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REAL ESTATE Buy Home With Cash VS Getting A Mortgage (for well off, self-made 34 year old)

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webguy

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Jun 19, 2013
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Hi FastLaners,

I have a “good” problem to work through but am really wavering on this one. I would love some advice from folks who have been in my shoes or have experienced this or thought through the scenario:

I just had my cash offer accepted on a home. The closing is in about 1.5 months and I am now debating if I should close with “all cash” or try to get a 15- or 30-year fixed rate mortgage in the next 1.5 months while I wait because of how low rates are and the opportunity costs associated with tying up that much capital in a home. Here are some relevant facts:
  • The home costs $650,000 (after I fix up some things before moving in I'd guess I'd pay $680,000)
  • My liquid net worth is $4.1 million (mostly invested in a well-diversified portfolio of low cost index funds in a brokerage account, as well as a SEP, and some other alternative investments)
  • When you factor in my company, my net worth is probably in the $5 to $6 million range
  • My credit score is in the 800s
  • I’m a single male who is 34 years old
  • I live in Florida in the USA
  • I founded and own a U.S. company (this is where I have made my money)
  • I have no debt
  • I have about 400k of my Net Worth sitting in cash right now.
Here are my thoughts:

Pros Of a Paid Off Home:

I very much like the thought of a paid off home, freedom, and low monthly bills. If my company ever tanked my investments would provide enough income to pay for everything. This also would allow me to invest my net worth (minus the amount I put into the cash payment for the home) in slightly more aggressive funds since I know I will be able to afford all of my bills no matter what with a paid off home (If I pay off the home, I will definitely not have bonds for a while since I’m only 34 + a paid off mortgage acts like a bond basically + the home can appreciate (so it actually acts like a bond that appreciates). I may incorporate a small portion of my portfolio to CEF Muni Bonds Funds since I’m a high-income earner.

I also save on closing costs (although I will pay for an inspection still and may even do an independent appraisal for peace of mind)

The home would only make up about 16% of my net worth if I paid with cash (and more like 10% to 13% when you factor in my ownership of my company). So this would diversify 10% to 16% of my net worth into something new (a personal residence). Although, I don’t know that the home value would grow at the same rate as the stock market over the next 30 years (I doubt it even though the home is in a great area that has been appreciating).


Pros Of a Mortgage:

I am only 34 and have an 800+ credit score. I can probably get a great 15- or 30-year fixed rate mortgage (maybe close to 2%?). If history tells us anything, the stock market will likely grow faster over the next 30 years than this piece of real estate (if I’m even in this home that long) - but of course, I could be wrong with the market at all time highs right now and the fear that we would have returns like the Japanese market it's past 30 years. I understand the math of this all… put 20% down, finance the rest at 2%-3% fixed rate and invest this in the market and “hopefully” get 8% over the long run. Of course the 8% is not guaranteed and some experts are thinking it may only average 4% to 6% after this bull run is over.

But the thing is, I already have most of my net worth in the stock market. I’ve saved most of my income since I started my business in my early 20s. I’m now 34 and have about $3.36 million in a well-diversified portfolio of low-cost index funds. So this home will just take about 10% - 15% of my net worth and place it in something that may appreciate 3% to 5% (it’s in a good area that has been appreciating over time). White appreciating slower, it does diversify and would be good in a bear market or economic crash scenario (or if my company ever stops being profitable).


Closing:

I love the security, peace of mind, and preparedness for a down market a paid off home gives me. I have a slight FI/FIRE mindset, mixed with a Dave Ramsey mindset, mixed with an @MJ DeMarco mindset.

But because I’m only 34 and could get a great mortgage rate, I don’t like the thought of not optimally allocating my money + the opportunity costs of investing more in a home rather than the markets (even though I’ll still have much more in the markets still and only about 10% to 16% of my net worth would be in this home).

Do you have any thoughts? Thank you for your help.
 
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Last edited:

BizyDad

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Although, I don’t know that the home value would grow at the same rate as the stock market over the next 30 years
The home value will grow at the same rate whether you get a mortgage or not. So the rate of real estate growth really shouldn't factor into your decision at all. You will capture that appreciation whether you get a mortgage or you whether you don't.

