Property usually provides better long-term returns, but cash is liquid and flexible. Let’s talk about which one is better for you to focus on.
The question of whether it is better to buy property or hold cash is one I get all too often. The truth is, the answer to this question depends on what you are looking for at the time. There’s no wrong answer, but it comes down to personal preference for a few variables. How do you know if it’s better to have property or cash for your investment strategy?
Deciding whether or not to put your money in real estate depends on a few factors. While real estate is more lucrative over time than holding cash, it has more risk. On the other hand, holding onto money or putting it into something safe like a CD or savings account might earn smaller yields, but you have less chance of losing it altogether.
Luckily, you don’t need to choose just one place to invest! So let’s look at the pros and cons of using either all cash or all real estate as places to put your money. I’ll also show you how you can have the best of both worlds; it’s easier than you think. Let’s dive in.
Reasons Why You Should Hold Cash
Cash is king. It’s easy to understand but also easy to forget. So why should you hold on to cash instead of putting it all on lucrative investments like real estate?
- Cash is available in more forms than just physical money, and it can also be the cash value of your home, or your retirement funds, for example. You can use these different types of “cash” as collateral for a loan, so you have access to more money without needing to take out a high-risk investment.
- Cash will always have some value, even if the market tanks tomorrow.
- Having enough cash in reserve gives you options when the going gets tough. It’s a financial safety net and can help protect your wealth while allowing for some flexibility. Having a cash reserve is much easier to use than liquidating assets like land if you ever need money quickly.
Why Holding Cash Might Be a Bad Investment Strategy
While cash is safer than real estate investing, it’s not a guaranteed way to become rich. Any currency will be subjected to inflation at some point, which can significantly reduce your buying power. I’ll show my age here a little but remember penny candy stores? If you’re too young, these were brick and mortar stores where you could buy individual pieces of candy for a few cents. They were big hits for kids and always seemed strategically placed in front of school bus stops.
When was the last time you saw a penny candy store? Could you imagine sustaining a business on only a few cents per transaction? You’d lose your business in a week! But there was a time when the value of cash was so great that even dimestore candy could support a family easily.
That’s the power of inflation, and one of the biggest reasons using holding onto cash doesn’t guarantee wealth. Consider how much interest your highest-earning savings or money market account accrues today. Now, look at the inflation rate over the past ten years compared to how the value of land has increased over the same period of time.
If your account had an interest rate higher than 2.29% on average over the past decade, then you’re beating inflation, but not by much. Say you’ve had an average of 3% interest over ten years. You’ll need to deduct that 2.29% from your interest rate to see how much you’ve truly earned in compound interest.
In 2021, inflation is currently at 5.4%. If your accounts aren’t earning that, then you’re losing buying power. That $10k you’ve got in savings won’t buy you the same things it could ten years ago. That’s why you need to diversify your options and never solely rely on cash.
Reasons to Why You Should Hold Real Estate
The beauty of real estate investing is that it’s versatile; there’s no one way to put your money into property. You can buy a rental property and sit on it for as long as you like, building passive wealth over time. You can fix & flip houses and get a return on your investment within six months. You can even mix and match strategies to diversify your income and create multiple revenue streams. As long as there’s someone out there looking for a new place to live or move their business, you’ve got a viable business.
Why Real Estate Might Be a Bad Investment Strategy
Real estate can be hugely profitable, but there’s a catch: it’s extremely risky. If you’re not experienced, you have just as much a chance of losing everything as becoming a millionaire. Even experience isn’t a guarantee; I’ve seen seasoned investors fight to break even on a property.
The risk lies in market volatility and finding the sweet spot of selling it for a competitive price that gives you maximum profit. Too high a number and you’ll price yourself out of the market; too low and you’ll never earn enough to grow your business.
Also, unfortunately, it sometimes comes down to dumb luck. You could have the perfect fix & flip that would typically incur a bidding war, but the market suddenly tanks due to a massive company in your area moving locations and laying off its workers. Or your general contractor finds a massive infestation of mold. Or the price of lumber skyrockets due to a shortage, like what happened in the summer of 2021.
