Quake3World

^misantropia^ wrote:

duffman91 wrote:Buying a house cash is about the most foolish thing you can do.

I respectfully disagree. A mortgage isn't free: 5% interest over a 30 year period is a lot of money. There is a reason why banks are so eager to loan you the money and it isn't their charitable nature.

Buying a 200,000 dollar house in cash is only a good idea if I have 2,000,000 dollars in the bank. Buying an asset with all of my savings is not smart. Agree?

duffman91 wrote:

Eraser wrote:tbh buying your first house at 25 is not that much of an achievement. Buying a house without any financial support from a bank in the form of a mortgage, now that is an achievement. But that's true at any age.

I know you don't invest your money, but do you own a house? Because I disagree with you entirely and am getting the impression that you are not well informed.

Yes, I do own a €230,000 (which is 320,000 US dollar) house with my girlfriend.

duffman91 wrote: 1) In order for a bank to loan you 200,000 dollars, you have to prove that you have assets cash, collateral, cash flow, and a solid debt to income ratio. Most people can't get to this point until their mid 30's.

In my experience (and this was last year, I was 26 at the time) the banks here only look at your income and debts. Not a whole lot more. Banks have become a lot stricter since the financial crisis, but if you have a decent income and no debts, it's usually not a problem. Ofcourse the amount of money scales with the amount of income. Your example of 200,000 dollar (which is 144,000 euro) is something I could relatively easily get on my own €40k salary, as I have no debts.

Quite a few people I know bought a house between 25 and 30 years old. Maybe there's big differences between how things go in the US and how things go over here, but here in the Netherlands, if I look at all the people I know, most people own a house before their 30's.

duffman91 wrote: 2) Buying a house cash is about the most foolish thing you can do. Take a loan and invest your liquid assets in a different way. The house will accrue value on its own. Before you reply with a "housing market just tanked" comment, please consider the length of time associated with a real estate investment.

Like misantropia said, a mortgage is not free. If you calculate what a house will cost you based on the interest you pay, you're actually buying the house at twice what it's worth. It's just that its spread out over a 30 year period, so that's way easier to handle than having to shove over 200 grand at once, which most people simply don't have.

However, if you've got a few tonnes left doing nothing, then it's absolutely no bad idea to buy a house from it. Let me put it this way: if I didn't have to pay back the bank plus interest every month, I would have a lot more money left at the end of the month than I do now. And you know, you need a house, so if you can buy it all by yourself, free of paying interest or rent, then that is absolutely a great thing IMO.

Buying a single asset with all of your savings is maybe not a good idea in the sense that if your house burns down, you're left with nothing, but other than that it is no different from buying lots of different assets from all of your saved money. The latter just spreads the risk of losing tangible property. The bottom line is that not having any savings left in case of a dry spell or unforeseen spendings is generally a bad idea. I don't think it has to do with whether or not you're buying a house from your money or a $300,000 sports car.

duffman91 wrote:Edit: If you rent a car, condo, apartment, or house, don't bother replying.

I fully own a car as well. No rental or lease.

Quite interesting.

For the age, that's an extremely conservative tactic. The economic goal is to diversify assets the most at a young age. I've used 200,000 as an average for a home, so i'll stick with that. Over a 10 year period, your mortgage will still not add up to 200,000. Within this time, the value of your house will most definitely rise. At which point you could sell for a net profit. With this in mind, if a loan was taken, your liquid assets could have been compounding interest in a number of different ways. Some with a high risk, others with less.

The overall gains possible in that 10 year period will far exceed what you'll save by paying a house cash.

That's probably true, but then you're assuming I could be arsed to actively invest large sums of money and spend good amounts of my time on that.

I also never looked at buying a house as something that could get me a profit. I need a roof above my head and to have that and be sure I can pay it is far more important to me than any possible profits the house would get me in 10 or 20 years.

But alas, I have no 200,000 euros lying around so a mortgage was the only option for me anyway

Interesting read on this topic I started

Me, well we are just sweating on the bloody bank (they are true bastards here - comment please as to your local financial supplier) to approve a $700k (AUD) loan (and we are good for it ) for a coastal holiday home come investment opportunity * leading into possible retirement It is bigger than our current abode

*I say opportunity because the same property 12 months ago was $850k (AUD)

The time is right for us now, so cross your fingers, legs and whatever.

