patrick.net

some factors i thought about

1. not really an inflation hedge since his salary is most likely going to rise with inflation

2. has emergency fund

3. interest deduction is negligible b/c his income will rise over the years and be phased out quickly, especially if he marries
http://www.financialsamurai.com/2011/05/25/mortgage-interest-deduction-limit-and-income-phaseout/

4. don;t have to deal with the hassles of having a mortgage (e.g. "lost" checks, origination fees, etc)

Wouldn't it make sense, with record low interest rates, to put the money to work for you instead? Assuming you can beat the interest rate with an investment of your own and that you have substantial savings?

Cash is king - but make sure you get a steep discount on the asking price or walk away otherwise - take the time you are in no hurry. I'd say 15%-20% below asking price at the minimum or otherwise - to say it with AF - 'fuck em'. Don't listen to any realtor.

mell says

Cash is king - but make sure you get a steep discount on the asking price or walk away otherwise - take the time you are in no hurry. I'd say 15%-20% below asking price at the minimum or otherwise - to say it with AF - 'fuck em'. Don't listen to any realtor.

good point. i never thought about the leverage of an easy quick sale for the seller, especially since most ppl can't get a decent down pmt together

mell says

Cash is king

But couldn't "cash be king" if it's left in your checking account or otherwise liquid? Let the bank's filthy lucre work for you for a change.

CL says

mell says

Cash is king

But couldn't "cash be king" if it's left in your checking account or otherwise liquid? Let the bank's filthy lucre work for you for a change.

It could if the bernank and his minions would stop suppressing interest rates. I'd say as soon as we get back to more realistic interest rates of about 5% and over the savings account option looks promising as well. But make sure you pick a bank that won't gamble your money away ;) Also you would be recapitalizing the banks with your money to some extent, so if you don't like the banksters you might go for other options instead..

Oxygen says

pay 100% cash

If you were to believe home prices inflation (da bubble!) was due to lower interest rates, it certainly seems you should get a 50% cash discount off asking during peak years or dont buy at all until prices fall back to long term trend line.

This is an easy decision, there's nothing to ponder about.

Get a mortgage. At 27, keep the cash and pay the interest rate subsidized about 33% from income tax. If you think otherwise, I would like to see if anyone on this earth would loan you 500K or so at 2%.

That income is in the sweetspot of the MID. The phaseout is not material. Essentially 3% interest rate is less than 2% net of tax. Interest is deductble for AMT and state tax have no AMT.

If you think cash can help close the deal, just buy with cash and get the mortgage afterwards (as soon as the next day). Most cash purchases are really delayed financing anyway. IF cash is indeed King, than keep more of it in your control.

With the cash, skip 30 year or 15 years, just use a floating rate in the 2% range. At worst, use 5 year ARM

Put 20% dn on five places. or Take the remaining 80% and invest in a good operating business.

Oxygen says

- 150k salary, single, 27
- maxed out 401k/IRA, no student loan debt, or any other debt
- health insurance fully covered

$150k/yr, no debt with health insurance @27? What is your hypothetical career?

Cash, then you can save after. Or whatever. Pay taxes , scumsurance, you have a place.

Why would you pay a mortgage? You really want to pay 200,000 for a 100,000 property? Crazy is as crazy does.

Why wouldn't it make sense to get a 15 year fixed rate at 3% or whatever it is right now? Perhaps you can't beat that investing currently, but rates can't stay this low forever, can they? It seems like eventually they'd get back to some normalcy. Then you've got all that cash, and you could beat 3% just putting it in CDs. If the opportunity is there to lock in an historically low interest rate, why not take advantage of it?

Cash sucks, mortgage the hell outta it nd do again and again, yeh yeah, pay double triple. Because isn't that what most people try to do. Follow the herd. Do it do it.

KILLERJANE says

Why would you pay a mortgage? You really want to pay 200,000 for a 100,000 property? Crazy is as crazy does.

Huh? If you borrowed $80,000 on a $100,000 property with a 15-year fixed rate loan at 2.75%, the total interest would be about $17,000. Where are you getting that it would cost $200,000?

And as a comparison, if you had put $80,000 in an S&P index fund for the last 15 years, you would have made $42,000. (Actually, I think more - I'm only counting the increase in share price).

Pay cash and you will feel like a rock star.

Why pay any interest?

KILLERJANE says

Why pay any interest?

Thinking saying and doing need to line up.

Because it's possible to make MORE money than the amount of interest you are paying by having the cash on hand. More money is better than less money.

You can own the property, move forward, feels great. Cash is what is overvalued. Beware.

Thats your best case scenario....
"Huh? If you borrowed $80,000 on a $100,000 property with a 15-year fixed rate loan at 2.75%, the total interest would be about $17,000. Where are you getting that it would cost $200,000?"

