Roth IRA... a good time?

[thinks]

I'm thinking about making a contribution to our Roth IRA for 2004.... I've got my check out. Would anyone agree to go ahead and send it in this week?

Does anyone else make contributions to a Roth or something other than your TSP? Looking forward to any discussions.

[Mr. Duke]

thinks,

Absolutely, Personal IRAs should be a priority for all concerned...Depending on age and a few other factors determines either a ROTH or Traditional....

Traditional IRA money deposits are tax deferred as are the gains until you begin taking the money out of your account

Roth IRA you pay the tax on your deposit up front, however the GOLDEN part of this equation is that you never pay tax on any of the capital gains....ie; you might invest $12,000 over the next 4 years and if it were to gain to say $50K you would not be taxed on any of the $50K. Additionally, if you ever needed to take any of your original contributions back out, you may without penalty because you already paid taxes on the $12K.

Make your contribution.. it is not until you invest in either stocks, or funds or bonds that the money goes at risk

Good Luck.........smart move!

[tsptalk]

thinks wrote:
I'm thinking about making a contribution to our Roth IRA for 2004.... I've got my check out. Would anyone agree to go ahead and send it in this week?

Does anyone else make contributions to a Roth or something other than your TSP? Looking forward to any discussions.


I agree thinks. This is not 2000-2002 again.

Roth is a great idea.

Tom

[thinks]

Thanks to you both and I'll just add that I really enjoy both of your posts because they're so informative and thoughtout.

I went ahead and mailed the check.

[Pete1]

The best time to start your Roth IRA is, well, yesterday!! Sooner rather later!! Just do it!! Okay, you get the idea.One thing you may want to do withyour Rothis to invest in value stocks or international small stocks. Don't just put it into anotherS&P fund - diversify.

[Rolo]

I make the max Roth IRA contribution on January 2nd from my cash reserves. The sooner you make your IRA contributions, the sooner you get tax-deferred growth. I also have a regular margin account, into which I contribute 5%-25% of my income monthly.

The priorities: TSP (since it lowers my taxable income), IRAs, then regular brokerage account.

[Mr. Duke]

10-4 Rolo....

[azanon]

How do you pull that off Rolo, if you dont mind saying. Frugal living,high income, a combination of both? I find it pretty admirable you are maxing both TSP and Roths, and still have 5-25% left over for a personal portfolio. Married or Single?

[thinks]

The Roth contribution also helped our taxes for 2003 and I believe will for this year again so that's a nice bonus too.

[azanon]

Roths only help a current year's taxes in that the earningsgrow tax deferred. There is no allowable deduction for Roth IRA contributions. Hope you didnt take a deduction for a Roth IRA contribution :-).

If you're wondering why the IRS keeps up with Roth IRA contributions, its because you are allowed to withdraw the contributions tax free (not the earnings) simply because you already paid taxes on them...... or you should have :-).

Azanon

[thinks]

For 2003 if a persondid a IRA one received the Retirement Savings Contribution Credit. I can't remember right now more about it w/o looking but recall something along the lines of one w/o retirement benefits so I didn't do the deduction but was able to use the credit. :)

[azanon]

Really??? I haven't heard of that, and i did my taxes using Quicken. Considering I had Roth IRA contributions for 2003, i'd be disappointed to find out that there was a credit I could take.

If you come across a link showing that guidance, i'd be interested in seeing it.

[thinks]

here's the info: just paste/copy for ya


Retirement Savings Contributions Credit

Tax Tip 2004-50, March 12, 2004

This tax credit, which will be available only through 2006, could help you offset the cost of the first $2,000 contributed to IRAs, 401(k)s and certain other retirement plans.

The Retirement Savings Contributions Credit applies to individuals with incomes up to $25,000 ($37,500 for a head of household) and married couples with incomes up to $50,000. You must also be at least age 18, not a full-time student, and not claimed as a dependent on another person’s return.

The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income, as shown below:


Credit Rate

Income for Married, Joint

Income for Head of Household

Income for Others

50%

up to $30,000

up to $22,500

up to $15,000

20%

$30,001–32,500

$22,501–24,375

$15,001–16,250

10%

$32,501–50,000

$24,376–37,500

$16,251–25,000
When figuring this credit, you must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies for distributions starting two years before the year the credit is claimed and ending with the filing deadline for that tax return.

Form 8880, Credit for Qualified Retirement Savings Contributions, is used to figure the amount of the credit, which is then reported on line 48 of Form 1040 or line 32 of Form 1040A. You cannot use Form 1040EZ to claim this credit.

Using Form 880 for your 2003 tax return, you would first subtract distributions received from January 1, 2001, through April 15, 2004, from your total 2003 retirement contributions. Then you would multiply the result (but not more than $2,000) by the credit rate that applies to your filing status and income level. The maximum credit amount allowed for 2003 is $1,000, or up to $2,000 if married filing jointly and each spouse made contributions.

The subtraction rule does not apply to distributions which are rolled over into another plan or to withdrawals of excess contributions.

The Retirement Savings Contributions Credit is in addition to whatever other tax benefits may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a 401(k) plan are not subject to income tax until withdrawn from the plan.

For more information, review IRS Publication 590, Individual Retirement
Arrangements (IRAs). The publication and forms can be downloaded from this Web site or ordered by calling toll free 1-800-TAX-FORM (1-800-829-3676).

Related Items:



Form 8880 (http://www.irs.gov/pub/irs-fill/f8880.pdf), Credit for Qualified Retirement Savings Contributions (PDF 46K)


Form 1040 (http://www.irs.gov/pub/irs-fill/f1040.pdf), U.S. Individual Income Tax Return (PDF 176K)


Form 1040A (http://www.irs.gov/pub/irs-fill/f1040a.pdf), U.S. Individual Income Tax Return (PDF 136K)


Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf), Individual Retirement Arrangements (IRAs) (PDF 449K)


Tax Topic 610 (http://www.irs.gov/taxtopics/tc610.html)

[azanon]

The Retirement Savings Contributions Credit applies to individuals with incomes up to $25,000 ($37,500 for a head of household) and married couples with incomes up to $50,000.

Ahh, that's why quicken didnt suggest it for me.:-) I dont qualify.

[Rolo]

azanon wrote:
How do you pull that off Rolo, if you dont mind saying. Frugal living,high income, a combination of both? I find it pretty admirable you are maxing both TSP and Roths, and still have 5-25% left over for a personal portfolio. Married or Single?

No, I do not mind at all...personal finance has become a big hobby of mine over the last year or so and I enjoy finding people with whom to discuss it.

hehe, Single. I get a lot of, "Oh! That explains it!", to which Iwryly reply, "But I have a cat! She eats expensive cat food!"

This is my third time being single; I survived two divorces unscathed.

My income is a little better than average, full-time job plus two sideline businesses. The more time I spend on the businesses, the more income as a result and the less time I have to spend money; my computer geek hobbyis a little profitable. Anything above my salary goes towards investments.

Being frugal is the bulk of it. By no means do I deprive myself, but I do strategise purchases, buy the best value (which is not always the best price), and take care of my stuff for longevity. I also shop online a lot since items are much cheaper that way. I definitely do enjoy my things, particularly having the 'best' several years after I bought it.

Thinking long-term is the key: "What do I want 10/15/20/whatever years from now?" Frankly, I would love to have the 2005 Bentley Continental when it is available, but that just ain't gonna happen, so the question to myself is, "How can I afford that X years from now?" and strategising toward that goal.

Probably the most critical habit of all is paying yourself first.Put your calculated X dollars into your investments before you paid the mortgage, bills, etc. and never touch it. "What if I run out of money before I run out of month?" Err...well...don't!

The point is that it is easy to slack on our investments, so take care of it first. Personally, I need that, for I am precisely the opposite of 'Mister Disciplined'.

I started in January 2003 and the bulls came-a-runnin' in March, so I got to enjoy a very lucrative market very easily. I more thandoubled my money in a year in fact. Seeing that kind of opportunity in my grasp makes spending my money more controlled and easier to delay gratification (and oh, boy am I the last guy to 'delay gratification'). "I can hold off buying this now, and buy two of them later." i.e. Don't just think 'money', think 'money over time'.

Okay, enough of the paradigm-shifting pep-talk, I like definitive tangibles, too:


When I moved here, I bought a brand new townhouse before construction was completed. The monthly payment with insurance and taxes was still cheaper than renting an apartment with half the space. A comparable single-unit house (3/3/2.5, 1500 sq. ft., garage) was $40-$50K more. Plus, I hate yardwork.

On that note, keep your mortgage, especially now. That money is cheap, do not hurry to pay it back any sooner than you have to. I am continually amazed at how much Depression-Era thinking permeates our society, "I want to 'get out from under' my mortgage." I mean, people younger than I are saying that and I am 33!

Calculate refinancing. Six years into paying that mortgage, I refinanced to knock off a point in interest, bring it back up to 30 years, and reduce my monthly payment. The difference between the old payment and the new payment goes into my brokerage account. The refund from escrow and the difference in principal (I stated a figure higher than what I owed, hehe) went right into my brokerage account.

Be shrewd. Everyone has an angle, have one better than they. The money made from the mad-refinancing is that they charge you points. They also usually make the mistake of comparing their mortgage with your original mortgage: in my case, they compared theirs to my 30-year mortgage rather than the 24-year mortgage I actually had since I paid it for six years. I let Mr. Salesman think he got one on me, waited until a few hours after he left, called the company, berated them for wasting my time and stated that these two points they are charging me makes me pay more than what I am now. They dropped the two points and had new paperwork for me the next day.

I bought my first new vehicle in 1990 when I was 19.The loan rate was 22% and full-coverage insurance was outrageous. I paid cash for it and kept liability/uninsured only and was confident that I would not total my own car. That cash also let me buy it at invoice price. (Sticker: >$16K, paid $10.8K)

I finally sold it just last year--it was about to have many problems and no longer financially feasible to keep it--and bought my PT Cruiser (http://members.cardomain.com/rolox2). I re-accomplished my financial schedule (budget) and decided to spend $21,450. Sticker on the PT: $27.7K. I paid $21,500...$1800 under invoice. I really think I could have gotten it for $20K even, but I really, really, really wanted this particular PT Cruiser and it was the only one I found within 900 miles.

