You have $400k in cash, buy House with it or rent & invest - Page 4

mtgordon · #31 11-01-2007, 03:45 PM

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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.

Henry17 · #32 11-01-2007, 03:53 PM

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.

mtgordon · #33 11-01-2007, 05:49 PM

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.

47outs · #34 11-01-2007, 10:45 PM

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.

47outs · #35 11-01-2007, 10:57 PM

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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.

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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.

47outs · #36 11-01-2007, 11:01 PM

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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?

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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

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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.

Shoe · #37 11-01-2007, 11:24 PM

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.

47outs · #38 11-01-2007, 11:47 PM

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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.

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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.

mtgordon · #39 11-02-2007, 12:13 AM

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.

Shoe · #40 11-02-2007, 12:21 AM

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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.

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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.

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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.