You have $400k in cash, buy House with it or rent & invest
 

Not many have that kind of 'problem', but if someone had that, would just buying the house for 400k, with no mortgage and interest payments, sway one to buy vs renting, or does it have no effect on the regular rent vs buy debate?

Re: You have $400k in cash, buy House with it or rent & invest
 

I'd rather get a tax-deductible 30-year 6% loan than pay cash, so in the US, no it wouldn't impact my decision.

Re: You have $400k in cash, buy House with it or rent & invest
 

I just started a similar thread yesterday. It basically comes down to do you think

appreciation + (rent saved - property taxes) > Return on $400k

In my case it doesn't seem like it is worth it.

Re: You have $400k in cash, buy House with it or rent & invest
 

Depends on what you want to do.

If you want to throw money into a money pit, buy a house. It isn't only rent saved and property taxes. It's insurance, repairs, furniture for a house, lawn mower, appliances, etc etc etc.

Don't forget that as your house appreciates, the dollar inflates as well. So 5% appreciation isn't really 5% appreciation.

If you want that money to have actual return on investment, rent and invest.



I personally would only buy a house when I have a substancial amount of cash flow from passive investments to support being able to have a house.

Re: You have $400k in cash, buy House with it or rent & invest
 

Well if he rents he'll need furniture and some insurance as well. The only big difference is the appliances but that is not significant.

Re: You have $400k in cash, buy House with it or rent & invest
 

Repairs is probably the biggest significance by the way because it is the biggest expense a homeowner has besides the mortgage payment.

Re: You have $400k in cash, buy House with it or rent & invest
 

It depends on what he buys. Older properties would need repairs but something new should be pretty maintains free.

He also needs to consider what he could buy for $400k vs what he ends up renting. The property has to be the same value. Comparing a cheap rental to a nice owned property ignores quality of life issues.

Re: You have $400k in cash, buy House with it or rent & invest
 

thats a very good point i didnt consider completely.

Because one could probably for equivalent monthly payments rent a $500k property, or own the $400k.

Maybe not a huge difference, but yes, you probbably can enjoy a little better lifestyle going the rent route....

Re: You have $400k in cash, buy House with it or rent & invest
 

[ QUOTE ]
thats a very good point i didnt consider completely.

Because one could probably for equivalent monthly payments rent a $500k property, or own the $400k.

Maybe not a huge difference, but yes, you probbably can enjoy a little better lifestyle going the rent route....

[/ QUOTE ]

Not where I live, the opposite would be true.

Jimbo

Re: You have $400k in cash, buy House with it or rent & invest
 

Look at it this way...if you are old enough & mature enough for homeownership...go for it. You'll never be evicted & the rent will never go up.

Re: You have $400k in cash, buy House with it or rent & invest
 

I think so many people forget that rents go up every year. And they also forget the value of having you own (much larger) living space, a garage/yard/no one complaing about loud music, etc etc etc

Re: You have $400k in cash, buy House with it or rent & invest
 

I dont think the housing market has bottomed out yet

still though, i think it's a pretty decent time to buy if you're in it for the long term. 30 years from now it wont matter if you're house went down 2% the year after you bought it but recovered in the next 29. Prices have dropped more in the last year than they have in a while

if you choose to invest i wouldnt just go throwing it into the stock market either...

Re: You have $400k in cash, buy House with it or rent & invest
 

They're gonna keep dropping I certain areas of the country.

I've spoken to many investors in the States that have said that bank owned real estate account for up to 20-25% of homes on the market in some areas. That's huge.

With more mortgage resets bound to happen next year, the worse is still to come.

Re: You have $400k in cash, buy House with it or rent & invest
 

What kind of rent do you charge on a $400K house?

Re: You have $400k in cash, buy House with it or rent & invest
 

The quality of my investment decisions has improved immensely since I stopped renting. [img]/images/graemlins/grin.gif[/img]

Re: You have $400k in cash, buy House with it or rent & invest
 

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What kind of rent do you charge on a $400K house?

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Where I'm from it's generally around $3,000-$3,500/mo.

Re: You have $400k in cash, buy House with it or rent & invest
 

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[ QUOTE ]
What kind of rent do you charge on a $400K house?

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Where I'm from it's generally around $3,000-$3,500/mo.

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Where the heck are you from?

