PP or Buy a new House

[Mark Leavy]

Still looking for the cool study. 

Try it both ways.  Tell me what you think.

[Pointedstick]

Still looking for the cool study. 

Try it both ways.  Tell me what you think.

I decided to try the no-mortgage route from the start and haven't once regretted my decision. It certainly does cost you a fat chunk of change, but at least for me, that really helped clarify what I could "afford." And it's freed up a huge amount of my cashflow, which goes right back into the my PP.

[barrett]

Buying a house with cash might not always be the absolute smartest long-term financial move in dollar terms, but I don't know of too many people who have a paid off house and are anxious about it. I think it also depends on how old you are. To a younger person the idea of 20-30 years of payments might seem OK. When you are older that debt can really feel like a heavy weight.

Ditto to what PS wrote about paying something off up front helping to clarify what you can afford. Just recalled that when traveling in Turkey I'd often see shoe stores advertising ten-payment plans. I realize fundamentally that is not much different than having an outstanding credit card balance, but still... PP or Buy New Shoes???

[dragoncar]

This is not a hard question rationally. Expected PP return vs. mortgage cost with personal tax situation factored in for both sides of the equation. Frugal should get a calculator, done.

I know that this forum is filled with some of the most brilliant, rational and pragmatic minds that I have ever seen.  Yet... There is something very cool about not having a mortgage.

The day that you can say "I don't owe anybody anything" is a hell of a good day.

Until tax time

[barrett]

Until tax time

But doesn't that tax advantage virtually disappear for lower to middle income people? In general people seem to be better of carrying a lower debt load. I know for me personally the MID never made a lot of sense. For higher income earners, it probably does.

[Mark Leavy]

Until tax time

But doesn't that tax advantage virtually disappear for lower to middle income people? In general people seem to be better of carrying a lower debt load. I know for me personally the MID never made a lot of sense. For higher income earners, it probably does.

Taxes (and tax deductions) are weird things.  I tend to think of them as pressure to act in some way that society (or some special interest group) has determined is best for the community.  Yea!

Clearly, the homeowner's tax deduction is meant to encourage you to own your own home - and to hold a mortgage.  Is that best for you as an individual?  Maybe.  Maybe not.

I encourage you to think about what is best for your life without the bias of incentives.  And then add in the incentive and consider if the incentive is enough to make you want to conform.  Sometimes it is, sometimes it isn't.  Maybe it already matches your preferences.  That's a big win.

[craigr]

I'll just start by saying that I HATE real estate and home ownership. It's so overrated and a huge money sink. The only reason to buy a home really is if you want a place to call your own and modify to your own tastes. Owning a home shouldn't be looked at in any other light than that. It's not an investment, there are negligble tax benefits (especially for non Americans), it costs a lot to maintain, you pay constant taxes on it, you tend to fill it with lots of stuff which is expensive, it needs remodelling every X years, it's expensive to get into and out of with commissions and fees, etc.

Then of course there is that mortgage grinding away at you each month.

I've been very happy the past many years just renting a place. It frees up a ton of cash to keep invested, you don't have to worry about the maintenance, if you find you don't like the place due to neighbors, area, etc. you can move easily, and mostly it's a pretty low stress way to do things. The only downside is having to ask someone for permission to do things to the property and maybe a lease doesn't get renewed so you have to move. But again, if this is not a concern to you then I suggest renting is almost always a better option than owning a home.

As for buying a house outright vs. the permanent portfolio. Honestly it's a really tough call. It depends on interest rates, etc. Plus if you buy a house for all cash and have no  other savings you can find you are "house rich and cash poor." Meaning if you need to access money in an emergency you can't do it because it's all locked up in your home. And when there is an emergency is the exact same time most banks won't make a loan to you against that home equity. Banks are sunshine loan lenders, they aren't there to help you when you are hitting the skids with a problem and risking default.

If you absolutely want a home for the reasons above, I'd suggest that unless you will have a lot of cash left over after the home purchase, you may want to opt instead to do a good sized downpayment and extra loan payments each year to pay it off earlier. This way you have the cash on hand for other emergencies that could come up, but could at any time pay off the house if you got sick of the mortgage.

So count me in the no mortgage/renting camp unless you feel compelled to own your own place because you really want the stability and ownership rights over your home. Otherwise, rent as long as you can get away with before dumping a huge amount of money into a house.

If I buy another home (which could happen), I will only be doing it because I want to have something that is mine, and not for any other reason. If possible, I'd do it so there is no mortgage or very little mortgage to keep liquid assets available for other purposes.

I think James Altucher summed up my position on this subject as well:

http://www.jamesaltucher.com/2011/03/wh ... ome-again/

[dualstow]

I can't argue with anything Craig wrote, but it makes me sad because we're leaving our apartment to return to our newly renovated home in a few days.

Don't get me wrong- the renovation went well and we're looking foward to moving back in. But the apartment is pretty great, too, and it has a lot of perks. Mail often doesn't make it to my house. Here, they have email alerts when you get a package and you collect it at your convenience, not when you're in the shower and UPS comes knocking. We also got a private tour of an art museum with a dozen other residents, just because. Made me feel like I was on vacation for an evening, in my own city.

