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Old 09-18-2011, 12:35 PM
 
Location: Murrells Inlet, SC
52 posts, read 87,872 times
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Planning to retire next year and will rent in our new town before buying, as we're not sure what part of town will work best for us.

The main disagreement we're having is about getting a mortgage vs. buying for cash. DH wants to pay cash and not worry about a mortgage. I think a mortgage makes sense as we'll have that money as a cushion. The only real advantage I can think of is you might be able to negotiate a lower price with cash on hand.

Need some advice, as we keep butting heads over this!
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Old 09-18-2011, 01:31 PM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
22,527 posts, read 39,903,732 times
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IMHO... Buy with cash, (leverage) then refinance with a HELOC or a 3.5% 15yr as needed for cash reserves. (credit union is my preferred lender)

Tho my real advice... is to use house equity on a accessible & desire able 'retirement friendly' multi family facility that cash flows at ~ 10% Net AND is in a location you love to visit, or preferably end up living.

Then you use postive cash flows to rent wherever you feel like living... Paris, Paraguay, Peoria, Phoenix, Portland ,,,

When you are ready to REALLY retire ... stay home, then you use one of your units in rental, or trade it (1031) for a primary residence of your choice. (You can 'convert' either to primary residence to shelter LTCG up to $500k, special rules apply to converting a previous income property, but they are very ez to comply.)

I hope to never have another primary residence. Except as needed for sheltered income ($500k every 2 yrs under current law). Sheltered income (not taxed) will become very valuable in the not to distant future of USA.

My bottom line is that a home is NOT an asset, but a liability. YOU decide what best fits your investment / security needs. I am plenty happy having several rental places paid off that I could move to, while having a moderate mortgage or HELOC @ 3-5% to avail cash for screaming good investment deals (Current Mortgage actually only 10% LTV ratio for me... i.e. $150k loan @ 2.7% on a ~$750k property (for which I have a $150k cost basis... homeschool building project with kids). I invest my home equity ONLY in RE that I KNOW is undervalued, and desirable enough to sell for 30% more than I pay for it. Those properties are everywhere at the moment, and having cash available is a very good thing.

I have been far more successful at making $$ by leveraging cheap mortgage money, than I have been playing the equity markets for 40 yrs... I trust you have other investment options and more success than I.

BTW: I have had little to no trouble with senior tenants (or non-senior), AND I do not use a management company, AND I do not fix toilets. My rental agreement is tough, but I am benevolent. I give my tenants a 5% annual bonus (Cash Back) on their Dec Payment (50% of payment back) IF... They have never been late or caused me to come track them down for an issue. AND if they have taken care of most / all issues using a list of contractors / servicemen I provide. I work like a dog right beside them on a few projects. and I drive a $35 car. They appreciate me, and I appreciate them. (That is called a Win:Win)

Last edited by StealthRabbit; 09-18-2011 at 01:40 PM..
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Old 09-18-2011, 01:42 PM
 
29,764 posts, read 34,848,700 times
Reputation: 11675
Quote:
Originally Posted by Alexia561 View Post
Planning to retire next year and will rent in our new town before buying, as we're not sure what part of town will work best for us.

The main disagreement we're having is about getting a mortgage vs. buying for cash. DH wants to pay cash and not worry about a mortgage. I think a mortgage makes sense as we'll have that money as a cushion. The only real advantage I can think of is you might be able to negotiate a lower price with cash on hand.

Need some advice, as we keep butting heads over this!
You will get a lot of advice with the bottom line being trying to determine what is right for you and your situation and future goals and interest. We had to make a similar decision and ended up doing a combination of each. Paying cash for our primary home and getting a mortgage on a beach home. It has worked out well but that was US and our interests. Good luck to you and think not just of now but down the road. Keep in mind cash flow now down the road. Will you have additional revenue streams coming in? Etc etc etc. As our realtor told us back in the day cash was no advantage as the bottom line amount was king. Now however with so many deals falling through cash might be king as there is less to go wrong.
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Old 09-18-2011, 02:36 PM
 
Location: Los Angeles area
14,018 posts, read 17,723,738 times
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Part of the answer has to do with what you would be doing with the cash if you get the mortgage. The stock market is risky for retirees and the interest rates on CD's are close to zero right now. If the cash will be just a "cushion" (and I am a great believer in having a cushion), then the extra cash flow from not making the mortgage payment every month can also become your cushion. Just put aside that amount each month and it'll mount up quickly.
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Old 09-18-2011, 04:07 PM
GLS
 
1,985 posts, read 4,845,333 times
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Quote:
Originally Posted by Alexia561 View Post
Planning to retire next year and will rent in our new town before buying, as we're not sure what part of town will work best for us.

