High-net-worth individuals might be tempted to mortgage a home when interest rates are low, choosing instead to invest on high-yield stocks or mutual funds than on property, which could take a long time to appreciate.
But there are instances when paying in cash can be an advantage when bidding for a prestigious penthouse.
"There a host of reasons why someone might choose to pay cash, but they generally fall into three buckets: simplicity, negotiating power and peace of mind," said Jay Messing, senior director of wealth planning for Wells Fargo Private Bank.
For starters, a cash transaction is more straightforward, he said. "It’s easier to close, there are fewer fees and it saves time as opposed to shopping for a loan."
In addition to the convenience, cash can also be an important tool for buyers trying to shave a few million off the purchase price of an estate or to make their bid stand out among others vying for the same property.
More:Click to Read the Four Pillars of Foreign Investment
"An all-cash buyer is the most attractive to sellers," according to Mr. Messing. "There’s no mortgage contingency...with cash on the table, the seller knows [the deal is] going to close."
For those same reasons, a cash offer could help sway the sellers in a heated bidding war for, say, a $10 million home.
"The negotiating power of cash" can help buyers get a lower price or a faster closing, according to Suzanne Shier, a wealth planning practice executive at Chicago-based financial services company Northern Trust. Buyers who show up with the payment in full have an advantage over someone dependent on a stamp of approval from a bank.
Cash can also add another level of privacy and confidentiality, Mr. Messing said. Applying for a loan requires the applicant disclose a lot of information and answer a lot of questions. That’s not the case with cash.
In addition, or some, it’s about peace of mind, Mr. Messing said. "Maybe if they are older, the knowledge that their home is paid for is important."
From Penta:Deadline Nears to Reveal Undisclosed Foreign Assets to the IRS
Others not as confident in the stock market may go the cash route, as well. Those who fear a market crash may want to use their cash for a five-bedroom Colonial with water views rather than a slice of a high-yield mutual fund. Although there may be more financially advantageous ways to put one’s money to use, buying property is still one way to diversify.
Some clients will use cash to get the deal done, Mr. Messing said, and then apply for a home equity line of credit through their bank. Using cash now and getting a loan later could help a buyer get leverage when making the deal, then free up the cash for more lucrative investments.
The interest on a home equity line of credit may not be as low as a mortgage, but could still be lower than investing in other places. Mr. Messing estimates the return from stock investments is about 8% to 10%, and investors might earn 12% to 15% investing in private equity, according to Mr. Messing.
One thing to remember for buyers in the U.S.: Unless it’s used to renovate the home or make substantial improvements, the loan won’t be tax deductible under the new tax law.
More:Strategies for Successfully Negotiating for Your Dream Property
Buying Abroad
"For international transactions, adding financing could add another point of complexity," Ms. Shier said.
Julian Walker, director of InternationalPropertyForSale.com in London, which promotes property in investment hotspots in Western Europe, said cash definitely makes things move faster when buying across borders. He did caution, however, about doing one’s due diligence with all overseas deals. If taking out a loan, a local bank in the town or country where the property is located will do its due diligence, including title checks and surveys on the land. Since the buyer will have his or her own lawyer, that amounts to a "double legal check" on the property, he said, which could protect buyers from getting a bad deal.
In any case, be prepared to move the money early. The buyer will have to provide "proof of funds," Mr. Walker said. With overseas transactions, it’s easier to do that if the money has already been transferred to the country (and currency) where the home is located.
More:Click for More In-Depth Analysis of Luxury Lifestyle News