I never thought I’d buy a property cash. Yet this is my second one. Right out of college, I had $25K in savings, thanks to a lot of student jobs, and the French system’s cheap tuition. I wanted to put the money down for a flat, but since my work contract was ending with the company that had paid for my master’s degree, and I planned on traveling the world for a year, the bank was not too fond of the idea.
So I went looking, to see what $25K saved up would buy me. If I wanted something near Paris, the answer was almost nothing, but a 20sqm studio flat in one of the worst neighborhoods of the country, about 15 miles from the center. I did way too little research, blinded by the perspective of passive income, and listened too much to what the realtor was saying.
He said the neighborhood had reached the bottom, what used to be a working class residence was now overcrowded with illegal migrants but thanks to a lot of public funds, it would get better in 3-5 years. In the meanwhile, I would get a rental return of nearly 10%, something unheard of in the center of Paris.
I went for it. Had I done ALL my homework, I would have learned that the council AND the homeowners’ association were deeply in debt, that they were poorly administrated and both local taxes and condo fees were among the highest of the country, basically to pay interests on the debt.
I have to admit I freaked out a little, but I went traveling anyway, and for 10 years the property was managed professionally, so I didn’t have to worry about anything. I had an insurance to cover the rent which proved useful since the tenant was not so inclined to pay, then died, then his widow squatted for a while until the police got her out in March 2012.
Let’s not digress. Having no mortgage gave me peace of mind for those 10 years. I could afford the condo fees thanks to the rent and anything on top was for me. No budget stretch, no ”what if the tenant leaves”, to be honest I barely reviewed the statement the rental agency sent over, I just waited for my quarterly money transfer to kick in.
Then I spent a stressful six months looking for a buyer after the widow was evicted, but finally sold the place at the end of 2012. The proceeds allowed me to buy a place cash in Guatemala. I should say a home. My residence. For the first time, I am living in a place that I fully own. And it has a lot of benefits.
- I don’t have to pay a mortgage so all my would-be rent money can go into repairs and improvements to turn the place into a home.
- I can sleep at night knowing that even if I go broke I will still have a roof over my head. And some land to grow food, since the property came with 90 acres of land.
- I could take a loan against my home in case of financial hardship. Although I hope I will never have to, and will certainly not take a loan to buy a new car or take on some kind of consumer debt, my cash is invested in an appreciating asset (since we are working like crazy on it), and can be partially withdrawn to cover an emergency. Mortgage rates here are around 9-12% so it is a pretty healthy return on investment.
- I can rent it without asking my mortgage provider for an authorization, or them changing the rate to a buy-to-let mortgage.
- I can brag about it and paint the parcel red in Google Maps and say ”that little corner of the world is mine”.
- Even though monthly expenses are crazy at the moment with all the improvements, the ”survival” mode budget would be very low, I would say we can live with $250 each a quite basic life with no luxuries.
- It makes the financial future bright. Knowing I could weather any storm makes me want to take more risks, try to grow, start a business, invest… with a comfortable safety net in the form of a home. I admit it is not as liquid as a cash emergency fund although many people with emergency funds still have mortgages so it kind of evens out.
There are lots of mortgage options but the best one I think is having none.