Is it better to buy your house in cash or get a mortgage? (Houston: apartment complex, rentals)

[asus100]

Thank you for all your opinions. I read some real-estate investment books and the books said it is better to use leverage (meaning get a mortgage).
For example, let's say I have $250K plus change in cash. If I buy a $250K house with cash as my primary residence, I will only own and control $250K of real-estate. Let's say 5 yrs later, property price increased 10%, so my house is now worth $275K. My gain is $25K. But if I sell my house, I'll also have to move out, which is a hassle. After I moved out, I either have to buy another house (where property price is now higher) or rent.

If I didn't pay with 100% cash, but instead mortgage 80% and put down 20%, I can buy five $250K houses with the $250K cash. I can live in one of the houses and rent out the other four houses. In this case, I don't own the five houses since I mortgage 80%. However, I do control $1.250M worth of real-estate ($250K x 5 = $1.250M). Let's say 5 yrs later, property price increased 10%. My total real-estate would be worth $1.375M, which is a $125K gain. One important note is that the rent from the four houses must be able to cover mortgage payment, property tax, insurance, and hopefully still have some cash left over.

From the above two examples, after five years, you have $25K gain if you buy in cash or $125K gain if you mortgage.

What do you guys think? Has anyone actually done it this way? If so, how did it work out?

[cheryjohns]

Originally Posted by asus100

Thank you for all your opinions. I read some real-estate investment books and the books said it is better to use leverage (meaning get a mortgage).
For example, let's say I have $250K plus change in cash. If I buy a $250K house with cash as my primary residence, I will only own and control $250K of real-estate. Let's say 5 yrs later, property price increased 10%, so my house is now worth $275K. My gain is $25K. But if I sell my house, I'll also have to move out, which is a hassle. After I moved out, I either have to buy another house (where property price is now higher) or rent.

If I didn't pay with 100% cash, but instead mortgage 80% and put down 20%, I can buy five $250K houses with the $250K cash. I can live in one of the houses and rent out the other four houses. In this case, I don't own the five houses since I mortgage 80%. However, I do control $1.250M worth of real-estate ($250K x 5 = $1.250M). Let's say 5 yrs later, property price increased 10%. My total real-estate would be worth $1.375M, which is a $125K gain. One important note is that the rent from the four houses must be able to cover mortgage payment, property tax, insurance, and hopefully still have some cash left over.

From the above two examples, after five years, you have $25K gain if you buy in cash or $125K gain if you mortgage.

What do you guys think? Has anyone actually done it this way? If so, how did it work out?

Yes, it works like that - or used to. With the entire financial world in upheaval - I am now afraid to advise this like I did at one time. In a normal world, leverage is a good thing.

[chris_ut]

Do you actually have this kind of money to invest or is this just a thought exercise?

[houstonfan]

Originally Posted by asus100

Thank you for all your opinions. I read some real-estate investment books and the books said it is better to use leverage (meaning get a mortgage).
For example, let's say I have $250K plus change in cash. If I buy a $250K house with cash as my primary residence, I will only own and control $250K of real-estate. Let's say 5 yrs later, property price increased 10%, so my house is now worth $275K. My gain is $25K. But if I sell my house, I'll also have to move out, which is a hassle. After I moved out, I either have to buy another house (where property price is now higher) or rent.

If I didn't pay with 100% cash, but instead mortgage 80% and put down 20%, I can buy five $250K houses with the $250K cash. I can live in one of the houses and rent out the other four houses. In this case, I don't own the five houses since I mortgage 80%. However, I do control $1.250M worth of real-estate ($250K x 5 = $1.250M). Let's say 5 yrs later, property price increased 10%. My total real-estate would be worth $1.375M, which is a $125K gain. One important note is that the rent from the four houses must be able to cover mortgage payment, property tax, insurance, and hopefully still have some cash left over.

From the above two examples, after five years, you have $25K gain if you buy in cash or $125K gain if you mortgage.