There are no guarantees because there are just too many moving parts to control. Unfortunately, real estate is a cruel partner that can wipe out that nest egg of yours faster than you think, even if you’ve done everything right.
How You Can Have it All
So, before you throw your hands up and give up on ever making money, let me share how you can have the best of both worlds: lower risk and higher returns.
Get some rental properties. Buying and then renting properties is great for those who are risk-averse but also want to earn money from their investments. Not only will your tenants’ rents cover your investment’s mortgage (as long as you’ve projected your costs correctly), but they’ll also provide a regular, semi-passive revenue stream that can grow your business and generate income.
That said, I should give a full disclosure that there’s more to rental properties than just “buy a house, put a tenant in it, sit back and count your stacks of money.” So let me give you some ideas for how you can increase your chances of getting a return on investment faster than your competitors.
My Tips for Having Profitable Rental Properties
The easiest way to ensure your rental property gives you the best of both worlds, cash and property, is by finding long-term tenants. As a landlord, it’s my goal to have tenants that stay for at least five years, and the compromises I make to build that strategy have paid off dividends every year.
Having a tenant who stays with you for multiple years does a few things:
- It lowers your costs. Not only will you be on the hook for the carrying costs (mortgage, utilities, taxes), but you’ll also need to account for how much time you spend sourcing, interviewing, background checking, and onboarding a new tenant every time you have a vacancy. Not having a tenant is the #1 cost that crushes rental owners.
- It grows your business. Being able to rely on a monthly check from a reliable renter is fantastic for any real estate investment business. You can create better revenue forecasts, attract new business partners, and even get more competitive offers from lenders due to the steadiness of your revenue streams.
- It builds your reputation. This is more of a soft perk, but having tenants that sign multi-year leases says things about how you run your business. People talk, and everyone loves to tell a nightmare landlord story. If your tenants have no horror stories to give and can recommend you to other potential renters, then you’ve acquired a marketing avenue worth its weight in gold. Consider how critical reviews are for any business and the amount of time and money spent to get customers to recommend a company to their friends. You’ve cut that out completely by having good relationships with your tenants and can blow past your competition easily.
So how do you get long-term tenants? I dive into this more in another article, but here’s the runover:
- Have a property that renters want. I buy properties that naturally attract long-term renters. In my area, this means focusing on single-family houses that have at least three bedrooms. In your area, it might be different; you could be in a fast-paced city that attracts lots of young professionals who just want a one-bedroom condo that they don’t have to think about. Know your area and understand the type of person you’re looking to have as a tenant (this is known as “avatar building”), then find the properties that would quickly bring them to you.
- Have a lower rent than your competitors. It sounds counterintuitive, I know, but stick with me on this. I price my properties anywhere from $50 – $100 less than everything else that’s out there to rent. I don’t price it so low that it scares people off (“What’s wrong with it?”) but still make a conscious effort to use pricing as a way to stand out. There’s a method to my madness which I’ll get into below.
- Attract a pool of applicants. By having the nicest house with the cheapest rent, I get the biggest pool of applicants possible. Since I have such an in-demand property, I get to be picky. I look for tenants who are handy and come with their own set of tools and skills. It’s my goal to be hands-off as much as possible, which works out for everyone involved. My time is worth more than that $50 or $100 I lose in potential rent every month, so I pay that as a cost of entry to get tenants who want to do their own thing without dealing with a middle-manager landlord.
- Be accessible but not overly so. If there’s a major issue, then I absolutely want my tenants to reach out. But I pick tenants that can have a sense of ownership for their home, even if it’s just a rental. I give them lists of contractors they can call should something happen, and I never want them to feel like they’re bothering me if there’s a problem; I need to know if something’s going on. On the other hand, I’m not running a hotel, and they aren’t my kids; their lower rent comes with a compromise on their part, too, and that’s being more self-sufficient.
The key to becoming a successful investor, no matter the route, is to utilize methods that diversify your earning potential as much as possible. Don’t rely on one path, but instead think of ways like rental properties where you can have your cake and eat it, too.