marks@yogi.DEC (11/15/85)
I am selling my house and buying another. Because I have been in my house for 6 1/2 years and the market has gone up in the Boston area considerably, I have a large amount of equity in my present home, and was planning on putting most of it down on my new home. Many people have been telling me, however, that it is unwise to put most of my money into a new house (I was going to put 2/3 down, but my mortgage will be about 2 1/2 times as large as my present mortgage, because prices have gone up so much). My question is this: how should I invest my money? I want to keep my monthly mortgage payments down (my present ones are $260/month, which is not realistic today, but I would like to keep them under $600/month). If I put all my equity into a new house, I will be able to do this. If I put 20% down and invest the rest of my money someplace else, where and how should I invest it? The real estate market has been appreciating in this area at least 25% per year for the past couple of years (I heard the figure 42% for this year). What kind of investment should I make to realize a decent return on my money? Why shouldn't I put it all into a down payment on my new house? Thanks for the advice. R.M.
vsh@pixdoc.UUCP (Steve Harris) (11/16/85)
In <1439@decwrl.UUCP>, marks@yogi.DEC asks (paraphrase):
How much of the profit from the sale of my old house should
I put down towards my new house, and how much should I invest
elsewhere, and where should I invest it?
I'm no expert on these things, but, as another new home buyer, here
goes...
Let's say your mortgage rate is 12%. Then, any extra money you put
into your house (either in down payment or increased monthly payments)
represents an investment at 12%. However, because of the enormous tax
benefit of mortgage (interest) payments, the actual return on your
prepayment investment is more like 8 or 9%. If you invest the money
in, say, a mutual fund (with a good track record), you should be able
to realize at least a 10 or 11% return.
I'm not sure how to account for the appreciation of the house, except
to note that the phenomenal growth in the housing market here in
greater Boston (37% last year, according to the Globe) seems to have
slowed considerably (according to my realtor friends).
Also, if you don't invest your profits in a new home, I believe you
have to pay capital gains tax on them. Of course, there may be ways
around that, I don't know.
As for ways to invest, good luck. Consumer Reports evaluated mutual
funds a few months ago -- look up that issue. Also, Forbes and Money
(among so many others) do regular ratings of the Mutual Funds.
Everybody seems to like Fidelity Magellan. However, you may need
tax sheltered investments. Certainly, you can put some of the cash
into an IRA (which can be in a Mutual Fund like Magellan); also, if you
can point to any self-employed income (you don't do any consulting?!!),
you can put a lot of that into a Keogh (significantly more than in an
IRA), and avoid taxes that way.
A good book is "The Only Book You'll Need To Buy On Investments" (or
some such title) by Andrew Tobias (wow, I actually remembered his name!).
In short, you have many options, and I don't know what would be best.
If I were in your shoes, I would consult a good investments advisor
(not a broker -- they're just salesmen). I don't know of any, but I
have a good accountant I can recommend, send me e-mail if you want his
name.
--
Steve Harris | {allegra|ihnp4|cbosgd|ima|genrad|amd|harvard}\
Pixel Systems Inc. | !wjh12!pixel!pixdoc!vsh
300 Wildwood Street |
Woburn, MA 01801 | 617-933-7735 x2314ark@alice.UucP (Andrew Koenig) (11/16/85)
> My question is this: how should I invest my money? I want to keep my > monthly mortgage payments down (my present ones are $260/month, which > is not realistic today, but I would like to keep them under $600/month). > If I put all my equity into a new house, I will be able to do this. > If I put 20% down and invest the rest of my money someplace else, where > and how should I invest it? The real estate market has been appreciating > in this area at least 25% per year for the past couple of years (I heard > the figure 42% for this year). What kind of investment should I make to > realize a decent return on my money? Why shouldn't I put it all into > a down payment on my new house? If real estate prices are rising that quickly, why not keep your present house and rent it out? If necessary, refinance it to get enough cash for the down payment on the second one. You can probably make enough money in rent to pay the mortgage and meanwhile you get appreciation on two houses.
