WatchAssuming someone has the cash and wants to buy a house now (lives at parent's home for free while building wealth), in this low interest rate economic environment, does it make sense to pay with only cash? in other words, does it make sense to take out a mortgage?
other parameters in this hypo situation
- 150k salary, single, 27
- maxed out 401k/IRA, no student loan debt, or any other debt
- health insurance fully covered
- home prices won't drop in this local market
- won't be "house poor" if he buys a house
i'm sure this is a multifaceted answer that depends on multiple factors...
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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.
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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.
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Brooklyn, NY
FortWayne says
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
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FortWayne 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
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Oxygen says
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.
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FortWayne says
More correctly, you'll have LOWER closing costs. You still have to pay a litny of standard fees.
KILLERJANE says
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.
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Oxygen says
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.
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SFace says
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.
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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.
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FortWayne says
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).
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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 ;)
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"The things you own end up owning you"..
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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...
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If you buy a house together each partner providing 50% of the money than that's dandy, but if you buy the whole house yourself and then get married without a prenup you leave it up to the government and your partner to freely redistribute your property (that goes for both sexes) in case it doesn't work out (unfortunately statistically the chances are > 50%).
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mell says
Buy with cash if it helps with the deal, but I'd refi into a loan.
30 year @ 3.375 / 25% Fed Tax / 8% State Tax = ~2.3% after MID
15 year @ 2.875 / 25% Fed Tax / 8% State Tax = ~2.0% after MID
If you can't find anything to do with your cash right now, stick it in a 5 year Jumbo CD @ 1.9% and wait. In 5 years pay it off if you want, but I'm betting you can find an investment that pays more than 3% at that time.
If disaster strikes (earthquake/zombies/housing prices drop 50%), walk away.
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mell says
why isnt the house a premarital asset but subject to community property rules after marriage?
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Oxygen says
Is the cash legal? Sorry, but that kind of income at 27 makes me wonder.
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Oxygen says
Do you consider 150k at 27 to be LOW? If not why would your friend be pressed for time?
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FortWayne says
Then again fear and trepidation exist for a very good reason. Its OK to regret not taking an action if taking it would have ended in tragedy. Usually after uttering the words "hey guys, watch this!"
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New renter says
Software Engineering with a location adjustment for a high cost of living area would do it. I was making $105K in 2001 when I was 28 in Boulder, CO which would be $136K in 2012 dollars. Bay Area (and perhaps NYC?) salaries are about 15% higher which would be $156K.
Law would do it too
It took me 70-80 hours a week to make executives ecstatic and get big raises when I was a young lad. There's not enough time left after that to both do enough hobbies to stay sane and fit and start a business.
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yes, engineer in NYC. Law starts at 160k (biglaw salaries, not shitlaw)
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Oxygen says
Well it is, but lets take CA for example: If you paid cash or took out a mortgage and your house appreciated during your marriage by let's say $200K, then you owe your spouse 100K on the appreciation since it became a marital asset. If you take out a mortgage you have to consider that even if the house does not appreciate in value you will owe the reduction in principal by 50% since you joined forces. If you think that's fair than it's all good, if you think that any appreciation/reduction in principal should be yours you have to have an ironclad prenup. Or just rent a nice pad and don't worry, what StoutFiles said ;)
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Amazing how many people in this thread use emotion to make financial decisions rather than reason.
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drew_eckhardt says
Ah you meant not enough time in the day, not left in one's career
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You know anything about practicing law in Big Law in your first couple of years?
Getting slightly off topic, someone making $150,000 as a lawyer shouldn't buy a house right away, although since most people finance their law education with student loans, it's usually unlikely.
The first priority for a young lawyer should be socking money away. The second priority should be keeping mobile (especially if you're in NYC, since many lateral opportunities will be in smaller markets). The third priority should be staying liquid. The fourth priority (believe me, it's an issue) is not to get caught up in an extravagent lifestyle. Lawyers really don't make much money when you take into account loans and costs of living where the law jobs are.
My first law gig, I just put it all in the bank the first year. It came in handy when my boss jumped ship and I had to find a new job.
There's a great blog to read for attorneys and law students. It's called The Legal Dollar. This post (from 2010) sums it all up. http://thelegaldollar.blogspot.com/2010/09/not-rich-at-250k-its-how-you-live-not.html
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Homeboy says
Exactly. Because nobody loses money on stocks , its all up and up.
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Homeboy says
Ha Ha Ha... so true... and many don't seen to know how to use a calculator either...
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Idiot says
yes I know a decent amount regarding biglaw, but the hypo isnt about biglaw attorneys. also, as i said in the hypo, SL debt and stability of career is not an issue, even if it is not true for the majority of the population.
i just wanted to see what the options are available that i havent thought of and what areas to research further.
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mell says
interesting. divorce laws vary by state though.
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Idiot says
thanks
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KILLERJANE says
You are assuming too many things - perfect tenant,no vacancy,no maintenance......
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This depends on the prediction on your crystal ball.
I did the caculation myself since I invest in residential real estate.
If you believe we can muddle through the recession (or even recover) without a deflation collapse, mortgage COULD be better since it could gives you higher return rate (from an investment POV) assuming it makes no difference in selling price (but usually cash gives you better negotiate position, esp. for REOs.)
However, if you believe the deflation collapse is coming, DO NOT buy ANY house. Save the cash and buy whatever you want AFTER the collapse (this will use some patience.)
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Mobi says
Oh how I wished more thought deflation were a real risk. Then I'd have fewer offers to compete with to buy real estate!
Just keep in mind that if your money isn't earning money, then you're losing money. Since a true deflationary spiral would take years to fully develop with out a major catalyst, how much will you lose before you gain? Right now I am earning $6000/yr on each of my $50,000 condos. If rents plunge by 25%, then I'm still making $4000.
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Mick Russom says
Right. Your only choice for the next 15 years is going to be risky stocks, because CDs will pay historically low rates for the rest of time.
A decade ago you could get 5% with your money just sitting in a savings account. But you're right, you should pass up the opportunity to get a loan at 2.75% interest, because rates will never go up again.
"Finance frightens and confuses me"
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Only thing I can add that hasn’t been said already. If this person buys with a cash offer - would they have sufficient reserve? If they drain their savings close to zero and then something unexpected comes up - then what?
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robertoaribas's website
put 20% down, avoid PMI and MI, and go 30 years at the lowest rate possible...
If your plans change later, you will be able to rent this for positive cashflow, and you will have plenty of money left to buy another home in a year or so if you so choose.
Just a few years ago, I was getting 6% return on online checking accounts... How good would you feel getting over 6% on money you are only paying 3.5% for?
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Call it Crazy says
Yeah, and its Amazning how loud people are when they wine (however rare), and how completely silent they are when they lose.
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robertoaribas says
Yeah, thats sustainable. Exactly where will this magical money spread come from. Ahh, the printing press. Inflation on food, gas, tuition, rent and commodities and everything made from them will really help the average guy out.
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Homeboy says
Pretty much we are all just trying to beat inflation. Only the obscenely wealthy will be able to expand their principle.
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EastCoastBubbleBoy says
he wont be "house poor" and his credit is good enough to float funds on a 0%APR credit card