Get the mortgage. If you're not feeling comfortable borrowing as much as possible, split the difference and finance 50% of the value. You'll get a lower interest rate if you stay under the jumbo threshold, and if you're purchasing. If you decide to pay cash now, and then later try to get the money out, you'll have higher interest rate.

If you are asking for the "smart" advice, that's it. You're right that your mortgage interest will likely be less than your return in investments. Or even than in your business.

But if I were in your shoes, I'd pay cash. At 34 years old you have plenty of time to compound your money and earn more. And it sounds like that business of yours has room to grow too. What's the point of accumulating all this wealth if you can't occasionally do the baller move and just buy the home out right?

Why aren't you growing your business faster by the way?
 

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Hi FastLaners,

I have a “good” problem to work through but am really wavering on this one. I would love some advice from folks who have been in my shoes or have experienced this or thought through the scenario:

I just had my cash offer accepted on a home. The closing is in about 1.5 months and I am now debating if I should close with “all cash” or try to get a 15- or 30-year fixed rate mortgage in the next 1.5 months while I wait because of how low rates are and the opportunity costs associated with tying up that much capital in a home. Here are some relevant facts:
  • The home costs $650,000 (after I fix up some things before moving in I'd guess I'd pay $680,000)
  • My liquid net worth is $4.1 million (mostly invested in a well-diversified portfolio of low cost index funds in a brokerage account, as well as a SEP, and some other alternative investments)
  • When you factor in my company, my net worth is probably in the $5 to $6 million range
  • My credit score is in the 800s
  • I’m a single male who is 34 years old
  • I live in Florida in the USA
  • I founded and own a U.S. company (this is where I have made my money)
  • I have no debt
Here are my thoughts:

Pros Of a Paid Off Home:

I very much like the thought of a paid off home, freedom, and low monthly bills. If my company ever tanked my investments would provide enough income to pay for everything. This also would allow me to invest my net worth (minus the amount I put into the cash payment for the home) in slightly more aggressive funds since I know I will be able to afford all of my bills no matter what with a paid off home (If I pay off the home, I will definitely not have bonds for a while since I’m only 34 + a paid off mortgage acts like a bond basically + the home can appreciate (so it actually acts like a bond that appreciates). I may incorporate a small portion of my portfolio to CEF Muni Bonds Funds since I’m a high-income earner.

I also save on closing costs (although I will pay for an inspection still and may even do an independent appraisal for peace of mind)

The home would only make up about 16% of my net worth if I paid with cash (and more like 10% to 13% when you factor in my ownership of my company). So this would diversify 10% to 16% of my net worth into something new (a personal residence). Although, I don’t know that the home value would grow at the same rate as the stock market over the next 30 years (I doubt it even though the home is in a great area that has been appreciating).


Pros Of a Mortgage:

I am only 34 and have an 800+ credit score. I can probably get a great 15- or 30-year fixed rate mortgage (maybe close to 2%?). If history tells us anything, the stock market will likely grow faster over the next 30 years than this piece of real estate (if I’m even in this home that long) - but of course, I could be wrong with the market at all time highs right now and the fear that we would have returns like the Japanese market it's past 30 years. I understand the math of this all… put 20% down, finance the rest at 2%-3% fixed rate and invest this in the market and “hopefully” get 8% over the long run. Of course the 8% is not guaranteed and some experts are thinking it may only average 4% to 6% after this bull run is over.

But the thing is, I already have most of my net worth in the stock market. I’ve saved most of my income since I started my business in my early 20s. I’m now 34 and have about $3.36 million in a well-diversified portfolio of low-cost index funds. So this home will just take about 10% - 15% of my net worth and place it in something that may appreciate 3% to 5% (it’s in a good area that has been appreciating over time). White appreciating slower, it does diversify and would be good in a bear market or economic crash scenario (or if my company ever stops being profitable).


Closing:

I love the security, peace of mind, and preparedness for a down market a paid off home gives me. I have a slight FI/FIRE mindset, mixed with a Dave Ramsey mindset, mixed with an @MJ DeMarco mindset.

But because I’m only 34 and could get a great mortgage rate, I don’t like the thought of not optimally allocating my money + the opportunity costs of investing more in a home rather than the markets (even though I’ll still have much more in the markets still and only about 10% to 16% of my net worth would be in this home).

Do you have any thoughts? Thank you for your help.

