The Investment Thread

[CheezWizHed]

I am pouring some money into the market again. Probably a good time for everyone else to pull theirs as I have had comically bad luck in past attempts. For example, I had a large position in BP right before their oil spill. That led me to just focus on real estate which I have had extremely good luck with.

 

I have a specific set of conditions for my real estate purchases and there is nothing out there right now that fit so back to the market I go. Not to "flex" too much but I could retire today from my real estate income which is pretty good for a dude in his 30s.

 

What sort of real estate? Flipping? Rentals?

[wallus]

I am pouring some money into the market again. Probably a good time for everyone else to pull theirs as I have had comically bad luck in past attempts. For example, I had a large position in BP right before their oil spill. That led me to just focus on real estate which I have had extremely good luck with.

 

I have a specific set of conditions for my real estate purchases and there is nothing out there right now that fit so back to the market I go. Not to "flex" too much but I could retire today from my real estate income which is pretty good for a dude in his 30s.

 

What sort of real estate? Flipping? Rentals?

 

Side by side duplexes and farm land.

[GAME05]

I am not surprised seeing Phoenix and Tucson on the list. The housing market both for rent and buying has exploded due to people moving here from California and Canada well mostly California.

 

My father has a second house near Phoenix. He can walk to the football stadium. It's not listed, but he's still getting two calls per day to sell at some very high prices. He was really tempted to sell but my brother I think correctly reminded him that since he's set money-wise, what's the point of selling? Unless there's a plan to actually do something with the money to better enjoy retirement, then there's no value to just having more money.

 

My father is a good example of what consistent savings can do for a person. Never made more than $40k/year and the mother only occasionally worked. But the father saved 20-30% of every paycheck and was blessed to only be out of work for six months of his entire career. It meant stretching every penny, certainly. We never went out to eat, etc. But now someone who never made much money never has to ask himself if he can afford anything anymore. If either of them end up needing long-term assisted living we'll actually be able to pay for it.

[wallus]

I am not surprised seeing Phoenix and Tucson on the list. The housing market both for rent and buying has exploded due to people moving here from California and Canada well mostly California.

 

My father has a second house near Phoenix. He can walk to the football stadium. It's not listed, but he's still getting two calls per day to sell at some very high prices. He was really tempted to sell but my brother I think correctly reminded him that since he's set money-wise, what's the point of selling? Unless there's a plan to actually do something with the money to better enjoy retirement, then there's no value to just having more money.

 

My father is a good example of what consistent savings can do for a person. Never made more than $40k/year and the mother only occasionally worked. But the father saved 20-30% of every paycheck and was blessed to only be out of work for six months of his entire career. It meant stretching every penny, certainly. We never went out to eat, etc. But now someone who never made much money never has to ask himself if he can afford anything anymore. If either of them end up needing long-term assisted living we'll actually be able to pay for it.

 

The power of compounding interest is pretty much undefeated.

[CheezWizHed]

The power of compounding interest is pretty much undefeated.

 

First rule of investing is start early. Second rule is start now.

[wallus]

Anyone have an opinion on QYLD? Everything I read seems to be love/hate.

[nodakfan17]

I put $10,000 down on a $213,000 home in 2015. My PMI was ~$94/mo until I hit 80% LTV. That meant I needed to pay my mortgage down from $203,000 to ~$170,000. It took me about 5 years to knock off the PMI, so I estimate I paid about $6,000 in PMI.

 

I detested paying PMI, but had I waited until I saved up a 20% down payment, a comparable home in my town would have cost at least $50,000 more. So I paid $6,000 to save $50,000. I’m not really salty about it anymore.

[umphrey]

Buying a house is basically a hedge against inflation. It sets your rent to a constant value and gives you a huge asset that tracks inflation. Since inflation has been so high, it makes PMI look great because it got you that inflation hedge. If inflation drops (which the fed is clearly trying to make happen) then PMI won't look so good. House values won't increase at the same rate as the past year, although plenty of other things affect house value.

[OldSchoolSnapper]

I own and I love owning, and I love doing extensive DIY upgrades. However I've always felt like the idea of a house as some cornerstone part of your portfolio is exaggerated and in most cases due to luck more than anything else. And my house has appreciated $100k+ since buying in 2014.

