I’ll let you in on a little real estate secret. Realtors love cash sales. Negotiations are easier and quicker. There’s less paperwork. And, of course, everyone gets to the closing table much faster. Just because we like them doesn’t mean they’re always the best deal for a client, though. Before you scoff and remind me that having no mortgage is always better than paying the bank every month, let’s look at some real numbers.
High-End Cash Buyers in Naples
Here in the Naples market, it’s not unusual for buyers to pay cash for $1 to $2 million homes. In some ways, this makes complete sense. You pay cash and own your home outright. You don’t have to deal with the banks or take on any new debt. Homes in Naples appreciate, on average, by three to five percent per year, so it’s a good, solid investment. But what if there was a better way?
For high-end buyers, you already understand the value of making your money work for you - it’s why you’re able to pay cash for your home. Buying real estate seems like a good long-term investment (and it is!) so putting your cash into real property makes sense. It might not be the only or even best way to invest in real estate over time.
Invest Your Money and Pay Your Mortgage
Another alternative might not seem obvious at first glance but if you dig in a little deeper, the benefits become readily apparent. Instead of putting all your cash into real estate, try something different. Invest your money in an investment fund or money market account that creates its own income. Now, take out a mortgage on the purchase of your home and use your income to pay the mortgage. It’s not as crazy as it sounds if you work with someone who can help your money grow and choose wisely in your investments.
Working with a money manager, you can invest your cash with conservative to moderate risk. Before you invest, decide if you’re looking for appreciation as well as an income or if you’re only concerned about an income from your investment. I recently spoke with John Kinkead of The Naples Money Managers, and he outlined two specialty covered call portfolios that let you invest your cash and pay a mortgage from the income.
First scenario:* Invest $1 million in a specialty covered call portfolio focused on income and appreciation. The average annual return on this portfolio over the past 10 years is 7.17% net of fees with a current cash flow of around 6%. On the hypothetical investment of $1 million, the portfolio would yield approximately $60,000 a year in cash flow or $5,000 per month.
Second scenario:* Invest that same $1 million in a specialty covered call “in-the-money” portfolio that focuses only income. Currently, this portfolio is returning 5.48% year-to-date as of 10/12/2017. This is still more than enough to pay the mortgage on a home.
*This material does not purport to contain all of the information that a prospective investor may or should consider when making investment decisions. This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy. Past performance does not guarantee or indicate future results. . Naples Money Management, LLC, does not represent, warrant or guarantee that the information contained herein is suitable for any investment purpose and should not be used as a basis for investment decisions.
Imagine a situation where you could keep your cash, own a home, and get a better and bigger return on your investment. Yes, your home might increase in value by more than five percent each year, but you won’t see that return until you sell - and one hiccup in the real estate market could reduce your home’s value for a year or more. By investing your cash in a fund designed to grow and increase over time, you still have the benefit of appreciating value in your home while also allowing your cash investment to grow as well. It’s a little bit like having your cake and eating it too.
This option won’t necessarily work for everyone, and there are never any guarantees in any investment you make - mutual funds, real property, or any other forms of investment. But if you’d like your money to make money and still receive the benefit of the appreciating value of your property, this could be an option for you. It’s certainly something to think about. Talk to a money management professional to find out if this makes sense for you. Of course, John Kinkead of Naples Money Managers is our trusted recommendation.
No matter how you want to buy your next home - cash or mortgage - I’m here to help. When you’re ready to buy, give me a call. Let’s talk!