Like mortgages, car loan money is cheap. It would cost me more to pay cash for my PT than to finance it, so that money stayed in my brokerage account and I am more than happy to make a car payment.

Your largest expenses are taxes, your house (it is an expense, not an asset), and your wheels. Scrutinise those first.

Learn how to make your own Financial Statement. I really got a clear picture when I put together mine and it is the basis from which all my financial moves are made.

Interesting side-note:my PT Cruiser (I love that car, BTW) is how I found TSP Talk. As a result of PT Cruiser owners having a tendency to coagulate, I started PTCrew.com with a fellow owner.PTCrew uses the same forum software that TSP Talk does.I saw one of Tom's posts on the software's forum, saw that TSP meant THE TSP and thought, "NO WAY!!! How cool! Wow these guys are totally into it...alright!" :^

Some books that helped give me a clear perspective and knowledge that I recommend: The Truth About Money, Cashflow Quadrant, Peter Lynch's Beating the Street, J.K. Lasser's income tax guides, and--I have only read 1/3 of it so far but a must-read for everyone--The Millionaire Next Door. My attention diverts itself easily (glad I am not a child now, I would be ritalin-boy for sure, blecch) but I could not put these books down, they were very informative, entertaining, and well-written. Ric Edelman's books will have you laughing out loud as you read them, highly unexpected from a tome about personal finance.

hehe, Ihope there something for everyone in all of that.

[Rolo]

*Bump*

Since I started my post at work hours agoand just finished it at home.

[tsptalk]

Super post!! Great info.

[thinks]

Rolo, awesome post!! I'll have to look for those books at the library... thanks for your recommedations.

I found part of your post intriguing in particular because I was looking over someone's reasoning behind one should pay off your mtg first even before any $ goes to investments... To be honest, I'm going to have to look it over again because at the time I didn't have much time. I'm trying to find the link but can't find it at the moment so I'll copy/paste at the end and I would love to her your response to the information when you get time because I was under the impression like you had said but we've only had our mtg since Jan. and this moneymgmt(?good name?) is becoming to be a hobby of mine too(wink). Hopefully, I'll find the link that I'll add later. The person who wrote it I believe his name is in the info.

p.s. My dh loves the PT Cruiser. I thought maybeyour site was the link but doesn't look like it...

The following is Copy/paste... not written by me... I would reference but still looking for it so will add when I find it:

Prepaying your mortgage vs. investing: the perennial decision. This material summarizes and extends a discussion about prepaying held on FIA mailing list during November of 2003.

The gold standard text for prepaying is "The Bankers Secret" by Marc Eisenson. It is likely to be available in your local library. The book is thick, but it's 90%+ tables. The material itself is only about 40 pages, and written at the 8th grade level. Computer users with a spreadsheet package can run out their own amortization table pretty easily, so there's no need to buy anything. Now, just make sure everyone avoids the "biweekly payment conversion" scam... ;-)

Carolyn spake: "I think that at some point you have to almost become obsessed with the goal of paying your mortgage off early."

Jonathan: Absolutely. And it's fun too. I still have the amortization tables we used. 8-)

And then this little bit popped in (again from Caroyln):

"I'm glad Penny Yunuba raised the point about fully funding your retirement accounts before paying off mortgages early. I absolutely, enthusiastically concur."

Jonathan: Augh!!!!!!!! This is conventional wisdom and in many cases is simply **not** the best thing to do. Everyone *must* run the numbers in order to determine the best thing for them. Please note that the discussion following applies only to US citizens considering prepaying their home mortgage. There are accounting reasons why this discussion does not apply to investment or business properties (although even then I'd assert you need to run the numbers out).

I too heard that "wisdom" about funding your retirement accounts before prepaying your mortgage. Being spreadsheet-savvy, I decided to model the situation and see what the reality actually was. Here is what I found. First off, some definitions and assumptions:

1) You can afford a building and want one enough to actually buy one.

2) You have arranged your financial affairs such that the mortgage is your only debt and you have an adequate (whatever that means to you and your family, if any) cushion already built up to stave off financial emergencies. If you have no cushion, this whole discussion is moot - go fund a minimal cushion first!

3) You have excess money that you can choose to either prepay your mortgage with or invest with each month. This amount is assumed to be the same each month to make the spreadsheet manageable. In reality, we found this amount to be highly variable, though there was seldom a month we didn't have some excess we could prepay with.

4) The measure of "wealth" is net worth. That is, increasing your net worth is the goal, *not* avoiding taxes. We'll come back to taxes. I think any YMOYLers who have thought about their personal cash-flow will agree with this definition (note 1). My definition is just a way of measuring relative value differences in the spreadsheet model, nothing more. Feel free to disagree that this is a valid discrimination method and contact me to discuss it.

So I set off to model the accumulation of net worth across time. I picked a period of 60 years to model for various reasons, none germane here. The real point is that it's more than 30 years a conventional mortgage can last. I did the modeling in Excel-97 and with the Analysis Toolpak installed for the financial functions (note 4). I modeled four possible scenarios:

1) Conventional wisdom (CW) is to put money into investments, not your mortgage, to preserve your tax deduction and earn compound interest on your investments.

2) No Invest (NI) is paying your mortgage off before you invest a single penny. The whole extra amount is sent in as a Regular Prepayment, to use Eisenson's terms.

3) Splitting the difference (50/50) - pay 50% of what you can invest into your mortgage to retire it early, and invest the rest.

4) Irregular prepayments (IP) is paying as many principle payments as you have money for each period. Unused "investment principle" carries over to the next period. Investments begin after mortgage pay off. This is an Irregular prepayment scheme as Eisenson would label it. Incidentally, this is the approach my wife and I took while prepaying our mortgage, and we are not sorry in the least, even though it can underperform some of the other models.

Then I ran the numbers. That is, I put a sheet together for each model. Each sheet calculates net worth across 720 months. I created another sheet to make comparisons and collect the data in one place to make graphing easy. Finally I created a chart page with a graph of all four options and a common place to change numbers and run scenarios from. That's the workbook associated with this file.

So let's discuss a few scenarios. The common elements of all the scenarios below will be the amount borrowed: $150,000; 30 year conventional mortgage, $0 down, average tax rate of 20% (see note 1 for the calculation), and a mortgage interest rate of 7%. This makes the principle and interest portion of a mortgage payment $997.95 per month. I'm also assuming there is $302.05 available to invest each month. As a point of comparison, these numbers represent the median values in my current housing market (12/2003 in the Midwest) and roughly equate to an annual income of $52,000 as the bankers calculation of acceptable income to support this amount of indebtedness (note 5). All the numbers below take place at month 360 - just when you'd have paid off the last mortgage payment under the conventional wisdom.

Consider for the moment you are considering the NI option vs. the CW option (this is the most radical choice you can make to many). Further assume that the rate earned on investments is 7% *pretax* and earnings are not taxed each year. If you follow CW, at 30 years your net worth is $688,540.27. If you follow NI, at 30 years your net worth is $511,897.14. I don't know about you, but the mutual funds in my tax deferred accounts are making nowhere close to 7%+ at the end of 2003.

Now, I picked 7% for the tax-deferred return precisely because it was a relatively high return (Treasury bonds are returning around 5% during 12/2003) and because it was close to the equivalency point (7.101%) between NI and CW scenarios. Here's a table with various investment rates/net worths to consider:

I-Rate CW NI 50/50 IP
3.000% $325,667.86 $420,082.81 $370,456.29 $422,468.13
4.000% $358,405.99 $440,774.37 $393,880.75 $443,494.19
5.000% $398,911.77 $463,517.49 $421,748.44 $466,589.76
6.000% $449,213.46 $488,537.40 $455,141.02 $491,977.49
6.825% $499,899.24 $511,070.10 $487,811.77 $514,822.20
7.000% $511,897.14 $516,085.42 $495,431.84 $519,904.45
8.000% $590,265.11 $546,442.06 $544,368.35 $550,645.67
9.000% $688,540.27 $579,920.55 $604,178.40 $584,506.62
10.00% $812,129.95 $616,870.68 $677,707.39 $621,827.72
11.00% $967,966.82 $657,683.30 $768,595.52 $662,986.97
12.00% $1,164,949.57 $702,795.19 $881,506.86 $708,404.96
13.00% $1,414,513.08 $752,694.63 $1,022,425.64 $758,550.59
14.00% $1,731,366.40 $807,927.62 $1,199,039.80 $813,944.61
15.00% $2,134,448.57 $869,104.89 $1,421,237.62 $875,166.40
16.00% $2,648,167.14 $936,909.69 $1,701,751.26 $942,861.97
17.00% $3,304,003.93 $1,012,106.67 $2,056,991.02 $1,017,749.48

I picked 3% to reflect the traditional inflation rate, and the rate at which conservative investors are making about now (end 2003) across their portfolios. Clearly prepaying makes sense before any investing at this rate. CW doesn't catch up to NI until 7.1%, as noted above. In fact, your best deal is the IP plan over the NI plan across all the rates in this example (note 2). Note the 50/50 option overtakes NI and IP after 8% as well. Finally at 14%, picked because it's exceedingly aggressive (note 3), but not out of the realm some brokers will try to sell you off at, now the CW and 50/50 start to look pretty good compared to NI and IP, though IP is still better than NI.

What's going on here? As you can see, *the more conservatively you invest, the more likely you are to benefit by prepaying!* It's not until you start taking serious risk (more than 8%) in the investment markets that you start to see the CW and 50/50 models start to pay off. As a YMOYLer, I think you have to be realistic about what you can get in the bond market. And by the way, that's the downfall of this model: assuming a steady rate of return on the investments and that your tax rate will remain the same.