The main disagreement we're having is about getting a mortgage vs. buying for cash. DH wants to pay cash and not worry about a mortgage. I think a mortgage makes sense as we'll have that money as a cushion. The only real advantage I can think of is you might be able to negotiate a lower price with cash on hand.

Need some advice, as we keep butting heads over this!
This decision used to be more clear-cut from a purely financial perspective. In the past, relatively safe investments could be found that paid more than the return you would get from retiring your mortgage. However, now, assuming you qualify, you can easily get a 4% 30 year mortgage. If you still are working making a good salary, this loan might only cost you 2% after taxes. As others suggested, 2% is not much to pay, IF and only if you can get an ROI of >2% on the cash you would have spent.

Now start factoring your "best guesses" for future changes. For example, will the politicians eliminate the mortgage deduction? Probably not for the average voter. However, if you are one of the "millionaires and billionaires", you will probably lose most or all of your mortgage deduction. In addition, factor in individual characteristics like age. For example, if you are 60 or seventy, are you really going to be around to pay the last payment on a 30 year loan? Some people would suggest a strategy of finding a 40 year loan, and blowing your cash on some fun now.

So here is my concluding point from experience: most people do all this complex financial analysis, and end up making their final decision based upon emotional prejudice. It is a gut feel. Psychologically, not financially, your husband may sleep better at night because he "owns it lock-stock & barrel". My personal example is that, I didn't have crap as a kid. When I finally did earn enough to buy some creature comforts, I wanted to make sure they would never be taken away. So you see, despite the fact that I am capable of sound financial analysis, my childhood paranoia creeps in and I usually pay things off early.

I hope what you take away from this is that, while the discussion between you and your husband may seem to be based upon financial considerations only, there may be legitimate psychological reasons driving the decision. Some introspection in this area may help you resolve your impasse. Good luck.
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Old 09-18-2011, 04:42 PM
 
Location: Lexington, SC
4,281 posts, read 10,728,968 times
Reputation: 3716
Quote:
Originally Posted by GLS View Post
This decision used to be more clear-cut from a purely financial perspective. In the past, relatively safe investments could be found that paid more than the return you would get from retiring your mortgage. However, now, assuming you qualify, you can easily get a 4% 30 year mortgage. If you still are working making a good salary, this loan might only cost you 2% after taxes. As others suggested, 2% is not much to pay, IF and only if you can get an ROI of >2% on the cash you would have spent.

Now start factoring your "best guesses" for future changes. For example, will the politicians eliminate the mortgage deduction? Probably not for the average voter. However, if you are one of the "millionaires and billionaires", you will probably lose most or all of your mortgage deduction. In addition, factor in individual characteristics like age. For example, if you are 60 or seventy, are you really going to be around to pay the last payment on a 30 year loan? Some people would suggest a strategy of finding a 40 year loan, and blowing your cash on some fun now.

So here is my concluding point from experience: most people do all this complex financial analysis, and end up making their final decision based upon emotional prejudice. It is a gut feel. Psychologically, not financially, your husband may sleep better at night because he "owns it lock-stock & barrel". My personal example is that, I didn't have crap as a kid. When I finally did earn enough to buy some creature comforts, I wanted to make sure they would never be taken away. So you see, despite the fact that I am capable of sound financial analysis, my childhood paranoia creeps in and I usually pay things off early.

I hope what you take away from this is that, while the discussion between you and your husband may seem to be based upon financial considerations only, there may be legitimate psychological reasons driving the decision. Some introspection in this area may help you resolve your impasse. Good luck.
We did that with our last home. We could afford to pay cash but we put 75% down and floated a mortgage. Lenders were screaming for our business.....LOL

The tax write off helped plus the CD interest we collected on the extra money helped. The extra money was a nice cushion. We never touched it and in reality it did "cost" us some to have it, but we were comfortable doing it.