Refi happens or you just don get that rate or?

why pay interest?

KILLERJANE says

Thats your best case scenario....

"Huh? If you borrowed $80,000 on a $100,000 property with a 15-year fixed rate loan at 2.75%, the total interest would be about $17,000. Where are you getting that it would cost $200,000?"

Refi happens or you just don get that rate or?

why pay interest?

Thinking saying and doing need to line up.

This is your brain on drugs.

Go get your ass in debt. Good for you!

IMHO the only time financing makes sense is if you are renting it out, or otherwise investing your money. Then it becomes a cash flow equation, and if you can take the equity out in the form of a mortgage and use that equity to make a few percent more than the cost of the mortgage 'cost' using another investment vehicle (rentals, commodities, whatever), then it makes sense to do the mortgage.

If you are going to live there and you have no intention of investing the rest of the money, (or can't earn more than 6-7% on it somewhere else) then pay cash.

Also in many real estate markets, you simply aren't going to get a good deal on a place if you try and finance it. You need to pay cash in order to even be in the running these days on anything below $150k.

If you buy a house cash and rent it, more cash flow ROI!!!!

New renter says

Oxygen says

- 150k salary, single, 27

- maxed out 401k/IRA, no student loan debt, or any other debt

- health insurance fully covered

$150k/yr, no debt with health insurance @27? What is your hypothetical career?

even though this is a hypo, i framed the hypo to mirror exactly the situation a friend of mine is in, although he is in no rush to buy a house.

gbenson says

IMHO the only time financing makes sense is if you are renting it out, or otherwise investing your money. Then it becomes a cash flow equation, and if you can take the equity out in the form of a mortgage and use that equity to make a few percent more than the cost of the mortgage 'cost' using another investment vehicle (rentals, commodities, whatever), then it makes sense to do the mortgage.

If you are going to live there and you have no intention of investing the rest of the money, (or can't earn more than 6-7% on it somewhere else) then pay cash.

Also in many real estate markets, you simply aren't going to get a good deal on a place if you try and finance it. You need to pay cash in order to even be in the running these days on anything below $150k.

thanks. i thought about MFR rentals, but not in the context of first paying cash only and then taking out a mortgage. since the Fed is keeping the rates stable till the end of 2014, an 2/13 ARM may be a great idea

Conventional logic says let the money work for you, but those words come from another time. When banks rewarded savers for saving money in the bank and 401K only grew with each passing year.

These days, the smartest thing you can do, is have a place to live free and out right clear of a mortgage or rent. The money you will have each month that you aren't putting toward housing, put that money to work for you.

I'd do netiher. You are all forgetting that females like to pick their own house, and the one that marries this guy will likely not be satisfied with the house and want to move.

Get an apartment.

If you pay cash you won't have any closing costs, I'm assuming in Bay Area that adds up to a pretty penny.

We paid cash for ours, this was long ago. No regrets there. But interest rate is really low today, so I'd advice to wait out the buying till rates go up and reduce the overall price.

But being 27 you are too young to tie yourself down into a house. At that age you need flexibility. So save and try to grow a business if you can. If you are not tied down, world is your oyster, you can create a business, make something amazing, move and live anywhere, find a good woman, you have options. I wouldn't advice buying into housing until you are mid 30's at least and family life requires settling down.

FortWayne says

If you pay cash you won't have any closing costs, I'm assuming in Bay Area that adds up to a pretty penny.

We paid cash for ours, this was long ago. No regrets there. But interest rate is really low today, so I'd advice to wait out the buying till rates go up and reduce the overall price.

some say use cash to negotiate a lower price, and u say quite the opposite...need more insight on how to even compare such situations

FortWayne says

But being 27 you are too young to tie yourself down into a house. At that age you need flexibility. So save and try to grow a business if you can. If you are not tied down, world is your oyster, you can create a business, make something amazing, move and live anywhere, find a good woman, you have options. I wouldn't advice buying into housing until you are mid 30's at least and family life requires settling down.

the nature of his career doesnt allow him to start a business. someone who gets paid 150k at 27 is definitely going to be pressed for time, so that would not even be an actionable option

Oxygen says

the nature of his career doesnt allow him to start a business. someone who gets paid 150k at 27 is definitely going to be pressed for time, so that would not even be an actionable option

Take risks, it's only going to be harder later. Some of the biggest regrets in life have always been having an opportunity and not doing anything about it.

FortWayne says

If you pay cash you won't have any closing costs

More correctly, you'll have LOWER closing costs. You still have to pay a litny of standard fees.

KILLERJANE says

If you buy a house cash and rent it, more cash flow ROI!!!!

