Cash or Finance? A Worked Comparison on the Same Property

Paying cash avoids financing cost and ties up capital. A calculation comparing both routes on the same purchase.

The choice between paying cash and using finance is often decided by preference rather than arithmetic. The comparison below applies the same purchase to both routes so the trade-off becomes visible rather than philosophical.

The situation

An investor has SAR 800,000 available and is considering a property priced at SAR 750,000 that would produce rental income. The question is whether to buy outright or finance part of it and retain capital.

Assumptions (illustrative)

• Property price: SAR 750,000.
• Assumed transaction costs: SAR 22,000.
• Assumed net rental income after costs: SAR 34,000 per year.
• Finance option: 60 per cent of price, assumed annual financing cost SAR 26,000.
• Equity required under the finance option: SAR 300,000 plus costs.
• Assumed return available on retained capital elsewhere: 4 per cent per year.

Step 1: Cash purchase position

Capital committed SAR 772,000, producing SAR 34,000 net income, a return of about 4.4 per cent on capital.

Simple, with no financing cost and no exposure to rate movements, but almost all available capital is now in one asset.

Step 2: Financed purchase position

Capital committed SAR 322,000, income SAR 34,000 less financing cost SAR 26,000 equals SAR 8,000, a return of about 2.5 per cent on equity.

Lower cash return on equity in this example, because the financing cost exceeds the yield the property produces.

Step 3: Retained capital under the finance option

SAR 450,000 retained, assumed to earn 4 per cent, equals SAR 18,000.

The comparison only works if the retained capital is actually deployed. Capital left idle makes the financed route worse, not better.

Step 4: Total position under finance

SAR 8,000 from the property plus SAR 18,000 from retained capital equals SAR 26,000.

Against SAR 34,000 from the cash purchase, the cash route produces more current income in this example.

Step 5: Where finance changes the answer

If the retained capital earned 8 per cent, it would produce SAR 36,000, giving SAR 44,000 in total.

Finance wins when the return available elsewhere exceeds the cost of borrowing. That is the entire question, and it is specific to your alternatives.

Step 6: Risk difference

Under finance, a vacancy or rate increase reduces or eliminates the SAR 8,000 surplus, while the obligation continues.

Financing amplifies outcomes in both directions. The higher potential return is compensation for carrying that amplification.

What changes the answer

• Rising financing costs reduce the financed position directly and can turn a surplus into a deficit.
• Better rental income improves both routes, but improves the financed route proportionally more.
• Capital growth benefits the financed buyer more, since the gain is measured against a smaller equity commitment.
• A vacancy affects the financed buyer more severely, because the financing obligation does not pause.

What the numbers tell you

• Finance is worthwhile when the return available on retained capital exceeds its cost, not because borrowing is inherently efficient.
• Capital retained must actually be deployed, otherwise the comparison fails.
• Financing amplifies both return and risk, which is a choice about volatility as much as about return.
• Run the comparison with your actual alternatives rather than with a theoretical rate.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

If you are buying, selling or investing, Domira can verify the documents, assess the property and build the numbers with you before you commit to a transaction.