Send us good karma please Q3W

Hope you get it good luck!

duffman91 wrote:
1) In order for a bank to loan you 200,000 dollars, you have to prove that you have assets cash, collateral, cash flow, and a solid debt to income ratio. Most people can't get to this point until their mid 30's.

E160k ($220k) at age 22. either I'm doing something terrible good or most people are doing something terrible wrong, going by your statement :/
28 now and a E270k ($375k) house with a $430k mortgage.

lars63 wrote:Hope you get it good luck!

Thanks lars63

Just got an email from the bank in reply to one where I voiced my frustrations at their attitude.

I am trying to twist their arm (not that they have one, even a heart or soul for that matter ) for an early closure/settlement on this deal.
I would hate to loose out because of a faceless bureaucracy.

Send more good karma my way please

MKJ wrote:E160k ($220k) at age 22. either I'm doing something terrible good or most people are doing something terrible wrong, going by your statement :/
28 now and a E270k ($375k) house with a $430k mortgage.

Maybe it's apples and oranges. The Dutch mortgage market has all kinds of safeguards built in, for both consumers and lenders, so it's fairly risk-free for both parties.

I don't think the same can be said of the USA. Maybe there are exceptions on the state level but, unless I'm very much misinformed, not on the federal level.

Whiskey 7 wrote:
......... I voiced my frustrations at their attitude
...........I am trying to twist their arm
............... faceless bureaucracy

The bastards are playing hardball ..... Send all good karma my way please Q3W people

Here's what I do: Invest all my net worth into local stocks and loan it out to local companies.

Here's what I suggest, as someone that is soon to receive his master's degree in Finance and has held different financial specialist positions: Diversify your net worth between real-estate, bonds, stocks, cash and commodities.


Why the disparity?

The method I suggest is the safe way to ensure you have a pension to live off and/or can send your kids to college. You will be diversified up the wazoo and the odds of totally getting anihillated are pretty slim.

The method I use, with extremely limited diversification and high risk instruments, is the only way to get rich fast (and by fast I mean 10-20 years) notwithstanding some pretty incredible luck, inheritance or starting your own company (which is basically the same as high risk/low diversification anyway). Your results will totally be at the mercy of how good your investment selection is. For me, I started investing in the beginning of 2007 and I've made an average compounding annual return of about 30%. This is not saying you will earn that or even I will manage to earn that in the next 5 years. But if I do, I can buy my house outright at age 28 without any financial support from my family or spouse, which isn't something a lot of people can say.

Oh, and I wanted to correct some horrible misconceptions in this thread:

"I respectfully disagree. A mortgage isn't free: 5% interest over a 30 year period is a lot of money."
A mortgage will end up costing you almost twice your house over 30 years, yes. But say you have 100,000$, which you could use to pay off your mortgage, or buy stocks. Sure, the bank will want 5% every year. But the stock market will _likely_ end up making you more money than 5% p.a. over that 30 year period. At the cost of additional risk, yeah, but you're still opting out of making money.

"Buying a single asset with all of your savings is maybe not a good idea in the sense that if your house burns down, you're left with nothing, but other than that it is no different from buying lots of different assets from all of your saved money."

Yeah, the difference is that your investments suddenly become a lot less risky because they are much more diversified. Not a light difference. Your house doesn't even have to burn down, you will incur large losses if the price of real-estate in general or in your specific area drops for some reason. You might still have your physical house, but would you really want to live there if you're suddenly living in a ghetto? Not likely.

The other difference is that marketable securities can be sold every workday and you get the money almost instantly (generally 1-3 days for the sale to be cleared). If you needed a large amount of money suddenly, how long would the normal selling period for your house be? Weeks? Months?

"That's probably true, but then you're assuming I could be arsed to actively invest large sums of money and spend good amounts of my time on that."
That's quite frankly bullshit. Diversifying your investments between several assets takes as much time as it does to find a decently-managed fund that invests all around the world in several different classes of assets. You could pick one in a few hours and not look at it again for 10 years.

tl;dr
Investing all your money in your house is a bad idea for a lot of reasons.

"I respectfully disagree. A mortgage isn't free: 5% interest over a 30 year period is a lot of money."
A mortgage will end up costing you almost twice your house over 30 years, yes. But say you have 100,000$, which you could use to pay off your mortgage, or buy stocks. Sure, the bank will want 5% every year. But the stock market will _likely_ end up making you more money than 5% p.a. over that 30 year period. At the cost of additional risk, yeah, but you're still opting out of making money.