It's math, I realize its confusing. Lets run some numbers:
For simplicity, lets assume you have $100k to invest and every property cost $100k and earns 10% ROI including all expenses except for your mortgage cost. Investment mortgage requires 25% down and 5% interest rate. (It cuts your cash flow in half) and properties never appreciate.

Cash:
$10k profit per year, its 10 years before you can afford the next property, and you are then making $20k/yr. So at the end of 20 years you have just bought your 5th property and are cash flowing $40k/yr. Net worth = $540k

Finance:
You start with 4 properties, but only earn 5% on them, but that's still $20k/yr. Plus now you can afford a new property by year 2. At the end of 10 years you have 21 properties and are cash flowing $85k. You don't own the properties outright since they are mortgaged, but if you sum up the portions that you do own, its around $300k or so. Extrapolate out to when you actually start paying off the principal on the mortgages and your net worth skyrockets.

That being said, 21 properties is a full time job, 5 isn't. You also can't get more than a couple investment mortgages before most banks won't talk to you anymore.

Oxygen says

does it make sense to pay with only cash?

I have thought about this question a lot myself. You will no doubt get, or should get at least a 10% lower purchase price than if you had financing no matter when and what market you buy in. However, I think the real leverage for the cash buyer is when interest rates are at historical highs or even norms. As the affordability factor (what a buyer can afford to pay monthly towards the mortgage) is lower. Your $$ will go further. With interest rates currently hovering around the rate of inflation, I would be very hard pressed to actually pay cash for a house in this market.

I think the smarter play here is to leverage the fact that they COULD pay cash, and maybe take out a financing clause with the offer to help get that lower purchase price. This is assuming that you can get financing at the same interest rate and get the MID even after you've paid cash for the house. Sometimes when you get financing after the closing, it is considered a HELOC and is treated differently both by the bank for interest rates and the government for MID.

Money is cheap right now and if you have good credit you can get a lot of it.

SFace says

et a mortgage. At 27, keep the cash and pay the interest rate subsidized about 33% from income tax. If you think otherwise, I would like to see if anyone on this earth would loan you 500K or so at 2%.

That income is in the sweetspot of the MID. The phaseout is not material. Essentially 3% interest rate is less than 2% net of tax. Interest is deductble for AMT and state tax have no AMT.

If you think cash can help close the deal, just buy with cash and get the mortgage afterwards (as soon as the next day). Most cash purchases are really delayed financing anyway. IF cash is indeed King, than keep more of it in your control.

With the cash, skip 30 year or 15 years, just use a floating rate in the 2% range. At worst, use 5 year ARM

Best advice in the thread.

CASH or a super low-interest loan that is tax deductible AND non-recourse? The only reason it should be debated is if you have an emotional reason for not getting a loan. Maybe you've insecure and it feels good to say "I can pay cash, "f*ck the bankster scum" or perhaps you'll have peace of mind without a loan.

As a pure financial decision, I'm not sure how it's debatable.

It depends on how much reduction you get for all cash, but in any case you will be paying far less without interest. It is stupid to say that just because the interest rates are low it is great to pay more. If you think you have money leftover after the monthly payment and can invest it safely at a much higher return rate then a mortgage might become interesting, however don't forget that you pay interest on a large amount of money while the money leftover after the monthly mortgage payments is likely not a large sum to reinvest. It's not just peace of mind and absolutely debatable. Inflation is only useful if the house value inflates with it which it will likely not and also if the core goods needed to survive (food, energy) don't inflate as much but as I see it it is actually the opposite so I would be very careful with the mortgage rah-rah.

FortWayne says

But being 27 you are too young to tie yourself down into a house. At that age you need flexibility.

I lived within a one mile radius from ages 18 through 33 (apart from a couple months where I tried farther and went back) which is pretty stable (15 years). I bought my first place at 27, found it fine for married life, and it still would have been fine if I chose to breed.

Although I'd decided that I was never leaving Boulder, CO 6 years later I did so things do happen; although with 0 appreciation and a full realtor's cut I'd have still come out ahead of renting (I could also have rented it out, covered my costs, and owned it outright in another 11 years).

Oh yeah that's another issue if you - assumedly male - buy you cannot freely shag girls and let them live part time in your fancy new house, let alone becoming engaged or married to someone with less $$ than you. Otherwise you may find yourself in a situation where you have to give up half of your house and/or get kicked out (even worse if kids are involved). Owning is almost always a losing proposition in that sense. The government becomes more involved in your life the more you "own", in ways you could have never imagined ;)

"The things you own end up owning you"..

We sorta thought about doing this ourselves as we too had saved up a lot of cash and could have bought entirely for cash. We live in the Bay Area so that's usually a big chunk of change for houses here. In the end we just put 20% down and have the rest in retirement accounts and cash because in the end what you have in retirement will determine how long you'll get to stay in the house you buy anyway...