Real Estate Market / Inflation / Recession / Depression (Denver, Empire: housing, rent, income)

[MileHi5]

[quote=multitrak;3250101]the home as a tax shelter...property taxes and mortgage interest are deductable against annual income

So are you better off financially taking a mortgage on a home even if you have the cash to purchase it outright?

[multitrak]

Originally Posted by Bob from down south

Yes, it's possible. But you have to avoid the trap that says if your savings are not growing then you're being damaged. In the Great Depression, a tremendous deflation occurred. The sharp reduction in the money supply caused prices to fall...in this case just holding cash in a box buried in the back yard was a good thing, as its real value in buying power increased despite not earning any interest..

cash is THE KING during deflationary times. and food/water is queen. if you expect a massive deflation, then sock away as much cash as you can. then buy productive assets later for pennies on the $. it's been done before and can be all done again. plus get out of debt.

[Bob from down south]

Originally Posted by MileHi5

So are you better off financially taking a mortgage on a home even if you have the cash to purchase it outright?

Paying the bank $1.00 in order to save $0.28 in taxes rarely makes sense.

I suppose somebody can engineer a scenario where it's to your advantage, but most of those scenarios usually leave out important considerations like the "risk premium" needed for taking the loan and then putting your money into an asset class that poses some risk. Your money in a paid-for house represents a guaranteed return (and tax-free at that) of the mortgage interest rate. Your money in stocks or other investment instruments must earn a return equal to the mortgage rate, plus tax losses, plus the premium for taking a risk that your investment will lose some/all of its value.

Of course spending nearly *all* your money on a house isn't a good idea...one needs a cash war chest good for 6-12 months of average operating expenses to live free from most economic shocks (layoff, serious illness, pregnant daughter, defense lawyer's fees for boyfriend's "suspicious" gunshot death, etc).

[Bob from down south]

Originally Posted by multitrak

cash is THE KING during deflationary times. and food/water is queen. if you expect a massive deflation, then sock away as much cash as you can. then buy productive assets later for pennies on the $. it's been done before and can be all done again. plus get out of debt.

The US Treasury's I-series savings bond grows at a fixed rate plus CPI, and does not decrease from the current cash value if CPI ever goes negative. So it's cash-like in that it is a treasury security...it never declines from face value plus already accrued interest, and it keeps up with the CPI. I have been buying them at the max limit for years, and the older vintages are paying around 7% now (tax-deferred until redemption). I remember a couple readings I did in my MBA studies that convinced me that serious inflation protection was a requirement for long-term retirement planning, and that converted me to an I-bond junkie.

The bad news is that the treasury just clamped a $10,000 per person per year limit on current sales ($5K electronic account, and another $5K in paper bonds).

[multitrak]

Originally Posted by Bob from down south

The bad news is that the treasury just clamped a $10,000 per person per year limit on current sales ($5K electronic account, and another $5K in paper bonds).

so do the yearly i-bond max limit and then go with tips, also trableable online. a fellow trader i know really likes strips. me, i just bought a 28 day t-bill at 1.500 disc. rate. what can i say, i like short maturities!

[multitrak]

Originally Posted by MileHi5

So are you better off financially taking a mortgage on a home even if you have the cash to purchase it outright?

it depends upon your situation. me, i paid 100% cash on a house that i bought 3 years ago... i hate paying any interest to a bank. but try to avoid being property rich and cash poor. so i agree with chile bob on this one. however, if you have excellent credit and can get a sub-5% 15 yr fixed mortgage rate (no points), what's wrong with putting 50% down and borrowing the rest? something to think about...

[NewAgeRedneck]

When I purchased my most recent home in 2006, I put down more than 40% to keep the mortgage payment very affordable. I also held back a good chunk of change from the proceeds of my previous home sale for cash reserves. If for some reason I'm forced to become a landlord, the rent should easily cover the PITI and management fees and even provide a small positive cash flow...but one never knows for certain what economic conditions might arise. Fortunately for me, home values are holding steady in my locale.

[Charles]

Originally Posted by multitrak

iwhat's wrong with putting 50% down and borrowing the rest? something to think about...

Nothing is wrong with that except possibly not maximizing net worth by putting too much money down. Historically had you put down 20% and invested the remaining 30% in a tax efficient mutual fund or index fund you would have maximized your net worth.

But it is a comfort level thing.

I didn't do what I described above, but I moved to Colorado with higher than normal down payment from a California sale. I'm 46, I'm the only breadwinner and I have four kids. I played it more conservatively - didn't take out the biggest mortgage I could afford. I did do the above when I was 27 (first house) and again at 36 (second house). I don't need to do it now.

[multitrak]

Originally Posted by Charles

Nothing is wrong with that except possibly not maximizing net worth by putting too much money down. Historically had you put down 20% and invested the remaining 30% in a tax efficient mutual fund or index fund you would have maximized your net worth.

But it is a comfort level thing.

I didn't do what I described above, but I moved to Colorado with higher than normal down payment from a California sale. I'm 46, I'm the only breadwinner and I have four kids. I played it more conservatively - didn't take out the biggest mortgage I could afford. I did do the above when I was 27 (first house) and again at 36 (second house). I don't need to do it now.

age is a big factor, but so is income expectation risk. it seems that you have a reasonable expectation of maintaining a stable income until you retire and the kids are out of college, so your risk is fairly low. otoh, since i own my businesses, and most are high risk ventures following boom-bust cycles, i'm playing it safe at 56. if i lose everything (in the businesses) due to unforeseen economic forces, i'll still have my property and cash assets debt free for retirement. i'm concerned about folks retiring at 65 with no expectation of paying off their home for another 10 or 20 years, massive credit card debt, little to no savings or retirement assets, iow, just p*** poor future planning. for them, retirement will definitely suck. i'm trying my hardest not to be them...

[Charles]

Originally Posted by multitrak

age is a big factor, but so is income expectation risk. it seems that you have a reasonable expectation of maintaining a stable income until you retire and the kids are out of college, so your risk is fairly low. otoh, since i own my businesses, and most are high risk ventures following boom-bust cycles, i'm playing it safe at 56. if i lose everything (in the businesses) due to unforeseen economic forces, i'll still have my property and cash assets debt free for retirement. i'm concerned about folks retiring at 65 with no expectation of paying off their home for another 10 or 20 years, massive credit card debt, little to no savings or retirement assets, iow, just p*** poor future planning. for them, retirement will definitely suck. i'm trying my hardest not to be them...

Makes sense to me.