Now, about those taxes. I chose to model with taking taxes into effect. If we go back to the 7% model and assume combined federal, state, and city income taxes average 20%, then the effective rate of the mortgage is in fact around 5.83%. It depends on how close you are to itemizing being better than the standard deduction without mortgage interest and several other variables. I never managed to see more than $0.25 tax return per $1 mortgage interest (note 1).

So I hope you're convinced that you *must* run the numbers when deciding between prepaying your mortgage and investing. As a rule of thumb, if you can make more than 1.5-2.0%+ over your mortgage rate on your total investment portfolio, then splitting 50/50 has a good chance of increasing your net worth faster than any of the other methods. And remember, that's 2%+ pretax. You'll have to increase that by your average investment tax rate if you're investing post-tax.

I'd be delighted to take any feedback you may have on this write-up or the workbook, especially if you find an error. Note that you may disagree with the ways I've handled the tax factor in the workbook. If so, change the sheets to suit your inclinations. But I'm not going to help you if you change the workbook formulas or VBA code! So do this *at your own risk*!

Note: Please read *ALL* the comments on the PlayTime sheet of the workbook before doing anything with it!


(Note 1) There are tax-phobes that will refuse to understand this definition because they "lose their deduction" and are so desperate to screw Uncle Sam that they do stupid things financially even though it's demonstrable to an 8 year old that the deduction is worth far less than freedom from debt (prepaying). But I digress. If you want to debate this point, we can. But before you get your e-mail client all fired up to send me mail, please consider the following scenario and do the math for your situation. You will need the current years tax forms, so it's best to consider this whole concept shortly after you file your taxes for the prior year.

First figure out how much mortgage interest you actually paid for the tax year. You ought to be able to just read this off your 1040 Schedule A. If you didn't itemize deductions, then you have **no excuse** for not prepaying - you aren't even using the mortgage deduction in the first place!

Next, run out your taxes as if you did not have the mortgage interest deduction. That is, pretend the house was already paid off and redo your taxes on that assumption. This may mean you take the standard deduction instead of itemizing; that's fine. Do what makes sense.

Now you should have three numbers:
1) The amount of mortgage interest you actually deducted, call it MI.
2) The amount of taxes you actually paid from your 1040, call it TP.
3) The amount of taxes your would pay if you did *not* deduct the interest, call it WP.

So make the following calculation: (WP - TP). This is the amount of tax you managed to avoid paying because you deducted your mortgage interest. (This is actually one amount the federal government directly subsidized your lifestyle by, but let's not get into political rants here.) If TP is greater than or equal WP, then something has been calculated wrong; go check your math again.

Now let's do the really interesting math. Calculate (WP - TP) divided by MI; this is the fraction of your mortgage dollar that you actually deducted. Let's call it PD, for Percent Deducted. The calculation result should be a fraction less than 1.0, for example 0.21, so convert it to a percent (multiply by 100 to get 21%). Again, if MI is less than (WP-TP) or if PD > 100%, you've got some math done incorrectly somewhere. When my marginal tax rate was 28%, the highest I ever saw PD was 25%. The *highest*; your numbers will vary because the tax rates have changed since I had a mortgage, among other things.

Let's put this in concrete experience though, because these numbers are rather abstract. In order to "earn" that interest deduction, you had to pay the mortgage holder MI dollars. You got back from the government PD*MI (or WP-TP) dollars. If your PD was 25%, you paid out a dollar to get back a quarter. If you didn't have your mortgage, you would have paid that quarter in taxes and had 75 cents left over in your pocket. Which would you rather have? 25 cents? Or 75 cents? Or rather, PD*MI or (1-PD)*MI? Remember, it's *your money* you went out an earned. Are you quite so tax-phobic now?

OK, if you're still not convinced by the math, go back and read the rest of this file before hitting send. ;-)

(Note 2) This is actually an anomaly related to the tax calculations from Eisensons's point of view. If you set taxes = 0.0%, you'll see that regular prepayments (the NI option) beats out irregular prepayments (IP plan) most every time.

(Note 3) For comparison, consider the average returns on a portfolio made up solely of:
Investment Return
Small Company Stocks 16.9%
Large Company Stocks 12.2%
Long Term Corp Bonds 6.2%
Long Term Govmt Bonds 5.8%
Intermed Trm Govmt Bnd 5.6%
US Treasury Bills 3.8%
Inflation 3.1%
Source: Ibbotson and Associates, SBBI 2003 Yearbook, pg. 33. Remember that return compensates for risk, so the more return, the more risk.

(Note 4) To turn on the Analysis Toolpak, make sure it's installed as part of your MS-Office installation. Then open up Excel-97, pull down on Tools | Add-ins and make sure all the Analysis Toolpak boxes are checked. Close Excel and then load the spreadsheet.

(Note 5) For the pedants among us, this is about $8,000 more than the median income for the USA in 2003, but pretty close to the median for my area.



[Rolo]

hmmm..I thought I did put links in there.

PTCrew.com (http://www.ptcrew.com) (http://www.ptcrew.com) Have your other check it out for sure!

My car, The Rolocoaster (http://members.cardomain.com/rolox2): http://members.cardomain.com/rolox2 (http://members.cardomain.com/rolox2)

Let me chew on the pasted info there for a while (omw to work right now, hehe). My knee-jerk responses are:


I plan/strive to have an average annual return on my investments of 30% or greater, in which case 12% would be a very bad year. If I can only do 12%, then I am wasting my time; I should just buy some index funds and move on to something else.

Investment balance-to-mortgage balance ratio is important. My investments just got beaten-up over the past two months and my portfolio is still 50% of the amount I owe on my mortgage. Hence, simplified,

30% * $50K > (1-TaxRate) * (5.5% * $100K)

{Investment Earnings} > {Mortgage Cost}

The investment balance will grow much more quickly, which affects the dollars earned. The mortgage is fixed, so the cost of it is constant. The difference between the two continually widens. Ultimately, you want to have your investment income make your mortgage payment and still grow--A Financial Prepetual Motion Machine! hehe

I'll dig up my Excel spreadsheet that shows how a Ferrari is cheaper than a PT Cruiser.

[tsptalk]

Thanks thinks, for that very informative post.

Another interesting personal finance "guru" is Ric Edelman (http://www.ricedelman.com/). He is a big advocate of getting a big, long, cheap mortgage and investing the payment savings. "Never pay off your mortgage" he says. I don't disagree but my timing was terrible.

I read his book in 1999 or 2000, and at the time I had a 15 year mortgage. His book convinced me to go refinance to a 30 year loan and using the extra money to start a Roth IRA. Since I had my TSP I decided to get into a very aggressive fund to start out. It was a newwireless mutual fund that opened at $20 a share. At the time techs were flying and I had many years to go before retiring. Well, we all know what happened to the market during the following three years. The fund went from a high of $22 a share down to $1.75. (It has sincebounced to almost $5 but is now closer to $3.50). Of course I was dollar cost averaging the whole time so my losses aren't as bad as they seem.

I don't really have a point to the story because I do believe in the concept. I do doubt that it is practical foreverone. You have to be disciplined. If you don't invest that savings you are making a big mistake and I bet many people intend to do that but never get around to it."Let's investafter we ..."

I understood what was happening and that the market would eventually turn around and I would be glad I had all those cheap shares etc., but try telling my wife that :D. She seems to focus on the fact that we would have hadless than 10 years left on the mortgage now. (As a side note, I did refinance again last year for 15 years at 4 7/8%. That just seemed hard to pass up.) Now I am focusing on investing in real estate. The leveraging andusing OPM makes real estate very attractive. But that's another subject.

[Rolo]

Ouch (on the tech burst there).

Yes, if there is only one book you read on finances, make it Ric's. Hisare good books to read first. I still keep The Truth About Money handy for reference. They also make for an extra high school graduation gift since schools'teaching of finances goes only as far as balancing a checkbook. (Checkbooks? Do they still make those? heh)

I have my next home's down payment money in VLCCF, hehe, a stock thatI heard about from a fellow PT owner on PTCrew.

[tsptalk]

They also make for an extra high school graduation gift since schools' teaching of finances goes only as far as balancing a checkbook.
Excellent idea.

[Pete1]

I read Ric's "Ordinary People, Extraordinary Wealth" about 2 months ago and decided to refinance my 15 year and go with a 30 year. I'm investing the difference of $360 per monthinto Dodge and Cox Balanced viaRoth IRAs for my wife and I. I'm dollar cost averaging viathe automatic monthly investment program. Ric's books areawonderful read. Hopefully, this strategy will pay off. I am being really conservative with D&C Balanced. D&C has a nice international value fund that I may use as well.

[Pete1]

Another tip from Ric - invest allnew contributions into the stock funds of your 401K. Not sure if this idea works for timers but it is a very good buy and hold strategy.

[Rolo]

I really could not keep up with that pasted argument, because I believe the premise to be wrong, which makes it difficult to remain attentive to the dry, convoluted reading. :cool:

Instead, I kept it simple with an Excel spreadsheet with which you can plug in your own numbers. Feel free to check my work, but I think I got it. (I almost forgot to add investment contributions in full after the 15-year mortgage ends.)

Four scenarios: 30-year vs. 15-year, and to make a huge down payment or not?

My thinking is that if you are going to "pre-pay" then get as close tobuying it outright as possible by financing it for 15 years and making as large of a down payment as possible. Why do I say this? There are fundamentally two approaches: "Borrowing money is good." and "Borrowing money is evil." I do not go for mamby-pamby, 50/50, ride-the-fence decision-making-based-on-undeciciveness. Make a plan, check the plan, and execute the plan 100%. "In or out"

Simple premise: You have $100K. You wish to buy a house that costs $100K. The "good" proponent will keep the cash and finance the house. The "evil" proponent will pay cash and start investing all over again. The spreadsheet lets you use your own figures to to see which plan works best for you.

It does not take into consideration the tax advantages from interest payments. First, it was not necessary in order to see which is the superior approach. Second, I do not know how to do that and it would take me a long time to figure out how. I would like to have tax savings in there and to have those tax savingsfund theinvestment. If anyone has any advice or wants to edit it, please do so. Third and last, I wanted to keep the spreadsheet (and argument) simple--you can just bear in mindthat financing will let you keep a few extra dollars in your pocket.

