From: "lpogoda" 
Newsgroups: misc.invest.real-estate misc.invest.stocks misc.invest misc.consumers.frugal-living misc.consumers.house
Subject: Re: Pay off the mortgage?
Date: Mon, 20 Oct 2003 21:56:02 -0400

v wrote in message <3f945bdb.18676055@news.verizon.net>...
>On Wed, 15 Oct 2003 15:11:27 GMT, someone wrote:

>I am (in no particular order), a long ago MBA, long time real estate
>investor, and business manager of a substantial small business that
>carries over $1 million in debt.  I think people make this Q more
>complex than it is, *and* put in their blinders and rose colored
>glasses, ignoring costs and seeing only positives.  My thoughts:


Then you should remember that, when assessing which course of action to
take, that you compare alternatives.  For most people, the choice is between
paying rent or paying on a mortgage.  And for a lot if not all of those,
there comes a time when the mortgage payment is less than a rental payment
would, simply because rents go up over time, while mortgage payments remain
fixed.

>1) This is merely the basic business concept of "leverage".  The only
>problem is when people ASSUME that they will make a higher rate of
>treturn than the loan interest.  Suppose you took the max home eq
>loans on your house, and bought all dot com stocks.  If you did it in
>a certain period and cashed out at the right time, you made millions.
>But if your timing was not right you lost your shirt.  We borrowed to
>buy more business locations.  One of them did not work out, it is not
>profitable, we do NOT make more than the cost of borrowing.  Why do
>people think it is any different when they borrow on their house?
>Leverage increases RISK OF LOSS as well as possibility of profit.


Right.  Nothing ventured, nothing gained.  The money's *probably* safer
stuffed into a mattress (discounting the possibility of fire or flood) but
you stand no chance of making anything that way either.

>2) The tax break: spending a dollar to save 35 cents.  The "tax break"
>allows the interest expense to be deducted from ones INCOME, not one's
>"taxes" (and this is merely what any business does with all its
>interest expenses, not just real estate ones).  The government does
>NOT pay your interest, the deduction reduces the effective interest
>rate but you still have to beat that rate.  Meanwhile the interest is
>a "certain" cost while the investment you make is uncertain.


It makes no sense to spend a dollar to reduce your taxes by 35 cents.  But
if you're going to spend a dollar (it's either going to be on rent or a
mortgage payment) it makes sense to spend it in such a way as to reduce your
taxes.

>3) "Profit" on resale.  Somebody buys a house for $200k and years
>later sells it for $250k, thinks they "made" $50k.  BULLSHIT.  How
>much interest did they pay during those ten years? Probably $75k.
>Just because they got to "deduct" it and get back 35 cents on the
>dollar doesn't mean they didn't pay the other 65 cents.  Add up ALL
>their costs, they didn't make any money.  They just offset their
>spending a little.


You buy a house.  You live in it for 10 years, then sell it and move away.
After everyone's paid off, you have $50,000 left over.  Plus during those 10
years, you have the tax savings due to the mortgage interest and real estate
tax deductions.

Or you rent an apartment.  You live in it for 10 years, then move away.  You
have nothing left over.  Very likely the aggregate total of the rental
payments equals or exceeds the aggregate total of the mortgage and real
estate tax payments.  And there have been no tax savings during those 10
years.

In my own case with my first house, the money I had left after selling it
and paying everyone off came to slightly more than the total of the payments
over 10 years.  For most of those years, the rent on my last apartment was
higher than my mortgage payment.  Net dollar cost for 10 years of housing -
zero.

I'm not a semanticist enough to tell whether I "made" money or not.  I do
know that my total wealth was higher than it would have been if I'd not left
the apartment and bought the house (and paid on a mortgage).

>Here's my bottom line:  if this is something you could make money
>doing, then the more you do it the more you'll make, so do you REALLY
>think they by borrowing the max you make the most money?

Of course not.  You make the most by investing the most, provided your
investments are "sound".  Isn't that what you do in your business?  You find
a profitable line and develop it to the hilt, while spending as little as
possible.  If one location can't expand profitably and you have more money
to invest in the business, you look for another location.

>Sheesh.  You
>people don't know what is an investment and what is an expense.  The
>house you live in is an expense, the bigger and more expensive the
>house the bigger the expense.  If you can make money by borrowing it
>is on those properties that pay you rent and have positive cash AFTER
>interest and expenses are paid, or that (like vacant land bought
>right) you will make money even INCLUDING all the interest costs.


Maybe an established business, or even a new business during the dot com
craze, can borrow the initial capital without putting up any collaterol, but
most individuals aren't so fortunate.  Ordinary people have to provide some
security.  I can't go to the bank and borrow $10,000 to buy, say, US
Treasury Bonds and put up only the bonds as security.

>Paying down mortgage debt has its proper function in a balanced
>portfolio, acting as the "safe" portion of the 'investment' strategy
>similar to bonds. You can easily borrow yourself into bankruptcy as
>you can into riches.


Sure.  But it's no safer than the vagaries of the real estate market.
Residential real estate has a pretty good track record when it comes to
return on investment.  But there's no guarantee that your particular piece,
your house, will match the overall statistics.