If I Had $300k Should I Buy a House Outright With Cash?

[theasxgorilla]

And lets not forget that the more important "rate" is sweden is the suicide rate!

Actually it's a myth. Google "sweden suicide myth" to find out more. What isn't a myth is the disproportionate rate of beautiful blonde females over here, of which I already have one of my very own...so you can all have your millions, as far as I am concerned I've already won life

 

[prawn_86]

Actually it's a myth. Google "sweden suicide myth" to find out more. What isn't a myth is the disproportionate rate of beautiful blonde females over here, of which I already have one of my very own...so you can all have your millions, as far as I am concerned I've already won life

Well arn't you in a happy/gloating mood today? :

 

[pepperoni]

Actually it's a myth. Google "sweden suicide myth" to find out more. What isn't a myth is the disproportionate rate of beautiful blonde females over here, of which I already have one of my very own...so you can all have your millions, as far as I am concerned I've already won life

Blondes you say???

OK you win ;-)

 

[theasxgorilla]

Well arn't you in a happy/gloating mood today? :

Haha, could be something to do with the fact that I am hoping on a plane bound for Brussels in a few hours for a multi-day junket at some as yet unknown destination. Doh! There I go again

 

[Sean K]

Yep, but we're holding onto our 300ks for now right?

For a little while longer. But not sure how much.

I had an uncle that owned 1000's of acres around Flinders a few years ago.

Thousands........

I'm still shocked everytime I think of it. Like WTF!!!!!!

Sold it off for pittance....now.....crap!!!!!!

Anyway, another story...

Mornington will be the Marthers Vinyard of Victoria.

Our time will come..

Not too far off..

 

[pepperoni]

Spanning Tree,

OK This is a hypothetical....so long as it's hypothetical I'll pass on some hypothetical advice...BUT you should speak to a financial adviser about this.

OK I'll make an assumption that you will hold the house for several years, and that it is NOT your PPR. I'll also assume that you are borrowing at 10% interest-only rate (Yes I know you can do a lot better, it's just for ease of calc),

Lets say you borrow 80% of the money for an investment property worth 300K.

So you are borrowing 240K with an interest liability of 24k p.a. (Tax deductible). Lets ignore rental income in this circumstance because that is going to be highly variable depending upon location/size/etc etc. And lets say you can use the remaining 240 in a term deposit at 8%. Below is a ten year period including a boom and bust cycle for an "average" house near where I live.

1997 157 $131,546 -3.40%
1998 135 $124,167 -5.60%
1999 148 $127,500 2.70%
2000 164 $128,458 0.80%
2001 188 $126,896 -1.20%
2002 110 $130,396 2.80%
2003 270 $155,897 19.60%
2004 206 $211,708 35.80%
2005 195 $240,021 13.40%
2006 209 $274,063 14.20%
2007 171 $309,813 13%

So over ten years your property increased in value by 235%. A simple forecast of the same on your $300K property means after ten years it's worth...$705,000.00 -for which you have paid 240K of tax deductible interest... and received some portion of rental income to defray the costs. (Be aware that at some point during this ten years the increase in rental income will turn this revenue positive).

And the other 240K compounding for ten years?

1 8.00% $259,200
2 8.00% $279,936
3 8.00% $302,331
4 8.00% $326,517
5 8.00% $352,639
6 8.00% $380,850
7 8.00% $411,318
8 8.00% $444,223
9 8.00% $479,761


So at end of the day after ten years you've got a house worth 700K with a debt of 240K, and a term deposit worth 480K.

(And paying lots of tax)

Now start playing with these numbers until you get an outcome you like

Sir O

What the hell am i missing here cause its driving me nuts?

Give the bank the 300k at 8% and then you borrow it back for 9.5%.

I dont get it ... Even it it werent for tax making your 8% more like 4%? No tax saving/negative gearing will bridge that gap .. Even if the property were empty???

I feel like Ive just witnessed the financial advice equivalent of a 300 car pile up?