In my "out-of-the-box" example I used nice, round numbers. [1] is what the house costs. [2] and [3] are mortgage rates; 15-year rates are normally lower. Do not enter your down payment as a dollar amount anywhere, but rather as a percentage [4]. Scenarios 3 and 4 take your Investment Balance [6] and adds it to your down payment amount calculated from that percentage. Do not edit the loan term unless you edit the Future Value formulas.

[5] is how much you are paying into your mortgage and investments. Imade it the same amount as the 15-year mortgage payment for a direct comparison. Do not edit the Investment or Mortgage Payments, they are calculated automatically.

I chose 14.4% for [7] since it is a nice round figure for doubling your money every five years as you can see by Scenario 2. (And you thought "14.4" was not a round figure, tee-hee.) Incidentally, it is an average of large and small company stock returns quoted in (Note 3) above.

You'll notice in my example that sticking with a regular 30-year mortgage, keeping your cash invested, and investing the difference of a 15-year mortgage payment yields the best results. This is true as long as you abide by the tip in [7] below. The main reason is that you have your investment balance's momentum continuing to grow uninterrupted.

You can also see that making a large down payment (paying cash) is evil. Aside from losing money, another ramification is that you no longer have your investments nor the options that go along with having cash on hand.




[line]




Edit: The table did not paste like I hoped it would.


[1] (file:///C:/Documents%20and%20Settings/Tabish/My%20Documents/Finance/Mortgage-Investment.htm#_msoanchor_1)
Total cost of item to be financed, I.e. house


[2] (file:///C:/Documents%20and%20Settings/Tabish/My%20Documents/Finance/Mortgage-Investment.htm#_msoanchor_2)
Loan rate for Scenarios 1 and 3


[3] (file:///C:/Documents%20and%20Settings/Tabish/My%20Documents/Finance/Mortgage-Investment.htm#_msoanchor_3)
Loan rate for Scenarios 2 and 4


[4] (file:///C:/Documents%20and%20Settings/Tabish/My%20Documents/Finance/Mortgage-Investment.htm#_msoanchor_4)
Down payment as a percentage of total cost; 0 for none


[5] (file:///C:/Documents%20and%20Settings/Tabish/My%20Documents/Finance/Mortgage-Investment.htm#_msoanchor_5)
Combined total to be disbursed towards loan and investments


[6] (file:///C:/Documents%20and%20Settings/Tabish/My%20Documents/Finance/Mortgage-Investment.htm#_msoanchor_6)
Current worth of portfolio


[7] (file:///C:/Documents%20and%20Settings/Tabish/My%20Documents/Finance/Mortgage-Investment.htm#_msoanchor_7)
Annualised rate of return of portfolio
Tip: It better be more than loan rate! :)

[azanon]

thinks, you made that paying off mortgage vs investing money way too complicated, than it needed to be. Its really quite simple:

If one pays off any amount of any loan, you effectively "earned" exactly the rate of the loan by doing so - at least up to the point that you would pay it off normally. For example, my loan on my house which i bought a year ago is 5.96%. If i make an extra principle payment, then from that point on, that exact amount of "extra money" will hypothetically earn 5.96% up until such time as i would have normally paidthe loanoff. Does that make sense?........ And that's not taking into account the deduction i would have gotten had i not paid it off early, so the real earning rate is effectively something less than 5.96%.

In contrast, if i invest that money instead of making a house principle payment, then I earn whatever my investment would make.

So can i beat 5.96% investing my money elsewhere? I should hope so!

Seriously, no excel is needed. A loan is a loan, except in a house's case, the interest is deductible, so less the reason to pay it. Its the same as your credit card, your student loan, anything.

So.....The questionis the always the same, and is simple when facing paying a loan vs investing: Is the rate on the loan higher than what you can earn in an investment. Answer that, and you know exactly what to do.

[azanon]

Rolo, great writeup - I really enjoyed it, and agreed with 99% of it too.What's the 1% I disagree with?? :-). I'm not sure i agree with you or the writer you're paraphrasing, that your house is an expense, and not an asset.

IMHO, not only is your house an asset, but its an appreciable asset. If you've ever run across a rent vs buy chart, you'll see that the longer you intend to say in one place, they recommend buying because it is assumed your house will appreciate over time (if you bought in a good location, and real estate, as an investment, is on the rise). What that means is your investment really is paying off. People every day turn around and sell the house they bought 5 years ago for 20K more than they paid for it. Sure, most people dont buy their first house for the sole reason of investing, but that doesnt make it not an investment. If your house appreciates in value, then it is an "asset" that can be liquiddated, or borrowed against (via an home equity loan), at any time that the owner so chooses.

[Rolo]

azanon wrote:
thinks, you made that paying off mortgage vs investing money way too complicated, than it needed to be.

Good G-d man, I wish I had a nickel for every time I've heard that.



azanon wrote:

If one pays off any amount of any loan, you effectively "earned" exactly the rate of the loan by doing so ... In contrast, if i invest that money instead of making a house principle payment, then I earn whatever my investment would make.

So can i beat 5.96% investing my money elsewhere? I should hope so!

Precisely! The part I substituted with the ellipsis did make sense; did I redeem myself by simplifying your simplified argument? :D

With many people with normal emotional capacity, it is not so simple. Sometimes you have to practically be Moses coming down from the mountain in order to get over the emotional hurdle--and sometimes you will wind up smashing the tablets in frustration anyway, hehe. You can spot them right away when you ask, "Why do you want to pay off your mortgage early?" and they revert to the child-who-got-caught-doing-something-wrong behaviour, replying,"I dunooooo...."

But, yes, you hit the logic right on the head. That is how I think when I use margin, "Can I beat 5.45%?" I hope so, I am fully margined. :shock: (hehehee...even started out with it, never done it before...against what "they say" to do...I look at it as a pretty strong incentive to not f--mess up!)





azanon wrote:
Rolo, great writeup - I really enjoyed it, and agreed with 99% of it too.

Thanks. I get a lot out of reading here and hope to "put back".



azanon wrote:

What's the 1% I disagree with?? :-). I'm not sure i agree with you or the writer you're paraphrasing, that your house is an expense, and not an asset.

How dare you!:X hehehe, kidding. ;)

Robert Kiyosaki's Rich Dad/Poor Dad books, which are excellent and great for challenging perspectives.

Basically, it's all about the cash flow.

Anything that puts money into your pocket is an asset.
Anything that takes money out of your pocket is a liability.
Place items in the proper column. Period.

Which does your house do? It costs you: mortgage, taxes, insurance, upkeep/maintenance. Does it earn money for you? No.

Yes, your house is an equity, but the fact that it has a somewhat arbitrary, market-controlledvalue attached to is is not relevant here. "It will likely go up in value" is completely meaningless when it comes to cash flow, only in/out, asset/liability matters.

Make it analogous to another equity: stocks. They have value, and will likely go up in value, and you can borrow money to acquire them. Would you consider them an asset or a liability? It depends.



Stock 1: No margin, No dividend. Inconsequential, like that Babe Ruth baseball card in mint condition you wish you had. It neither costs nor earns money, even if it has appreciated in value. It is an equity and it goes into the "Net Worth" footnote of a financial statement.

Stock 2: 6% Margin, No dividend. It costs you money, you pay interest every month on it, it is a liability. This is like your house.

Stock 3: No Margin, 10% dividend. It is an asset, for it earns you money.

Stock 4: 6% Margin, 10% dividend. It is still an asset, earning 4%.

Granted, we don't generally put every individualstock in our portfolio on a financial statement, but it illustrates the direction of money flow.

Let's say you boughtone shareof Stock 2at $84K on6% margin interest rate. Is it an asset or liability? (you are thinking, "It depends on what I made when I sold it." nuh uh, it is a liability regardless, itis costing you $420/monthto find out if it will go up in value.

Instead of a stock, let's say it was a house on Berkshire Hathaway Avenue. Same question, same answer. Liability. You cannot include "what-may-happen"s here, no chickens before hatching.

Let's say your selling price for the Berkshire Hathaway equity was $69K. You alreadypaid $5K interest, so that is moot in regards to selling the equity.

Let's say you sold it for $84K. Did you "break even?" Yes, you did, you sold it for the same price in which you paid for it. "What about the interest?" No, your argument is based on the equity's value, so there you go, you broke even. It was not a liability as you say. :P :)

Let's say you sold it for $95K. It was still a liability when you owned it. Your profit is only realised when you sell it. When you sold it, you no longer had the montly interest liability. Separately, you made $11K profit off of the transaction due to appreciation. Ultimately, when youcompare the two, you are $6K ahead, for a net gain of over 7%, but that is only after a particular sequence of events had occured.

Assets provide income, liabilities take it away. Your house is not putting money into your pocket, it is a liability. When you sell the house, you no longer have that liability. If it appreciated in value, then you recovered your costs, but they were still costs.

If I still have not won you over, then try the "appreciation/it's an asset" argument the next time you have a margin call. "You have $x due immediately for a fed maintenance call." In lieu of writing a check, just send them a note, "But it'll appreciate in value!" to learn what goes in what column. :D

[Rolo]

azanon wrote:
then it is an "asset" that can be liquiddated, or borrowed against (via an home equity loan), at any time that the owner so chooses.


That is crap! (not against you, but against the institutions that propigate that propaganda)

They say you are "borrowing against" your "equity", but all that is is collateral, and it is not "any time". Try getting a home equity loan without any source of income. Many have learned the hard way that you cannot, for you are actually "borrowing against" your income, your house is only insurance for the loan.

How is borrowing more money "against" something that you already borrowed money to have putting money in your pocket? That is like calling your credit card an asset, especially when they raise your limit. It is also a similar trap for John Q. I-maxed-my-card-but-glad-they-raised-my-limit-in-time, thank heavens for this MasterCard asset!

It sounds absurd, but that is what happens when we misapply terms. Your house is an equity and a liability, but not an asset. The same goes for cars, boats, cards, wine, anything.


