johnl@ima.UUCP (11/18/85)
/* Written 4:18 pm Nov 14, 1985 by marks@decwrl in ima:net.invest */ > Many people have been telling me, however, that it is unwise to put > most of my money into a new house ... Sounds like you've been talking to mutual fund salesmen. It it hard to imagine an investment better than putting your money into your house. First, as has been pointed out, since mortgage rates are currently about 12%, your return on money not borrowed is equivalent to a 12% investment. Investments that reliably pay 12% are fairly hard to come by these days, so the house is a good bet. One possible exception is that if you're in a high enough tax bracket, you can win by putting your money into a tax-exempt fund that pays about 8%, paying and deducting the 12% mortgage interest, and gaining about 2% on the tax arbitrage. Second, there is the issue of cash flow. If you take the larger mortgage, you have to come up with the larger payment each month, and if anything goes wierd with your other investment you may have problems. If you minimize the mortgage payment, you gain flexibility. Finally, if you don't roll over all of your money from the old house to the new one, there might be capital gains tax, though I believe that if you buy a new house within 18 months of selling the old one, the presumption is that you rolled over the whole thing even though you're doing funny things with the money. Except that if you buy tax-exempt investments to finance taxable ones, in theory you lose the deduction for the exempt ones, so you might be put in the unfortunate situation of having to owing both capital gains tax on the amount not rolled over and also income tax on the income therefrom. John Levine, ima!johnl PS: What you really should do is to consult somebody who really knows about tax law.
johnl@ima.UUCP (11/21/85)
/* Written 4:26 pm Nov 18, 1985 by morse@leadsv in ima:net.invest */ > How much income do you derive from equity in your house? None. That money > should be invested in some way. Not quite. The income you get is the interest you don't pay on a larger mortgage than you'd otherwise have. This is real money, as anybody who has a $100,000 mortgage can tell you. Limited real estate partnerships have their charms, but they also have serious risks. The first thing to keep in mind is that they have wonderful tax benefits if you're in a really high tax bracket, and correspondingly less wonderful benefits if you're in a lower bracket. The other thing is that they're extremely illiquid. If your real estate deal runs 10 years and you need to get out in 5 years, you're lucky to get 50% of what you put in. (I know people who make a bundle picking up these slightly used partnerships and waiting them out, in fact.) Oh yes, and if the deal you get into is a lousy one, as most of the ones available to small investors are, you may not get your money back even after 10 years. I wouldn't touch a public real estate partnership -- they all smell like sucker deals to me. Sceptically, John Levine, ima!johnl PS: In case you wondered if I'm sincere, I cashed in most of my other investments and put down over 50% of the purchase price of my house when I bought it 4 years ago.
marc@petrus.UUCP (Marc Pucci) (11/22/85)
> ... > John Levine, ima!johnl > > PS: In case you wondered if I'm sincere, I cashed in most of my other > investments and put down over 50% of the purchase price of my house when > I bought it 4 years ago. Will making a large down-payment alter the amount of mortgage a bank will extend to you. Generally, I hear they will not lend more than 28% or so of your monthly gross can cover in taxes and payments. I guessed that this was to cover themselves by a less likely default. If you put 50% down the bank is practically guaranteed to get their share of the money back even if they sell the house at a loss. Marc Pucci Bell Communications Research