 

[N1Spec]

What the hell am i missing here cause its driving me nuts?

Give the bank the 300k at 8% and then you borrow it back for 9.5%.

I dont get it ... Even it it werent for tax making your 8% more like 4%? No tax saving/negative gearing will bridge that gap .. Even if the property were empty???

I feel like Ive just witnessed the financial advice equivalent of a 300 car pile up?

i think you need to factor in the capital gains.

 

[pepperoni]

i think you need to factor in the capital gains.

They are the same if you buy with cash or borrow and invest in a TD.

The only variables are the net interest expense and the tax (incl negative gear).

Makes even less sense if you positive gear too IMO.

I watched alot of people out west get conned with these sorts of schemes in the 90s.

The market took off and the flawed structures didnt matter so they are all rich now but thats not the point ha ha.

 

[Sir Osisofliver]

What the hell am i missing here cause its driving me nuts?

Give the bank the 300k at 8% and then you borrow it back for 9.5%.

I dont get it ... Even it it werent for tax making your 8% more like 4%? No tax saving/negative gearing will bridge that gap .. Even if the property were empty???

I feel like Ive just witnessed the financial advice equivalent of a 300 car pile up?

Pepperoni,

Did you miss my second post?

I don't know anything about this guy. Perhaps he's a doctor earning 500K a year and NEEDS negative gearing and tax minimisation strategies. Perhaps he's made a career out of saying "you want fries with that?" and the 300K is from dear departed granny. In either case he needs to play with the numbers, which I told him to do. IE Evaluate the effectiveness of multiple options to get the best outcome for his circumstances. This is an EXAMPLE. If I was getting PAID for this and was allowed to provide advice here on the boards....Then I would go through that process of evaluating which option is best for his circumstances.

Does that make any more sense for you?

Sir O

 

[pepperoni]

No ... I think investing money at 8% instead of paying off mortgage at 9.5% should be punnishable by death.

Every cent should go onto the mortgage unless its going to do better than 9.5% AFTER TAX (and factor in negative gear benefit on the property of course).

Nobody else seems to care so forget it I guess.

 

[Glen48]

Get on to SBS web site and have a look at Insight House prices ( Tuesday 9). Houses prices to go down by 40% as we have the highest priced houses in the World most are at 2-3 times annual income OZ's at 7 times.
to work out the true value of a house take the Monthly rent income and x 150.
Look at patrick.net to see what will happen to the OZ market, look at onthehouse.com.au to see how many houses were sold last year and this year and then have a look at The Money managers.
Got to bed and get in the fetal position and ask some one to ring you when its all over.

 

[Sir Osisofliver]

No ... I think investing money at 8% instead of paying off mortgage at 9.5% should be punnishable by death.

Every cent should go onto the mortgage unless its going to do better than 9.5% AFTER TAX (and factor in negative gear benefit on the property of course).

Nobody else seems to care so forget it I guess.

Pepperoni,

Ok how about investing money at 15% and borrowing at 9.5%? that work for you?

We have no way of knowing what level of investment return he is capable of achieving, nor the rate at which he could borrow. This is why I said he had to play with the numbers (in association with how much risk/return he is prepared to accept). I know a very wealthy man in Melbourne who borrows money at the Libor rate and by a series of sneaky manouvers invests it here in Australia. I persoanlly think that he's setting himself up for the mother of all tax audits, but maybe that is just me.

Sir O

 

[wayneL]

to work out the true value of a house take the Monthly rent income and x 150.

A friend of mine just bought a flat in Basingstoke UK for £120,000 with a projected rent of £800PCM. That 150 times. (8% gross yield)

**Verifiable - I have seen the documents

Quite an astonishing deal by recent history.... Same flats last year were ~£180,000. Here is the current delusional asking prices.
http://www.rightmove.co.uk/viewdetails-17443562.rsp?pa_n=6&tr_t=buy

Here is the identical flat @ £825PCM asking
http://www.rightmove.co.uk/viewdetails-19204984.rsp?pa_n=4&tr_t=rent

This sort of deal is not common yet, but an indication of where things are going.