Offset your long term returns against inflation and taxes and I don't think your ROI is going to be much better than 5%, not with a little-bit-of-everything portfolio.

"Buying a single asset with all of your savings is maybe not a good idea in the sense that if your house burns down, you're left with nothing, but other than that it is no different from buying lots of different assets from all of your saved money."

Yeah, the difference is that your investments suddenly become a lot less risky because they are much more diversified. Not a light difference. Your house doesn't even have to burn down, you will incur large losses if the price of real-estate in general or in your specific area drops for some reason. You might still have your physical house, but would you really want to live there if you're suddenly living in a ghetto? Not likely.

Now replace 'ghetto' with 'bull market' and 'real estate' with 'stock'.

And to be perfectly clear: I'm not against investing in the stock market. But paying off your mortgage /will/ make you money, whereas stocks /may/ make you money.

^misantropia^ wrote:And to be perfectly clear: I'm not against investing in the stock market. But paying off your mortgage /will/ make you money, whereas stocks /may/ make you money.

Whiskey 7 wrote: ......... Send all good karma my way please Q3W people

Thank you good people of Q3W.

At the 11th hour it looks like the bank does see some sense* as everyone else would given the circumstance.

It isn't rocket science but simple maths.

* Yes the bank is a faceless, indeed soulless beast of course and sense refers to feeling but some one finally listened

^misantropia^ wrote: Offset your long term returns against inflation and taxes and I don't think your ROI is going to be much better than 5%, not with a little-bit-of-everything portfolio.

Now replace 'ghetto' with 'bull market' and 'real estate' with 'stock'.

a) A home mortgage will not earn you the same as stocks in the long run. That's not how assets are priced, less risky assets will always earn on average less than riskier assets. In any case, seemingly small differences in returns will compound over the years. Let's assume you can earn 5% with a home mortgage (and I'm being generous, 4% seems more likely provided you have good credit quality) and 8% with a diversified portfolio of financial assets and you can invest 100,000$. In 30 years, a 5% save in interest costs means 150,000$ saved while a 8% return will earn 900,000$ dollars. Even if we assume that the 5% compounds, which it probably won't (unless you start buying new houses every year), a 5% compounding return will only earn 330,000$. Small difference in percentage points, big difference in outcome.

BTW, inflation is unimportant here. Remember, the value of your savings on interest costs are going to reduce in real value (that 5,000$ you save every year will buy you less and less as time goes buy) so both investments are affected.

b) I'm assuming you meant bear market, I have no idea why you would dislike owning stocks when everything is going up. In that case, you missed my point entirely. Buying your own home is like investing all your money in one company. If something happens to that company, you're fucked. If you're diversified into several different assets, one of them is likely to do well even when others might not be.

strong adam smith vs john nash in this thread.

Not quite, because I don't really disagree with Deji. I do think that some of the numbers are somewhat off.

That 8% ROI should realistically be 7 - 7.5%. Deduct transactional overhead like trading costs and taxes - for example, that maddening 1.2% capital gains tax we have here - and your real ROI won't be much over 5%.

I also don't buy the liquidity argument, that only works when your stock is up.

The 'all your eggs in one basket', well... I have more influence over my neighbourhood than I have over the stock market.

Deji, how do you feel about index funds?

Last year there were news that the Yale's University Endowment Fund had made close to 9% p.a. average annual return for the past decade, which includes a big crisis. It's a fair comparison in terms of the asset allocation we are talking about, even though I think a young person should be able to take in some more risk for the first 10-15 years, so I wouldn't say 8% is an unrealistic assumption. In comparison, a 5% average interest rate, with a 0,75% margin would mean an average floating rate of 4,25%. If anything, I would say that estimate is on the high side if we look at interest rate levels for the past 10 years. (Then again, past yields are not indicative of future rates)

Trading costs should be non-existent provided you don't rebalance your portfolio made up of individual assets and hold diversified funds. And while I am unsure of the US tax system, the only capital gains tax we have is on realized income, meaning there is no tax as long as you don't sell anything so you can put the taxes off for years and years. By the way, we also get tax deductions from mortgage costs, so at least for me it will even out a great deal in any case.

As for the liquidity argument.. huh? Have you ever bought/sold shares? As long as we're not talking about sums of money in the hundreds of millions, you can sell your relatively meaningless stake instantly into the market, as long as the stock has any liquidity at all, the loss will be way under one percent. With bigger and more liquid stocks, you will probably lose something to the order of <0,1%.

