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Old 10-12-2007, 10:03 PM
QuarterTon QuarterTon is offline
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Default Is there any disadvantage to buying a house outright?

A lot of young poker players are making a crap load of money, probably enough for some people to just buy a house/apt/condo with cash... so I've been wondering is there any disadvantage of just buying a place outright instead of taking out a mortgage?

Say on average you pay 300k for a place, the money that you use for your house would on average make 8%-10% a year properly invested. So you would lose about 24K a year in portfolio earnings. However you would save money on rent/mortgage payments, say 1500 a month, 18K a year. So now the difference is around 6K a year on that 300K (2% loss on that money). On top of that you would save 5-6% a year on interest charges on any mortgage you would have had. Factor in other things like Taxes on that 24K you make and the amount your property appreciates on average a year and I would think that you would actually make more money on your big 300K investment then investing it in a well diversified portfollio.

I can think of a couple of negatives like property taxes and maintenance, and of course having to have saved up 300K but I cant think of anything else.

So question is, is there any disadvantage to just paying cash for a house/apt/condo?
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Old 10-12-2007, 10:14 PM
stinkypete stinkypete is offline
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Default Re: Is there any disadvantage to buying a house outright?

[ QUOTE ]
However you would save money on rent/mortgage payments, say 1500 a month, 18K a year. So now the difference is around 6K a year on that 300K (2% loss on that money). On top of that you would save 5-6% a year on interest charges on any mortgage you would have had.

[/ QUOTE ]

you can't compare it to a situation where you pay both rent and interest on a mortgage. if you rent you don't have a mortgage.
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Old 10-12-2007, 10:17 PM
SlowHabit SlowHabit is offline
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Default Re: Is there any disadvantage to buying a house outright?

For the first one, no.

After that, yes.
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Old 10-12-2007, 10:24 PM
QuarterTon QuarterTon is offline
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Default Re: Is there any disadvantage to buying a house outright?

yeah sorry i wasnt clear about that. what i meant to say was in one situation u have a mortgage and are paying some arbitrary amount and the interest on the amount that you borrowed. Not only would u save the mortgage payment but you would also save the interest.

in the other situation where you were just renting you would save the rent costs, maintanence costs, and property taxes.

What i was trying to figure out was if you are able to pay for a place in cash is it better to either 1) paying for it in cash and have no mortgage or 2) keeping a mortgage and using the rest for investments?

What I was thinking of doing personally was just continue to save and grow my portfolio and when I have enough to buy a place just go ahead and cash it in and buy a place outright. Just wondering if theres any obvious disadvantage to this that I'm missing or if this plan is just bad in general.
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Old 10-12-2007, 10:41 PM
T50_Omaha8 T50_Omaha8 is offline
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Default Re: Is there any disadvantage to buying a house outright?

The complicating factor is that interest on mortgage payments is tax deductible from your income. This little quirk dramatically shapes our housing market.
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Old 10-12-2007, 11:11 PM
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Default Post deleted by Mat Sklansky

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Old 10-12-2007, 11:43 PM
jaydub jaydub is offline
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Default Re: Is there any disadvantage to buying a house outright?

[ QUOTE ]

Now imagine if you took that $250k that you would have used to buy that one house in cash and you put it down as a down payment on 10 properties, then after one year refinanced all of them and took out your equity and used that to buy still more properties and then a year later...

You create a blog called iamfacingforeclosure.com

[/ QUOTE ]
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Old 10-13-2007, 02:51 AM
Preem Preem is offline
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Default Re: Is there any disadvantage to buying a house outright?

[ QUOTE ]
So question is, is there any disadvantage to just paying cash for a house/apt/condo?

[/ QUOTE ]
If you take out a mortgage and invest the money such that your rate of return is higher than your mortgage rate, then it makes sense to get the mortgage.

Taxes sort of cancel each other out since they reduce the cost of the mortgage, but they also reduce your rate of return by the same percentage.

However, if the absolute amount of taxes and investment return changes your tax bracket, then it could sway the situation one way or the other.
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  #9  
Old 10-13-2007, 05:53 AM
stephenNUTS stephenNUTS is offline
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Default Re: Is there any disadvantage to buying a house outright?

As a seasoned real estate investor(and HOMEOWNER as well obviously),I will say the most prominant advantages to taking out a mortgage vs. paying cash are:

1.By paying cash you are tying up monies that are highly illiquid.If you can afford it,and can make a deal that is highly favorable even under present conditions (e.g slow market,credit crunch,desparate sellers,etc)...then fine,make sure YOU are getting the best of it

2.With the high historical returns of RE appreciation,the ROI leverage is mind-boggling down the road

3.As an above poster stated,having free cash flow to invest in other properties is critical

4.The TAX Benifits are enormous to home owners,as well as investors.(thats a whole other subject to discuss)

5.By locking in these still LOW rates at this time(NO ARMS plz),even if the housing market remains soft,the tax benifits and liquidity to invest in OTHER instruments(stocks,commodities,bonds,etc.) are still an advantage

6.One of the most important negative to paying cash IMO is ..."IF" interest rates rise,the market will weaken further,now if for any reason you need to tap into the equity of your home(you need cash ASAP,emergencies,whatever),you will regret it down the road with higher costs you will ensue at higher rates.

That $300k or so,could be then put into a very safe HIGHER interest bearing instrument (much more liquid short-term.) such as a T-bill,money market,CD,etc giving you a very decent safe return,to at least off-set the soft R/E markets ROI,and as stated once again...being LOCKED into a first mortgage at these low rates is huge,and a MUST.

7.If you HAVE TO sell your home for any reason,you might have major issues due to being cash-poor,at the wrong time.Many a bad decision has been made when having to sell something out of desparation

A MAJOR MISTAKE I made back in the 1990 real estate environment,was NOT having enough cash to sustain the slow-down,being highly leveraged,and my available free cash flow was zilch,forcing me to liquidate some properties..that I only WISH I still owned.

Unless you have some SERIOUS money(and I mean serious,not $400K as mentioned),or are comfortably retired ...DO NOT PAY CASH for your home!

~stephen
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Old 10-13-2007, 12:57 PM
spider spider is offline
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Default Re: Is there any disadvantage to buying a house outright?

[ QUOTE ]
If you take out a mortgage and invest the money such that your rate of return is higher than your mortgage rate, then it makes sense to get the mortgage.

Taxes sort of cancel each other out since they reduce the cost of the mortgage, but they also reduce your rate of return by the same percentage.

[/ QUOTE ]

This is all you really have to ponder. Bizarrely, this is one of those rare financial decisions that is a lot easier than you'd think -- compared to rent vs own, for example, which can be be pretty complicated. The key is to keep in mind that once you've decided to buy, none of the factors like property taxes have anything to do with whether you pay cash or borrow money. You are just deciding what level of leverage you are comfortable with.

Anyway, if you put 20% down, you should get a rate well below your expected return on simply buying and holding an S&P index fund for the long run. So borrowing is a no brainer in that respect. But that's assuming you own the house for a long time.

That said, leverage is leverage, and you are increasing your risk, so the other side of it is simply your risk tolerance. My parents own their house outright and I told them it's dumb and they know in some respects I am right. But they don't care, the decision is based on their risk tolerance (very low).
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