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Hi Footsox,

Interest rates on this mortgage will be in the 4% range, because it is an investment property (we have been told).
if we just pay cash for this house, it would be like getting 4% interest on our money (since no 4% mortgage) right?

No, if that were true I would be making a "profit" of $90,000 every day I pass the local luxury sports car lot and decide not to buy one. Nice in theory... but not real money.

Your net return would be your gross rent revenues, plus gross appreciation, minus the costs of your cash (the alternative returns on an equal risk, equal timeframe basis... a conservative number is 6%,) minus management costs, taxes, and anything else nibbling at your cashflows.

And whenever you hear peorple talking about "depreciation" being in a landlord's favor... it is, but not the way most people describe it. 'Depreciation' is an interest-free loan that the government gives you to reduce your tax payments along the way... but they demand the loan be repaid back in full from yoru sales price when you sell. It doesn't even matter if you actually take advantage of their 'loan'... they'll keep track of how much *THEY WOULD HAVE* loaned you, and demand it all be paid back from your sales price (even if you didn't actually use their loan proceeds at all!)

After you figure your real net return (if its positive at all while foregoing the alternative safe return rates) then you'd divide it into your acquisition cash required, in order to determine your real rate of return.

So, where else would we get 4% on our money (if we are not putting it in the stock market).
Eliminating the stock market as an option, but staying in equivalent timeframe & risk, I can think of two places right off the top;
1. Fully leveraged SFR rental real estate (currently yielding 8-12%, depending on the market,) and much higher potentials for sharp, active investors that don't buy retail,
2. Indexed Universal Life contracts (which yield 6-8% tax-free, conservatively.)

There are most definitely other safe, high yield opportunities in specialty niches... often "insider deals" like when a doctor knows about a medical device startup that needs seed funding, or such.

So, my question I pose, is why get a mortgage at all? This is almost like finding a CD that pays 4%... isn't it?
No. The costs you avoid are not returns. They are merely costs you avoid. You have to include all the pieces of the picture to get the full view.

Some would say we should get the mortgage, so we could deduct the mortgage interest.
Deducting mortgage interest as a business expenses is just one item on the whole P&L... almost never a complete game changer by itself. If you incur a $1 of expense resulting in $1.50 of revenue, it might be a smart move to make.

Dave Donhoff
Leverage Planner
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