Investment properties: should I pay cash or make use of a bond?

Should I still consider using a bond to purchase an investment property even though I have sufficient capital to pay in cash?

Jason Smith

Private Wealth Manager

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Investment properties: should I pay cash or make use of a bond?

While growing up, many of us have probably been told that "bricks and mortar are good, and debt is bad". While there is some merit to this statement, it's based on the perception that debt is acquired for consumption purposes rather than acquiring an investment property – an asset that can generate a passive income while also benefiting from long-term capital appreciation.

The financing decision generally follows the decision to purchase an investment property. Will it be more beneficial to acquire the property by using a bond or paying for it through a single cash payment? This would only be a question for investors with sufficient liquid capital to cover the purchase price and the related acquisition costs, generally ranging from 8% to 15% of the purchase price.

For this comparison, we will assume that the investor has access to the required liquid capital to purchase the property outright and cover all the associated costs. The investor, therefore, only needs to weigh up the costs and benefits of each financing option.

The table below presents a summary of the pros and cons of acquiring an investment property by way of cash or a bond:

Cash Pros	Bond Pros
No interest payments on a 20 or 30 year home loan. Avoid exposure to potential rises in interest rates. Avoid the worry about being approved for a loan and having to pay bond registration costs. Cash buyers are more attractive to serious sellers - may even enable you to negotiate a better price.	Tax deductibility of interest. You maintain a more liquid position by only funding the deposit and paying bond registration fees upfront. You have additional liquid capital available to invest in other income-generating investments. In the event of an emergency, you still have access to a cash reserve.
Cash Cons	Bond Cons
In an emergency, you don't have access to a cash reserve as your capital is tied up in the property. In terms of portfolio management, you are heavily exposed to a single asset/asset class.	Exposed to potential rises in interest rates. Risk of defaulting tenants and having to cover repayments out of your pocket. If you repay over the bond's lifetime, the total amount paid is considerably higher than the original purchase price.

It is not a given that an investor with sufficient liquid capital to purchase the property through a single cash payment will elect to do so. An investor should weigh up the pros and cons of each financing option and decide based on what they view as important.

For most individuals looking to acquire an investment property, the decision to purchase the property through a single cash payment is not an option. Bonds allow individuals with access to smaller pools of capital to become property investors and reap the rewards of such an investment. If used prudently, debt can assist individuals in building investment portfolios that generate passive income streams well into the future.

This article features in the Nov / Dec 2021 edition of the Proficio, NFB's bi-monthly financial update newsletter. Download the complete newsletter here.