Is there any disadvantage to buying a house outright?

[Preem]

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

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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.

[stephenNUTS]

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

[spider]

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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.

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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).