card, a car loan, or any other type of loan, you probably have no credit. When you have no credit, getting a loan on a big-ticket item like a house is really hard.
I am selling one of my fix-and-flip properties right now. I had multiple offers on the property, and a couple wanted to make an offer on the house. However, they had not gotten pre-approved for a loan yet. They thought getting a loan would be easy because they had over $200,000 to put down on a $389,000 house. When they went to the lender, they were denied the loan because they had always paid cash for everything and had no credit history. Even with a huge down payment, you need to have some type of credit in order to get a loan.
What if you pay cash for a house and then want to refinance it?
Many people also have the dream of buying a house for cash or eventually paying off their loan on their house. Owning a house free and clear feels great, and I did that with one of my rentals a few years ago. However, many people also run into problems when they buy a house with cash or pay off their loan. Eventually, the owners of the house may want to access their equity for retirement, medical expenses, or for a job loss. Refinancing a house isn’t easy if you have no credit, even if you own the house free and clear. If you have medical problems, cannot work, or lose your job, getting a loan can be even more difficult. Even though buying a house with cash (if you can) may seem smart, it may hurt you in the long run if you ever need that money. I think it is safer to get a loan and keep cash in an emergency fund. I also think you can make much more money investing the money than you can by using it to pay off or buy a house with cash.
Why do I love using credit cards for everything?
A lot of people also hate using credit cards, and they can be devastating to your finances if used incorrectly. I use credit cards to buy almost everything for a number of reasons:
- I get 2% cash back on everything I purchase using my Capital One cards. That means if I spend $100,000 per year, I get $2,000 back from the credit card company. I flip houses and spend much more than that every year on supplies.
- I hate keeping track of expenses, but I have to since I own my own business. For tax reasons, I need to keep track of everything I spend money on. If I paid cash for everything, I would have to keep every receipt for every purchase. By using credit cards, I have a record of what I spend money on, and tracking my expenses is much easier.
Using credit cards saves me a ton of money, but you have to be careful with them. I pay off my credit cards every month so that I am not charged any interest. If I was not paying them off, saving 2% on everything I buy but then paying 15% interest to the credit card company wouldn’t be worth it.
How can you build credit in order to buy a house?
If you have always paid cash for everything and have never built any credit up, it may be wise to change how you do things. Building good credit can take time, and if you want to get a loan for a house, it could take months to qualify if you have no credit now. Even if you think you will never want a loan, things change. You may have a child who wants you to help them buy a house, or you may have an emergency and need a loan to pay expenses. It does not take a lot to build up your credit. A simple credit card can usually do the trick. If you pay it off every month, it will not cost you anything and may save you money through cash back. You could also talk to a lender who can pull your credit report, let you know what needs work, and how to improve it.
Paying cash for everything may be the best option if you cannot control your spending. If you can control your spending and use loans wisely, you can save money and build your credit at the same time. If you have credit problems already, you should talk to a lender as well. Often, a lender gives the best advice for how to fix credit, and the advice is free.