First let me tell you a story about a client of mine who wanted to purchase a home in cash.

I recently had a client in her 50s who had NO emergency fund and wanted to purchase a home all in cash. She wanted to follow the Shariah law, which meant she didn’t want to take out a mortgage.

This is why I advised her that this may not be the best way to invest her money.

A house is an illiquid investment.

This means that even if you sell your house tomorrow you won’t get all of the money straight away, and therefore the cash from the house is never readily available. The fact that my client didn’t have an emergency fund rang alarm bells.

An emergency fund should include 6 months of cash to cover ALL of your expenses including your rent/mortgage and all bills, food, living expenses etc.

Firstly it’s important to look at your full financial picture.

Before deciding whether to pay for a house in cash, we need to take a deep dive into the ‘before and after’ of how paying cash would affect your entire financial picture, including your future retirement needs, your current cash flow, and your investment portfolio.

The rich get richer because they’re using debt to make themselves more wealthy. Using loans from the bank to get wealthier. They know how to use debt wisely by investing in assets not liabilities. A house is a liability. The ongoing maintenance, decoration, updating of furniture, community fees etc etc - it’s a money pit.

Look at your full financial picture. Do you have 6 months worth of emergency funds? Do you have a plan of how you’ll retire? What is your cash flow like?

How much cash will you have post-purchase?

A house requires hefty maintenance and upkeep. Will you want or need to do renovations? Are you planning to buy new furniture? (note, new furniture can cost a lot of money and many people get into debt with finance or credit cards buying new furniture).

What else are you doing with your cash?

You can earn more over time with investments than the interest rate on your mortgage. You can invest in gold, farmland and in the stock market, all with a higher return on investment than a house. You may wish to consider keeping your money in the market and taking a loan to purchase your home.

Will you ever move?

An important consideration to make, include unforeseen circumstances. What if your kids move out of state and you want to downsize? What if you want to move nearer to your family in the future?

Tax Savings

How valuable are the potential tax savings? Mortgage interest can be deductible for mortgages up to $750k for taxpayers who itemize. This means that all expenses are accounted for in your tax calculation. Speak with your tax advisor to get individual advice. Your property tax payments may also be deductible, regardless of whether you have a mortgage.

Current Interest Rates also play a part.

The current Interest Rate is around 7% which means that if you bought a $500k house with 20% down and you opted for a 30-year fixed rate mortgage at the recent rate of 7% for example, you’d pay over $613,837 in interest over the course of the 30 year loan term.
Wow! This is a lot of interest to pay.

And if you have a low credit score the interest rate will be even higher than this!

So if you have $500k, is a cash purchase on a house the best way to invest your cash?

Skipping a loan can save you a significant amount in interest and other costs.

In fact, an all-cash offer might help you beat out other buyers and speed up the purchase process, as sellers prefer cash buyers.

Is it a good move though? Even if you have the funds readily available, skipping a mortgage might not always be the best move….

A note on Islamic Mortgages

Islamic Mortgage companies like Guidance Residential allow us to benefit from not having to tie up all our money in a home and also staying within Shariah…

An Islamic Mortgage is a co-ownership model which means that you only own part of the house and you pay rent to the other co-owner (Islamic finance company) on the part you don’t own. This means you get to still live in the house you want to, without putting all of your cash into it.

The conclusion?

I am not a big real estate investor. I would not tie up by money in an asset that’s a sinkhole. A house is a money hole and for an average earning person, putting all your money in this one single illiquid asset is not advisable. There are lots of other options out there for you to make better use of your money!

Check out my re-launched Muslim Women Invest podcast

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