The mantra

Income = asset
Expense = liability

Repeat until you agree. hehe. :dude:

[tsptalk]

Can you guys slow down? I'm trying to take notes.

Great stuff! Am I allowed to call you guys assets to the site? :)

[azanon]

Well let me make a few follow-up comments rolo


Your house is an equity and a liability, but not an asset. The same goes for cars, boats, cards, wine, anything.



As a preface, i think this is to a large extent, this is a semantics issue. How so? Lets do it this way..... Tell me the lamens term formula for net worth. Its assets minus liabilities, is it not? What if you owned a house? Are you going to put your owned house in the liability column? I should hope not!

Ok that out of the way, I believe you said "expense" in the original statement i objected to - not exactly the same thing as the terms you are using now, equity and liability. I would definitely not object to characterizing a house as an "equity", but liability? I still hesitate to say that and i'll try to explain why:

For starters, what are the alternatives? I'd feel self-conscious to toss around the word "expense" and "liability" when referring to a house, because someone might get the mistaken impression that renting is a better long-term solution. Ya know - you've got to live somewhere.

My second objection is based on this: Do you know what the average person's #1 asset is when they retire (ok, you prefer equity:-) )? Yep, you guessed it. Their house. Really, unless you bought in a poor location, or didnt take care of it, it really isnt that difficult to liquidate into cash. I've never heard of a "liability" that can be liquidated for massive amounts of money and you not owe anyone for it after you did so (assuming you owned the house). To that point, and i know you will throw it out, I wouldnt even call a car a liability. Its also an asset (equity); granted a depreciating one in almost all cases, but if it has value, its an asset(equity).

Well, anyway, i see your point. A owned house doesnt generate cash flow, but as you said, neither does a stock that doesnt pay dividends. Regardless, home ownership is one of the wisest things one can do with one's money. If you must, its the "liability" that trumps just about every asset you can think of.

Re: the home equity loan. I've never done one of those, but my understanding is that what you're doing, in effect, is selling the house back and in the process, being paid for it. So why would it matter if you have income or not? For whatever amount of money you're gettingmonthly or all at once, you gave equivalently just as much house equity back to the lender - the lender then gave you the cash at the same time. Even trade and no risk to the lender

Azanon



Great stuff! Am I allowed to call you guys assets to the site?

Thanks man! :D

[Rolo]

tsptalk wrote:
Great stuff! Am I allowed to call you guys assets to the site? :)


hehe...As long as you don't trail off on the "-ets" part. :dude:



azanon wrote:



Your house is an equity and a liability, but not an asset. The same goes for cars, boats, cards, wine, anything.
As a preface, i think this is to a large extent, this is a semantics issue.

Yes and no. When we lose precision in the terminology, we lose perspective on the roles the things the terminology represents.Truths become half-truths, and eventually, we are 180° from where we need to be. Religion is a good example: how many diametrically opposed "semantics" come from the same Book?

{heh, grenade!}

azanon wrote:


Tell me the lamens term formula for net worth. Its assets minus liabilities, is it not? What if you owned a house? Are you going to put your owned house in the liability column? I should hope not!


I did not emphasize this enough but merely hinted at it by calling Net worth a footnote on a financial statement. Net worth is an entirely different subject and largely trivial. Net worth does not say anything about income, it only says "If I were to sell everything right now at these values, I would have this much cash." That is a lot of if's.

This very topic came to mind today when I was talking to a guy this morning who is filing for bankruptcy. There were a lot of circumstances that caused his situation, but the number one mistake was calling his investment properties assets. What gave that away? When I asked how the heck did he wind up in that situation, the first words out of his mouth were, "Well, everything looked good on paper..."

His plan was sound and all, but the reality is that onlyhalf of his properties were true assets since they generated income and the other half were liabilities. Yes, their fair market value was double of what he paid for them, but that is not relevant and he did not get FMV when he sold them for a lesser profit.

Net worth is completely hypothetical; it has no place in the income/expense financial statement.

azanon wrote:


Ok that out of the way, I believe you said "expense" in the original statement i objected to - not exactly the same thing as the terms you are using now, equity and liability. I would definitely not object to characterizing a house as an "equity", but liability? I still hesitate to say that and i'll try to explain why:

For starters, what are the alternatives? I'd feel self-conscious to toss around the word "expense" and "liability" when referring to a house, because someone might get the mistaken impression that renting is a better long-term solution. Ya know - you've got to live somewhere.


But you are carelessly tossing around the word asset and people get the impression that their primary residence generates income. :Pbooyah! ;) hehe

Renting v. buying is an entirely different subject. In some cases, renting would be better. But, that is not even tangentally related here and it is that asset word that makes people think it is.





azanon wrote:


My second objection is based on this: Do you know what the average person's #1 asset is when they retire (ok, you prefer equity:-) )? Yep, you guessed it. Their house.


Oh, I was gonna say "personality", hehe.

You are half-right, for that is a half-truth. Their house is the average person's #1 money-hole. Why? What income did that house provide? None. It is an equity that has value, but it still costs. The value is not related to the money flow.

Here is an example of a primary residence being an asset: Buy a multi-family building, say a duplex. Live in one side, rent the other. If the rent income pays for the entire mortgage plus taxes, insurance, and maintenance with a little left over, then you have an asset--positive cash flow. Lose the tenant, and it becomes a liability. I will concede to saying that breaking even still makes it an asset, since it is not costing you anything and it is providing a residence for free.

isnt that difficult to liquidate into cash. I've never heard of a "liability" that can be liquidated for massive amounts of money and you not owe anyone for it after you did so (assuming you owned the house).[/quote]

Or if interest rates rose and the real estate bubble pops, one's "asset" could severely depreciate. Did the condition of the "asset" change? No, but the market did, and the market is what sets the value, hence my calling it somewhat arbitrary. The market also affects liquidity. In this case, when the valueis falling, would you then consider the house a liability?

azanon wrote:


To that point, and i know you will throw it out, I wouldnt even call a car a liability. Its also an asset (equity); granted a depreciating one in almost all cases, but if it has value, its an asset(equity).


Yes, cars are also money-holes and illustrates my point as well. Most people do not consider a car an "investment" and rightfully so. Some cars do appreciate in value, but they are still liabilities...just liabilities that may recover your expense in owning them and possibly turning a profit. Even then, it is still a liability, whether it is an equity that appreciates in value that is eventually realised is moot.

My PT Cruiser, of which I am very fond, has a market value that is higher than what I paid for it (I negotiated a great deal), not to mention the modifications that add more to its value. However, it is still a liability since is costs me to own it--tohold that beautiful, shiny, fast, tangerineequity.

Yes, you can say that the car/house has value and it is the loan that is the liability. There are two things wrong with this. 1. The equity still has an expense, whether it has a loan against it or not. 2. The loan and the equity are married, you would not have the loan without the equity.

azanon wrote:


Regardless, home ownership is one of the wisest things one can do with one's money.

If done properly, and for most people, yes, I agree. However, many people do it improperly, largely thinking that it is an "investment" when it is really usurping their cash flow and they come to a point when they ask, "I have all this net worth, so why am I broke!?"

booya!, hehe)

Also, stop paying full-coverage insurance on your car and let your lender know. I think they will seriously object. Explain to them thatit isyour car, it isyourasset,and you will do as you please! :dude:



If I lost you somewhere in this tome (hopefully from chuckling rather than sleeping), the point is:




Your house, your car are assets on your bank's financial statement
Your house, your car are liabilities on your financial statement

[azanon]

Well, i appreciate your viewpoint, but its ultimately one we just disagree on. (remember, we agree on 99%, lets think positive here!)

Reading from my dictionary here, an "asset" is 1. anything owned that has value 2. A fine or valuable thing to have. A house is definitely #1, and subject to opinion, is also #2. So, the only impression i'm creating is one that agrees with my dictionary. Further, I've read several finance books, and honestly, i've never heard "asset" conditioned as requiring that it generate income, or that it generates more income than expenses. So, clearlywe'renot talking about the same kinds of "asset".Problem is,its the only one i'm familiar with though, and apparently webster hasn't been clued in on your type of asset either :D. (sorry if that sounds like a jab, but i'm just trying to emphasis my point) Seriously though,maybe we need a new word for an equity that, over time, produces more income than expense?

Now, i do understand your viewpoint on this, and i think its one that means well; by making someone understand that financial commitments that generate more income than they absorb have a special kind of value as an ..... equity :^and should types we all seek out. But that being said, i think your viewpoint also inherently casts a negative light on all "liabilities", at leastper your definition, and i just think that's ultimately a bad thing. Specifically, for long-term housing (meaning an intention to not move for several years), home ownership is almost always the right solution. The "rent vs buy" graphs ive seen have on one axis how long you intend to stay there, and after a certain amount of years, there's no condition under which these graphs recommend renting over buying.

Lastly, I want to note i'm not in the minority here, even in a professional sense. Net worth and assets minus liabilities is literally the home page for quicken software (the one i use, and the most sold even over microsoft money). Ok, they reworded net-worth in the 2004 version (forgot the new term - Financial something or other), but its the same as always; assets minus liabilities yields the final talley at the bottom.

* I just have another thought as i was about to post this that may shed some light: It seems your definition of asset is "casting in good light" on realized income and looking negatively at unrealized income. Like stocks, the historical record of real estate is not only positive, but so positive that it is considered one of the best investments one can dabble in. When you say a house doesnt generate income, its only because the owner of that housesimply chosenot to realize the income that is already a reality "on paper" - just like a stock gain. Sure, real estate can depreciate, but so can stocks. That's no reason to brand them liabilities!

Take my house for instance. I already know its risen by 10K in value, cause i've had it surveyed. Are you saying, its not an investment simply because i continue to own it and not realize the income via a sell? I think if one avoids investments simply because they only gain value through capital appreciation, then you'll miss out on some of the best investment opportunities. You know, most small cap stocks dont pay dividends, but small cap stocks historically are the best types.

