I’ve now paid cash for a home twice: once for a fixer in 2019 and again for a fully remodeled home in 2023. In this post, I’d like to share some of the psychology of paying cash for a home.
I know some of you think paying cash for a home is a poor financial decision to build more wealth. You could be right. It stands to reason that if you believe paying cash for a home is suboptimal, you also think paying off a mortgage early is also suboptimal. Perhaps.
Meanwhile, some of you might also think that paying cash for a home is a great idea. Without a mortgage, life is both cheaper and easier. However, you may not have the sufficient funds to do so at the moment. Hopefully you will get to have the option one day as your savings and investments continue to grow.
Financial Situation Changes As We Grow Older
When I was in my 20s and 30s, I couldn’t pay cash for a home because I didn’t have enough money. In addition, I wanted to take on as much leverage as comfortably possible to potentially supercharge my net worth growth rate.
Today, in my mid-40s, I no longer have the desire to maximize my returns because I am more satisfied with what we have. I also can’t afford to lose as much given I lack the desire and ability to grind as hard anymore. Growing our net worth by 5% – 10% a year is good enough.
At the end of the day, the decision to pay cash for a home is a personal decision that involves financial analysis, knowing what you want out of your money, and understanding where you are on your financial journey.
Let’s talk about some basics first and then we’ll talk about the psychology of paying cash for a home.
Two Levels Of All Cash Homebuyers
To start, there are two levels of homebuyers who can pay all cash for a home.
1) True Cash Buyers (<10% of all buyers)
The first level is the homebuyer who has cash sitting in a money market fund, savings account, or Treasury bills, and doesn’t need to sell any assets to pay cash. Their cash balance is also a minority percentage of their net worth, typically less than 30%. These people are true cash buyers and are often considered ultra-rich.
For example, someone with a $100 million net worth can easily plop down $10 million for a home in San Francisco because they have $20 million sitting in a money market fund.
Alternatively, they might be someone with a $5 million net worth who can plop down $800,000 cash for a home in Memphis because $1.5 million of their net worth is in rolling 3-month Treasury bonds.
2) Hybrid Cash Buyers (>90% of all buyers)
The second level of homebuyer who pays all cash is one who has to sell assets like stocks or bonds to come up with enough cash to buy a home. They do not have enough money sitting in a money market fund or short-term Treasury bonds to pay all cash.
The hybrid cash buyer needs to rebalance one risk asset for another. Most home cash buyers fall into this camp, including myself. As a result, there is more psychology that goes into making an all-cash home purchase when you have to sell other assets.
Hybrid cash buyers must constantly consider what they might give up in future profits by selling such assets to raise cash to buy a house. As a result, this article will largely by focused on the psychology of hybrid cash buyers, who have more to worry about.
Paying Cash For A Home Is Quite Common
You might think that with the high cost of homes, paying cash would be rare. However, at the end of 2023, roughly 34% of all home purchases were made with cash. The percentage of cash buyers has fluctuated from 20% in 2020 to 37% in 2012.
In 2024, the percentage of homebuyers paying cash is likely even higher. According to Redfin, 46.8% of luxury homes (priced in the top 10%) were bought entirely with cash in the three months ending February 29, 2024. This is the highest share of all-cash luxury home purchases in at least a decade, up from 44.1% a year earlier.
The Psychology Behind Paying Cash For A Home
Now that we got some basics out of the way, let’s now talk about the psychology behind paying cash for a home. These thoughts are based off my own experience as well as the experience of other cash buyers I’ve spoken to.
1) You always want the best deal possible
No matter how much money you have, you will always appreciate a good deal. Sales attract more buyers for a reason. Eating freshly baked cookies and drinking champagne at open houses is hard to resist even though you know you shouldn’t.
If you can offer to pay cash for a home, you could easily save between 1% and 10% off the purchase price. Add in no-financing and no-inspection contingencies as well as a short close, and your offer will be hard for a seller to resist.
Having the power to pay all cash is like having a secret weapon to beat out your competitors, most of which need a mortgage. In battle, you have no qualms regarding using everything at your disposal to get ahead.
In my case, paying all cash for my house in 2019 saved me at least 5% off the market price. Five years later, I know this to be true based on comparable homes sold.
In addition, the San Francisco Assessor’s Office emailed me the next year and put me through the wringer, asking me to prove how I was able to pay the price that I did. This might be a topic for a new post, but it makes me mad just thinking about it.
2) You don’t want to waste time and spend unnecessary fees
When you have the cash, you want what you want, and you want it now.
You don’t want to spend time finding a mortgage broker and negotiating a rate. In the past, you might have leveraged relationship pricing by moving assets from one bank to another to get a lower mortgage rate. However, now that you have cash, you can save yourself the hassle.
The worst part about getting pre-approved for a mortgage is the two to three months spent sending in financial documents and having all your finances scrutinized. Given that time is money, paying cash will literally save you from this financial lobotomy.
