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Thread: Home financing, or not

  1. #1
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    Home financing, or not

    I am in a bit of a quandry here.

    My brother in law came to me last night and asked my advice about buying a home. He is something of a free spirit, as is my sister. Neither one of them works a "normal" job. They will have massive inflows of capital, then nothing for several months (for years I suspected he was a professional burgalar).

    In the next couple of months, they will be taking in a few hundred thousand dollars and they want to buy a house. What my brother in law essentially wanted to know was if I thought they should finance it, or buy it outright.

    My first bit of advice was to put the money in a short term (6 mos) investment, beacause NONE of the real estate folks I know are buying right now.

    I can see advantages to both ways. If they finance at a resonable rate, there is a good chance they can get a higer return on their money than the finance charges. On the other hand, if it was me personally, I would buy it outright just for the security that it provides. If they buy outright, and then have a bad year next year, their housing is still gauranteed.

    What do you guys think? Personally, I do not carry a note on my home. I prefer the security that comes with complete ownership even if it does cost a little every year in total return because that money is tied up.
    If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

  2. #2
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    How likely are they to not spend the money in the meantime?


    If they would likely keep the money safe while waiting then the 6 month investment makes sense. If however the freespirits that they are will take it out and spend like no tommorow then buy the house now outright.
    Admittedly, the concept of the Straussian text is one susceptible to intellectual mischief in the form of wild claims about the esoteric meaning of texts, not to mention rather off-putting for anyone who doesn’t like know-it-all elites.
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  3. #3
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    I carry a mortgage on 50% of value at 6.5% and have that money invested in 12-15% short-term notes. That provides a minimum spread of 5.5% after debt service and the debt service, being tax deductible, reduces my tax exposure to provide a net investment ROI dependent on other investment yields.

    The important factor is being liquid enough to retire the mortgage if investment yields drop below the debt service. When I was younger, I'd mortgage 100%, keep the proceeds liquid, be able walk away from the house if real estate values fell and replace it with a new market value house. Fortunately, I didn't have an opportunity to exercise that strategy and I'm not aware of how the new BK legislation affects real property. I've gotten far more conservative with age, but still dislike idle money such as real property equity.

    I do not advocate mortgage on a principal residence if the debtor is unable to retire it in times of economic change and/or cyclical real estate markets.

    Disclaimer: Posted for discussion, not as investment advice.
    These are my principles. If you don't like them I have others. ~Groucho Marx~

  4. #4
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    Quote Originally Posted by lord tammerlain
    How likely are they to not spend the money in the meantime?

    If they would likely keep the money safe while waiting then the 6 month investment makes sense. If however the freespirits that they are will take it out and spend like no tommorow then buy the house now outright.
    Coming into a chunk of money affects people in different ways. I've seen people who were former spendthrifts become tight as ticks, just as viewing former fiscal conservatives XXXX it all on depreciating toys. They should spend a reasonable piece of it on themselves as a reward, and that might be incentive enough to hold the remainder.
    These are my principles. If you don't like them I have others. ~Groucho Marx~

  5. #5
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    Quote Originally Posted by lord tammerlain
    How likely are they to not spend the money in the meantime?


    If they would likely keep the money safe while waiting then the 6 month investment makes sense. If however the freespirits that they are will take it out and spend like no tommorow then buy the house now outright.
    Spending the money in the meantime is the problem, which is why I would suggest locking it down in an investment for 6 or 8 months (give the RE market time to soften up). It seems like they are really making an effort to be a little mroe responsible, but neither knows anything about investment or finance, so I can just tell them where to put it and they will.
    If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

  6. #6
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    Quote Originally Posted by georged
    I carry a mortgage on 50% of value at 6.5% and have that money invested in 12-15% short-term notes. That provides a minimum spread of 5.5% after debt service and the debt service, being tax deductible, reduces my tax exposure to provide a net investment ROI dependent on other investment yields.

    The important factor is being liquid enough to retire the mortgage if investment yields drop below the debt service. When I was younger, I'd mortgage 100%, keep the proceeds liquid, be able walk away from the house if real estate values fell and replace it with a new market value house. Fortunately, I didn't have an opportunity to exercise that strategy and I'm not aware of how the new BK legislation affects real property. I've gotten far more conservative with age, but still dislike idle money such as real property equity.

    I do not advocate mortgage on a principal residence if the debtor is unable to retire it in times of economic change and/or cyclical real estate markets.

    Disclaimer: Posted for discussion, not as investment advice.
    That is my real problem, is figurign the risk and the ability to retire the morgage. Our financial state in the US is getting prograssively worse, and I certainly would not wnat to end up upside down in something and unable to walk away from it.

    I generally dislike property equity, except for my home. I will likely always live in my home, and retire there when the time comes. I have made mistakes in the past, or bad calls and worse hedges on investments, that have left me penniles. This has happened more than once, luckily not for several years (besides which, I am a little older and wiser now...learning from your mistakes is the real key to sucess). When I had my children, my opinion as far as home equity changed a little and I decided I would rather have the 100% sucrity of full equity rather then the extra money to play with.

    Coming into a chunk of money affects people in different ways. I've seen people who were former spendthrifts become tight as ticks, just as viewing former fiscal conservatives XXXX it all on depreciating toys. They should spend a reasonable piece of it on themselves as a reward, and that might be incentive enough to hold the remainder.
    I can tell you that with these particular folks, money comes in, and they start spending and do not stop until it is gone. The amount does nto seem to matter, it all goes.

    My personal strategy when it comes to unusual, large influxes of capital has always been to spend 20% of it max, and put the rest back in somewhere. Anymore I generally put it all back in. I have about all the material posessions I really want. I buy a new car or toy ocassionally, but beyond that, I am pretty much happy with what I already have.
    If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

  7. #7
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    Quote Originally Posted by daewoo
    Spending the money in the meantime is the problem, which is why I would suggest locking it down in an investment for 6 or 8 months (give the RE market time to soften up). It seems like they are really making an effort to be a little mroe responsible, but neither knows anything about investment or finance, so I can just tell them where to put it and they will.
    You don't want to become their financial advisor, so I'd suggest federally insured CDs. Low yield, 3-4%, but early withdrawal penalties should keep them away from it. Make sure they spend a little on themselves to cure that itch.
    These are my principles. If you don't like them I have others. ~Groucho Marx~

  8. #8
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    Quote Originally Posted by georged
    You don't want to become their financial advisor, so I'd suggest federally insured CDs. Low yield, 3-4%, but early withdrawal penalties should keep them away from it. Make sure they spend a little on themselves to cure that itch.

    That was pretty much my thought, CDs, or a nice account in the Caymans paying 12%. I hate giving financial advice to family, especially if they are not financially literate. Many people have difficulty understanding that there is no such thing as a high yield risk free investment, and the uninitiated always get a little testy when they loose money.
    If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

  9. #9
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    I think it's also important to know the status of the housing market in the area where they want to live. In some areas of the US the price of homes has peaked and is on its way down, while in other areas the bubble is still going strong.

    If they don't need a house right now (i.e they can wait a bit) and the price of homes in the area is already on the decline, then I would put the money away for a while and invest it so that it at least grows as fast or faster than the inflation rate. Every day they've postponed their purchase of a house will then be a day on which they'll have saved money.
    Eh, what's this? A Republican from Texas that actually makes sense and can speak English?

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  10. #10
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    The RE market here has increased by over 60% in the last 5 years. It seems to have flattened out at this point, so I expect prices to decline, thus the 6 month lag to see which ways the winds are blowing at that point
    If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

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