So ... what? Are you makeing money with the house or living there?

Could you make 20% on the asset value annually as rent? Even 18%? Thats a fairly standard return but takes a lot of house purchases for the purpose out of the picture.

20%? Really?

Yep. But more likely 18%. Rental is a mainly a cash flow commodity. People are buying the cash flow, not the property per se. There are always high demand areas that break a rule but they wouldnt be a more than a fraction of a market. Its not unrealistic to look at your bills and see a 1.5% per month late fee. Thats 18% per year also. And its there for the same reasons. Some of the older landords used fractions. They would sell at 1 part rent to 6 parts price for example, but try to buy at 1 to 4. This just means values can move and market can change and that how some would think about it.

Lisa, you would sell at the end of ownership to cut your losses if it would not pay. As an investment, houses do not have much to offer as they suck down interest, maintenance, power, utilities, property taxes etc. You might choose to live there for your own pleasure but beyond that you could be selling into a time 5 years in the future where they are having to pay people more to get them to buy treasury bonds. This will make the interest rate higher by far because so much of that mortgage debt gets sold to the fannie mae /freddie mac structure. Obviously CDOs are in disfavor now. That leaves 2 options, taking less asset value and get out of the house which increases cost of ownership or staying in it until you can sell it which can drain you pretty quick. The latter is often a reason people rent out a house, they are stuck. Have you considered the idea that the liquidity of the housing market will not be as strong as it is right now if rates go up? Currently it is a time when house prices are very high because there is little supply due to the Great Recession shutting down the supply completely. Market values will drop or stay the same as more product begins to hit the market in the coming years. Right now people are standing on their prices and the market is really slow because the supply is limited and prices are high. The last 11 months of sales have not generally been stellar. But its a big country and local hot markets are bound to be out there. You will be buying into the top of the market. Will that impact you?

I doubt that renting in San Diego gets you anything close to an 18% return. I'm in the DC area, and asset value/annual rent is substantially lower, as in way lower. Your buying/selling ratios of 1/6 or 1/4 are completely off the mark in whatever market I'm familiar with. Just to give one example: < 40K rent/year just sold for 825K. And no, this wasn't a super duper low rent; in fact, it was relatively high.

Getting to the OPs main point and not some tangent on ridiculous slumlord rental returns, it really doesn't seem to make that much of a difference. In general I prefer liquidity in such a situation.

So freeoscar, I am interested in how many you have owned?

My choice would be to put the money where my return would be larger. If 80 dollars would make a difference in my mortgage payment then it is likely that I shouldn't be buying the home (not your case, but just a perspective that it shouldn't matter so much). You still pay less interest than you earn by keeping the money. Unless property values guaranteed will increase at the return rate of your mutual funds or more then it might be worth putting your money into the real estate.

You sound like you have your finances together - Congrats :)

15 year mortgage only...

Please don't start with the "more interest to write off".. Whether you pay the mortgage company or the GOV the money is still going to be owed. Pay down the mortgage as quickly as possible. You have a lot of money in savings and if you want to keep doing smart things then pay off any debts as quickly as possible and increase your net worth.

Whether you have 185K or 196K left in the bank most likely won't make much of a difference, unlike, say, 3K vs 14K; are the 80.00/month going to make a difference in your life?

Once you rent the house, mortgage is deductible as cost, you pay taxes on dividends/capital gains of your mutual funds, but, really, IMO it doesnt sound that it'll make much of a difference whether you pay down 23 or 25%.

Just my 2 cents...

First, fix your mutual fund, 4.2% is not good for someone who is 29 years old. My five year average is nearly 14% and my ten year average is 9% and that is just a broad market mutual fund. I suspect your risk profile is too conservative for someone who is still quite young.

Second, the objective right answer to this question is to put 23% down and finance for 30 years rather than 15 years, if you fix your mutual fund. Mortgage interest rates are crazy low right now and it doesn't make sense to divert any money from mutual funds into paying off a mortgage that is barely higher than the inflation rate. The interest discount for 15 year mortgages just doesn't make the net reduction in savings worthwhile.

However, the objective right answer isn't always the best answer for you. Although, I can easily prove my answer is correct mathematically, only you know what your spending and saving habits are like. If you are a saver, stick with my advice, and if you are a spender do the opposite of those things that I advised. If you invest that difference in mutual funds you will come out well ahead, however, if you are going to invest it in beer and burgers, do the 15 year with 25% down.

Finally, I have no idea where the rental stuff came from and why this conversation started talking about rental property. I can say, that if we are talking leveraged investment then, yes, a 20% return is pretty easily achievable. However, if are talking an unlevered investment then 20% is ridiculously high. I have never gotten rents in any market that even approached 20% of my unlevered investment.

