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

PokerPaul · #1 10-30-2007, 01:28 PM

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?

haakee · #2 10-30-2007, 02:34 PM

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.

Henry17 · #3 10-30-2007, 03:01 PM

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.

Tien · #4 10-30-2007, 03:20 PM

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.

Henry17 · #5 10-30-2007, 03:35 PM

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.

Tien · #6 10-30-2007, 03:39 PM

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

Mook · #7 10-31-2007, 03:16 PM

[ 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

Henry17 · #8 10-31-2007, 07:38 PM

He is Canadian so mortgage interest is not tax deductible.

47outs · #9 11-01-2007, 11:01 PM

[ 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.

47outs · #10 10-31-2007, 10:09 PM

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.