What do you guys think? Has anyone actually done it this way? If so, how did it work out?

Yes, in theory, this is true. "Leveraging" works sorta like this in any type of investing, not just RE. But usually, with any type of investing, the bigger the rewards, the bigger risk you have to take, and hence, the potential for bigger failure. So in your example, what if you couldn't find renter for all your houses and now you're just paying taxes, insurance, interest, etc. What if the value of those houses went down over the years? Are you able to absorb those potential bumps along the way?
Like I said, the answer to buy or mortgage has to do with what else you could be doing with that money? If using it to buy other houses, businesses, investments makes sense for your situation, then mortgage; otherwise pay it off.

[poptones]

As soon as you start renting a house, the value drops. I live next door to the only rental house on this block, and it's the noisiest and poorest maintained house with the possible exception of mine. The difference is mine is 100 years old and being repaired, the one next door was built in the forties and it just sits and gets uglier with each new renter. I live in a pretty nice part of a small town, yet I see the effects of rentals even here. It's become to the point I can just about drive down a street and tell you which is the rental property.

If you rent homes you have to deal with the business of renting them. I have friends who do this and from what I have seen it can be a real pain. My father once owned three homes and tried renting one, he dumped it after a year of that nonsense.

I paid cash for mine and glad I did. No matter where the economy takes me, so long as I can pay taxes I got a home. I may sit in the dark, I may have to burn logs for heat, but I got a home. But I am the type I HATE shelling out $1000 a month for a place to live.

[oceangaia]

Originally Posted by studiobtm

Usually I would recommend cash. However, for the first time in US history we are monetizing debt (just printing money and not even backing it with loans (investments) from other countries). Debt and obligations are at terminal levels. In other words, we are almost certainly going to enter a period of high inflation. If you have a low interest FIXED RATE debt obligation, your payment, in real dollar terms, is going to drop way down.

That's a non-factor because the cash you would otherwise use to pay off the house will also be devalued.

[houstonfan]

^^ I'm with DiverTodd. Not only that, but if he paid the house off today, and inflation takes off, in theory his house will be worth a lot more in just a short time due to inflation alone. Nothing in economics is pure and clear cut of course, too many factors muddle the outcome, but speaking in theory alone...

[Texascrude]

Originally Posted by cheryjohns

Get with your financial advisor - because everyone's circumstances are different. With interest rates so low, it's cheap money and you have the write-off. However, it then depends on what else you do with the cash.

Best advise you're going to get here. I personally would pay off my house as soon as I can, but I realize that is a rather poor investment choice -- it just comes down to how risk adverse you are.

Right now you can borrow at about 4% - after your tax deduction that will drop to about 3%. Chances are you can earn more than that in the market, even just buying AAA bonds which are very low risk. But, like I said, the idea of being free of debt is very appealing.

[studiobtm]

Originally Posted by DiverTodd62

That's a non-factor because the cash you would otherwise use to pay off the house will also be devalued.

Um... that's what I said.

Getting a mortgage and keeping the money in cash on the side is a bad idea. Paying cash for the house is pretty good idea. Getting a mortgage on the residence and paying cash for some income producing properties might be a really good idea - if you have the skills to handle rentals. There are also alternatives to rentals which I will not detail here.

[studiobtm]

Originally Posted by houstonfan

^^ I'm with DiverTodd. Not only that, but if he paid the house off today, and inflation takes off, in theory his house will be worth a lot more in just a short time due to inflation alone. Nothing in economics is pure and clear cut of course, too many factors muddle the outcome, but speaking in theory alone...

The house will not be worth any more in the future in real terms unless the price appreciates faster than the rate of inflation. You have to convert everything to inflation adjusted dollars.

The advantage to what I am suggesting is you pay off the fixed rate note with inflated dollars.

Most people should just pay the house off because most folks cannot effectively manage income properties.