How bout the tax advantages of investments (like that over asset?? :-) ) that produce only unrealized "income". :D You have to pay uncle sam's share every year if you focusonly on assets that producerealized income and avoid the "liabilities", as you define them, simply because you only realize their income when you sell them.

Ahh well, we are probably going in circles by this point. I'm enjoying the discussion though. :)

(edit) I will concede this: Lodging is an expense. It costs me money to live somewhere, and ultimately even in personal home ownership, there's an unrecoverable expense associated with that. As you said, the lights have to be paid, the property taxes have to be paid, etc and so on and so forth. So that concession i make.......... But buying a track of land in an areayou think will grown in value, buying a house for the sole purpose of selling it for more money later, etc is, without a doubt, an asset you own after the fact and also an investment.

[thinks]

Rolo, nice ride!!!:^You definitely don't need'pimp my ride'(the tv show)... looks like you're doing nicely on your own. Wow, is all I can say! I'll show my dh this weekend... thanks for your link. I'll have to search 'n see if there's a site for our car as it looks like your community shares good things on what's worked for changes, etc. You should have your hot pepper flames in your picture under your name here.Didn't see a picture of you in any of the pictures.

Tom, it would be interesting to hear about your real estate plans for investments... maybe starting another thread? Are you thinking along the lines of renting or more like a 2nd home, land or something else? I'll have to look at that link when I get time and look into getting his books.

You two made a good point of doing what's 'discipline' and by knowing yourself.... some people are better off just doing 401k/tsp and not doing IRA because if they have to do it themselves it doesn't get done but by the company doing it then they don't have it.

I'd like to comment more on/in/about this thread but off to bed for me right now but see some GREAT information to think about in here. Thanks to all for great insights and mind provoking posts!! Will come back later... till then have a great holiday weekend!

[Rolo]

thinks wrote:
Rolo, nice ride!!!:^You definitely don't need'pimp my ride'(the tv show)... looks like you're doing nicely on your own. Wow, is all I can say! I'll show my dh this weekend... thanks for your link.
Thanks! I really could use another market rally, for I have many plans for the PT. :u

thinks wrote:
You should have your hot pepper flames in your picture under your name here.Didn't see a picture of you in any of the pictures.

That's a good idea! When I get home (heh, I am at work now) I will do that.

I'm in one of the pics! Er...well my shadow is...and, no, we didn't have six more weeks of winter.

thinks wrote:
Tom, it would be interesting to hear about your real estate plans for investments... maybe starting another thread? Are you thinking along the lines of renting or more like a 2nd home, land or something else? I'll have to look at that link when I get time and look into getting his books.

Ya, another forum would be nice for that. hehe, scope creep.

thinks wrote:

You two made a good point of doing what's 'discipline' and by knowing yourself.... some people are better off just doing 401k/tsp and not doing IRA because if they have to do it themselves it doesn't get done but by the company doing it then they don't have it.

There are a lot of people who do not even do TSP/401(k). Yet, many people will fantasize about winning the lottery. I try to foster awareness and motivation. It seems to be working since everybody wants my financial statement spreadsheet, which is the "War Room" to my financial planning and execution, hehe.

As for myself, I find that, once I got started, maintaining the discipline was easy; the motivation is self-sustaining. "The value of a dollar" takes on a whole new meaning when you have applied the principles of compounding/investing with your very own numbers. I do not have to force myself, "Blowing an extra $3,000 on a wardrobe todayinstead of funding my IRA will cost me a fortune later." is always in the back of my mind and my desires look down the road. Keeping my finances as efficient as possible is fun and helps me to achieve my long-term goals.

This is all quite a statement since I have an addictive personality and seriously lack impulse control. Now I just wish I can get in half as much physical shape as I am in fiscal shape. :l

[Rolo]

azanon wrote:
Well, i appreciate your viewpoint, but its ultimately one we just disagree on. (remember, we agree on 99%, lets think positive here!)

Roger on the 99%...no negativity here...'cos I know I'm right! :l (hehe...I am all for quips and jabs, BTW)

azanon wrote:
Reading from my dictionary here, an "asset" is 1. anything owned that has value 2. A fine or valuable thing to have. A house is definitely #1, and subject to opinion, is also #2. So, the only impression i'm creating is one that agrees with my dictionary. Further, I've read several finance books, and honestly, i've never heard "asset" conditioned as requiring that it generate income, or that it generates more income than expenses.

Aw, now, see, you had to go and drag Webster into this, muaha.



as·set
n.
A useful or valuable quality, person, or thing; an advantage or resource: proved herself an asset to the company.
A valuable item that is owned.
A spy working in his or her own country and controlled by the enemy.
Accounting. The entries on a balance sheet showing all properties, both tangible and intangible, and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights, and goodwill.
The entire property owned by a person, especially a bankrupt, that can be used to settle debts
Note that it says "balance sheet" vice "financial statement" and that it "can cover the liabilities", so the two are together.



li·a·bil·i·ty
n. pl. li·a·bil·i·ties
The state of being liable.
Something for which one is liable; an obligation, responsibility, or debt.
liabilities The financial obligations entered in the balance sheet of a business enterprise.
Something that holds one back; a handicap. <-- snicker
Likelihood.
Another "balance sheet" item.



eq·ui·ty
n. pl. eq·ui·ties
The state, quality, or ideal of being just, impartial, and fair.
Something that is just, impartial, and fair.
Law.
Justice applied in circumstances covered by law yet influenced by principles of ethics and fairness.
A system of jurisprudence supplementing and serving to modify the rigor of common law.
An equitable right or claim.
Equity of redemption.
The residual value of a business or property beyond any mortgage thereon and liability therein.

The market value of securities less any debt incurred.
Common stock and preferred stock.
Funds provided to a business by the sale of stock.
"Residual value" (not tangible cash), "less any debt incurred" (very tangible negative cash), "Funds provided...sale" (now we're talking real cash, after the sale)

I will not argue that your home is not an asset on the balance sheet, but that is moot in light of this discussion, cash flow is the only relevant thing in regards to the income/expense portion of the financial statement, upon which financial planning is based.

The definition of equity is much more suitable over asset. Value does not equal income. The debt and expense that comes with that value, however, directly affects income.

I am not suggestinganything is wrong with the terminology or definitions, but the application of them. On the lower part of the financial statement, the balance sheet, yes, you have your house/car in the asset column, and you have the loans against them in the liability column.

However, your asset does not contribute to the income column, but the liability costs in the expense column, hence, in this context, your house/car is a liability by very definition: "The state of being liable...Something for which one is liable; an obligation, responsibility, or debt....financial obligations...Something that holds one back; a handicap."

Oh,from finance books is where I got this perspective. :P

azanon wrote:
Now, i do understand your viewpoint on this, and i think its one that means well; by making someone understand that financial commitments that generate more income than they absorb have a special kind of value as an ..... equity :^and should types we all seek out.

That would be an asset since it generates income. Applying the first definition to your income/expense financial statement, "A useful or valuable quality, person, or thing; an advantage or resource: proved herself an asset to the company.", implies that the asset is a contributor.

azanon wrote:
But that being said, i think your viewpoint also inherently casts a negative light on all "liabilities", at leastper your definition, and i just think that's ultimately a bad thing.

And the common viewpoint casts a dangerous positive light on "liabilities". nyah!

azanon wrote:
Specifically, for long-term housing (meaning an intention to not move for several years), home ownership is almost always the right solution. The "rent vs buy" graphs ive seen have on one axis how long you intend to stay there, and after a certain amount of years, there's no condition under which these graphs recommend renting over buying.


I am not implying that buying a house is bad, only that it impacts cash flow. Your primary residence negatively affects it, and investment property can go either way. This is one fiscal faux pax I am trying to point out: you must consider the gestalt and not just one graph. Context will determine if renting or buying is a good idea. Saying that buying is always better than renting is not looking at the complete picture.

Example: A single 22-year old moving to a new city. House loan payments would be $825/month plus insurance and taxes. Apartments cost $575/month. The time horizon is seven years. Let us see what a rent vs. buy graph says:



$100K mortgage, 2% down payment


Difference invested at 10% annual growth



Results:
Based on the information you provided, buying a home looks like a smart move. Over 7 years, it would increase your net worth by $15,108.14compared with renting.


1st Month's Payment

Rent Buy Difference

Monthly Payment $575.00 $824.54
Tax Savings ($90.62)
Appreciation ($327.37)


Net Payment$575.00 $406.54 $168.46



Increase in Net Worth After 7 Years

Rent Buy Difference

$17,635.92 $32,744.06 ($15,108.14)

There's that "Net worth" again! "Gee, $15K difference is better!"...not!

Here is why:



A bird in the hand is worth two in the bush. Which does a 22-year old need more: cash on hand, or net worth?Someone starting out definitely needs cashon hand, reserves.



This mentality will have you believe that you are only paying $406/mo. This precisely epitomises my point: You are still paying $825/mo., do not fool yourself otherwise. The value of the home does not contribute to cash flow.



The sale of the home will trigger a huge taxable event--unless the person buys a larger home. This is the trap in whichmany fall. You will either forfeit ~25% of that $32K, reducing it to $24K, or you will put all of it into another house. Sure, your "Net Worth" will increase, but so will your mortgage payments. Not only will you have less cash flow, you still have zero cash! Hope nothing happens to where you need cash while you are building your net worth.



$333.33 of the $350 difference can be invested in a Roth IRA to gain the tax advantages, making the investment grow faster and paying less in taxes. Or you can fund a traditional IRA for the income tax break, keeping ~15% more in your pocket now, making a positive effect on cash flow, which you can turn around and fund a regular taxable investment with the remainder of the$350, which is an added $50/mo. into your investments.




You are invested in the market longer and with more cash and can capitalise on more opportunities with more leverage.



The renter has more options which keeps him out of financial crunches. What if, in year 3, his transmission falls out of his car? He has the cash to get running again. The buyer will inevitably put it on his credit card, creating more negative cash flow.



