Attn: Savvy Investors- RE Buying & Investing Question

[Patdeisa]

Alright, I know there are a lot of savvy and creative investors here, especially after reading some of the real estate threads. Here's a hypothetical question for you, using some rounded, easy to think about numbers.

Say you're looking at buying a 500k house for your prime residence, have 250k cash, and can afford to finance a maximum 250k at 1500/month for mortgage payments. The cost of borrowing each 100k is 600 a month. You have an option of using all, none, or some of the cash for the down payment. Here's the summary:

Price: 500k
Cash: 250k
Payment: 1500/month budget max (250k total)
Cost/100k: 600/month to borrow (~6%)
Low Risk Yield: ~5% yearly for cash

There's two main options with varying degrees in the middle. Do you put 0 down, finance all 500k, invest all 250k in low/medium risk holdings, and withdraw 1500 (5x600 - 1500) from the investment each month to cover the remainder of the mortgage payment? Or, do you put 250k down, finance 250k, and leave nothing invested? What would you do: put 0, 250k, or somewhere in the middle down? I know you can calculate which one would be theoretically better, but what would you really do if it was your prime residence? Feel free to ignore housing bubble issues and other monthly payments/savings, as we're talking cash and budget allocated solely to housing.

 

[Dtrigg]

Put the $250K in a brokerage account and then pledge a portion for your down payment. That isn't a margin account but a pledged account. Your broker can still trade the equities in the pledged account, you still get interest and dividends on the equities in the pledged account, etc. Why spend your money for a down payment?

 

[ShiftyBob]

If it were *ME*... (and keep in mind that I am a VERY aggressive investor) and I were in that situation... I would NOT put $250k down. If you put ALL of it into the property, then you have a property at 50% LTV, low payments, and no capitol. It takes money to make money. Here's a short version of what i would do (and MOST will disagree) ...

If your concerned about the payments...

Use $50k as a down payment on the house (not to be brought in until COE) which could get you into a 90% LTV NegAm loan. Your looking at payments of APPROXIMATELY $2k ($400 per $100k financed to be on the safe side). Then use the rest in other aggressive investments, that if done properly, could net you enough to payoff the property in less than 3 years (really, if done properly you could do it less than a year). I'm not saying that *You* should do this, it's just how *I* would do it. But I am suggesting that you NOT put $250k down...

If you are REALLY concerned about the payments and don't want a NegAm loan... put $50k down, set aside enough money for your payments for a year, and invest the rest. There are many creative financing options right now. You could literally get into a house with nothing but a small deposit (relative to the purchase price), and get your closing costs paid for, and then some. If you're interesated in details, shoot me a PM and I'll fill you in (I'm not trying to sell anything, or sell my services or company, just offering advice!).

Again, these are VERY aggressive examples and come with some risk (not as much as most would think), and they are not for everybody. Good luck in whatever you choose to do. Home ownership is never a bad choice...

 

[pvmike]

I agree with Bob. I'd put 10-20% down and invest the rest.

 

[Hothonda]

http://mtgprofessor.com/A - Down Payment/what_is_the_yield_on_a_larger_down_payment.htm

 

[lrsudog]

If you are a disciplined investor, inclined to pay attention to your investment vehicles, and if you have an income that would benefit from the deduction of Mortgage interest, then finance as much as you can at as low a rate as you can and invest your cash for as much as you can for as long as you can.

It is not unreasonable to earn 10% on a well managed portfolio, so on $250K, you should be able to finance half the larger mortgage note on investment gains without touching your original investment.

Selling off investment assets to to finance part of your house payment will increase your taxable income annually though. How much depends on what your current income level is.

If, however, you are inclined to not pay attention to your investments, or would not benefit from a mortgage interest deduction, or if you are nearing retirement and investment volitility would be problematic, then put down as much cash as you can afford without harming your nest egg.

"Own nothing, control everything"--John D. Rockefeller

 

[Patdeisa]

Thanks for the replies so far- keep 'em coming!