Finally, paying cash saves you from paying thousands in mortgage fees. You also avoid paying thousands of dollars for lender’s title insurance. And if you don’t want to pay for home insurance, you may be allowed to skip it (check with your state) if you buy a home without a mortgage.
Unfortunately, if you need to sell many risk assets to raise cash, you will face capital gains taxes. However, you might be able to offset some of the gains by selling some losers. Additionally, you may have some capital losses from past investments that can now be harvested.
3) You won’t miss the money, instead, you’ll feel better it’s being utilized
If you pay for a house entirely with cash from a money market fund, you won’t miss the cash. Instead, you’ll feel great knowing that your money has finally been put to good use.
There is a certain emptiness that comes with having a large amount of unused cash. You start asking yourself what’s the point of having so much liquidity if you never spend it. While it’s nice to have liquidity, having too much can make you question the purpose of continuing to accumulate more money every month, especially if you’re still working.
For hybrid cash buyers, the feeling is similar, but potentially even more satisfying to put cash to use. Hybrid cash buyers are often diligently saving and investing for a specific goal. It can be unsettling to have your down payment invested in assets that could fluctuate by +/- 20% in any given year. Hence, once gains are locked in and a new house is purchased, there can be a tremendous sense of relief.
Real estate is tricky because there is usually only a 1-4 year window of opportunity to buy a home at a discount before prices resume their upward trend. If you miss this window, you might be priced out of your dream home forever, as prices can quickly reset to new all-time highs in a bidding war.
4) You’ll eventually stop lamenting on the money you could have earned
The opportunity cost of paying cash for a house is the return you could have made by keeping your money in another asset class. However, given a home provides utility, you’ll be too busy enjoying your new home to miss the potential gains from investing elsewhere.
When I brought our daughter back to our remodeled fixer-upper in December 2019, I felt a great sense of satisfaction. My Provider’s Clock was ticking loudly. We purchased the house in April 2019 and then I spent seven grueling months remodeling the kitchen, floors, and three bathrooms. When COVID hit in March 2020, the larger house became even more valuable. It felt priceless no landlord or bank could kick us out.
Missing out on potentially 10% – 20% annual gains by not keeping the money in the S&P 500 is acceptable. After you start missing out on about 20% in gains a year, that’s when you might start feeling some regret about paying cash. However, the historical return of the S&P 500 is about 10% since 1926.
Thankfully, if it’s a bull market in stocks, it’s generally also a bull market in real estate. As a result, for the true cash buyer in a bull market, their wealth grows faster as real estate tends to outperform cash. For the hybrid cash buyer, their net worth is likely also increasing. But the rate of growth will depend on what assets were sold to pay for the house.
Six months to reconcile with my missed gains
When I sold stocks in July 2023, I initially felt good because the S&P 500 proceeded to correct by about 10%. Then, of course, stocks took off after bottoming in October. My emotions were mixed because on the one hand, I had landed my realistic dream home. On the other hand, I could have made more money if I had just held on.
However, after doing my taxes in April 2024, I realized only about 62% of my house purchase capital came from selling stocks, 30% came from selling Treasury or letting them mature, and 8% came from cash. I was thinking the percentage was more like 80% from selling stocks.
Therefore, I didn’t miss out on as much upside as I thought. Although 62% of my capital underperformed the S&P 500, 38% of my capital outperformed Treasury bonds and cash.
With the way bidding wars have returned, I might not be too far behind after all, if at all.
5) You’re less worried about how the economy performs, which provides relief
If the economy booms after you pay cash for your house, you’re happy because your house and other risk assets are likely appreciating in value. There’s nothing better than making money on an asset that you can also enjoy and use to take care of your family.
If the economy goes into a recession after you pay cash for a house, you’re fine because at least you’re enjoying your money. If you had kept your growth stocks instead of buying the house, you might have seen their valuations get cut in half during the bear market.
Meanwhile, there’s often a flight to safety during bear markets, which drives down bond yields and mortgage rates. As a result, the demand for real estate tends to pick up during times of uncertainty. Think about the surge in real estate demand during 2020. As stocks were getting hammered, the demand for homes shot up as everyone spent more time at home.
In this regard, paying cash for a house can be the ultimate “heads I win, tails I still win” scenario. But you can only feel this win-win situation if you pay cash and have at least a 5% cash buffer left after purchasing the house. Without this buffer, you may feel cash poor, which may be stressful until you regain your liquidity.
6) You feel invigorated to make more money
Because you’ve been accustomed to having a lot of cash or liquid securities, the liquidity hit will take some time to get used to. The more liquidity you use to buy the house with cash, the more motivated you’ll be to make back that money.
Even though you’ve converted your cash or risk assets into a house you use, it can feel like you’ve lost 100% of that money. As a result, you’ll naturally want to replenish your liquidity to the amount you sunk into your house. This might include making new investments, finding new work, or developing new business partnerships.
