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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76419  
Subject: Re: How much is enough? Date: 1/7/2011 6:01 PM
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We paid $12,000 in a Chicago suburb 15 years ago. Of course they picked up the garbage twice a week, so it was worth it.

LOL ! My $10,500 doesn't include garbage fee, the city only comes once a week, and I get to pay $27.5 per month for the privilege.

OK. It's still twice what you can get in a savings account, which is what the OP advised I should do.

Yes, at this time it is. However interest rates will not remain this low forever, but my fixed mortgage rate will. Indeed mortgage rates are up over the last 6 months. Savings accounts rates will probably go up too over time. At that point, it might make sense to lock in a CD. I still wouldn't do it on a taxable basis, but I might lock in a CD within an IRA when the rates go up.

Once you have paid off your mortgage you are limited in the ability to get the equity out if you want to make different investments. HELOCs can be had, but the rate is variable and deductible up to $100k only. Reverse mortgage is possible, but only if you are old enough.

It depends what you mean by "a lot of cash." First, we didn't put "a lot of cash" into it.

Well, for last year I put $22,000 of non-deductible contributions toward 401k/IRA, and this year it will be about $30,000. Those amounts could have gone directly towards the mortgage principal instead. If I kept this up as a $2500 monthly prepayment, the mortgage would be paid off in about 12.5 years instead of 30.

This isn't a rental property, it is my primary residence.

The property value grew, over time, because we selected well. (Back Bay Boston, riverview. They're not making any more of that.) Second, it's still a small fraction of our net worth, and it provides a diversity of revenue stream - as well as a significant payout. Condo fees: $400/mo. That leaves $600/mo for taxes and maintenance, which is more than sufficient. That that leaves 1800/mo profit. I really don't know where I'm going to put $400,000 (the net after sales commissions, fees, and taxes) and get $24,000 a year, virtually guaranteed, with the prospect of asset appreciation to boot. It's difficult for me to envision a scenario in which this investment goes to zero, unlike any stock or bond you could name.

Yes, it doesn't sound like your property is in an area at high risk for natural disaster. $1800/month profit is very nice.
If I kept my old townhome as a rental, the numbers would look like this :
$1600-2000/month rent. Let's say $1800.
$285 property taxes
$220 HOA dues which includes insurance
$625 loan. This is HELOC for $250,000, making minimum payment interest-only at 3% currently.
Maintenance on a $450,000 house at 1% is about $400/month.
This would leave $270 for profit, if I never paid another cent of principal, and the interest rate on the HELOC never went up. If had intended to keep it as a rental I would have gotten a fixed rate last year around 4.375%, not a HELOC. But then the monthly payment would be higher by about $200.
Ie. there would be about $70/month left for profit.
That's $840/year out of $200,000 equity or 0.4% net yield, plus all the headaches of being a landlord and managing it myself. Negative yield if not 100% occupied or not paid on time.
Needless to say I'm not keeping the old home :)

Entirely possible. Indeed, historically over long stretches of time incontestable. But there are also fairly long periods where the market goes backwards or remains flat, and you have no progress at all. The market is trading about where it was a decade ago, for instance.

Yes, the US stock market hasn't done very much in terms of index prices. With dividends the picture is slightly better. Some other countries have done better, though.

My cheery advice: don't build in California. ;)

Yes, I wouldn't do it as an investment, especially right now when you can still buy resale homes for about 1/2 of what the costs are to build a new one.
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