We sold it that home and bought a new home earlier this year. We bought down and did pay cash (no mortage) for our new home.
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Old 09-18-2011, 06:09 PM
 
Location: Florida
4,356 posts, read 3,689,532 times
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If you can afford to pay cash then a mortgage could be a good option as inflation will help pay off the debt. The problem is how to invest your cash so it is safe and produces at least as much income as your mortgage costs. I think I wold lean toward the mortgage if I had an investment in a companies stock that had a large capital gain and was also growing at a rate in excess of the interest I was paying on the mortgage. Then I would place a stop loss of 5 or 10% on the stock so that if (maybe when) the market drops you sell enough to pay off the house. The risk is that you could spend more on this option that just buying the home.
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Old 09-18-2011, 06:29 PM
 
Location: NW Las Vegas - Lone Mountain
15,756 posts, read 33,407,225 times
Reputation: 2661
Quote:
Originally Posted by Alexia561 View Post
Planning to retire next year and will rent in our new town before buying, as we're not sure what part of town will work best for us.

The main disagreement we're having is about getting a mortgage vs. buying for cash. DH wants to pay cash and not worry about a mortgage. I think a mortgage makes sense as we'll have that money as a cushion. The only real advantage I can think of is you might be able to negotiate a lower price with cash on hand.

Need some advice, as we keep butting heads over this!
I deal with this pretty regularly as I sell houses often to retirees.

The big question is your happiness. The financial answer is the biggest mortgage you can swing below 4%. And 30 years not 15. Such cheap money will be an asset to you and to your estate.

Happiness however may dictate another solution. Though I always make this speech to my clients more than half pay cash. Better happy than rich.

What to do with the cash is another problem. Just make sure you are getting better than 5%. I am skeptical of those who get 10% but reasonably safe 7 or 8% is doable in a number of ways.
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Old 09-18-2011, 11:28 PM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
22,527 posts, read 39,903,732 times
Reputation: 23634
I did some rough calculations, and during the last 15 yrs, my $150k mortgage (on a $750k property w/ $150k cost basis) allowed me to purchase a combined total of $850k worth of properties,(5 individual acquisitions). These all were sold and generated $1m profits (while retaining equity as well as 3 paying their own way through rents. (2) were land speculations (1) scenic rural and (1) commercial parcel on @ freeway interchange.

~ 1/2 of $1m profits was very passive in nature (mow the fields 2x / yr)
~1/2 was fairly intensive... building homes / commercial units / rezoning / property improvements.

All was done while being a caregiver, working multiple jobs, living internationally, and homeschooling (thus, this is not very hard to do, nor does it require a lot of time).

One has to be VERY careful, you make your money when you BUY, not when you sell.
Internet commerce / smart phones / economy / mortgage crisis has changed the RE game, but there are lots of opportunities. (likely more than before the crash, if you strategically plan).

I for one WILL NOT invest real estate equity dollars into stocks, personal businesses, needs of friends and family, or gambling. RE stays invested in RE or cash (personal choice + experience watching my parents AND inlaws lose EVERYTHING @ post age 50 by making poor RE investment choices. I hope to NOT follow in their footsteps... mine will be different ...). I have traded / dealt with ~ 25 - 30 properties. Bought my first house @ age 19. Have used realtors for a total of 2 transactions. They were very painful and totally messed up. I prefer to deal with owners, title companies, appraisers, attorneys, lenders, planning officials MYSELF; without the complications of a 3rd party salivating over a measly commission check.

I have had a few sour investments (including NOW, sitting on a bare land commercial site, bought 35% below market... but today and possibly into the distant future there is NO MARKET for buildable commercial sites (plenty of CHEAP inventory and CHEAPER rents).

Be wise, stick with what you are best at, and are comfortable with returns.

I stay quite diversified and will be buying props in international destinations as a hedge to USA issues. (economy / jobs / education / healthcare).

Too bad life is not so simple.... I should have spent my 32 yrs in Federal work, rather than dedication to a benevolent employer (turned bad by hiring a medieval witch for a CEO). Then I might have retired w/ healthcare and even a PENSION !!!. Fo me, if it is gonna happen, I must do it, thus I am using low cost mortgage money as an investment tool, as I have since age 19... When I am in my late 70's I will sell properties that I don't wish to keep, and carry back the paper for lifelong income (with a minimum of 30% down).
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Old 09-18-2011, 11:40 PM
GLS
 
1,985 posts, read 4,845,333 times
Reputation: 2408
Quote:
Originally Posted by StealthRabbit View Post
.............. Fo me, if it is gonna happen, I must do it, ........
Although your overall story and success is worth quoting, I "cherry-picked" one line that jumped off the page at me: Fo me, if it is gonna happen, I must do it, ........

If the attitude in this sentence were taught to every young high school and college student, we wouldn't be worried about Social Security running out in the future.
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