Gyroscopic Investing

Hello,
how are you?

Should we ask money (loan) to the bank and pay X % interest rate to the bank and keep a PP or pay the house 100% advanced ?

What would be the maximum interest rate that would make you keep the PP and a loan?


Thank you and best regards!

It's a personal decison.

Also depends on what rent you're paying, property taxes in future home, your income, and your reasons for buying a new house.

I got a loan for renovations at 3.5x% last year. The stock market rise has helped pay for it, but I had waited so long for renovations, I just had to get them done, no matter what direction interest rates would take. In hindsight, We probably could have squeezed by without the loan, but it would have been nerve wracking.

I would recommend against buying the house at all.  It sounds like it would consume virtually all of your wealth to buy it outright.  That means you can't afford it.

LC475 wrote: I would recommend against buying the house at all.  It sounds like it would consume virtually all of your wealth to buy it outright.  That means you can't afford it.

Seriously though, who buys a house outright these days? A residence is one of the few purchases where a loan is acceptable and usually necessary.

buddtholomew wrote: Seriously though, who buys a house outright these days? A residence is one of the few purchases where a loan is acceptable and usually necessary.

I did. And I'm sitting in my beautiful paid-off living room right now. In order to afford the cash price, I had to buy much less house that I otherwise might have, but I have no regrets about the decision.

To partially respond to frugal's question, I withdrew some cash from my PP to make the purchase, and made up the cash deficit from new contributions. I would not have sold any of the volatile assets to afford the purchase. That's one of the things I really love about the PP: during the accumulation phase, you can withdraw money from the cash quadrant without materially altering your investment mix, and then make it up by directing all your contributions into cash until you're balanced again.

buddtholomew wrote:

LC475 wrote: I would recommend against buying the house at all.  It sounds like it would consume virtually all of your wealth to buy it outright.  That means you can't afford it.

Seriously though, who buys a house outright these days? A residence is one of the few purchases where a loan is acceptable and usually necessary.

A loan may be acceptable.  A loan may even be necessary.

But to spend >100% of your net worth on a single consumption item?  That is probably neither financially acceptable nor necessary.

I have never regretted paying off our house as soon as we could.  The security was very important to me.

Wish I would have been as smart with my investing money earlier in life as well!

Hi,

the PP is 2x the house investment.

Please inform me best decision.

frugal wrote: Please inform me best decision.

Only you can do that.

Frugal,

In order to give you serious advice on this, we would need to know a lot of things, like approximately how old you are, how close to retirement you are, how much money you have saved up, how much the house will cost, how much other debt you have, what your annual expenses are, what your annual savings rate is, etc.  If you want to share that info, then we can start to provide some better advice, although I'm sure you will hear quite a diversity of opinions.  In the end, only you can make the final decision.

Come and live in the Bay Area where a modest home in a good neighborhood costs 800K+.

Not many can afford to purchase a house with cash.

buddtholomew wrote: Come and live in the Bay Area where a modest home in a good neighborhood costs 800K+.

Not many can afford to purchase a house with cash.

Funny you should use that as an example... that's exactly why I left it a year ago. So I could finally afford real estate after years of frustration renting a ratty, uninsulated apartment for twice what most people pay for their mortgage. It was the best decision I'd made in years.

I would personally (lacking more information) be tempted to take out a mortgage for the following reasons:
  - A 30 year mortgage here in the US runs 4.3% (roughly), while the PP average return is higher
  - Interest rates are near historic lows, and likely to rise, so that makes your relatively cheap mortgage worth even more
  - A mortgage can be paid back with "tomorrow's" dollars, which will be worth less than today's dollar, especially if inflation (which is also low) kicks in
  - The PP is relatively liquid compared to a house, and you would be in better shape to handle an unforeseen emergency with money in the PP
  - Long term a house is unlikely to beat inflation, while the PP will provide a real return above inflation

I'm not a big fan of debt, but I would probably put the normal 20-30% down on the house, and take a mortgage for the rest.

Not my area of expertise at all, but one thing I would add to mortalpawn's post is that you are trying to beat that 4.3% return after taxes.

barrett wrote: Not my area of expertise at all, but one thing I would add to mortalpawn's post is that you are trying to beat that 4.3% return after taxes.

I'd also add that the interest is (likely) tax deductible.

I believe that frugal's first language is not English, and that he probably doesn't live in the US.

Xan wrote:

barrett wrote: Not my area of expertise at all, but one thing I would add to mortalpawn's post is that you are trying to beat that 4.3% return after taxes.

I'd also add that the interest is (likely) tax deductible.

And for most of us our marginal income tax rate is higher than our capital gains rate.

Hello!

I have EU-PP since 2013 and until now the average annual turnover is below 3%.

I don't know if I have confidence to go ahead with this idea.

What do you think?


Thanks to all the answers.

frugal wrote: I have EU-PP since 2013 and until now the average annual turnover is below 3%.
I don't know if I have confidence to go ahead with this idea.
What do you think?

I think it's hard to have an average annual anything when only one year has passed.

Frugal, do you rent now? Would a mortgage payment be (much) more than the rent you pay now?
What about property taxes on the new home, and maintenance?

Use the NYTimes Buy/Rent Calculator:

http://www.nytimes.com/interactive/2014 ... 0002&abg=1

Enter something like 8-9% for your expected investment returns (avg PP returns), the annual rate of appreciation of your local real estate (could be anywhere from 5-10%), how long you'd like to stay, etc and see what the "equivalent rent" is.  If it's significantly lower than what you're currently paying, then buy.

You have, say, 200K in a PP and want to buy a 100K house.

Take it the other way : if you already had your 100K house paid off and a 100K PP, would you take a 100K mortgage and invest that money in your PP ? If not, maybe you should avoid a mortgage. Because, technically, it's the very same thing : you would have a 100K house, a 200K PP and a 100K debt.

This is not a hard question rationally. Expected PP return vs. mortgage cost with personal tax situation factored in for both sides of the equation. Frugal should get a calculator, done.

Kbg wrote: This is not a hard question rationally. Expected PP return vs. mortgage cost with personal tax situation factored in for both sides of the equation. Frugal should get a calculator, done.

I know that this forum is filled with some of the most brilliant, rational and pragmatic minds that I have ever seen.  Yet... There is something very cool about not having a mortgage.

The day that you can say "I don't owe anybody anything" is a hell of a good day.

"Yet... There is something very cool about not having a mortgage."

We have a study for that...http://b.3cdn.net/nefoundation/10b8aabd ... 6bvv5a.pdf

1. In general, credit card and ‘unmanageable’ debt is associated with lower well-being. This relationship, however, does not hold for mortgages or investment debt.

Still looking for the cool study.