suze@terak.UUCP (Suzanne Barnett) (11/18/85)
> In <1439@decwrl.UUCP>, marks@yogi.DEC asks (paraphrase): > > How much of the profit from the sale of my old house should > I put down towards my new house, and how much should I invest > elsewhere, and where should I invest it? > > Also, if you don't invest your profits in a new home, I believe you > have to pay capital gains tax on them. Of course, there may be ways > around that, I don't know. > I believe that one simply has to buy a home costing as much as or more than the sale price of the one that was sold. I don't think the cash realized has to be invested in the new home. I could, however, be wrong. -- ************************************************************** Suzanne Barnett-Scott uucp: ...{decvax,ihnp4,noao,savax,seismo}!terak!suze phone: (602) 998-4800 us mail: CalComp/Sanders Display Products Division (Formerly Terak Corporation) 14151 N 76th street, Scottsdale, AZ 85260
morse@leadsv.UUCP (Terry Morse) (11/19/85)
In article <1439@decwrl.UUCP>, marks@yogi.DEC writes: > > I have a large amount of equity in my present home, and was > planning on putting most of it down on my new home. > > Many people have been telling me, however, that it is unwise to put > most of my money into a new house. > > If I put 20% down and invest the rest of my money someplace else, where > and how should I invest it? Why shouldn't I put it all into > a down payment on my new house? > > Thanks for the advice. How much income do you derive from equity in your house? None. That money should be invested in some way. I recommend using that equity to purchase income property. If you don't want to become a landlord, then you can get into a general partnership private offering. Be careful, though, to make sure you are getting into a good deal. Private offerings are not scrutinized very carefully. Minimum investments are usually $20 - $50K. Check the track record of the general partner. You are putting a lot of trust in him. Another rule of thumb is to never pay more than 10 times the annual gross rent receipts for a property. And steer clear of high tax writeoffs ( > 2 times investment). -- Terry Morse (408)743-1487 { ihnp4!amdcad!cae780 } | { allegra!sun!sunncal } !leadsv!morse
alex@rruxc.UUCP (A DeSimone) (11/26/85)
> I believe that one simply has to buy a home costing as much as > or more than the sale price of the one that was sold. I don't > think the cash realized has to be invested in the new home. I > could, however, be wrong. > Suzanne Barnett-Scott > uucp: ...{decvax,ihnp4,noao,savax,seismo}!terak!suze I don't think that's right. My understanding is you pay capital gains tax on: (sale price of old house)-(purchase price of new house)-(cost of improvements) That is, if you buy a home for less that the one you sell, you can deduct the cost of any home improvements you made on the old house from the profits but Uncle Sam gets a bite of what's left. -- Alex DeSimone, Amala Consultants @ Bell Communications Research UUCP: ..!{ihnp4,allegra}!rruxc!alex USMail: 444 Hoes Lane, Room RRC 4B-313, Piscataway, NJ 08854 MaBell: (201)699-4438 ** Disclaimer? I don't need no stinkin' disclaimer! **
suze@terak.UUCP (Suzanne Barnett) (12/03/85)
> > I believe that one simply has to buy a home costing as much as > > or more than the sale price of the one that was sold. I don't > > think the cash realized has to be invested in the new home. I > > could, however, be wrong. > > > Suzanne Barnett-Scott > > uucp: ...{decvax,ihnp4,noao,savax,seismo}!terak!suze > > I don't think that's right. My understanding is you pay capital gains tax on: > (sale price of old house)-(purchase price of new house)-(cost of improvements) > That is, if you buy a home for less that the one you sell, you can deduct the > cost of any home improvements you made on the old house from the profits but > Uncle Sam gets a bite of what's left. Looks like you didn't understand me. If I sell a house for $100,000, to avoid capital gains tax I must buy a house costing $100,000 or more. (I'm not taking your improvement costs into account. They are another issue, not the one under discussion.) Suppose the remaining mortgage on the house I sold was $70,000. That means I receive $30,000 minus realtors fees and closing costs. I do NOT have to place that $30,000 down on my new house. I can finance the entire cost (assuming a lender will agree to that) and use my $30,000 for some other investment. Or, I can use part or all of it for my down. As long as my new home has a sales price of equal to or more than my previous home, I avoid capital gains. -- ************************************************************** Suzanne Barnett-Scott uucp: ...{decvax,ihnp4,noao,savax,seismo}!terak!suze phone: (602) 998-4800 us mail: CalComp/Sanders Display Products Division (Formerly Terak Corporation) 14151 N 76th street, Scottsdale, AZ 85260
mat@amdahl.UUCP (Mike Taylor) (12/06/85)
> In article <1439@decwrl.UUCP>, marks@yogi.DEC writes: > > > > I have a large amount of equity in my present home, and was > > planning on putting most of it down on my new home. > > > > Many people have been telling me, however, that it is unwise to put > > most of my money into a new house. > > > > If I put 20% down and invest the rest of my money someplace else, where > > and how should I invest it? Why shouldn't I put it all into > > a down payment on my new house? > > > > Thanks for the advice. > > How much income do you derive from equity in your house? None. That money > should be invested in some way. Absolutely true. However, you do avoid paying interest on that money. In order to be ahead of the game, you must invest the money to yield more than the mortgage cost. For an individual investor, it is quite difficult to get yields higher than mortgage rates on investments that include real and substantial risks. In addition, you must consider the issue of matching maturities and rate exposures. If your mortgage has a variable rate, then you must invest it in a way that will yield a higher return when mortgage rates go up. Or if your mortgage lasts 30 years, your investment had better yield more than the mortgage for 30 years... not easy to guarantee. A further aspect is that of personal cash flow. Less equity means higher payments. If your investments don't yield current cash, or even absorb cash as many income property investments can, then you can end up "property-poor" - lots of illiquid assets and no cash. Then you end up making deals at firesale prices to bail out. As a last point, if things go sour (layoffs, other bad news) then a smaller house payment means your minimum cash flow is smaller. You also are more likely to realise some cash out of your house if it "rains real hard." -- Mike Taylor ...!{ihnp4,hplabs,amd,sun}!amdahl!mat [ This may not reflect my opinion, let alone anyone else's. ]
franka@mmintl.UUCP (Frank Adams) (12/10/85)
In article <2342@amdahl.UUCP> mat@amdahl.UUCP (Mike Taylor) writes: >As a last point, if things go sour (layoffs, other bad news) then a smaller >house payment means your minimum cash flow is smaller. You also are more >likely to realise some cash out of your house if it "rains real hard." But you have fewer outside assets, so it requires less "rain" to force you to sell or refinance. The most prudent course is probably somewhere in the middle: don't tie up all your cash in the mortgage, but don't minimize the down payment, either. Frank Adams ihpn4!philabs!pwa-b!mmintl!franka Multimate International 52 Oakland Ave North E. Hartford, CT 06108