11 Great Reasons to Carry a Big, Long Mortgage

[JohnnyH]

@George: That is the only way to buy... Cash is king, especially with REOs.

You get prices that mortgage buyers can only dream of.

[Seneca]

Our last house increased ~13% in about 2.5 yrs. It was pretty much fully mortgaged when we bought it so the cash on cash return number the RE debt loving books love to crow looked great.

We itemize, negotiated a 5% fee sale, and still lost money compared to renting over the same period.

[SimpleLife]

So the strategy is:

1. Accurately predict the market low
2. Invest as much borrowed money as possible
3. Accurately predict the market high
4. Profit

Steps 1 and 3 are tough. Even if there are no repairs, the 6% broker cut, property taxes, insurance and mortgage interest make it even tougher. In a single year, you're down 10-12% before inflation.

I am pretty sure I didn't say anything about predicting market lows and then predicting market highs. I didn't predict the current market downturn, but I certainly took advantage of it. Considering one of my houses has double in value since I bought it three years ago, it doesn't take a crystal ball to figure out now is a good time to sell. As I noted earlier, I plan on selling soon, either this or next summer. Largely due to tax reasons, but also because I am not going to do what most people do: get greedy.

My point was that when an opportunity presents itself, take advantage of it. I am not going to predict the next stock market crash, but I'm certainly pooling cash to prepare to take advantage of it when it happens. Then I will ride until I make a nice profit. It probably won't be anywhere near the high, but again, I don't predict when things will happen, I just take advantage of them when they do. Incidentally, Marc Cuban, the self made billionaire stated that if he had a large pool of cash that he came into suddenly, he would hold a large percentage of it to invest in an opportunity when one arose.

[Sclass]

Hi,

I thought I'd chime in from the SF bay area since it seems to be used as an example double digit increases in equity. Ive seen the RE prices gallop as much as 20% in a year here. But over the long term (I've lived here since 1987) it averages less than 10%. And as pointed out by many posts in this thread this doesn't account for a bunch of investment costs that may push the number down a few points.

I don't know anyone who got rich buying a home here whether they are in their 70s, 60s, 50s or 40s. The difference only seems to be the neighborhood they can afford. The younger successively get worse neighborhoods. But I repeat, none of these people strike me as wealthy. House rich but cash poor. I think it is a consequence of the strategy of buying as much as you can afford. Even in the 1980s, my parents generation complained of how buying their home was such a stretch while being a tech worker here. Those same people are living in a $2M home living on SS.

Rather than whip out my HP12c and try to calculate why they're this way I will just observe that they are not rich. It's like the gold rush just keeps repeating itself and nobody learns.

The few rich guys who did it off RE did exactly as some of the posts here say. They bought a scary number of houses for little money down at bad times and serviced the debt with rent income. Then they sold and rolled the money into more lucrative investments like multi unit apartments. Sadly most of my middle class techie friends Cannot distinguish this from buy as much house as you can afford and pay it off over thirty years while working your butt off till you die.

[Seneca]

I know people who made a pile of money on their house in Silicon Valley. But I know as many who went bankrupt over CA real estate. Most are just house poor, as you said.

Property tax on a $2mil house is about $40k/yr. Add an invested million just to pay your tax, and with Cali tax rates, you have to make more than $2mil (beyond reg expenses) to get it saved. By my math, to buy a "middle class" SV home on the Peninsula, and invest the money to pay your prop tax in retirement, you'd have to earn over $6mil pretax. This does not include any interest payments, and oh yeah, yet another one of those rich tax breaks limiting mortgage interest deductions to $1mil.

[Sclass]

Seneca,

You mean earn over $6M pretax? Or have?

My neighbors are doing it on high six figure salaries and loans.

Old folks living in $2M homes don't pay much property tax...like $1G a year. But they never were really wealthy and now it's catching up with them. They refuse to move but they want money. I have several asking for money management tips and they just scream when I say step 1) sell your house and move someplace cheaper.

What I was trying to say is taking the jumbo loan and working it off hasn't made anyone I know rich. I think having $1M of home equity alone at 75 isn't rich for whatever that's worth. And that's the best of them. Consumerism has always been around. So has inflation. While people discuss how little they paid for their homes out here while never discussing their salary programming COBOL in 1979.

[FI Fighter]

I use rentals as my primary strategy for getting to early FI.

I'm also from Silicon Valley and the appreciation here has been insane... It's especially powerful when you are making that type of return off of someone else's money (the lender).

Property taxes can be high, but if you are an investor, why do you really care? You need to locate cash flow positive properties so that you can let your tenants pay for everything. The trick is to buy houses that provide strong rents relative to purchase price. If you can find that, you get cash flow (passive income) and the potential for strong price appreciation.

Using leverage is a risk though, and not suitable for everyone.

[Seneca]

$6mil is gross earnings to pay for a $2mil house and have $1mil to invest to pay the property tax.

Please don't take my comments as argument in favor of big mortgages. I'm simply saying I do know people that became millionaires highly leveraged there, and cashed out. I know people who went bankrupt over it too.