You could borrow the full $400k and owe significantly less than $3k a month in PITI, assuming 1% property tax. That doesn't add up.

eastbay

Re: You have $400k in cash, buy House with it or rent & invest
 

[ QUOTE ]
[ QUOTE ]
What kind of rent do you charge on a $400K house?

[/ QUOTE ]

Where I'm from it's generally around $3,000-$3,500/mo.

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Sick.

Re: You have $400k in cash, buy House with it or rent & invest
 

That seems high. I live in a $600k condo and only pay $2700.

Re: You have $400k in cash, buy House with it or rent & invest
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
What kind of rent do you charge on a $400K house?

[/ QUOTE ]

Where I'm from it's generally around $3,000-$3,500/mo.

[/ QUOTE ]

Where the heck are you from?

You could borrow the full $400k and owe significantly less than $3k a month in PITI, assuming 1% property tax. That doesn't add up.

eastbay

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There isn't one answer to this question. In any rental, you charge as much as the market will bear. The price of a house has almost nothing to do with the rent. Also, different investors might have different goals, which could effect rents as well.

Re: You have $400k in cash, buy House with it or rent & invest
 

[ QUOTE ]
That seems high. I live in a $600k condo and only pay $2700.

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henry, that sounds like a very good deal.

since i pay about $2000 for what i think is about a $350-$365k unit, and i thought i had a good deal, yours sounds that much better.

Keep renting bud!!

Just for comparison what condo fees does your unit cost if you would own? mine are just above 900...if i were to own, so real rent only $1100.

Re: You have $400k in cash, buy House with it or rent & invest
 

slightly off topic...

Would it not seem that buying once the bottom is reached is not the optimal time to buy b/c everyone is going to be buying and then you find yourself in a seller's market?

Re: You have $400k in cash, buy House with it or rent & invest
 

I live in one of those executive suite places so all the units are rented. I'm using a comparable building a block over to estimate the $600k.

The place I'm looking to move to in the spring is $3300/month vs buy an identical condo just on the opposite side of the building for $790k with condo fees of $850.

I think you might be under valuing the unit you live in. I find $900/month condo fees high for a $350k unit. I was considering moving to Toronto and the rental to cost of property ratio was comparable to Ottawa. If you check mls you'll often find rental units and units for sale in the same building so you can compare.

Toronto has some great properties under construction. If it wasn't because of the GF I'd move there in a second. As it is I spend so much time in Toronto hotels that I should really sit down one day and do the math.

Re: You have $400k in cash, buy House with it or rent & invest
 

dont pay cash.

Re: You have $400k in cash, buy House with it or rent & invest
 

[ QUOTE ]
And they also forget the value of having you own (much larger) living space, a garage/yard/no one complaing about loud music, etc etc etc

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What does this have to do with rent/buy? Not all rentals are apartments, not all owned properties are houses.

I rented a $400k house with three friends for $2000/month ($500 ea.) Other people own a condo where they still have the problems you listed.

Re: You have $400k in cash, buy House with it or rent & invest
 

[ QUOTE ]
slightly off topic...

Would it not seem that buying once the bottom is reached is not the optimal time to buy b/c everyone is going to be buying and then you find yourself in a seller's market?

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I'm not sure I understand what you are saying, would you rather be trying to sell in a buyer's market?

Ideally you want to buy in a buyer's market and then sell in a seller's market, which would be easiest to do right when the market is turning. However, another ideal situation (and possibly better situation depending how fast the market turns) is buying when a seller's market is heating up. You buy in a seller's market and sell in a much stronger seller's market.

Whatever the case you just want houses to be in higher demand when you sell compared to when you bought.

Re: You have $400k in cash, buy House with it or rent & invest
 

[ QUOTE ]
Not many have that kind of 'problem', but if someone had that, would just buying the house for 400k, with no mortgage and interest payments, sway one to buy vs renting, or does it have no effect on the regular rent vs buy debate?

[/ QUOTE ]
I'm looking through the responses and, really, this thread could have ended after the first reply.

No, the ability to pay cash for a house should not impact your decision to rent vs. buy, because you'd be crazy to do it.

Assuming you have good credit, the after-tax cost of a typical mortgage these days is somewhere around 4%. Anyone who has enough financial savvy to accumulate many hundreds of thousands of dollars in cash probably has enough savvy to invest it (or to trust someone else to invest it) in a way that would return in excess of 4% after taxes, with minimal risk, and with far more liquidity than a single residential property would provide you.

Mook

Re: You have $400k in cash, buy House with it or rent & invest
 

He is Canadian so mortgage interest is not tax deductible.