Fine, you have cash now, but what about at retirement age? The renter's $17K will grow to $308K in thirty years. If the buyer buys a larger house, he still has zero invested. If the renter funded a traditional IRA, the extra $50/mo. will be another $56K at retirement, for a total of $364K.

If the buyer takes the cash,his $24K will only grow to $220K at retirement (23 years, since he had to wait seven years to cash in his equity) and without tax advantages afforded by an IRA.

$364K vs. $220K, a 65% increase.


The renter will have seven more years experience in investing and learn responsibility with small amounts first, rather than risking one large amount.



Cash is king!

How isa homepossibly an asset and not a liability to your cash flow?

[Rolo]

Oh, yeah,



BOO-YAH!

:D
I really enjoy these stimulating conversations and exercises, too. I think everyone learns from them in all cases, as long as you keep an open mind. Either you reinforce what you know or learn what you didn't know, a true win-win situation.I think it is necessary to thoroughlyconsider contrary arguments to keep from getting locked into your own mentalities and stagnating, a check-and-balance. Plus, it can be entertaining!

[Pete1]

Rolo,



Do you know any good books regarding selling your home in a more expensive area in order to move to a less expensive area and buy ahome outright? Are there ways to protect the accumulated equity from taxation? Upon retirement, we will probably sell our home in the city to move to a less expensive locale. Home values in our area are growing at around 7% and we have about 31% equity already. 14 years from now (my MinimumRetirement Age of 56), we expect to have a lot of equity built up with the plan being to pay offthe remaining liability on the 30 year fixed loan and use the equity to buy a house outright in a less expensive locale(locale stillTBD :cool:). Any ideas?

[Pete1]

Just wanted to add that the other piece to the above puzzle would be to use our Roth's (which we just started) in order to fund the first few years of retirement and start drawing on TSP funds at age 59.5. In essence, the Roth funds saved by going from a 15 to a 30 year are expected to fund our initial retirement years and we expect to be able to pay for our retirement home outright in conjunction with my MRA and so, we are trying to eat our Roth cake and buy our house outright as well.

[Rolo]

Pete1 wrote:
Do you know any good books regarding selling your home in a more expensive area in order to move to a less expensive area and buy ahome outright? Are there ways to protect the accumulated equity from taxation?
Books? No, I have not read anything about real estate yet. I just started reading The 16% Solution, which talks about tax liens.

To answer your question, I believe up to $500K of the sale of your residence is exempt from capital gains. I think this is a one-shot deal, probably created for the very reason of which you speak. I'll consult my Ernst & Young Tax Guide when I get home.

Pete1 wrote:

...the plan being to pay offthe remaining liability on the 30 year fixed loan and use the equity to buy a house outright in a less expensive locale...

D'oh! I realise this is "The Neverending Thread", perhaps you missed my May 22d post whilegetting popcorn? :D I implore you to run the numbers before deciding to buy outright. Perhaps using the attatchment in said post. :D

Woot! Work is over...BBL!


[line]


Okay, resuming...

You can exclude $250K single/$500K joint from capital gains tax. You only report it when you exceed the exclusion. You can only use it for one home in a two-year period. There are other qualifications. See IRS Pubs 523 and 530. This is chapter 16 of Ernst & Young Tax Guide 2003, which I like since they give practical examples to illustrate how to apply the convoluted tax law.

I would suggest keeping your cash gained from the sale of your home and use it to increase your principal on your investments and just get a regular mortgage for your new home. Borrowing money is not always evil. Really. :) Of course, it all depends on your numbers and on your circumstances, but "count the cost"--you may be better off with a mortgage and more robust investments than "being out from under a mortgage", which is emotion talking.

[tsptalk]

thinks wrote:
Tom, it would be interesting to hear about your real estate plans for investments... maybe starting another thread? Are you thinking along the lines of renting or more like a 2nd home, land or something else? I'll have to look at that link when I get time and look into getting his books.


thinks -
For about a year now my wife and I have been toying with the idea of buying somesort of investment property. Wefound areally neat100+ year old retail building in the downtown area where I live. Italso has a couple of apartments in it. We plan to lease it out and maybe use the retail spaceourselves someday if we can retire from our day job while we're still young.

I'm noreal estate investment guru but I've been reading about thebenefits ofRE and so we decided to take the plunge. We still haven't closed on the deal. It's been one of those catch 22 situations. I don't want to get tenents to sign leases because I don't officially own the building yetthe bank is hesitant to lend money without leases signed. I have people interested and I just need to get them to sign letters of intent.

It's a much bigger hassle than investing in stocks, but it's that OPM that I like.

[tsptalk]

To answer your question, I believe up to $500K of the sale of your residence is exempt from capital gains. I think this is a one-shot deal, probably created for the very reason of which you speak. I'll consult my Ernst & Young Tax Guide when I get home.

I don't know the limits but I believe the exemption can be used once every two years! Big tax benefit.

:' I see you already answered that one.

[Pete1]

Rolo and Tom, Thanks!



Rolo, I may end up doing as suggest, ie, investing the proceeds from the sale of the house and starting out with a new mortgage. It would depend on mortgage interest rates, expected return on investments, etc., - 14 years from now. :shock:yikes.... It's nice to know that thereshould be options. :)

[Rolo]

Glad to hear it! Yes, always weigh all your options, even if they "don't sound right", do the math anyway.

Unless we see a return of the Misery Index, there should be no problem finding low-risk investments that have a greater return than your mortgage interest.

How to get a house for "free":


$100K 30-year mortgage @ 6% = $600/mo. expense

$100K investment @ 8% compounded annually =$676/mo.income +$100K at the end of the mortgage, you still keep your principal.

$100K investment @ 8% compounded annually =$600/mo.income +$156K at the end of the mortgage, your principal grew

$100K investment @ 8% compounded quarterly =$600/mo.income +$200K at the end of the mortgage, your principal doubled.
I used the same reasoning when I bought my car. Based on what I would have paid in cash and my car payment, an 18.4% rate of return during the five-year loan would make my car payment whilst keeping my cash. Having an asset (income-generating cash) to counterbalance the liability (car loan, which would not have existed if it weren't for having the car :D) keeps my cash flow from being negative. My requirement before I would let myself buy a car was that I had to have the purchase price as excess cash on hand in order to keep my finances healthy--basically "save up for it" only without actually spending what I had saved.

Will I sustain an 18.4% rate? I dunno, but it is fun trying. (Since I started, my IRR ranged from 8% to 80%.)

[azanon]

We were going in circles already with my post. Nothing changed with yours. I definitely dont regret buying my house. The alternative is paying someone else's mortgage. That's something i just cannot do. And think of the value and pride in owning's one home? How does that commercial go? .... Priceless.

Ever read the Millionairre Next Door Rolo? Lots of stats on those millionairres. One that stands outwith regard to our discussion ismost 1. own their own home 2. Dont move. I think its clear from that book most all those millionairres would agree with you that cash is indeed king. But most of them still bought a house.


You are obviously a very bright guy Rolo. But what you are suggesting is no different than setting up margin/leverage accounts, if you ask me. Renting (mathematically) is no different than buying a house, but not paying off the loan, and using theprincipleto invest in the market or some other investment, as opposed to paying off the loan. If you're a super investor, you will win big going this route. Conversely, if you're poor at it, you'll end up cashless, AND equityless.

[azanon]

Will I sustain an 18.4% rate? I dunno, but it is fun trying. (Since I started, my IRR ranged from 8% to 80%.)

Well gollie gee. If i could get 18.4% consistently, i'd never pay for anything with cash. If you've pulled that off the past 5 years, i'm with your approach100%.

[azanon]

Either you reinforce what you know or learn what you didn't know, a true win-win situation.I think it is necessary to thoroughlyconsider contrary arguments to keep from getting locked into your own mentalities and stagnating, a check-and-balance.

I fully agree. I carefully read and considered your viewpoint towards home ownership. I hope your heavy cash leveraging with minimal (paid for) hard assets continues to work to your advantage. My early going in investing hasnt been very glowing so i'm more inclined to put cash into these sorts ofinvestments.

[Rolo]

azanon wrote:
We were going in circles already with my post.
What's this 'we', white man? :D



azanon wrote:
I definitely dont regret buying my house. The alternative is paying someone else's mortgage. That's something i just cannot do.

In your circumstances, and likely in most scenarios, buying is the way to go. All I am saying, andillustrating with very real numbers *ahem*, is that is not always the case, for you have to look at the buyer/renter's financial statement and circumstances, not just a rent vs. buy graph.

As for myself, I agree, I would have to be forced somehowto pay rent before I purchased a home. Now and henceforth. But not when I was 22. And not for a while forthe aforementioned gentleman filing for bankruptcy.



azanon wrote:
And think of the value and pride in owning's one home? How does that commercial go? .... Priceless.


How can a person feel pride when they are broke? Sooner or later, a person in prolonged poor financial condition will not feel very proud, and Quicken telling them they are building "net worth" will be of no consolation when they cannot afford to do the things they need or want to do because they sacrificed cash flow for net worth.



azanon wrote:
Ever read the Millionairre Next Door Rolo?

I am reading it right now...sorta...I started reading another book...I'll get back to it as soon as I find it under the pile, hehe.



azanon wrote:
Lots of stats on those millionairres. One that stands outwith regard to our discussion ismost 1. own their own home 2. Dont move. I think its clear from that book most all those millionairres would agree with you that cash is indeed king. But most of them still bought a house.


And I still do not agree with paying it outright, except: The majority of said first-generation millionaires are business owners. It is easier to get business financing if you do not have a mortgage, for you have collateral. Using a paid-for home to finance a sound business would definitely be a way to go. Again, you must consider context.

As far as "Don't move", I will have a hard time with that because I get boredquickly and I am still sampling areas in which I want to live. I have a question, however, if buying a home is "good" for finances, then why do they refrain from moving, as if to avoid having to buy a house again? That is what I infer from #2...

BOO...aaah...nevermind, it is getting too easy. :dude:

[Rolo]

azanon wrote:
We were going in circles already with my post.
What's this 'we', white man? :D



azanon wrote:
I definitely dont regret buying my house. The alternative is paying someone else's mortgage. That's something i just cannot do.