To give you an idea of a great return in rentals, I just got final approval from the zoning commission for construction of an eight unit rental complex that will cost approximately $680,000 to build and will bring in rentals of $91,200 per year.

The last one I sold was in 2013. 4 unit near a college making 33,200 rent sold for 185k net. Markets do vary. 1 in 5.5 when I sold, where yours going in is 1 in 7.5.

The way I look at these decisions is pretty simple: what will cost the least. If I can afford the extra $80/month, I'll always take the lower interest rate option.

I'm a saver, not a spender (to Brian's point), but I'm not one that would borrow to invest (which is what the mortgage/mutual fund trade-off really is).

Removed...some days my spreadsheet ability just stays at work...

If you earn 4.2% on your $11,000, you still have to pay income taxes on those earnings, so taxes is an invalid argument.

No, mutual funds have tax deferred growth, so you only pay taxes on the dividend distributions rather than the increase in those accounts. This is one reason that mutual funds are superior to savings type accounts.

The OP's biggest problem is that his mutual fund performance is horrible. In the last 5 years my mutual funds have grown 192%, meanwhile his have grown 22%, and I am mostly in broad market mutual funds, I don't even have a single sector fund.

But now the market is high so the go forward plan is? Profits suck because they are a one time transaction.

But now the market is high so the go forward plan is? Profits suck because they are a one time transaction.

I really have no idea what you are talking about, I suspect that I am not the only one.

Sorry, I do not trust wall street and never have. I missed the CDO crash thing. I actually was trying to understand you. Will your mutual funds continue at such a stellar pace?

Sorry, I do not trust wall street and never have. I missed the CDO crash thing. I actually was trying to understand you. Will your mutual funds continue at such a stellar pace?

This has nothing to do with the OP's question. Whether or not mutual funds will continue along the same path that they have for the last 100 years is not the question.

The question wasn't about investment property, it was about whether or not to add more money to the down payment on his primary residence. So the options we have to pick from are reduce payment or increase mutual fund. I am answering that question.

I have owned quite a few rental properties and I have invested quite a bit in mutual funds. Dollar for dollar I would take the mutual funds all day long. However, you can get better leverage on properties but your posts make me believe that you are not leveraging your properties. I would never ever invest in unlevered real estate.

I'm still sticking with my 15 year recommendation... A paid off home is rare these days.

I'd rather have a home paid off and SOME mutual funds over MOST of my money tied up in the stock market.. But hey, that's just me.

You want a 30 year loan - go get one.

Does the OP even know 10, 15, 20 year is an option? Has the OP even looked at the total cost of a 30 year vs. a 15 year??? Do some math. The #s don't lie. And I get that one could invest the difference, but again, I'm not putting all my eggs in one basket. Pay down the house quickly AND invest at the same time.

"To give you an idea of a good return in rentals, I just got final approval from the zoning commission for construction of an eight unit rental complex that will cost approximately $680,000 to build and will bring in rentals of $91,200 per year."

Great job! It sounds like you have a lot going on and it's good to hear different opinions.

I'm still sticking with my 15 year recommendation... A paid off home is rare these days.

I didn't make a recommendation, I just noted the objective right answer to the OP and then noted that objective answers aren't always the best answer. A paid off home is neither that rare or that valuable. In fact, almost all economists agree that this idea of a home as the significant savings vehicle is simply wrong. There is little, if any, real value in having a paid off home, and there are many negatives from diverting money from investing to do it.

A paid off $500,000 home is NEVER better than owing $400,000 on that home and having $400,000 of liquidity. The only thing to do then is to look at risk and cost. Homes lose in both those categories.

If you do the math, long mortgages will beat out short mortgages and low down payments (that don't require PMI) will beat out high down payments. Do the math all day long.

Having said that... I like 15 year mortgages. I have two on properties right now. Everything doesn't have to be based on the best or right answer. Sometimes just do the thing you are more comfortable with at that point.

Does the OP even know 10, 15, 20 year is an option?

10 and 20 year mortgages are generally worthless, because they have essentially the same interest rates as 15 and 30, respectively. When evaluating mortgages the length of payback is really not relevant, only the interest rate is. The only reason a 15 year mortgage might be better than a 30 year mortgage is because the interest is lower.

ETA: My post on rental property was in response to trickyputt's assertion that you will get an 18% return on rental property. I have never gotten that much and the above is as profitable as I have ever been in 8 different markets.

