Paying Cash for Primary Residence

38 Replies

Hey guys, so I'm currently renting and looking to buy myself a primary residence. So, if you could pay cash for your primary residence, would you want to and why / why not?

I heard even, Mark Zuckerberg has a mortgage on his house, but it's a super low rate that only the elite has access to; 1% or something like that.

Note: I currently pay more taxes on my income then I would like to (Full time job, and a few rentals) and getting a mortgage would reduce my realized income.

I would not pay for my main residence in cash. It makes little sense with interest rates where they are. If you had $100k to buy a house, you could potentially buy 4 homes for $100k, putting $25k down on each at, let's say 5% interest. You can then collect income on the 3 investment props, and deduct the interest payments at tax time. As long as you make a 5.01% cash on cash return, you are making money. It is very possible to make closer to 20% if you do it right.

@Ace A.

Honestly I personal property is the LAST thing I would pay cash for unless I wanted the safety of not having a mortgage

Personal Properties in comparison to Investments

*lowest downpayment requirement

*lowest interst rates

*easiest to find financing

*easiest to get a short sale or foreclosure bank to play ball

@Ace A. there's one good reason that comes to mind - the cash buying advantage. You almost always get a better deal on your purchase with cash.

The rest of my answer is, then you cash out refinance for as much as you can for the full 30 years and you'll probably make out like a bandit! And then put that cash to work on building your portfolio!

Note: Paying $4 to get back or save $1 (25% tax bracket) is not the best strategy for building wealth. Getting something back in the form of the interest deduction is a good thing, but it shouldn't be the reason why you make the investment.

There are pros and cons to paying cash for your homestead residence.

Pros:

1. No mortgage payment (@Robert Leonard is correct when he says it is ridiculous to purchase a home for a tax write-off. You will spend much more than what you write off.)

2. Security of come what may, you always will have a roof over your head as long as you pay the taxes and insurance.

3. Sometimes you can negotiate a slightly lower purchase price - but in many markets sellers are getting offers in under 30 days and do not care if it is cash or financing.

Cons:

1. All of your cash will be locked in your home and thus cannot be used toward other investments.

You personally need to weigh the options. If you bought the home with a mortgage and paid 20% down, would the other 80% be able to earn you more interest that what you are paying on the mortgage? If not, then pay cash.

Originally posted by @Robert Leonard :
@Ace A. there's one good reason that comes to mind - the cash buying advantage. You almost always get a better deal on your purchase with cash.

The rest of my answer is, then you cash out refinance for as much as you can for the full 30 years and you'll probably make out like a bandit! And then put that cash to work on building your portfolio!

Better to say "you almost always get a better deal on your OFFER to purchase with cash. If you remove the financing contingency you can still do a financed purchase. You need to make sure that you have time to complete financing but most sellers generally are really not discounting for time but for the assurance that a third party can't stop the deal.

If you are not that familiar with the market and the property it is generally always better to have financing.

If you live in a state that allows you to completely exclude your primary residence from bankruptcy proceedings, it can be a good way to protect assets if you are in a line of work where bankruptcy is a concern.

When possible, I'm a big fan of paying cash for all non-income producing assets -- cars, personal residence, vacation houses, etc. I'm not saying you should spend all your cash on your house, but if you have enough additional cash to handle personal/business cash-flow, I believe the upside to paying cash for your doo-dads (yes, a personal residence is just an expensive doo-dad) outweighs the downside.

Btw, I saw a great documentary the other day that really drove this point home. It's called "The Queen of Versailles," and is about a billionaire real estate investor during the 2008-2010 economic meltdown. Despite being worth billions (on paper), before the meltdown he made the decision to mortgage his previously paid-off 26,000 sf house because he loved the idea of using the cheap cash to grow his business. He regretted that decision when he had to borrow money just to pay his mortgage and keep his family from losing their home.

Thanks for all the great feedback guys!!!

Didn't think about the bankruptcy protection @Michael Cerny , but I believe in NV, if you homestead your property, you are protected.