 

Yeah rent is a constant payment for eternity. But you are not replacing the roof, HVAC (this is currently like $10k due to supply chain crisis), painting siding, cutting your grass. Yet I constantly see people claiming things like "Yeah we made $80k in the sale." No, you really didn't. You did like $25k in sticker price maintenance in that time + all the labor and costs associated with routine stuff.

 

In most scenarios, I feel like the kind of money you make in a sale over a house you lived in for a long time would be dwarfed by what you could do in the markets.

 

I fully understand that it's not intended to be the main investment vehicle, I just have always felt that people really exaggerate its actual value as an investment. There are always stories where a guy bought a house for $150k and the is now worth $1.7 million (think booming vacation spots), but I personally don't even consider my house when planning for retirement. It'll be paid off or whatever, but I'm not really looking at it as something to extract value. It's just a place I have to live so I bought modest and just what I needed.

[nodakfan17]

The amount of equity I have in my home is a source of financial peace (knowing it could be tapped in an emergency), but I actually cringe when thinking about what housing will cost in retirement. For example, today I own a $300,000 home; however, the home I want to own in retirement will probably cost $500,000 to build (in 2022 dollars). What’s that going to cost 20 years from now? $1 million? $1.5? Geez, I might as well get comfy in my current home because I may never be moving out.

[nate82]

The amount of equity I have in my home is a source of financial peace (knowing it could be tapped in an emergency), but I actually cringe when thinking about what housing will cost in retirement. For example, today I own a $300,000 home; however, the home I want to own in retirement will probably cost $500,000 to build (in 2022 dollars). What’s that going to cost 20 years from now? $1 million? $1.5? Geez, I might as well get comfy in my current home because I may never be moving out.

 

In Arizona there are housing developments that are geared towards retirees. I wish I could qualify for these homes as they are in a rather affordable price. These are mostly manufactured homes but they actually look really good from the outside and inside.

 

I worked with someone who retired and sold their home and moved into one of these communities. She sold her home for $300k and then bought a manufactured home for about $75k. It was a nice house for the price and about the same size as a condo or townhouse.

[LouisEly]

Yeah rent is a constant payment for eternity. But you are not replacing the roof, HVAC (this is currently like $10k due to supply chain crisis), painting siding, cutting your grass. Yet I constantly see people claiming things like "Yeah we made $80k in the sale." No, you really didn't. You did like $25k in sticker price maintenance in that time + all the labor and costs associated with routine stuff.

 

In most scenarios, I feel like the kind of money you make in a sale over a house you lived in for a long time would be dwarfed by what you could do in the markets.

The thing with housing is that while it only appreciates on average 2-3% per year, you capture the appreciation on borrowed money so the actual ROI is much higher. Say you bought a house years ago for $100K and put 20% down ($20K) and the house appreciates at an average of 2.5% per year. The first year it appreciates $2,500 ($100K x 2.5%) because it's 2.5% of the value, but you only invested $20K so the actual rate of return on your down payment is 12.5% ($2,500 divided by $20,000).

 

On top of that, you deduct mortgage interest and property taxes on your tax returns and you net ~20-25% of what you pay in interest and taxes in income tax reductions, increasing the return to >12.5%.

 

Now, that 2-3% appreciation per year is compounded. Let's say that $100K house has now doubled in value to $200k. It keeps appreciating at 2-3% per year, so now that 2.5% appreciation is $5,000 but your original down payment is still $20,000 so the rate of return on your down payment is now 25%. If you're in a hot location and it's appreciating at more like 4%/year... your rate of return is now 40%.

 

You're correct in that maintenance and repairs needs to be factored in, reducing the returns. But you also have to factor in opportunity cost, in that if you were to rent that home your rent would have doubled over that time as well. Let's say rent on that $100K home was $750/mo, but since the value has doubled now rent might be $1,500/mo. You're "saving" $750/mo on rent now, or $9,000 per year, by locking in your housing payment, offsetting the maintenance expense. Where you lose in real estate is selling and giving up 5-6% of the value in real estate commissions.

 

Years ago I ran something like this on a spreadsheet factoring in loan principal reduction/equity building, appreciation, income tax savings, and estimated maintenance/repairs and I think the net ROI on the down payment was ~14-15%/year. If I could lock in stock market returns at 14% per year I would take that in a heartbeat.

[zurch1818]

I agree with a lot of what LouisEly said above. The only thing that I don't think people take into account when renting vs buying is property taxes. I feel like what I am paying in property taxes now is equivalent to what I was paying in rent. Because property taxes are increased with the home value, these also get increased. Now at least it probably is going to be a little more predictable than what the rent rate goes up or down. However, it is an expense that needs to be considered.