What I’ve done is create a three-year plan until the end of 2027 to regain my financial independence. This challenge has given me a renewed sense of excitement and purpose. I feel the same way as I did when I was a 23-year-old college graduate, ready to take on the world.
7) You don’t care what anybody thinks
When you can pay all cash for a house, you feel secure. Therefore, you don’t care about any negative opinions people may have about you not taking out a mortgage to buy the house. You already have enough money to feel satisfied and tell people to bugger off, if so desired.
There’s an ongoing debate about whether to pay off your mortgage early or not. My belief is that you should aim to pay off your mortgage by the time you no longer can or want to work. Timing this properly is tricky, which is why it’s good to stay flexible. Pay down extra principal when you have extra liquidity and pause during a negative real mortgage rate environment.
By paying cash, you transcend the mortgage payoff debate. It’s similar to no longer opening new credit cards for rewards points or transferring balances to a 0% APR credit card. Instead, you simply pay your credit card balance in full each month and focus on making money in more lucrative ways.
Being mortgage-free also gives you the confidence to take more risks. This could mean anything from changing careers to going back to school to having another child. Imagine some of the things you would do if you didn’t have a mortgage.
8) You take for granted not having to pay a mortgage
Once you pay cash for a house, you can’t help but think about the risk-free money market or Treasury bond income you could be earning instead. Consequently, you add the missed risk-free income to your property taxes and maintenance expenses to calculate your ongoing cost of owning your home.
Interestingly, what doesn’t come to mind is the monthly cash flow you’re saving by not having a mortgage at prevailing rates. Perhaps the reason is that once you pay cash, you no longer consider the possibility of getting another mortgage in the future. That part of your financial life is over, and you adapt to your current financial situation.
Take cars, for example. Since 25, I haven’t contemplate borrowing money to purchase a depreciating asset because doing so would further increase the cost. If I can’t pay cash for a car, I won’t buy it. Once I do buy the car with cash, I don’t think about how great it is to save on monthly car payments.
9) You’re happy to have a place to park some money and keep an eye on it
The more money you have, the more you need to figure out what to do with it. It’s the “more money, more problems” situation Biggie rapped about.
Some people invest their cash in fine art and jewelry. I’ve been in homes where the value of the art inside is five times the price of the home! At a basic level, some people prefer to invest their cash in their primary residence because they can keep a close eye on it every day they live in it.
Wealthy foreigners frequently park their cash in U.S. and Canadian real estate, even though they don’t live in these houses most of the time. Sure, they may be laundering money, but that’s a topic for another time.
I recommend spending no more than 30% of your net worth on your forever home. So if you end up paying for it in cash, that seems like a reasonable allocation. Just make sure to get your house insured.
10) You feel comfortable because you have optionality
Finally, if you pay cash for a house, it’s not as if your cash is permanently tied up in your home. You can always do a cash-out refinance or take out a Home Equity Line Of Credit if the need arises. Although you probably won’t need to, it’s reassuring to know that you have the option.
And if, for any reason, you decide you no longer want to own your home, you can always sell it. With real estate commissions gradually decreasing after the National Association Of Realtors price fixing settlement, selling a home is becoming more affordable than before. Perhaps one day, with the assistance of technology, selling real estate could be as straightforward and inexpensive as selling a stock.
Having options provides a great sense of comfort. It’s akin to having 61-year-old Michael Jordan as your shooting guard in the over-40 YMCA recreational basketball league—still dominating the game. Similarly, having the option to access cash is as comforting as a loving mother who will always support you regardless of your performance.
Go Ahead And Pay Cash For A House If You Want
If you’re contemplating paying cash for a house, I believe it’s a solid idea if you have the means. Over one-third of the home-buying population does.
Even if you simply let the cash remain invested in your home, over time, the house’s value as a percentage of your overall net worth will diminish as you accumulate more wealth. Eventually, its proportion will become so negligible that you won’t miss the cash at all.
When it’s finally time for you to say goodbye, you can always pass on your mortgage-free house to your children. What another lovely option to have.
Just like how I don’t regret paying off a couple of my mortgages early, I don’t regret paying cash for a couple of my houses either. My end goal is to live a peaceful, debt-free life. Paying cash for a home helps fulfill this mission.
Reader Questions
Have you ever paid cash for a house? If so, what was the psychology behind your decision? What are some other considerations missing in my list for cash buyers to think about? Surely, there are more downsides to paying cash for a house?
Invest In Real Estate Without Debt
You can invest in real estate without taking on a mortgage by investing in private real estate funds. Take a look at Fundrise, a leading private real estate investment firm, manages over $3.3 billion in assets with a minimum investment of just $10. It focuses on residential and industrial real estate in the Sunbelt region, known for its lower valuations and higher yields.
Personally, I’ve allocated $954,000 to private real estate funds, predominantly targeting properties in the Sunbelt. With remote work becoming more prevalent, there’s a growing trend towards lower-cost areas of the country.
Fundrise is a sponsor of Financial Samurai, and Financial Samurai is an investor in Fundrise.