<edit to add> ~250-275 times is more typical at the moment. (going on asking prices)

 

[Spanning Tree]

Thanks for the discussion, everyone.

This is all hypothetical, so I won't be doing it anytime soon. This idea is done mainly as an investment with the aim of reducing tax.

 

[Ageo]

Thanks for the discussion, everyone.

This is all hypothetical, so I won't be doing it anytime soon. This idea is done mainly as an investment with the aim of reducing tax.

Like others have pointed out buying your own home and buying an IP is 2 different things. I have learnt 1 thing thow, less debt means less passive income i need to survive comfortable in this world. If its 1 thing i learnt from Kiyosaki that was it

 

[wayneL]

Like others have pointed out buying your own home and buying an IP is 2 different things. I have learnt 1 thing thow, less debt means less passive income i need to survive comfortable in this world. If its 1 thing i learnt from Kiyosaki that was it

I wish it was as clear cut as that though Ageo.

More debt at current valuations means massive negative cash flows.

 

[tech/a]

Like others have pointed out buying your own home and buying an IP is 2 different things. I have learnt 1 thing thow, less debt means less passive income i need to survive comfortable in this world. If its 1 thing i learnt from Kiyosaki that was it

While true.
There are times when you can be out of the norm with debt.
These times arent now but there was and will be again times when capital appreciation warrents heavy investment.
Both in Property and the Markets.

If there is one thing Ive learnt its when the time presents itself and opportunity is punching youi in the face to take advantage of it best to put all you can afford rather than take the conservative approach.

Conservatisim while nice and comfortable---wont get you those home runs which you need in life.
Genuine home run opportunities dont come around all that often.
Better to say I did rather than I wish I had.

 

[jersey10]

While true.
There are times when you can be out of the norm with debt.
These times arent now but there was and will be again times when capital appreciation warrents heavy investment.
Both in Property and the Markets.

give us a date Tech!

I know you think the stockmarket will move sideways for a few years to come, how long till the property market moves upward again?

 

[tech/a]

give us a date Tech!

I know you think the stockmarket will move sideways for a few years to come, how long till the property market moves upward again?

I have answered this question once before---cant find it.

But Ive seen it twice in my lifetime and I'll probably see it once more.
Hit in the head opportunity occurs in property when.

(1) Interest rates drop to close to or all time lows.
(2) Its far cheaper to buy established property than it is to build.
(3) Rent return is greater than finance costs at 80%.Infact its almost impossible NOT TO gear positively.
(4) Opportunity will last 3-7 yrs you want to be in the first 3.
(5) Commercial property will do exactly the same but 3-5 yrs after the Domestic market---so you'll get a second bite! You want to be in the first 2 yrs of this boom as it will last only a couple of years.


When you see all of these come together---put your life on it!
For those ander 30 you'll probably see this another 3 times in your life---lucky buggers!

 

[jersey10]

I have answered this question once before---cant find it.

But Ive seen it twice in my lifetime and I'll probably see it once more.
Hit in the head opportunity occurs in property when.

(1) Interest rates drop to close to or all time lows.
(2) Its far cheaper to buy established property than it is to build.
(3) Rent return is greater than finance costs at 80%.Infact its almost impossible NOT TO gear positively.
(4) Opportunity will last 3-7 yrs you want to be in the first 3.
(5) Commercial property will do exactly the same but 3-5 yrs after the Domestic market---so you'll get a second bite! You want to be in the first 2 yrs of this boom as it will last only a couple of years.


When you see all of these come together---put your life on it!
For those ander 30 you'll probably see this another 3 times in your life---lucky buggers!

so the last time this scenario occurred was 1999-2005??

and the next time??

i can't see this happening in the next ten years without a major correction to current house prices