You buy the house and then Invest,
 

I read a few of the replies and realized you are getting terrible advice.

It appears you are from Canada, so you need some Canadian specific answers.

Buy your $400,000 property with cash. Take out a Line of Credit (LOC) for 80% of the value of your property(banks will do this with no or small fees and prime rates of 6.25% i think). Use the $320,000 LOC to Invest in great income (dividend) stocks. The interest on this LOC is tax deductable essentially making the interest rate approx 4.25% (depending on your tax bracket). The dividend income from your stock pays this 4.25% interest and any stock and home appreciation is yours to keep. This way you have a house, paid for in cash (no mortgage) and an investment portfolio of $320,000 and growing. Simple.

Re: You buy the house and then Invest,
 

This sounds so simple.

Almost too simple.....am i missing anything. Any significant drawbacks im not aware of?

Re: You buy the house and then Invest,
 

[ QUOTE ]
I read a few of the replies and realized you are getting terrible advice.

It appears you are from Canada, so you need some Canadian specific answers.

Buy your $400,000 property with cash. Take out a Line of Credit (LOC) for 80% of the value of your property(banks will do this with no or small fees and prime rates of 6.25% i think). Use the $320,000 LOC to Invest in great income (dividend) stocks. The interest on this LOC is tax deductable essentially making the interest rate approx 4.25% (depending on your tax bracket). The dividend income from your stock pays this 4.25% interest and any stock and home appreciation is yours to keep. This way you have a house, paid for in cash (no mortgage) and an investment portfolio of $320,000 and growing. Simple.

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Not so simple. You said nothing that addresses the opportunity cost of having the money tied up with the house. Also I assume there is real estate tax (although I certainly don't know) and then there's any repairs on the property. I think you raise a good point (assuming what you say is true) but there are still many other things you did not factor in.

Re: You buy the house and then Invest,
 

There would be no opportunity cost since he is borrowing the money to invest.

The mayor of Toronto is trying to implement some odd real estate tax but I don't believe it has been passed yet. With respect to capital gains on the residence though there is none so long as it is his primary residence and he doesn't allocate any of it for business purposes.

Re: You buy the house and then Invest,
 

He's not getting a loan for 100% of the value of the property so there is an opportunity cost. Also there is the fees associated with buying/selling and that money just vanishes into thin air.

Re: You buy the house and then Invest,
 

It is that simple. Research "the smith manouver (sp?)". there is much information on the net about it. And even a book at chapters. Its a TAX STRATEGY that canadian home owners use to turn there mortgage into tax deductable interest debt. It is perfectly legal. Americans dont bother because their gov'ts already allow them to deduct their mortgage interest against their personal income. Your accountant will fill you in on the minor details as you obviously have no clue about canadian tax law. If your accountant is not specialized in the smith manouver (sp?) then find one that is. Or you could just do the research yourself.

Re: You buy the house and then Invest,
 

[ QUOTE ]
[ QUOTE ]
I read a few of the replies and realized you are getting terrible advice.

It appears you are from Canada, so you need some Canadian specific answers.

Buy your $400,000 property with cash. Take out a Line of Credit (LOC) for 80% of the value of your property(banks will do this with no or small fees and prime rates of 6.25% i think). Use the $320,000 LOC to Invest in great income (dividend) stocks. The interest on this LOC is tax deductable essentially making the interest rate approx 4.25% (depending on your tax bracket). The dividend income from your stock pays this 4.25% interest and any stock and home appreciation is yours to keep. This way you have a house, paid for in cash (no mortgage) and an investment portfolio of $320,000 and growing. Simple.

[/ QUOTE ]

Not so simple. You said nothing that addresses the opportunity cost of having the money tied up with the house. Also I assume there is real estate tax (although I certainly don't know) and then there's any repairs on the property. I think you raise a good point (assuming what you say is true) but there are still many other things you did not factor in.

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YES SO SIMPLE. Unless your stocks tank, but then whos fault is that? Stick with BMO, RBC, etc and you should be fine.
There is not "real estate" tax. He will pay GST if the property is brand new, otherwise no. There will be misc closing costs as with any transaction.. approx 1.5% of purchase price.

There is an opportunity cost relavant to $80,000 tied to the house in an equity position (20% equity). Who cares though, in TO, this equity is going up up up anyway, its not like the states here. other than that he has no money tied up in the house, its leveraged.

What I say is true.

