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mshheaddoc

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I know someone who wants to buy a house with $100K cash they have and I'm trying to talk them out of it.

Does anyone have any good resources (links) about this? I'm trying to compile something together and email it to her. Thanks :)

If anyone wants to send their input I'd be grateful.
 

bkpa2med

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I totally agree with you. If I had $100k available I would buy 10 houses lol
 

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I know someone who wants to buy a house with $100K cash they have and I'm trying to talk them out of it.

.

I wouldn't.

If they are buying a $100K house, they are likely making 6-7% guaranteed on that investment. Why would you want to talk them out of that?

Interest on a $100,000 mortgage is only ~6K/year, not nearly enough to justify itemizing. That $700 a month they save by not having a mortgage can be invested in riskier investments in IRAs/401Ks and they'll be just fine, plus they have a roof over their head for the rest of their life in case something untoward happens.

Higher return isn't everything. Lower risk is also a worthwhile financial goal.

Taking your $100K and buying 10 houses with it is fine if you want a side real estate business. Many of us would rather spend our time with our families or doing a job we love, such as....say....medicine.
 
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Sol Rosenberg

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The 6-7% is NOT guaranteed, as you can easily lose money in real estate. Diversification is the key to successful investing, so putting all of your eggs into one basket (your house) is advice that no financial professional will ever give you.

The amount of money that she should put into the house seriously depends on her overall financial situation, and there is no way that I could give any sort of advice with solely the information that you have posted here.

If she is hell-bent on putting it all into real estate and can afford to make payments too, I would suggest buying a larger house in an excellent, excellent (I mean PRIMO) location. She WILL (in my experience) make buttloads of $$$ on such a house and come out significantly better in the end. This too, however, depends on her financial situation, so I take back the term "suggest" and substitute "suggest as an option."
 

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The 6-7% is NOT guaranteed, as you can easily lose money in real estate. ...... She WILL (in my experience) make buttloads of $$$ on such a house and come out significantly better in the end. This too, however, depends on her financial situation, so I take back the term "suggest" and substitute "suggest as an option."

You apparently don't understand exactly what I'm talking about. The 6% IS guaranteed. It is the cost of the mortgage. The appreciation on the real estate, of course, is not guaranteed, but is likely to be similar to the general rate of inflation.

Regarding your experience making buttloads of cash on a house, I suppose it comes from the last 3-5 years worth of real estate markets. Keep in mind they aren't always like that. In fact, my home didn't appreciate at all from 1999-2003. The 90s were awfully slow too. There is no guarantee that real estate will appreciate at all. Buying a large house in a primo location is a great way to waste money in a flat or declining market.
 

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One often does not refer to saved interest (from not taking out a loan) as earnings (i.e. "making 6-7% guaranteed on that investment,") but I now see what you are talking about.

All of my real estate earnings have not been in the past 3-5 years (though 5 years is a long time and certainly some of my real estate earnings have been generated in the past 5 years.) In fact, Austin missed the bubble of the past 3 years (our real-estate market was a total buyer's market because of overbuilding in response to OUR last boom of 1999-early 2001) and has just, once again, begun to take off.

OK, although I said larger, it doesn't necessarily have to be larger. But about location, my point is this: There are locations in cities that almost never depreciate, even in the worst of times. People always want to move there, and there is always high demand. Spend a little bit more and buy there. That was my point. Anyone experienced in real estate investing will tell you that location, location, location is the key.

Even in the hard times of Austin's real estate market of the past few years, there were areas of the city that continued to appreciate even in the bad market. My suggestion was to spend a little extra (whether it be a larger house or not, although I did say larger in my last post) and buy there. While I am generalizing to an extent, every city tends to have areas like this. However, any real estate transaction must be in the context of the local market, so I was only offering a suggestion for consideration by the OP and her friend.
 

mshheaddoc

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I am trying to talk her out of it as she is going to be a med student and her husband is going to quit his job and become freelance writer. At this point in her life the mortgage (even partial mortgage) is better for her I believe rather than taking this money on a house. She can easily make good long term investments well over the price of a mortgage right now. As a med student who is planning on moving into a new house I suggested she got at least a partial mortgage to save that money for other expenses she might have in the future (such as a rainy day fund). I don't see mortgage as a bad thing. Especially in this market and where she is looking to buy.
 

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I am trying to talk her out of it as she is going to be a med student and her husband is going to quit his job and become freelance writer. At this point in her life the mortgage (even partial mortgage) is better for her I believe rather than taking this money on a house. She can easily make good long term investments well over the price of a mortgage right now. As a med student who is planning on moving into a new house I suggested she got at least a partial mortgage to save that money for other expenses she might have in the future (such as a rainy day fund). I don't see mortgage as a bad thing. Especially in this market and where she is looking to buy.


So she is choosing between student loans and mortgage loans? I do see some benefits to a mortgage in that situation. I would be very careful suggesting to her that she is better off taking a mortgage until you run the numbers for HER situation. Calculate out the return she would need to get in the market to make it work out for her and present it that way.
 

mshheaddoc

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So she is choosing between student loans and mortgage loans? I do see some benefits to a mortgage in that situation. I would be very careful suggesting to her that she is better off taking a mortgage until you run the numbers for HER situation. Calculate out the return she would need to get in the market to make it work out for her and present it that way.
Well yes that is part of it. Thanks for the advice. I just sent her a couple of links explaining why mortgages aren't the "bad" debt people look at. As well as link on buying a home and mortgage basics. If anything the area she's looking to buy in is the "hot spot" as its the "next big place to move" here so she's making a very sound investment. I just hate to see people spend all their money on items you can have mortgages/student loans when that is the freest money you can get to invest in your future at the moment. Especially with unsubsidized/perkins loans available!
 

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Well yes that is part of it. Thanks for the advice. I just sent her a couple of links explaining why mortgages aren't the "bad" debt people look at. As well as link on buying a home and mortgage basics. If anything the area she's looking to buy in is the "hot spot" as its the "next big place to move" here so she's making a very sound investment. I just hate to see people spend all their money on items you can have mortgages/student loans when that is the freest money you can get to invest in your future at the moment. Especially with unsubsidized/perkins loans available!

I have to disagree - if a house is <200K I feel paying up front or paying it off faster is the way to go. Why would you keep a 200K loan to have it cost much much more in the long run with interest accrued when you can pay it off up front and THEN put all that money you would normally pay the mortgage with into investments.

Sure a mortgage isn't "bad" debt because you are working toward something that won't (or shouldn't) depreciate in value. But if you have the money to buy it up front or pay it off faster, then the smart thing to do is just that - PAY it off!

It irks me to no end to hear people talk about having all the extra money, but they want to keep their mortgage for the "tax break" - they're ok paying out more money and see a SMALL return in the form of a tax break. Screwy logic to me.
 

mshheaddoc

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I might agree but as I stated before in her circumstance her husband is working freelance (read: income won't be stable) and she'll be a med student. Taking a partial mortgage would save that money to buy that new car she wanted and/or furnishing the house and keeping money in investments for emergency.

Plus most likeyly she won't have enough money for the house in cash and she'd need to have some mortgage/money for closing. I think getting a partial mortgage would be the better solution. Leveraging yourself for "free" money isn't a bad thing I think. Especially if you can make enough money to pay it off when you graduate.
 
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