No. of Recommendations: 4
Hi Chopec,

You're certainly in an incredibly favorable position... good for you!

Which way you go should be determined by your confidence in which way you can get the most productivity from your capital. I.e., can you direct your capital to earn more money than the costs if you put it in real estate, or other instruments (stocks, bonds, mutual funds, pokemon cards, whatever.)

First thing is to figure out the costs of your capital. If you buy r/e outright, your capital is only burdoned be relative inflation. Will your real estate appreciation beat inflation? Do you have other investing skills that could beat the appreciation of the real estate?

If you take a portion of your purchase out in a mortgage, you will be paying interest as a burdon on capital (in addition to inflation.) In order to figure the real interest burdon, take the loan's interest rate, and discount it by the percentage of your tax rate (for the effective interest after your mortgage interest deductions.) I.e. if the interest was 7%, and you are at the 28% tax rate, discount 7% by 28%, for an effective interest burdon of 5.04%

Now... can you beat the costs of capital of 5.04% by some other kind of investment (keeping the investment's tax treatments in mind.)

Most folks on these boards feel they can easily do so with patience and diligence. Others disagree, and believe you should avoid any debt, regardless if it's less costly than the returns your capital can relatively safely generate.

Which way you go will be determined by your personal beliefs about investments, money, safety and risk. IOW, your financial constitution.

I realize this isn't offering you much "follow the numbers" advice. Rather, I hope you see the importance of self-analyzing the overall picture to determine how you want to play.

All the best,
Dave Donhoff
Lic. Mortgage Broker (and financial pop shrink!)
Print the post  


Useful Resources
Our Home Center has all you need to make buying and owning a home a great experience. Get or refinance a mortgage and much more!
Buying/Selling a Home FAQ

Mortgage Professor
Offsite resource for mortgage questions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.