HotHonda- thanks for the link. It looks in general to cap the down at 20% and no more. I'll have to read up more about what he's talking about, though.

One thing I didn't mention is that I'm in my 20s with a small family, if it makes a difference. Oh, and I'm debt free in a month. :biggrin:

 

[morrow]

I would leverage the property... put around 10% down ask the seller to cover you closing cost and invest the rest of the money. This is a good time to be liquid, I hate to see all that money tied up in one "investment". Consider a loan with PMI (now tax deductible), if you credit score is over 680 there are some really aggressive single loan products with a reduced MI that you will qualify for. Good Luck with your purchase and future investments.
-Ryan

 

[redshift]

I really depends on what type, or how savvy, of an investor you are. This is a difficult question to answer without a big lesson on investing, but I don't think it ever makes sense to obliterate your entire cash position. You need liquidity to take advantage of opportunities. If you're set on putting it all down, then at least get a HELOC to enable you to move on good investments. If you're not an investor and don't realistically think you'll be able to make considerably more money investing your cash than the cost of your financing, then put it all down (granted you have at least 3 months of liquid savings).

As a side note, I don't tend to think of your primary residence as an investment, but others may disagree.

 

[lrsudog]

I would leverage the property... put around 10% down ask the seller to cover you closing cost and invest the rest of the money. This is a good time to be liquid, I hate to see all that money tied up in one "investment". Consider a loan with PMI (now tax deductible), if you credit score is over 680 there are some really aggressive single loan products with a reduced MI that you will qualify for. Good Luck with your purchase and future investments.
-Ryan

PMI is deductible now?

What am I thinking? Of course it's deductible, since I don't pay PMI anymore.

Does it count against your mortgage interest deduction limit, or?

 

[pvmike]

I would leverage the property... put around 10% down ask the seller to cover you closing cost and invest the rest of the money. This is a good time to be liquid, I hate to see all that money tied up in one "investment". Consider a loan with PMI (now tax deductible), if you credit score is over 680 there are some really aggressive single loan products with a reduced MI that you will qualify for. Good Luck with your purchase and future investments.
-Ryan

Ryan,

So you're saying that there are now 80%+ LTV loans, with PMI, which will result in a lower payment than a comparable first and second? I haven't seen this.

 

[steveny]

If it were *ME*... (and keep in mind that I am a VERY aggressive investor) and I were in that situation... I would NOT put $250k down. If you put ALL of it into the property, then you have a property at 50% LTV, low payments, and no capitol. It takes money to make money. Here's a short version of what i would do (and MOST will disagree) ...

If your concerned about the payments...

Use $50k as a down payment on the house (not to be brought in until COE) which could get you into a 90% LTV NegAm loan. Your looking at payments of APPROXIMATELY $2k ($400 per $100k financed to be on the safe side). Then use the rest in other aggressive investments, that if done properly, could net you enough to payoff the property in less than 3 years (really, if done properly you could do it less than a year). I'm not saying that *You* should do this, it's just how *I* would do it. But I am suggesting that you NOT put $250k down...

If you are REALLY concerned about the payments and don't want a NegAm loan... put $50k down, set aside enough money for your payments for a year, and invest the rest. There are many creative financing options right now. You could literally get into a house with nothing but a small deposit (relative to the purchase price), and get your closing costs paid for, and then some. If you're interesated in details, shoot me a PM and I'll fill you in (I'm not trying to sell anything, or sell my services or company, just offering advice!).

Again, these are VERY aggressive examples and come with some risk (not as much as most would think), and they are not for everybody. Good luck in whatever you choose to do. Home ownership is never a bad choice...

This is good advice. However if he wanted to he could put the 250k down to be a what he feels is a comfortable payment and then HELOC the 250k back out after closing. This way he could have the money available to invest at any time or he could not reborrow the funds and keep the low payment. The best of both worlds.

 

[Ryanmcd2]

This is good advice. However if he wanted to he could put the 250k down to be a what he feels is a comfortable payment and then HELOC the 250k back out after closing. This way he could have the money available to invest at any time or he could not reborrow the funds and keep the low payment. The best of both worlds.