 

No, mortgages are compounded monthly - what you pay is the interest rate divided by 12 each month on the remaining balance, not the interest rate times the balance divided by 12. And HELOCs aren't a second mortgage - they leverage the equity in your home, so you can only take out a fraction of your home's appraised value.

I think we may be saying the same thing in different ways and I may have typed it wrong. All I can say is my monthly mortgage interest is calculated solely off the remaining principal balance. [Principal balance]*[interest rate/12]. It does not take into account any previously paid interest. Therefore, this technically makes it simple. https://www.thetruthaboutmortgage.com/are-mortgages-simple-interest-and-compounded-monthly/

 

I also still think because you are borrowing money on your equity, that makes it a type of second mortgage. I agree that it works much differently than a conventional mortgage. https://www.nerdwallet.com/article/mortgages/heloc-home-equity-line-of-credit

 

I still don't quite follow what you are doing. Are you taking the heloc money and putting it directly on the house? Or are you investing that money in another account and using the proceeds from that investment to pay off the loans? I also am not sure if your heloc has a fixed or variable interest rate. Variable interest rates scare me. It sounds like with your mortgage, you completely figured it out. I don't know if that would have worked with how mine is structured. I also probably am not as disciplined as you. It bugs me when my credit card bill gets above $3000 and I don't really even like having my checking account get below $4000, so I don't know why I worry so much.

 

I would think diversifying is better? If I understand current rules correctly in retirement you could take $40k of income from your traditional and it get taxed at 12%. But your current Roth deposits are probably taxed at 22% or above.

I do sort of diversify in the fact that my company match and profit sharing is put in as traditional. Outside of that, everything else is Roth. I just don't want to mess around with having a huge amount of non-retirement outside investing until my mortgage is paid off or trying to figure out what tax brackets will be in the future. Once that is done, I can then move to aggressively saving (and giving) in taxable non-retirement funds as I won't have any risk.

[homer]

The other thing about owning a home is that it's an investment that you can utilize. You have to live somewhere might as well live in a place that also can provide you a return when you stop living there. I can't "use" my 401K or my stocks. I can live in and enjoy a home.

[LouisEly]

I still don't quite follow what you are doing. Are you taking the heloc money and putting it directly on the house? Or are you investing that money in another account and using the proceeds from that investment to pay off the loans? I also am not sure if your heloc has a fixed or variable interest rate. Variable interest rates scare me.

You use the HELOC to pay down the principal of your mortgage. First you take out the mortgage, then the HELOC, then use the HELOC to pay down the principal on the mortgage. HELOC's can have either fixed or variable.

 

General rule of thumb - don't use a home equity loan to pay for anything not attached to your home.

[MrTPlush]

You are paying for house maintenance as a renter plus more. That’s how people make a living renting out houses. Your housing cost then rises with inflation and you have nothing in the end of it.

 

Yes, a lot of the equity is blown via repairs and improvements. But it is forced savings (if you end up selling) or the potential at very cheap housing cost come retirement.

[zurch1818]

You use the HELOC to pay down the principal of your mortgage. First you take out the mortgage, then the HELOC, then use the HELOC to pay down the principal on the mortgage. HELOC's can have either fixed or variable.

 

General rule of thumb - don't use a home equity loan to pay for anything not attached to your home.

Interesting. That is genius if the interest rate is lower than what is on the mortgage. If the mortgage rate is lower than the HELOC, I don't know if I agree. Plus it saves you the closing costs.

[umphrey]

You use the HELOC to pay down the principal of your mortgage. First you take out the mortgage, then the HELOC, then use the HELOC to pay down the principal on the mortgage. HELOC's can have either fixed or variable.

 

General rule of thumb - don't use a home equity loan to pay for anything not attached to your home.

Interesting. That is genius if the interest rate is lower than what is on the mortgage. If the mortgage rate is lower than the HELOC, I don't know if I agree. Plus it saves you the closing costs.

I feel like I'm missing something here because HELOCs are (quick google) much higher than mortgages. Above 4% while my mortgage is 3% and a new mortgage would be 2.65%.

[PeaveyFury]

You use the HELOC to pay down the principal of your mortgage. First you take out the mortgage, then the HELOC, then use the HELOC to pay down the principal on the mortgage. HELOC's can have either fixed or variable.

