Read Estate: Never pay off land?

[ElaineMonster]

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If the IRS is after you, you're probably not in a good position to be buying real estate in the first place.

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True, it's just something I came across and thought was interesting because it's the opposite of what I originally thought. I assumed, like many people, that the IRS doesn't seize homes anymore and so I thought it would make sense for people who don't pay their taxes and thus are afraid of the IRS taking away their gambling profits, to put an excess cash into the home, where it would be "safe" from the IRS. But I was wrong.

Anyway, here is a really good article that explains who should pay more down and who should just stick to the minimum payment and invest elsewhere.

[eastbay]

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The problem with borrowing on your home at ~6% to invest at a higher rate (say 12%) is that you're taking on the risk of a 12% investment for the return of a 6% investment. It's not just about your tolerance for risk, it's your tolerance for risk at a given return.


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Exactly. This point is too often brushed under the rug in these discussions.

eastbay

[Ray Zee]

it also depends on whether you believe you will need that down payment money for something else. overall you get the best bang for the buck carrying a large mortgage. but personal considerations should be what rules your life not maximizing every dollar, or we would play poker twenty hours every day. i guess some do.

[Nonononono]

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... most investors can get better than 6-8% return.


[/ QUOTE ] Huh? Over 5 years, the total U.S. stock market as measured by the Vanguard index fund is up 4% annually. Vanguard's best-performing bond fund is up a little over 7% annually, but the most aggressive, the junk bond fund, has only returned 3% a year. Money-market funds are up 2% annually.

And stock and bond investments can be highly volatile. Paying off a mortgage effectively offers a high risk-free return. I realize there are tax advantages associated with home mortgages, but in general I don't understand the merits of borrowing money to invest in stocks.

[tagtastic]

I think the answer to the question can't be found until you know the markets in question. At the moment a good number of very expensive real estate markets are projected to fall dramatically, while many smaller markets are projected to gain as usual.

Paying off less up front and keeping larger mortgage may be good advice for a very experienced investor, but generating more than 6-8% annually is no small task for the average joe. IMO the average family's best investment they will ever make is a home (not that it needs to be this way, but this is the reality). Avoiding as much interest as possible should be paramount to the average buyer.

If I could afford it I'd probably pay cash for a home right now.

[ElaineMonster]

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Anyway, here is a really good article that explains who should pay more down and who should just stick to the minimum payment and invest elsewhere.

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It's pretty simple I think. The calculator at the bottom of this article says it all.
You must compare your 1) loan interest rate with your 2) tax rate and 3) your expected return on alternative investments. 3 variables = different answers for different people.

[Misfire]

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personal considerations should be what rules your life not maximizing every dollar, or we would play poker twenty hours every day.

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No, *you* would be maximizing every dollar playing poker 20 hrs a day. *I* would be broke as hell after a week. [img]/images/graemlins/wink.gif[/img]

[mrbaseball]

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it also depends on whether you believe you will need that down payment money for something else

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This and also to consider is what you want your monthly payments to be. Cash flow and lifestyle. If you want a smaller monthly nut (and this is very important to many) you should go with a bigger down payment.

[MaxWeiss]

Pay off your OWN house that you LIVE in. Because the sooner you get that done, the sooner you stop having to pay for it and pay interest on it. DON'T pay off your INVESTMENT properties because you can spend the money better elsewhere.

For example:

Put 10% or zero percent down on a house, rent it out and have the tenets paying it off for you, and put that 90-100% other money into another investment. Or put a little bit down, and then flip for profit---like if you put $20K down on a $200K house and then re-sell it for $230K and pay back your loan, you've just made an extra $30K on your $20K investment. That's 150%. Why put the whole 200K into it when you could put a down payment on 9 other properties and make 150% on all of them, rather than 15% (30K/200K) on just the one. It's just simple math. Your money is spent better by NOT paying off your investments and putting that extra into down payments on OTHER investments.

Also, you put a downpayment on a house, let it appreciate, then refinance (i.e. simulataniously pay back your mortgage and take out a new one) when it has increased in value, and you then get to pocket the difference between what you used to owe and the total of the new mortgage TAX FREE. No taxable event has occured, so you can take out a chunk of money and reinvest that.

Real estate is pretty freaking awesome if you ask me. And I only know about it thanks to the Rich Dad Poor Dad series. People bash the author because the "Rich Dad" is a ficticious character--but what the hell does that matter??? The advice is solid and easy to understand.