You'd think that the apartment would be noisier, but after 13 years of quiet on our block, someone has moved in with a barking dog. I gently complained (and became the hero of the couple who live on the other side of the dog's home), and the problem went away for 30 days. Then it returned.  And with the apartment, you can quietly tattle to management if something is fishy.

The apartment is safe. We have a guard, and the whole building goes into lockdown at midnight. Although I live in a nice neighborhood, the home next to mine had yellow tape on it the other morning. (To be fair, the attack happened in the wee hours). I have to admit, I was glad to be in the apartment when I read the neighbor's text telling me about it.

The other major factor besides the details of good neighbors is price. This is a brand new building with a good manager. I don't know if it's a luxury apartment, but it's too expensive for us to live in long-term. Had I rented a shitty apartment, I could stay forever, but would probably be complaining about noise, trash, smoke, crime, etc.

Everything is a trade-off. I guess I like both homes and apartments and a decade from now maybe we'll be living in a new apartment or condo.

[Libertarian666]

Maybe I'm crazy but I like having a big non-recourse mortgage. It gives me a put option on my house and a short dollar position without any fear of a margin call.

Of course, I also have no trouble making the payments. If that were an issue, I wouldn't be nearly as happy with my situation.

[Tyler]

I currently have a mortgage but plan on killing it by the end of the year.  I consider a paid-off house the 5th leg of my personal Permanent Portfolio.  I realize it's not an investment, but having a debt-free house to cover my living needs (and trade for cash later if I desire) is one extra layer of financial diversification that will help me sleep very well at night. 

FWIW, when it comes to wealth accumulation I'm not even sure mortgage leverage was a net positive for me in retrospect, as my pre-PP investing track record was pretty spotty.  Lots of people talk about how the math of keeping a mortgage is a no-brainer looking forward, but that assumes they can stick to a good investing plan for 30 years without screwing things up.  That ability is much more rare than many realize.  And life has a way of messing with the basic assumptions of even the best spreadsheets. 

[craigr]

Maybe I'm crazy but I like having a big non-recourse mortgage. It gives me a put option on my house and a short dollar position without any fear of a margin call.

Of course, I also have no trouble making the payments. If that were an issue, I wouldn't be nearly as happy with my situation.

There are some asset protection strategies where owning your home in a state with strong homestead exemption (Texas and Florida for instance) is a good idea. It provides a good amount of protection against creditors if you have a lot of assets tied up in your home. There's a reason why OJ Simpson relocated to Florida after all, and it wasn't the weather.

So again each situation is different and a mortgage may be OK if the conditions are right. But often a house is sold to people under very incorrect assumptions like "It's an investment!" and "You're throwing your money away renting!" However if you do the numbers you may often find that these two assumptions are completely incorrect.

[magneto]

Should we ask money (loan) to the bank and pay X % interest rate to the bank and keep a PP or pay the house 100% advanced ?

What would be the maximum interest rate that would make you keep the PP and a loan?

Seem to be in a minority here.  We regard Residential Real Estate as a fine asset class, including both our own home and apartments we rent out.

Some numbers using forward inflation at 2.5% :-

Stocks    Yield    2.00% real
Bonds      Yield    2.21% - infl = -0.29% real
Cash        Yield    2.00?% - infl = -0.5% real
Gold        Yield    0.00% - infl = -2.5% real
Property    Yield  4 to 5% real (can reach 10% plus)

A renter is paying that 4 to 5% real plus the landlord's expenses.  The landlord does not subsidise his tenants, quite the reverse!

Frugal, compare cost of mortgage with the above remembering that mortgage payments are in future dollars eroded by inflation e.g.
Mortgage @ 3.5?% - infl = 1.0% real.

It will be noted that the growth element of total return is ignored.  These figures are just what an investor can expect to immediately receive in income should growth fail to arrive. 

Craig raises very good practical issues, liquidity, etc, but the numbers IMHO strongly favor the house owner, not the renter.

[barrett]

I currently have a mortgage but plan on killing it by the end of the year.  I consider a paid-off house the 5th leg of my personal Permanent Portfolio.  I realize it's not an investment, but having a debt-free house to cover my living needs (and trade for cash later if I desire) is one extra layer of financial diversification that will help me sleep very well at night. 

FWIW, when it comes to wealth accumulation I'm not even sure mortgage leverage was a net positive for me in retrospect, as my pre-PP investing track record was pretty spotty.  Lots of people talk about how the math of keeping a mortgage is a no-brainer looking forward, but that assumes they can stick to a good investing plan for 30 years without screwing things up.  That ability is much more rare than many realize.  And life has a way of messing with the basic assumptions of even the best spreadsheets.

I'd put the mediocrity of my pre-PP returns up against anyone's! I never tracked yearly returns but now when I sign into my Fidelity account, there is a "performance" button I can hit if I need any reminders. Not only was I mediocre but I was consistently so for all time periods that are shown.

Tyler, I think you nixed something else from this post that I believe is critical to this discussion... that of owning a home that is not a huge portion of total net worth. Overreaching on a home is probably why a lot of people hate real estate.