 

General rule of thumb - don't use a home equity loan to pay for anything not attached to your home.

Interesting. That is genius if the interest rate is lower than what is on the mortgage. If the mortgage rate is lower than the HELOC, I don't know if I agree. Plus it saves you the closing costs.

I feel like I'm missing something here because HELOCs are (quick google) much higher than mortgages. Above 4% while my mortgage is 3% and a new mortgage would be 2.65%.

 

Yeah, I’m not following either. Wasn’t the tax deductibility of HELOCs also eliminated by the tax reform a few years ago? Even if you got a sweet intro rate on a HELOC, you’d have to think that a deductible mortgage rate where they’re at now would beat that unless the HELOC was at a zero intro rate. Then, you’d be subjected to the floor rate unless you were constantly churning your LOC.

[igor67]

Somewhere in there you also have to have a big enough mortgage to make itemizing matter these days. A HELOC on a primary residence to lower the balance on a second home or investment property might have an angle for some savings though.

[LouisEly]

1) HELOC interest is still tax deductible, so long as it's used on something to improve your home. Not sure what you have to provide or document to prove what you are doing with it, but the interest on a $25K HELOC is only ~$90/month so it's not a significant deduction. Deducting it would save you about $250/year on your taxes, but as I demonstrated earlier, when used over the first 10 years of a loan it can eliminate around 70 payments (which in my example is over $120K in payments). I'll give back $250/year in tax deductions for eliminating $120K in payments.

2) With a HELOC, you only have to pay interest during the 10-year draw period. You do not have to pay back the principal until after 10 years.

3) I explained how it works with my real-life example earlier in the thread. If you don't believe it, get a mortgage schedule (Excel can generate one for you) and run it for yourself. I ran it on my mortgage schedule ($400K loan, 3.25% interest with a $25K HELOC at ~4.3% interest) and it eliminated ~70 payments, or over $120K in payments in the first 10 years.

4) It was compared to making extra payments on a mortgage. It's way, way, better than making extra payments on a mortgage.

[zurch1818]

Here are my numbers for a $175k loan on a 15-year fixed load at 4% refinanced to 2.75% last October.

 

[attachment=0]Screenshot 2022-01-18 071437.png[/attachment]

First line is current mortgage schedule (+25k payment payment in last month), Second line is my current mortgage with only making minimum payments (+25k payment payment in last month), Third line is if I didn't refinance at all but did the first line and the last line is minimum payments only with no refinance over all 15 years

 

My payoff period is going to be about 4 years. Good old conventional extra principal payments is going to save me about $40k in interest. I have no idea how a tax deductible payment HELOC would have saved me any sort of significant money. Sure, the 107k extra in payments has saved me a whopping 3k in interest to date. It will eventually pay off.

 

The reason banks give HELOCs out are because they can make more interest (plus a typical higher interest rate) on the equity in your house.

[umphrey]

First of several rate hikes is expected in about 2 months so get your loans in now. Also I feel like it really kills any upside in the broad market for the next year. The experts like to say that they are already priced in but I feel like the market more often prices in good news compared to bad news.

[LouisEly]

Here are my numbers for a $175k loan on a 15-year fixed load at 4% refinanced to 2.75% last October.

 

[attachment=0]Screenshot 2022-01-18 071437.png[/attachment]

First line is current mortgage schedule (+25k payment payment in last month), Second line is my current mortgage with only making minimum payments (+25k payment payment in last month), Third line is if I didn't refinance at all but did the first line and the last line is minimum payments only with no refinance over all 15 years

 

My payoff period is going to be about 4 years. Good old conventional extra principal payments is going to save me about $40k in interest. I have no idea how a tax deductible payment HELOC would have saved me any sort of significant money. Sure, the 107k extra in payments has saved me a whopping 3k in interest to date. It will eventually pay off.

 

The reason banks give HELOCs out are because they can make more interest (plus a typical higher interest rate) on the equity in your house.

That's because you have a 15-year loan. You're hardly paying any interest at all and extra payments will reduce the principal on a 15-year a lot more than on a 30-year, where you are paying a lot more in interest in the first 15 years. It works on a 30-year, not a 15-year refinance.

[FVBrewerFan]

I understand the concept, but I don't understand how itemized deduction is larger than the standard deduction. The loan amounts you're talking about wouldn't came close to the higher standard deduction that's beeb in effect the last few yesrs.