cash for real estate vs. Mortgage vs. margin

[crastogi]

So, I plan on acquiring another real property, and I am torn as to how to acquire it. 

 

Option 1 - pay cash.  However, the unlevered returns are not so attractive. 

 

Option 2 - Buy with a mortgage.  cost about 4%

 

Or option 3 - get a margin loan.  IB has great rates.  Loan would be about 1/4 of portfolio in this account. 

The caveat here is markets are high. 

I could also build a bond ladder with the cash and margin out and may have a +ve or small -ve carry, haven't checked. 

 

What would you do in this case?  Any thoughts welcome

 

 

[LC]

Compare the cost of the mortgage with the cost of (IB loan + put to protect from margin call).

[clutch]

I'd pay cash, get HELOC, and use that during the next market down turn. I like flexibility...

[Morgan]

I basically have no cash, so I usually mortgage as much as possible of the purchase price as long as it's cheap relative to the rents.

 

In my view, cash is key and worth a lot more than the possibility of getting a loan. I'd rather have debt and save my precious cash (if the interest rates are reasonable) for emergencies.

[bizaro86]

So, I plan on acquiring another real property, and I am torn as to how to acquire it. 

 

Option 1 - pay cash.  However, the unlevered returns are not so attractive. 

 

Option 2 - Buy with a mortgage.  cost about 4%

 

Or option 3 - get a margin loan.  IB has great rates.  Loan would be about 1/4 of portfolio in this account. 

The caveat here is markets are high. 

I could also build a bond ladder with the cash and margin out and may have a +ve or small -ve carry, haven't checked. 

 

What would you do in this case?  Any thoughts welcome

 

I would take the mortgage every time. Its not callable, and depending on your jurisdiction may include an effective put option. (All my mortgages are non-recourse to me, so if the market falls enough that I have zero equity my banks will be getting the properties).

 

Plus there's optionality. You might not be able to get a mortgage later, but cash is always cash and IB will almost certainly always offer margin. Thus, taking the mortgage loan keeps your options open the most.

[Spekulatius]

If the mortgage is non-recourse,  would always take a mortgage. Owning a property with a mortgage is safer than buying for cash in a sense, because you have the put option to give the property back to the bank, if prices fall a lot. If you take out a fixed rate mortgage, you are also protected against higher interest rates, If interest rates were to go much higher, your property would be worth less, but so would be the fixed rate mortgage that you took out. Most likely, your cash flow would increase, because rents would rise due to higher inflation and owning being too expensive for prospective buyers because of increasing interest cost.

[LR1400]

A huge benefit of real estate is the ability to get long debt. Without the debt it's not a great investment usually. In apartments you can often get non-recourse.

 

If you feel you want to get out of it quickly you need to have the proper exit plan for it.

[KJP]

In apartments you can often get non-recourse.

 

 

Are you in the US?

[LR1400]

In apartments you can often get non-recourse.

 

 

Are you in the US?

 

Yes.

[flesh]

No braina IMO, get mortgage put 20 down no pmi. I'm long debt. If they would mortgage me for double the homes value I"d take it, at today's rate. You don't have to do anything with it, don't you simply have to beat 4% - deductions over and above stardard minimum deduction over the period? Buy brk cheap once in ten years and your there.

 

Or pay cash, get heloc from america first credit union, fixed for five at 4.4, adjusts, then fixed for another five. Balance below 100k are still deductible afaik.

 

I also have 8 year car loans at 3.4%. GIVE ME ALL THE MONEY.

[LC]

GIVE ME ALL THE MONEY.

Agreed. Same situation - mortgage, car payment, refi'd student loans, and any other loan i can get below 4%. We have the entire world to invest in, and the hurdle is 4%.

[rmitz]

GIVE ME ALL THE MONEY.

Agreed. Same situation - mortgage, car payment, refi'd student loans, and any other loan i can get below 4%. We have the entire world to invest in, and the hurdle is 4%.

 

Well, you won't go broke doing this, but when we actually hit a serious downturn, I can say from experience that it really feels shitty to be in the situation with your equity decimated and all these loans hanging over your head.  It does work out in the long term (assuming you haven't done something really catastrophic on your investments) but it doesn't feel good at all.

[clutch]

GIVE ME ALL THE MONEY.

Agreed. Same situation - mortgage, car payment, refi'd student loans, and any other loan i can get below 4%. We have the entire world to invest in, and the hurdle is 4%.

 

Well, you won't go broke doing this, but when we actually hit a serious downturn, I can say from experience that it really feels shitty to be in the situation with your equity decimated and all these loans hanging over your head.  It does work out in the long term (assuming you haven't done something really catastrophic on your investments) but it doesn't feel good at all.

 

+1

 

Plus you won't have any room to invest when things get cheap.

[LC]

GIVE ME ALL THE MONEY.

Agreed. Same situation - mortgage, car payment, refi'd student loans, and any other loan i can get below 4%. We have the entire world to invest in, and the hurdle is 4%.

 

Well, you won't go broke doing this, but when we actually hit a serious downturn, I can say from experience that it really feels shitty to be in the situation with your equity decimated and all these loans hanging over your head.  It does work out in the long term (assuming you haven't done something really catastrophic on your investments) but it doesn't feel good at all.

 

Fair point!

[bookie71]

Just remember, Levers work BOTH ways.

[flesh]

My heloc and the money from car are not invested. They will be doing nothing until a good size correction 20% plus. Not even all my cash is invested, I simply like the low hurdle rate and having the ability to pounce when truly cheap things come about.

 

Also, my nut is nothing, cheap house with a mother in law in the basement being rented, only debt is 8 year car loan and mortgage. If needed I can live on 20k/year. My heloc itself can sustain me for three years if needed while still having 20% equity remaining if it's maxed out.

 

Just pointing this out before some young investors get too many ideas about maxing out debts to invest in equities, I expect once or twice a decade at opportune times I'll be in that position.