^^^ This is what I would do. Also a house is NOT a investment. Investments put money in your bank account.

 

[ShiftyBob]

This is good advice. However if he wanted to he could put the 250k down to be a what he feels is a comfortable payment and then HELOC the 250k back out after closing. This way he could have the money available to invest at any time or he could not reborrow the funds and keep the low payment. The best of both worlds.

Also very good advice, just make sure you get a decent rate on the HELOC, often times the rates are MUCH higher... Also, depending on the state/lender, it may take a little longer to get e HELOC. Most lenders want 6 mos seasoning before they will lend on a HELOC (Meaning you've got to own the property for 3-6 mos before they will consider you for a HELOC)

^^^ This is what I would do. Also a house is NOT a investment. Investments put money in your bank account.

Your right... the house I bought and lived in for $340k, then sold two years later for $560k was NOT an investment!:wink: DAMN IT! Why did I waste my money! :biggrin:

A blanket statement like "A house is NOT an investment" is pretty narrow minded. Just because YOU don't consider YOUR house to be an investment, doesn't mean that it's not to other people. It all depends on what the purchaser/investor plans on doing with the house, and in most cases, unless the person plans on living there for the rest of their life and paying off the house, then it will become an investment...

 

[steveny]

Your right... the house I bought and lived in for $340k, then sold two years later for $560k was NOT an investment!:wink: DAMN IT! Why did I waste my money! :biggrin

...

Do you think you could do that again in todays market in cali? Being in the right place at the right time is not the norm. I feel there are a lot of people who have done the math from your above statement and are now up-side-down on property they were hoping to get your kind of returns on.

IMO If you want to ride the wave all the way into the beach you have to be on it before it crests, the wave will slam you into the bottom if you catch it too late.

 

[ShiftyBob]

Do you think you could do that again in todays market in cali? Being in the right place at the right time is not the norm. I feel there are a lot of people who have done the math from your above statement and are now up-side-down on property they were hoping to get your kind of returns on.

IMO If you want to ride the wave all the way into the beach you have to be on it before it crests, the wave will slam you into the bottom if you catch it too late.

I agree completely, and while the market sure has taken a turn for the worse in the last year, there are still some good investments in CA. Granted, they are not going to be like they were 3 years ago, but they are there. I was just rebutting the blanket statement that "a home is not an investment". Even if you don't get those type of returns, it's still an investment because you are building equity. Personally, in CA I look for rental property that I can get for <70% LTV and cash flow, OR an investment property in the $1mil+ range at <70%.

Most people think that right now is a bad time to invest in CA... which is not correct. Right now is a bad time for "now" investors to invest. Meaning that the investors who aren't looking for long term investments and want to flip properties can't find anything worth their while in CA, but those who are in it for the long haul, and want to buy/rent/lease and hold for a year or so, are going to rake it in next year if they decide to sell. For "now" investments, there are plenty of opportunities in other states. Dallas is expected to go up by 58% in the next few years, which means prices are rising now. Along with Dallas, is Atlanta, Phoenix, Salt Lake, and most of Southern Fl...

 

[morrow]

Ryan,

So you're saying that there are now 80%+ LTV loans, with PMI, which will result in a lower payment than a comparable first and second? I haven't seen this.

Absolutely. A good single loan product with a reduced MI factor will almost always price out better than a 80/20 combo. Take a look at "Single File" from MGIC (MI provider). This is designed for A paper clients and has a reduced MI factor, or can be lender paid with as little as a .25% to the rate. It is still a good idea to have you mortgage profession present both options to you. One thing to consider is that the MI can be removed at a later date without incurring the cost of a refinance and some First Time Home Buyers can get a bit overwhelmed at having to make 2 mortgage payments especially if there are 2 different loan servicers involved. It is my understanding that the PMI will be added in a separate column to your 1080 at the end of the year for taxes. Good Luck.
-Ryan