[dualstow]

Tyler, I think you nixed something else from this post that I believe is critical to this discussion... that of owning a home that is not a huge portion of total net worth. Overreaching on a home is probably why a lot of people hate real estate.

We should all rent the documentary, Queen of Versailles.

[Tyler]

Tyler, I think you nixed something else from this post that I believe is critical to this discussion... that of owning a home that is not a huge portion of total net worth. Overreaching on a home is probably why a lot of people hate real estate.

Yeah, I felt like I was over-sharing and pared back, but my house value is less than 20% of my total net worth (balanced well with my stocks, bonds, gold, & cash).  With an affordable home relative to your assets, the mental calculus changes quite a bit.  I'm already well-invested and prefer to be debt-free.

I agree -- too many people over-extend on the house and compound that problem by over-extending on investments to "make money" on the mortgage. 

We should all rent the documentary, Queen of Versailles.

Ha!  Great movie.  Caught it on Netflix.

[jabba]

You can look at a house as an investment if you buy in a down market and your horizon is long enough. We got a cracking deal on a 5 bed villa in Spain where there is a huge oversupply. It was half lifestyle and half a business decision. We can get a 10% return by doing short lets, that is my day job so I know what I am doing. My neighbor has been getting consistently 40k GBP year after year in profit.

As for a home, I think everyone should buy one because if it all messes up you have a roof over your head all paid for, especially if you have a family to look after.

That said for you US guys what I saw in Florida horrified me, HOA fees, hurricane insurance, house tax. It seems being a property owner in the States means you are a cash cow for corporations and the government. My friend in Jupiter had to pay 15k a year just to stand still.

[Pointedstick]

Are there no property taxes in Europe? What about homeowner's insurance? I know things are generally built more durable there, but still...

[jabba]

Where I live, house insurance about 550 USD house insurance and my property taxes are about 200 USD a year.

My friend in Florida, HOA fees were about 6k a year, insurances were about 2k per year and about 10k property taxes. That is what an average bod earns near enough where I live

I do like the green grass and palm trees though

[Pointedstick]

Oh, that's not so bad. My annual property taxes are $1,400. You only see property taxes that crazily high in states that lack an income tax (like Florida and Texas) or that have been terribly mismanaged by loony big-spending Democrats (like Illinois, New York, and California)

[EdwardjK]

I am 57 years old, married 33 years (to the same woman no less) and have lived in 6 different homes in two states.  Permit me to offer my views.

A home is both a place to live as well as an investment.  You should purchase a home that slightly exceeds your personal needs and one that will appreciate over time.  Getting a great deal on a home in a poor neighborhood is no bargain and will be difficult to sell.  But be wary of paying too much for a home in a great neighborhood, as overpaying will limit your appreciation potential.  When you believe that your home will no longer appreciate, sell it and move to one that will.

Buy a home reasonably close to your work location.  Trying to save money by buying a home further away is a bad decision.  Although you may save some money, you will waste a lot of your live commuting and be miserable when you do get home.  I commuted on the Washington Beltway for 6 years from Fairfax, VA to Beltsville, MD every day.  It sucked.

Based upon my experience, if you expect to remain with your company at its current location for at least 4 years, I would opt to buy a home or condo.  If you think you'll be there less than 4 years, consider renting.  You will be surprised at how many unpacked boxes you will have at 4 years.

Having said that, if you have unpacked boxes after 1-2 years, you do not need that stuff.  Get rid of it.  Donate, sell or throw it out.  It'll only add to your next moving bill.  Sentimental value is over-rated.

If you plan to buy, look at how old the kitchen and bathrooms are.  Both need to be replaced around 15 years.  Don't get suckered into buying a house with 10 year old kitchens and bathrooms.  If you live in it for 4 years and try to sell, prospective buyers will be turned off by the idea of having to remodel both and you will never get your asking price.

Sorry if this is disjointed.  Hope it helps.

[frugal]

Hi,

I feel safer to buy the house, numbers are just numbers and in the future we never know ...

Thank you for all the posts.

[Tyler]

Buy a home reasonably close to your work location.  Trying to save money by buying a home further away is a bad decision.  Although you may save some money, you will waste a lot of your live commuting and be miserable when you do get home.  I commuted on the Washington Beltway for 6 years from Fairfax, VA to Beltsville, MD every day.  It sucked.

This is good advice.  And if you add up the car expenses, additional childcare, and opportunity costs of a long daily commute, you may not be saving much money either.

@Frugal -- good for you!  I hope you enjoy the house.

[stuper1]

The house also gives you some exposure to real estate investing, which is lacking from the four PP asset classes.

[Libertarian666]

The house also gives you some exposure to real estate investing, which is lacking from the four PP asset classes.

HB discussed owning a home as as an investment. He didn't care for it very much, and neither do I. It has tremendous vulnerability to many potential problems (neighborhood decay, rising insurance and taxes, etc.), is highly illiquid, and can't be rebalanced.

[Pointedstick]

I agree. Now, real estate can be a good investment, but not when you're living in it, especially. Your house is first and foremost a place to live, not a sort of freestanding savings account or bond.