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My wife and I paid cash for the first home we bought together, which was necessary since we were both unemployed at the time. No requirement for a job — that’s one advantage of paying cash for a home.
Another advantage is negotiating power. A seller doesn’t have to wait and hope for a loan approval, so he knows you won’t waste his time, and the closing can be simpler and sooner.
Those advantages are likely to motivate him to sell to you at a lower price than he would accept from a buyer whose offer is contingent on a loan approval.
Perhaps the biggest advantage of avoiding a mortgage loan is simply not having any payments. Whatever that monthly amount would have been is yours to use as you see fit.
A lack of debt also means you’ll never be “upside down” in your home — owing more than the home is worth. If you need to sell you’re free to do so, without worrying about whether you’ll get enough to pay off a mortgage loan.
Okay, you probably don’t need to be convinced of the advantages of avoiding a mortgage loan, but you might be skeptical about your ability to buy a home for cash. So let’s jump right in and look at…
How To Pay Cash For A Home
If you want to pay cash for your next home, and not wait decades to do so, there are two basic things you need to do:
- Save a lot of money.
- Keep the purchase price as low as possible
The strategies that follow are all based on accomplishing one or the other of those two goals. If you do it right you might buy an inexpensive home for cash within a few years
Your first cash-bought house might not be a dream home, but once you’ve arrived at that point you can continue to save in order to pay cash for the next, better home. I’ll return to that idea in a moment, but first, let’s look at some of those strategies.
1. Move To A Cheaper Town
In 2002 my wife and I drove around the country for six weeks looking for a new hometown. In Anaconda, Montana we found a cute little two-bedroom house with hardwood floors, a garage, and a full basement. We pulled together all of our savings to pay the $17,500 price.
Prices have gone up in Anaconda (that house, which we sold for $28,000, is probably worth $80,000 now), but there are always some towns where homes are selling at steep discounts.
If you can find one that works for you, moving to one of these places is a great way to become a homeowner for cash.
To find these gems, poke around on Realtor.com or another real estate website. Enter a town name and sort the listings by “lowest price first” to see what’s available.
For example, in Birmingham, Alabama.you can buy houses for less than $10,000. Those are likely to be fixer-uppers (see the next strategy), but there are hundreds of homes selling for less than $50,000, many of which look really nice.
Beware of lists of the “cheapest places to buy a house.” They go by average sales price, which can be irrelevant. You don’t need a low average price. You need really low prices for suitable homes.
And, of course, you need a town you can live in. Zoom in with Google Maps to see what the neighborhoods look like, and which stores are available.
2. Buy A Fixer Upper
If you like having a project to work on, and you don’t mind living in a half-finished home for a while, buy a fixer-upper. It’s one of the surest ways to get a lower price.
But you want it to still be low-cost after repairs and renovations. When making your offer determine the after-repair-value (ARV), subtract the cost of repairs, subtract enough to pay for your time, and offer even less than that final figure.
The nice thing about going this route is that it provides a way to build your assets so you can pay cash for an even better home, if that’s your goal. In fact, the IRS says that if you live in the home for 2 years (2 of the last 5, to be precise), any capital gain (up to $250,000) is tax free.
For example, my wife and I lived in our house in Florida for two years, fixed it up, and sold it for a tax-free profit.
Rather than upgrading homes, though, we bought the next one at an even lower price, so we could use the leftover money to upgrade our life (fancier houses just don’t matter to us).
3. Buy Smaller
Smaller is usually cheaper. That’s why we bought a one-bedroom, 700-square-foot house, the first time we moved to Colorado. That cost $65,000. Our current home, a condo in Tucson, Arizona, is only 675 square feet, and we paid just $55,000 for it in 2016.
We like small. Less time cleaning and caring for a home means more time to live. It also means lower expenses going forward. Small means lower heating and cooling bills, for example, and lower costs for future carpet replacement or painting projects.
A small place does require adjustments if you own a lot of stuff. Organizational skills and sheds help.
In any case, living in a small place can be temporary, if you wish. Just use the low expenses as an opportunity to save cash for the next, bigger, home.
4. Consider Alternative Housing
If you’re willing to look beyond traditional houses you’ll find that some types of housing cost a lot less and are still pretty livable. For example, my first home was a mobile home on a small lot.
It was perfectly comfortable, had three bedrooms, and it was in a nice area (I never locked the doors).
I bought it for $19,500, and later sold it for $45,000. You see, mobile homes do appreciate in value when they’re on land. For more on this option see my article “8 Reasons Why You Should Consider Buying A Mobile Home.”