"When you record a Declaration of Homestead, Nevada law protects the equity in your home up to $550,000 from general creditor claims (unpaid medical bills, bankruptcy, charge card debts, business/personal loans, accidents) but would not preclude a seizure or forced sale of your residence from general creditors if your equity exceeds the $550,000."

http://www.clarkcountynv.gov/depts/assessor/services/pages/Homestead.aspx

There are definitely Pros and Cons, and I think it really comes down to your own comfort level, but it's good to be educated by all the Pros/Cons prior to making a decision.

Thanks!

@J Scott

Why not pay cash for all your income producing assets??

Originally posted by @Ace A. :
@J Scott

Why not pay cash for all your income producing assets??

You certainly can if you want to (and some people prefer to buy everything with cash). But, in my opinion, the primary benefit of financing is positive leverage (increase the returns from the asset), and you can only get positive leverage on an income producing asset, not a non-income producing asset (at least not directly).

So, while there's nothing wrong with not financing anything, in my opinion, if you're going to finance something, it should be your income producing assets where the financing can bolster your returns.

@Ace A. another odd and maybe useless piece of information for you. if you are married but all of your investment property is in your name only, and you and your wife own property as tenants by the entireties all of the property held in that fashion is exempt from creditors that only you owe money on.

So if your spouse is very afraid of the debt associated with rental investing you can do it only in your name and keep your house and and other fully paid off real estate in tenants by the entireties and if she does not owe on the debt then it is exempt from creditors. Now if it is a joint debt then they can come after the property unless it is a homestead and meets the exemption. An example is a medical bill for you is technically owed by your spouse as well as both spouses have the obligation to to provide medical care to the other, but if it was a debt for a credit card they could not attach the property.

@Ace A.

It all boils down to risk tolerance. Are you willing to accept the remote risk of losing your home in order to possibly gain a few (or more) percentage points by investing that money elsewhere. Mathematically it makes sense but does it make sense emotionally?

Personally, I like a sort of hybrid of the two. Which is stashing away a year's worth of mortgage expenses into a don't touch unless emergency account. For simplicity sake lets look at a house with a $100,000 mortgage and a year's worth of expenses would be $10,000 (could be less with a 30 year mortgage). This basically frees up $90,000.

I'm sure there is a formula for this but basically for taking out a mortgage to make sense you would have to make more on the $90,000 less taxes than you pay in interest less tax benefits on the $100,000. But here is the kicker, anytime you make more on the $90,000 it compounds, while the $100,000 mortgage expense less taxes only increases slightly since you are paying less interest yearly thus less tax benefits. Even earning an additional three percent annually on the $90,000 means you'll more than $100,000 after four years.

As far as risk goes, I personally would much rather have easy access to the $90,000 rather than have to scramble and borrow on the $100,000 if I'm ever that broke. Besides there will be $10,000 put away to pay mortgage expenses for a year.

@Ace A.

The interest rates are at historic low, so I would probably finance fixed rate for 30 years, This presumes that you are planning to live in or keep the house maybe even as a future rental for a long period, but not necessarily 30 years.

The tax advantage of getting maybe a 28% deduction for each dollar spent means that you are spending $1 to get 28 cents. Not a wise investment.

I agree with @J Scott if you have the money, you should be paying cash for non-income assets.

Originally posted by @David Krulac :
@Ace A.

The interest rates are at historic low, so I would probably finance fixed rate for 30 years, This presumes that you are planning to live in or keep the house maybe even as a future rental for a long period, but not necessarily 30 years.

The tax advantage of getting maybe a 28% deduction for each dollar spent means that you are spending $1 to get 28 cents. Not a wise investment.

I agree with @J Scott if you have the money, you should be paying cash for non-income assets.

Most people don't borrow to get a tax deduction. That's just a happy by product of utilizing leverage and the time value of money. I'll take all the money you have at 3-4% over 30 years.

@Bob Bowling

I think the opposite, I can't tell you how many times people have said yes but its tax deductible. You said you would take all the money I have at 3-4%, I was not offering any money at 3-4 %.

But I'll make an offer back to you. For every dollar US that you give me, I'll give you back 28 cents, just like the tax deduction.

Originally posted by @David Krulac :
@Bob Bowling

I think the opposite, I can't tell you how many times people have said yes but its tax deductible. You said you would take all the money I have at 3-4%, I was not offering any money at 3-4 %.