Re: You have $400k in cash, buy House with it or rent & invest
 

[ QUOTE ]
[ QUOTE ]
Not many have that kind of 'problem', but if someone had that, would just buying the house for 400k, with no mortgage and interest payments, sway one to buy vs renting, or does it have no effect on the regular rent vs buy debate?

[/ QUOTE ]
I'm looking through the responses and, really, this thread could have ended after the first reply.

No, the ability to pay cash for a house should not impact your decision to rent vs. buy, because you'd be crazy to do it.

Assuming you have good credit, the after-tax cost of a typical mortgage these days is somewhere around 4%. Anyone who has enough financial savvy to accumulate many hundreds of thousands of dollars in cash probably has enough savvy to invest it (or to trust someone else to invest it) in a way that would return in excess of 4% after taxes, with minimal risk, and with far more liquidity than a single residential property would provide you.

Mook

[/ QUOTE ]

It sounds like you are American, you folks are lucky with tax deductable mortgages. The OP is canadian and the mortgage interest here is not tax-deductable.

Re: You buy the house and then Invest,
 

While I agree you should invest, i don't think you should go with dividend stocks just because that is coming from "house" money. You should invest in whatever you determine to be the best investment, regardless of it it pays a dividend or not.

Re: You buy the house and then Invest,
 

[ QUOTE ]
While I agree you should invest, i don't think you should go with dividend stocks just because that is coming from "house" money. You should invest in whatever you determine to be the best investment, regardless of it it pays a dividend or not.

[/ QUOTE ]

He needs dividend income to pay the interest on the LOC. Otherwise he'll have to pay it himself, now who wants to do that? You dont want to find great stocks then start profit taking to pay interest, too many capital gains. What if your great non dividend stocks dont increase, then what do you do when the interest bill comes? Warning to OP, be careful with some of the advice these other posters give. With the advice I gave you, call a (or a few) professional tax accountant and financial advisor. It's the only way to ensure what your hearing is true.

Re: You buy the house and then Invest,
 

Sorry 47outs, but it doesn't sound like you understand my point. I'm not saying that what you are suggesting is incorrect or illegal or even bad to do. What I am saying is that just because it is a good idea in general doesn't make it the best thing to do. There are still other factors.

For instance, you are saying that you should not invest in riskier investments because then you'll have to make the payments yourself if things go bad. Again, I'm not disagreeing with you, but there is some opportunity that is lost when you put that restriction on yourself.

The fact that 20% is tied up also is a factor that has to be taken into account. If the real estate market is going up faster than stocks then so be it. However that needs to be state as an assumption so the OP knows that is what he is betting on.

Just because the maneuver makes it like a US mortgage as far as the taxes are concerned doesn't mean it is the best way to allocate your money. If you look at the other threads on this board you will see other people that are talking about buying a house in the US so the interest is tax deductible and they are realizing that it makes more sense to rent than to buy.

Again, I'm not saying that is the case because I certainly don't know the real estate market in Toronto, but to say simply that this is one way that you can do it and not compare it to anything else is not analyzing the situation it is just stating one option.

Re: You buy the house and then Invest,
 

[ QUOTE ]
[ QUOTE ]
While I agree you should invest, i don't think you should go with dividend stocks just because that is coming from "house" money. You should invest in whatever you determine to be the best investment, regardless of it it pays a dividend or not.

[/ QUOTE ]

He needs dividend income to pay the interest on the LOC. Otherwise he'll have to pay it himself, now who wants to do that? You dont want to find great stocks then start profit taking to pay interest, too many capital gains. What if your great non dividend stocks dont increase, then what do you do when the interest bill comes? Warning to OP, be careful with some of the advice these other posters give. With the advice I gave you, call a (or a few) professional tax accountant and financial advisor. It's the only way to ensure what your hearing is true.

[/ QUOTE ]

First, who says he is dependent on dividends to pay back the loan? If I missed that part then I apologize, but even so, you should never limit yourself to dividend stocks, as you can always make your own dividends if you so desire.

Second, you can make you own dividends. Pick a good stock, sell x # of shares per month, that is your dividend. the appreciation in the other shares you keep should more than offset what you sell.

Note: I have nothing bad to say about buying dividend stocks. That is a very viable option for many people. It's just not the only solution, or only way to think about it. You can create your own divididend stock if you so desire, just like you can create your own party steps tourney if you don't want to follow their existing format. Just make sure you do the research before you jump in.