Even if you have more influence, diversification allows for better return for the same amount of risk, this is one of the main foundations of finance.

Index funds? I love 'em. I don't believe in fund managers' ability to consistently beat the market, so I would rather buy something with lower costs. If my net worth was +1M$, I would just make up most of my portfolio out of index funds from all around the world.

I'm basing that 7 - 7.5% on the general movement of the major markets in the last 30 years. Tell me I'm wrong, I dare you, and I will slap you senseless with interminable graphs and statistics.

Re liquidity: I might have spent some more words on that. What I mean is that you are not going to sell your stock if they're below what you bought them for, not unless you are willing to take the hit. The same can be said of housing prices but those are generally less volatile than share prices. Well, until recent years, that is.

I suppose you could make a case for diversity here but if you spread your investments too much, won't the transactional overhead kill you if you want to free up e.g. $20K?

stocks will work but imo the game has changed

now i feel its about working many many strong/solid stocks and making mini trades as they fluctuate

the window opens-buy, then just b4 the window closes, sell, then repeat over and over again with many different superstrong established stocks

whiskey- here in Canada if a person has an existing home mortgage, they must put 50% of the principal as downpayment to acquire a vacation property mortgage

^misantropia^ wrote:I'm basing that 7 - 7.5% on the general movement of the major markets in the last 30 years. Tell me I'm wrong, I dare you, and I will slap you senseless with interminable graphs and statistics.

Re liquidity: I might have spent some more words on that. What I mean is that you are not going to sell your stock if they're below what you bought them for, not unless you are willing to take the hit. The same can be said of housing prices but those are generally less volatile than share prices. Well, until recent years, that is.

I suppose you could make a case for diversity here but if you spread your investments too much, won't the transactional overhead kill you if you want to free up e.g. $20K?

7-7,5%? If I look at the S&P 500 index 1981-2011, I end up with an annual return of roughly 7,9%. Then again, indexes do not account for dividends. Look at a total return index for the S&P 500 and tell me what the average return for the last 30 years has been.

Liquidity has nothing to do with volatility. If you want to sell your house and get the money for it in the next 3 days, you will lose ~20% or so of it's value. If you want to sell your stocks, you will lose much less than a percentage. The fact that stocks are more volatile has no merit on that argument and the notion that you "can't" sell things for a loss is one of the most harmful and idiotic biases people have. (Even I have it to some extent, but I realize it's stupid and try to not consider it as a real argument when making my decisions).

With small amounts of money (like 100$k) you shouldn't diversify into separate assets on your own. Buy index funds, each fund/asset class being at least 10$k and the transaction costs will be pretty insignificant. If I look at my broker's transaction costs, I could sell 5 positions worth 20k€ and it would only make up 0,4% of the sum I am taking out. And let's not forget, when you sell real-estate, you're incurring transaction costs as well (notary, broker).

I'm currently studying for a degree in economics, and I haven't got a fucking clue what anyone in this thread is talking about now.

I decided last week that I was going to switch to physics and just consider the last year as wasted. Reading this thread makes me think it's not such a bad idea.

Oh god yes. Physics over this shit any day...

7-7,5%? If I look at the S&P 500 index 1981-2011, I end up with an annual return of roughly 7,9%. Then again, indexes do not account for dividends. Look at a total return index for the S&P 500 and tell me what the average return for the last 30 years has been.

You picked a bad example. S&P 500 is a by-committee index and not necessarily neutral in the stocks they pick (and companies on the list profit from the 'follower funds' effect). Rather, look at the US stock market as a whole and tell me what ROI to expect.

Liquidity has nothing to do with volatility. If you want to sell your house and get the money for it in the next 3 days, you will lose ~20% or so of it's value. If you want to sell your stocks, you will lose much less than a percentage. The fact that stocks are more volatile has no merit on that argument and the notion that you "can't" sell things for a loss is one of the most harmful and idiotic biases people have. (Even I have it to some extent, but I realize it's stupid and try to not consider it as a real argument when making my decisions).

Ah, but selling at a loss is not really a sustainable long-term strategy, is it now? /cheek

But seriously, is there ever a time when it's a good idea to cut your losses and walk away? This is a hotly debated topic among the traders I know (I hesitate to call them friends, traders don't have friends). The 'hang on for dear life and hope for better times' attitude is most common but it's by no means prevailing. I'm on the fence, convince me!