In your circumstances, and likely in most scenarios, buying is the way to go. All I am saying, andillustrating with very real numbers *ahem*, is that is not always the case, for you have to look at the buyer/renter's financial statement and circumstances, not just a rent vs. buy graph.

As for myself, I agree, I would have to be forced somehowto pay rent before I purchased a home. Now and henceforth. But not when I was 22. And not for a while forthe aforementioned gentleman filing for bankruptcy.



azanon wrote:
And think of the value and pride in owning's one home? How does that commercial go? .... Priceless.


How can a person feel pride when they are broke? Sooner or later, a person in prolonged poor financial condition will not feel very proud, and Quicken telling them they are building "net worth" will be of no consolation when they cannot afford to do the things they need or want to do because they sacrificed cash flow for net worth.



azanon wrote:
Ever read the Millionairre Next Door Rolo?

I am reading it right now...sorta...I started reading another book...I'll get back to it as soon as I find it under the pile, hehe.



azanon wrote:
Lots of stats on those millionairres. One that stands outwith regard to our discussion ismost 1. own their own home 2. Dont move. I think its clear from that book most all those millionairres would agree with you that cash is indeed king. But most of them still bought a house.


And I still do not agree with paying it outright, except: The majority of said first-generation millionaires are business owners. It is easier to get business financing if you do not have a mortgage, for you have collateral. Using a paid-for home to finance a sound business would definitely be a way to go. Again, you must consider context.

As far as "Don't move", I will have a hard time with that because I get boredquickly and I am still sampling areas in which I want to live. I have a question, however, if buying a home is "good" for finances, then why do they refrain from moving, as if to avoid having to buy a house again? That is what I infer from #2...

BOO...aaah...nevermind, it is getting too easy. :dude:

[azanon]

style="BACKGROUND-COLOR: #f8f8f8"


What's this 'we', white man?


The'we' was me being modest :dude:

What color are you? hehe




In your circumstances, and likely in most scenarios, buying is the way to go. All I am saying, andillustrating with very real numbers *ahem*, is that is not always the case, for you have to look at the buyer/renter's financial statement and circumstances, not just a rent vs. buy graph.

That's all i'm saying. Of course there's exceptions to every rule; one being if you can average 18.4%ROI with cash in hand!



How can a person feel pride when they are broke? Sooner or later, a person in prolonged poor financial condition will not feel very proud, and Quicken telling them they are building "net worth" will be of no consolation when they cannot afford to do the things they need or want to do because they sacrificed cash flow for net worth.

I guess that applies to someone.... definitely notme, but I guess someone out there. The onlyperson a home mortgage will break is a fool with finances. For the rest of us, we'll have 100% ownership of a home approximately the time we retire or sooner; and that is to say nothing of the 10-15%, cash, us savy folks invest in retirement.Home or big bank accountat retirement? Both please :-)


I am reading it right now...sorta...I started reading another book...I'll get back to it as soon as I find it under the pile, hehe.


The book's only so-so, IMHO. Sure, if one followed it religiously, they have a huge chuck of cash by 60+ (if they started young). Me? I'm shooting for equal consumption during my working years, and instead of focusing on retiring early, I'm shooting for physical health and wellbeing, make sure I excell at my job, found a job i love, and hope that i'll want to continue to work well into my 60s, by choice.



And I still do not agree with paying it outright

Well, neither do I. I just bought my home over a year ago, and my loan is at 5.96% for 30 years. I'm fully ok with just paying it normal for 30 years, and taking the tax break on the interest portion. I bought in a great location, so I should see unrealized gains on the principle flowing into the house over time.


As far as "Don't move", I will have a hard time with that because I get boredquickly and I am still sampling areas in which I want to live. I have a question, however, if buying a home is "good" for finances, then why do they refrain from moving, as if to avoid having to buy a house again? That is what I infer from #2...


Well, there is a cost for moving, closing costs, and all the other miscellaneous fees that one incurs by moving. Remeber that rent vs buy graph I referenced earlier? Well, it suggest renting if you're only going to live in one spot 3 years or less (give or take) cause it takes that long for the house to appreciate enough to make up all the entry fees. Think of buying a house as a mutual fund with a pretty heafty front end load :-).

If you really mean that, then you might very well be one of those exceptions that's better off renting a house or an apartment. Even I really dont advocate buying a house unless you really think you will stay put. My wife and I have been married 11 years, but we waited till last year to buy our first home because my early career had me running all over the place.



BOO...aaah...nevermind, it is getting too easy.

Wish i could say the same. I tried to explain how an equity that produces unrealized gains is anything but a liability earlier, but clearly I failed. Cant say that I blame you cause i couldnt even fathom a rebut. I have about 70K in cash invsestments right now, mostly stock, and i'd have to say 85% of my profits are unrealized gains that only become visible as cash when i sell. Oh sure, you may say I can clearly see my share price rising on a daily basis. Well, what difference is that and a third-party surveyer that reassess the value of my house? Sure I can dump a stock within a day, and a house might take a few months, but what's even a few months for any long term investment. Besides, if i was really hurting for cash at the time, they have these really neat things called home equity loans. Now I dont ever intend to get one, but they are there and worth pointing out.

[Rolo]

azanon wrote:
Think of buying a house as a mutual fund with a pretty heafty front end load :-)

haha! I like that.

Yes, 2-1/2 years was the break-even point over renting an apartment when I calculated buying my first home 8 years ago. I planned on staying about four years, but stayed a little longer for various reasons, working on my businesses and finances uninterruptedwere the chief ones.

Interesting thing back then: my house payment with taxes and insurance was actually less than rent for an average apartment half the size. Odd. Oh, and it was a brand new house--I had to wait for them to finish building it.

That is not the case now, however; my house increased in value 30 to 45 percent, depending on who appraises it (another arbitrary variable), so the no-brainer buy scenario no longer exists. That suits me just fine because I bought this place with the intent of converting it to investment property. Yes, my rental income will exceed my mortgage, insurance, and taxes, creating positive cash flow and converting it to a true asset.

My original mortgage was 6.55%, which was very good at the time. I refinanced at the 6-year point at 5.5%. It does not sound like much, but there are other positive ramifications to that move:


Obviously, my monthly payment decreased, making less negative cash flow for the next 30 years.

The difference goes right into my portfolio, which, at the moment is making 13.45%, my crummiest return by far, but it beats 5.5%.
This also makes my debt-to-income ratio better for when I buy another home.
The closing costs were only a few hundred dollars. That did not come out of my pocket. Lolligag after you fill out the application andhad gottenthe process started. I was able to skip two mortgage payments, and my refinancing balance was dated, so it was higher than what I actually owed, effectively skipping three mortgage payments. I got a few refund checks, which paid for the closing costs and the rest went straight into my portfolio.
They try to sucker everyone with a lower rate by adding points. I did not object so I can let the salesman present his flawed argument on how his offer is better than what I have. Themainflawis that he compared his 30-year loan to my 30-year loan. That is incorrect, because I did not have a 30-year loan, I had a 24-year loan at that time since I already paid it for six years. I let that go until the day before the closing. I called the refinancing company to cancel the closing because their offer was not better, therefore I had no reason to refinance. They nixed the points and some of the closing costs. :u

[azanon]

Well, i want to reiterate (in support of your position) that buying a personal home "only" for investment purposes is probably not the best reason to buy one. If it means nothing else to you beyond that, you might very well be better off renting permanently.

Borrowing from Gordon Williamson in "Low Risk Investing", : "Home ownership has three advantages: psychological comfort, appreciation potential, and tax deductions.... Owning a home carries a kind of satisfaction, an inherernt pride that cannot be valued monetarily. Until you buy your first house, you cannot fullly appreciate the difference between renting and owning. These feelings are different for each one of us and impossible to measure, but not to be underestimated, nevertheless..... A second reason people buy homes is - they hope - to own something that keeps pace with inflation."

He lists 3 disadvantages: 1. First, it will cost you more than you expect. By that he didnt mean initial fees, he meant things like replacing appliances, having the place painted every few years, maintaining a yard, etc. 2. Second, you should not buy a home purely as an investment. If this is your sole motivation, then you are making a big mistake, for one simple reason: There is no guarantee the house will appreciate in value, and if you end up selling such a large asset for a loss, it may have a profound effect on your financial security. 3. Third, from a strictly financial perspective, home ownership makes sense only if you assume a modest or moderate rate of appreciation. And then it only makes sense if you accept paper profits. (He then goes through a rent vs buy example that shows buying is only smart if the value of the home gues up by at least 5 percent per year).

Towards the end, he admits.. "The economics of ownership may not be as appealing as being a renter, but the pride of home ownership is hard to beat..... By doing some basic homework, you shouldn't get hurt owning your primary residence."

....

I think that assessment falls somewhere in the middle of our discussion and is probably a pretty good characterization of this choice we all face. For me, ultimately my wife wanted a house we could call our own, and i wasn't going to deny her. I kind of like it too considering my interest rate isn't so bad.

Azanon

[vethost.com]

I believe azanon meant to say the EARNINGS on a ROTH are also TAX-FREE upon withdrawal.


azanon wrote:
Roths only help a current year's taxes in that the earningsgrow tax deferred. There is no allowable deduction for Roth IRA contributions. Hope you didnt take a deduction for a Roth IRA contribution :-).

If you're wondering why the IRS keeps up with Roth IRA contributions, its because you are allowed to withdraw the contributions tax free (not the earnings) simply because you already paid taxes on them...... or you should have :-).

Azanon

[azanon]

I believe azanon meant to say the EARNINGS on a ROTH are also TAX-FREE upon withdrawal.

No i didn't mean to say that, because that would be incorrect if you "withdrew" them before you were 59 and 1/2 years old. Earnings are certainly tax-free after that age.

This was all besides the point i was making in 04'. We were discussing withdrawal options before the qualifying age (59 1/2). If you are going to dredge up an old thread, make sure and catch up with the conversation instead of just reading the last post.