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Subject:  Re: Condo down payment source (long) Date:  10/27/2003  12:27 PM
Author:  GusSmed Number:  1175 of 5245

BF disagrees. He thinks that I should cash out my v. small IRA (my only retirement vehicle right now) and liquidate my few inherited stocks so that we can have a larger downpayment.

This only makes sense if you're buying more house (or condo) because of the larger downpayment. If you're not, the increase in value of the condo is irrelevant. What you're doing is trading in stocks in order to reduce your mortgage. The comparison should be between expected return on your stocks and the interest cost of the mortgage, including tax effects, not between stocks and real estate.

Cashing out your IRA carries the additional expense of the withdrawal penalty, which is 10% before 59 1/2 (with notable exceptions). That's a pretty hefty front-end load that you'd have to offset with improved returns.

Have you calculated the CAGR (compound annual growth rate) of his parent's house? House appreciation often sounds better than the actual return, because people rarely compare it to other investments over the same time period. I made about $120K on the sale of my last house, net of improvement costs and real estate fees, but the return on capital was only about 7% per year. Not bad, but not astounding either.

Of course, since it was a house, I had a lot more leverage (debt) than I would be allowed when investing in stocks. Don't get sucked into the idea that leverage is in itself good. It magnifies gains, but it can magnify losses, too. If the local housing market goes down, you can end up being significantly underwater.

The return on simple ownership of real estate is like any other commodity, like gold - you shouldn't really expect the return to be any better than inflation. It's an object, if all you do with it is live in the condo, it's not generating any new wealth. Leverage doesn't help this, because mortgages are always priced well above inflation - the lender wants to make money.

For that reason, buying real estate purely for appreciation reasons is more of a speculation than purchasing a stock and hoping the price goes up, because stocks at least generate new wealth while you own them. You can make money that way, but you have to predict the movement of the local real estate market to do it.

This is not a comment on commercial real estate, because that's all about the income the property generates from rents, not appreciation.

Homes aren't investments. As CK pointed out, you can't eat your house. Even if things to well, the only way to realize a profit is to move someplace where the housing market hasn't gone up quite as much. HELOCs aren't gains, they're loans.

- Gus
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