But I'll make an offer back to you. For every dollar US that you give me, I'll give you back 28 cents, just like the tax deduction.

So you'd rather have say $100,000 sitting in your house than out earning 4%. Fine.

And you'll give me $28,000 and I'll pay you back $100,000 in equal payments over the next 50 years? I think we have a deal!

Originally posted by @Ace A. :
@J Scott

Why not pay cash for all your income producing assets??

In this way, you will greatly increase your cash on cash return. Let me show you how it works:

You have a property worth $100,000 which you paid cash for it and it rents for $1,500 per month. We will set aside 50% for vacancy and all expenses. This gives you a net profit of $9,000 a year or 9% cash on cash ($9,000 / $100,000).

Now, take that property and refinance it at 20% equity. You now have a $100K property which you paid $20k (not including loan fees which for the sake of simplicity we will leave out). Let us create a 30 year mortgage at 4.5%. Your monthly payment is $405. Your cash in pocket at the end of the year is $4,140. You now have a cash on cash return of 20.7% ($4,140/ $20,000).

Take the $80,000 you pulled out of Property #1 and invest it in 4 more $100,000 homes under the same cash flow scenario. Now you own 5 properties with the same $100,000 investment. Your annual cash before tax now totals $20,700 ($4,140 x 5 properties) and you are getting a 20.7% cash on cash AND now have 5 properties appreciating.

You have to love leverage!

@Bob Bowling

That's not how the IRS works. You spend $100,000 this year on a tax deduction and get back $28,000 this year. So for every $100,000 tax deduction you waste $72,000 that you'll never see again.

So you can give me $100,000 this year and I'll give you back $28,000 and we'll both be happy.

Originally posted by @Bob Bowling:

So you'd rather have say $100,000 sitting in your house than out earning 4%. Fine.

If you didn't have the $100K sitting as equity in your house, you'd have to finance that $100K instead -- assuming a typical 30-year fixed mortgage, at today's rates you'd be paying 4.32%.

If you took that $100K that you were paying 4.32% on and invested that for a 4% return, you'd be losing about $320/year versus keeping it as equity in your home.

So yes, given that I like money, I'd certainly rather have it sitting as equity in my house than earning 4% somewhere else... :)

Originally posted by @David Krulac :
@Bob Bowling

That's not how the IRS works. You spend $100,000 this year on a tax deduction and get back $28,000 this year. So for every $100,000 tax deduction you waste $72,000 that you'll never see again.

So you can give me $100,000 this year and I'll give you back $28,000 and we'll both be htherappy.

I don't work for the IRS. And neither does my money. If keeping cash in your house didn't throw away the TIME VALUE OF MONEY & LEVERAGE then I could agree with you. You want to point out one aspect of financing real property and ignore ALL the benefits. It's a package deal. As I said the tax deductibility is just an added benefit on TOP of all the sound financial reasons. But if you want you can stick all your cash in your sugar jar for all I care. It's about informed choices.

@Bob Bowling

If you pay taxes, you work for the IRS. If you don't pay taxes congrats, but the IRS wants to know your full name, address and ss number.

Okay, everybody place nice now okay.

Each buyer is going to have a different viewpoint, endgame and financial plan. It is up to the individual buyer to objectively weigh ALL of the factors including mortgage costs and interest, alternate investment returns, tax consideration, amount of time needed to implement and manage the decisions and personal investment goals. Only then can an honest and accurate answer be given.

The end game is the key here. It doesn't matter to me that the CoC on mortgaged property is 20%+ percent it's still peanuts when the annual cashflow is like 4K. I'll take 10% with cashflow on a paid for property of 12K+ while having less stress and less tenants.

I can count on one hand the number of people that I've met that got into rental with the 90 - 100% financing and are still going strong 10 years later. Now I still am all for people doing this because we like to pick them up afterwards.

Don't forget that a mortgaged house will cost you roughly twice as much money in the end. (I know, I am being crude with my figures, no need to nitpick that apart! my point is that you also need to consider the total amount of interest you'll pay, not just the rate)

If you have a non-mortgaged house you will have a stronger debt-to-income ratio, plus you can still have a line of credit against it to use for investment opportunities when they come along.

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