Can't advise on the property but congrats on your business progress.
 

MTF

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My opinion is probably very different from most people on this forum but I'd say that debt of any kind (even as leverage) is not worth the stress.

If you can buy the house with cash, buy it with cash. Who cares that you can use your money more "optimally"? There's more to life than "optimal" asset allocation.

Debt is a huge cost to one's mental health and peace of mind. I see no sensible reason to burden yourself with it if your new home will only cost you 10-15% of your net worth.
 

Sauce

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Another option - buy cash and then you can always do a refi or HELOC at a later date.

We bought our personal home cash. Waited 6 months, then we were able to cash out at the appraised value.

What would you do with the money otherwise?
 

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Imo its about taxes. If you can use the „system“ to get a significant amount of money via taxes, than do it.
If you can make your business much better, get a mortgage for the house.
If that not, the trouble of mortgage isn t worth!
 
Last edited:

MJ DeMarco

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With money this cheap, I'd finance half the home with a mortgage.

Money is practically free and I know I can easily take that money and earn more than the mortgage rate, which with good credit, should minimally be well under 3%.
 

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Where do you do this? I've used PeerStreet before. Do you recommend another?
Well I can only speak from experience in the USA, but you just have to find a mortgage broker in your state that can set up hard money loans. The broker does all the middle man work for you and for the buyer. I have purchased two properties utilizing short-term hard money at 9% interest.
 

AsherS

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First off, my net worth is nowhere near yours, but I can tell you that for a few years I took all of the excess income from my business and used it to pay off my mortgage. I could have used it in other savings/investment vehicles but felt like getting that personal home mortgage out of my life would be best, and I can tell you that I do not regret it. The answer to your question might be a "to each his/her own" thing. Whichever works best and/or makes you more comfortable would be the right decision. That being said however, I can tell you that if I'm in your shoes, and this is going to be my personal residence, I'm paying cash for it and walking home with the deed, same day. Sure, the interest rates are as low as they've ever been, but IMO, there's no amount of money that can buy the peace of mind of having your personal residence paid for, even if it's just a small portion of your net worth. If we were talking about an investment property here my answer might change, but this is going to be your home. Don't tie more stress (dept), to your home then you have to. You are sleeping there, eating there, recharging there, and resting your brain there. Keep it clean, pay cash, and move on to other things.
 

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No financial advice, but I would recommend to buy the home on mortgage as well since the money can be invested into more promising assets, especially during the current inflation. Since you have invested a lot into the stock market, what do you think about cryptocurrency?
 

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Get a good deal so that your equity in the property is substantial on day 1 whether you use a mortgage or not.

Usually that means buying distressed, fixer upper, etc.

Edit: just reread the post and realized it’s already a good deal, AND it’s a small percent of your net worth. Just buy the damn house!!
 
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Just buy whatever and however, you’re in good shape.

If it was me shopping, I would get a mortgage and just leave the money invested, but at the same time, sometimes it’s just nice not to screw with the drama of it all and write a check.

Or honestly… I’d rent. I hate home ownership more days than I love it. I have been going through an epic remodel and living in the mess. I’d rather live in a hotel than this. It will be nice when it’s done, I guess. :rofl:
 

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Move your funds to Interactive Brokers (if they aren't already there), and take advantage of their awesome margin rates.

Borrowing $650k on $3.3 million is less than 20% leverage. If it gets called, we have much larger economic issues to worry about...
 

WJK

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Hi FastLaners,

I have a “good” problem to work through but am really wavering on this one. I would love some advice from folks who have been in my shoes or have experienced this or thought through the scenario:

I just had my cash offer accepted on a home. The closing is in about 1.5 months and I am now debating if I should close with “all cash” or try to get a 15- or 30-year fixed rate mortgage in the next 1.5 months while I wait because of how low rates are and the opportunity costs associated with tying up that much capital in a home. Here are some relevant facts:
  • The home costs $650,000 (after I fix up some things before moving in I'd guess I'd pay $680,000)
  • My liquid net worth is $4.1 million (mostly invested in a well-diversified portfolio of low cost index funds in a brokerage account, as well as a SEP, and some other alternative investments)
  • When you factor in my company, my net worth is probably in the $5 to $6 million range
  • My credit score is in the 800s
  • I’m a single male who is 34 years old
  • I live in Florida in the USA
  • I founded and own a U.S. company (this is where I have made my money)
  • I have no debt
  • I have about 400k of my Net Worth sitting in cash right now.
Here are my thoughts:

Pros Of a Paid Off Home:

I very much like the thought of a paid off home, freedom, and low monthly bills. If my company ever tanked my investments would provide enough income to pay for everything. This also would allow me to invest my net worth (minus the amount I put into the cash payment for the home) in slightly more aggressive funds since I know I will be able to afford all of my bills no matter what with a paid off home (If I pay off the home, I will definitely not have bonds for a while since I’m only 34 + a paid off mortgage acts like a bond basically + the home can appreciate (so it actually acts like a bond that appreciates). I may incorporate a small portion of my portfolio to CEF Muni Bonds Funds since I’m a high-income earner.

I also save on closing costs (although I will pay for an inspection still and may even do an independent appraisal for peace of mind)

The home would only make up about 16% of my net worth if I paid with cash (and more like 10% to 13% when you factor in my ownership of my company). So this would diversify 10% to 16% of my net worth into something new (a personal residence). Although, I don’t know that the home value would grow at the same rate as the stock market over the next 30 years (I doubt it even though the home is in a great area that has been appreciating).


Pros Of a Mortgage:

I am only 34 and have an 800+ credit score. I can probably get a great 15- or 30-year fixed rate mortgage (maybe close to 2%?). If history tells us anything, the stock market will likely grow faster over the next 30 years than this piece of real estate (if I’m even in this home that long) - but of course, I could be wrong with the market at all time highs right now and the fear that we would have returns like the Japanese market it's past 30 years. I understand the math of this all… put 20% down, finance the rest at 2%-3% fixed rate and invest this in the market and “hopefully” get 8% over the long run. Of course the 8% is not guaranteed and some experts are thinking it may only average 4% to 6% after this bull run is over.

But the thing is, I already have most of my net worth in the stock market. I’ve saved most of my income since I started my business in my early 20s. I’m now 34 and have about $3.36 million in a well-diversified portfolio of low-cost index funds. So this home will just take about 10% - 15% of my net worth and place it in something that may appreciate 3% to 5% (it’s in a good area that has been appreciating over time). White appreciating slower, it does diversify and would be good in a bear market or economic crash scenario (or if my company ever stops being profitable).


Closing:

I love the security, peace of mind, and preparedness for a down market a paid off home gives me. I have a slight FI/FIRE mindset, mixed with a Dave Ramsey mindset, mixed with an @MJ DeMarco mindset.

But because I’m only 34 and could get a great mortgage rate, I don’t like the thought of not optimally allocating my money + the opportunity costs of investing more in a home rather than the markets (even though I’ll still have much more in the markets still and only about 10% to 16% of my net worth would be in this home).

Do you have any thoughts? Thank you for your help.
Buy it for cash. You'll sleep better. And it's only money. You can always make more.
 
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c4n

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I had the same dilemma just recently.

I asked myself: if I get a mortgage, will I really invest the "saved" money, or will I let it sit in a bank account so my wife (and son) can pay the mortgage off at any time should something happen to me?

The answer to me was clear; I knew deep down I would let enough funds to pay off the mortgage just sit in a bank account, so I paid cash.

You know yourself and your priorities best. Do what feels right for you.
 

ljean

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Move your funds to Interactive Brokers (if they aren't already there), and take advantage of their awesome margin rates.

Borrowing $650k on $3.3 million is less than 20% leverage. If it gets called, we have much larger economic issues to worry about...
I have $700k borrowed there at 1.13%
 

DebtFreeDr

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It's called PERSONAL finance for a reason.... it's "personal".

If you'll sleep better at night with a paid off home, then pay cash.

If not, get a mortgage.

Knowing what I know now (I'm a 47 y/o doc), if I was in this position as a 34 y/o, I'd be more concerned about my asset allocation.

Having all money tied up in only one asset, "stock market" or whatever, doesn't make sense to me.

I was 99% invested in index funds 8 years ago but have shifted to real estate syndications (passive investing) to slowly begin to get our asset allocation to 50/50.

But MORE importantly this is allowing me to replace my earned income (higher taxed), to lower taxed passive income to get out of the rat race.
 

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