Whether you are a real estate developer or an aspiring homeowner, you are probably wondering with it is better to finance land or buy it with cash.
Buying land is generally the biggest financial decision that people will make in their lives, which is why you want to be thorough and calculated when evaluating parcels. A lot of people find themselves on the fence between choosing to pay for a property with cash outright or opting for a mortgage or loan.
It’s better to buy land with cash, as the sale is faster, there are lower closing costs, higher acceptance rates, and no debts involved. However, if you do not have adequate savings, getting a loan allows you to have financial assistance and a timely real estate acquisition.
If you are searching the real estate market for a land parcel, you want to make sure that you have your finances in order before making any serious commitments to a property. Given that buying land is such a major financial decision, you want to weigh out your options carefully and strategize your budget. Having a concrete plan laid out that is in line with your savings and your real estate goals is going to be essential if you want to avoid unnecessary costs down the line. As you sit down and review your budget, you need to consider whether you want to pay for your land with cash or get a loan for the property. This can be a difficult decision for a lot of people, as both approaches come with advantages and disadvantages. To help you understand this further, we are going to take a closer look at whether it’s better to finance or buy land with cash in more detail.
After extensively researching land loans and property acquisitions, I have been able to gather enough information to determine if it is better to finance land or buy it with cash. My research has indicated that both approaches come with incentives but you ultimately need to consider your personal finances to figure out which one is more suitable and realistic for your budget and property goals.
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Advantages & Disadvantages of Buying Land With Cash
If you have solid savings and the finances to buy a property outright, you are in a much better position than most people on the real estate market. Buying land with cash is a luxury that not everyone can afford, which is why loans are often the route that a lot of people take when seeking out a property.
With that said, the pros certainly outweigh the cons when it comes to buying land with cash. However, while there are plenty of advantages, you must also consider the disadvantages of acquiring a property with cash upfront.
Advantages of Buying Land With Cash
In general, it’s better to buy land with cash than to finance it with a loan. The main reason why most people opt for loans is that they simply do not have the bankroll for their real estate acquisition.
That is why, if you are in a financial position to do so, buying land with cash is usually going to work out more in your favor.
The land buying process can take a long time and drag out for weeks, months, and even years, especially when working with a loan. There are a lot of obstacles and hurdles that both the buyer and the seller need to go through to finalize the process - with finances being a key component of this.
If you have the cash to buy the property upfront, the process is sped up considerably, as you are able to deal with the seller directly and hand over the payment without unnecessary delays.
Lower Closing Costs
When you deal with a lender, you will find that there are a lot of costs throughout the buying process, which will significantly add to the final dollar figure of your land acquisition.
To start, you do not have to deal with any interest rates from a financial institution. Interest rates alone can add tens of thousands of dollars to your overall payments and you can completely cut these out by buying land with cash.
In addition, you can avoid any underwriting fees when paying with cash. A lender will charge you for verifying your finances and processing your mortgage or loan application, which only adds to unnecessary costs.
High Acceptance Rates
Every seller will prefer cash. When someone sells a property, they will prefer to deal with a buyer that has their finances together.
Getting a middleman involved to assist with financing involves waiting and more risk. If you have the cash for the property upfront, you are going to have much higher acceptance rates from sellers, which is particularly advantageous in a competitive market.
One of the biggest perks of buying land with cash is that you are not in anyone’s pocket. Getting into debt is a standard routine for anyone looking to buy a home these days and it comes with a lot of risk and responsibility.
When you buy a property with cash, you can enjoy the freedom of owning land without having to pay it off for years - or potentially, decades.
Disadvantages of Buying Land With Cash
Before you buy a property with cash, it’s important that you also consider the disadvantages that come with financing land this way.
While paying for a property with money upfront is certainly the way to go, you may find that opting for a loan is still preferable in some situations.
If your land acquisition puts a major dent in your bankroll, you are going to have limited liquidity for future investments. This is not such a major issue for private homeowners who are buying a single property to live in.
However, if your cash payment inhibits your ability to pursue other developments, real estate projects, and investments, it can interfere with your other financial goals.
There is a certain level of risk analysis that the buyer takes on themselves when paying for land with cash. A financial institution will do some of this risk analysis for you to confirm that you are set up to buy the land you are reviewing.
If you are paying for land on your own with cash, the responsibility of risk assessment is entirely on you - especially if you are not thoroughly inspecting the property before so.
Advantages & Disadvantages of Financing Land With a Loan
As I mentioned, if you have adequate savings, buying land with cash is better than financing it with a loan or mortgage. However, this is not always a realistic option for every buyer.
To understand if buying land is better for you by financing it with a loan, we need to break down the advantages and disadvantages.
Advantages of Financing Land With a Loan
While dealing with financial organizations is intimidating for a lot of buyers, doing so comes with a lot of perks and it can make all the difference in your ability to buy a home.
The bottom line is that most people simply do not have the money to buy their property with cash.
Getting financial support from a lender enables you to buy the home of your dreams without having all the cash for it. Instead of assessing properties that are within your cash budget, you can look at homes and parcels that you legitimately want to acquire.
If you decide to wait and save money to buy a property upfront with cash, it may end up taking you years or even decades to do so. By getting a loan for your real estate acquisition, you can save yourself so much time and you can move into your home in a matter of months instead of years.
This is can be particularly advantageous in a competitive market where property values are constantly appreciating - implying that the longer you wait, the more expensive real estate will be later on.
Disadvantages of Financing Land With a Loan
Whenever you reach out to a financial institution for assistance on your property acquisition, you must understand that there are risks and drawbacks involved in doing so.
If you do not have the bankroll to pay for your parcel upfront, you should evaluate these drawbacks carefully before you commit to any financial agreement.
One of the biggest issues with getting a loan is that you usually have to pay interest.
While interest rates can vary depending on the type of property that you want to acquire as well as what your financial background looks like, you can expect to pay around 6% interest on standard single-unit housing (or more).
Just because you are getting financial assistance on your real estate acquisition does not mean that you do not need to have any cash in your bank to buy property.
Financial institutions will require you to pay a down payment for the land. How much money is required for a down payment can be quite subjective. Traditionally, 20% of the loan amount was considered to be standard, but these days you may be able to find some down payments that are as low as 3%.
About THE AUTHOR
Brittany has been in the land business since 2020 when the world was starting to shut down. Since then, we’ve sold to dozens of people from ATV weekend warriors to camping enthusiasts to retired truck drivers. Our inventory spans mostly in the western United States. We’ve been trained by experience, land acquisition courses, and hundreds of hours meeting with county assessors and clerks, zoning officials, realtors, and land investors. We’ve answered hundreds of questions from people regarding the buying and use of land.Read More About Brittany Melling