There are many other alternatives. My friend bought a small lot for a few thousand dollars and built a small cabin on it, paying cash as he went. Cheap living.
If you think you’ll run into building code and zoning issues, consider parking a cheap used RV on your land. That can be a very inexpensive way to live for a while while you save cash for building a home or buying one elsewhere.
Condos are another, often cheaper alternative. The condo we own here in Tucson, Arizona is worth about $65,000 (we paid $55,00), while houses just two blocks away that are just as tiny go for around $180,000.
Even with the $156 monthly HOA dues (which cover garbage, exterior maintenance, a pool, etc.) this is the cheapest place we’ve lived.
Co-ops are even cheaper. You can still buy a two-bedroom unit here in Tucson for under $30,000. These can only be bought for cash (part of why they’re so cheap) because banks won’t loan on them (you own shares in the co-op rather than a title to the specific home).
See my post on 40 cheap housing options for more ideas. And remember, if you pay cash and have low expenses, any home you buy can be a temporary place to live while you save money for a better home, if that’s your goal.
5. Cut Your Expenses
If you can reduce any regular expenditures you can set aside more money for that home.
So, for example, if you pay off a $400-per-month auto loan, and choose to drive that car until it’s dead instead of borrowing for another newer model, you can bank that $400 monthly, saving almost $5,000 extra per year toward your home.
Maybe you can even get by without a car to save thousands more per year.
Look at every expense you have, from utilities to cable television to, well, everything. See where you can make cuts. Then put that money saved in your new home fund. This brings us to what might be one of your biggest expenses…
6. Rent For Less
The less you pay in rent right now, the faster you can save up the money to pay cash for a home in the future. That’s a simple enough idea. See my article on how to save on rent to get started. It has 15 strategies you can use.
7. Put All Extra Income Into Your Home Fund
Paying cash for a home is a big goal, and may require some serious sacrifices. So drop that plan to pay for a big vacation with your tax refund. Do one of my 15 Cheap Adventure Trips instead and put the rest of the money in savings for your home.
Any “extra” income should go to your home fund. That includes tax refunds, cash gifts from parents, rummage sale proceeds, employee bonuses — you get the idea.
8. Develop Extra Income
To speed up your progress, develop an extra stream of income or two (or three or four) and devote that new money entirely to your home savings account.
That could mean getting a second job, selling your homemade crafts on weekends, or making thousands in bank bonuses like I do.
If you prefer to stay in the house while you earn extra income, see my list of 115 Ways To Make Money Without Leaving Home.
Remember, all of this “extra” money should go straight into a savings account set up for buying your next home. That brings us to…
9. Invest Your Savings Wisely
Make sure the money you save is working to make even more money. If you think it will take a decade or more to save enough for a home, you might consider putting your savings into stocks or stock index funds, at least for a while.
If you hope to buy a home sooner it’s risky to invest in stocks. After all, it’s possible to lose half of the value of your investments in any given year — like the year you hope to buy a home.
For most people it probably makes sense to go with low-risk, lower-yield investments, like CDs and savings accounts.
At the moment, a list of the best savings accounts shows nothing paying over 2.5%, but some banks and credit unions are offering CDs that pay 3% or better, with terms under 3 years (just be sure any CDs mature before you plan to buy a home).
10. Put It All Together
To get to your goal as quickly as possible, put together a plan using some of the strategies above. For example, let’s say you can save $300 per month at the moment. That’s $3,600 per year.
If you move to an apartment where the rent is $250 less than what you currently pay, you can add another $3,000 to that annual tally. Total: $6,600 per year.
If you put $2,000 from your tax refund into the account, you’re at $8,600 per year. Round up another $400 annually from unexpected “extra” income (rummage sales, whatever) and you’re at $9,000.
Find a way to make an extra $250 monthly and your annual savings will be $12,000. With a little interest you’ll have saved about $50,000 in four years.
As you save, consider cheap towns and/or cheaper types of housing, so you can find something for $50,000.
If it’s a fixer upper you can live in it for two years, keep saving, and turn a profit on it (tax free), so at year six you might be able to pay $80,000 or $90,000 cash for your next home.
You get the idea.
Remember that when you have no mortgage payment it’s easier to set aside money to pay cash for the next home, if that’s your goal.
For example, if you could have afforded a $850 mortgage payment, and instead you own your home free-and-clear, you should be able to save at least $10,200 ($850 x 12) every year. That adds up fast!
If you’ve been able to pay cash for your house, tell us about your experience below … and keep on frugaling!