OP-What is the purchase price or actual loan amounts?

bry911-

I'm not getting your math either. Also, OP stated that s/he has $ in mutual funds AND retirement account. You are right that you only get taxed on dividends....but you will eventually get taxed on earnings when you move from one mutual fund to another in non-retirement accounts.

"So let's revisit the situation after 10 years, a reasonable amount of time to look at investments. At that point the difference in payments would be $4,655.10 meanwhile our mutual fund has increased $5,600." You are negating the fact that the $80/month could be reinvested, thereby earning interest. OR the $80 could be applied to the mortgage anyway, decreasing the balance in a compounding way.

A 15 year $423,500 mortgage at 3.625% interest has total interest paid of $126,146

A 15 year $412,500 mortgage at 3.49% interest has total interest paid of $117,935

That is $8,211 less interest over the 15 years. When you sell your mutual fund at 10 years, the $5,600 is going to be taxed. Also, we can still account for the extra $80 payment. If we invest the $80 at the OP 4.2% (I used annual compounding) over 15 years, we have an end balance of $20,100.20.

So (Assuming a purchase price of $550,000)

Putting 25% down saves $8,211 in interest. Putting the $80 (monthly payment savings) into the OPs mutual fund earns $20,100.20 over the 15 years. Subtract about $9,500 in loss interest over 15 years on the initial $11,000. That is a TOTAL savings of $28,311.20 less $9,500 for $18,811.20 SAVINGS FROM THE EXTRA $11,000 Downpayment.

The other option is to put 25% down (still assuming $550,000 purchase...sorry if I missed price somewhere!), and take the $80 payment difference and add that to the loan payment. This will save interest AND pay off the loan before the 15 years (by about 6 months). The interest savings on adding the $80 to the loan payment versus putting the $80 in the mutual fund is $4,345.74. Additionally, the loan will be paid off in about 14.6 years. The payment savings at the end comes up to $13,839.05. So adding the $80 to the mortgage versus putting it into a mutual fund nets $18,184.79 savings over 15 years. Less the $9,500 earnings from the $11,000 staying in the mutual fund....you net $8,684.79 on this option over just doing the 23% downpayment and leaving the $11,000 in a mutual fund savings.

OP-These numbers are based on my purchase price calculation from $11,000 being 2% of the purchase price. I cannot find anywhere where you posted the actual purchase price. Given that you will still have money in mutual funds and retirement savings, Your best financial decision is to put the the 25% down. Take the $80 payment difference and put in your mutual fund. You will be almost $19,000 ahead in 15 years! I do agree that 4.2% is a LOW return for a 29 year old. If you have a job that covers your expenses, keep 6 months expenses in cash or a low risk mutual fund. Then, shoot for a 10% return on the rest of your savings. The funds will go up and down more dramatically, but historically you will be further ahead.

B Carey -

I miscalculated - I used the correct payment, but I used 80% as principal with the instead of adjusting down his principal to 77% and 75%. The OP would need a mutual fund return of 8.5% on average for investing to be the better option, something that I believe is achievable.

Note that these numbers are for 30 year mortgages...Or rather they better be.

bry-Thanks. My calculations were based on a 15 year note.

I agree with you that 8.5% is achievable through the stock market. However, I have also have a high risk tolerance. Someone who is using a 4.2% return may be sick over stock market fluctuations. Given that the OP has additional funds to earn investment income, then adding 2% for the guaranteed interest savings return on the mortgage makes the most sense.

Bry911, I agree with you. Unlevered real estate only makes sense if you do it the way I do, but not everybody can build a building. So as far as risky investment with high returns go, are you at all in Etherum or Litecoin? I am enthralled by the bank bypass ideas the younger generation is engaged in at this time.

Unlevered real estate only makes sense if you do it the way I do, but not everybody can build a building. So as far as risky investment with high returns go, are you at all in Etherum or Litecoin?

-----------------------------

Aside from the other problems, unlevered investment real estate has too much liability exposure. Sometimes it is hard to keep under the 30% mark, but it is usually worthwhile to try.

I don't know what makes you think I am in risky investments. I am not in anything that is at all risky. The S&P 500 five year return is at 14.5% with reinvested dividends....I am not even beating that. For that matter the Wilshire 5000 is around 12.5% annualized.

Risky investments are getting closer to 24% to 30% annual returns. However most of them tend to nosedive eventually.

Bry-I am sorry if you read that I thought you were into risky investments. I was agreeing that OP should not hang all his money in a 4.2% return fund. Hard to keep up with inflation that way! However, some people simply are too risk adverse to invest in a mutual fund that follows the primary indexes. Some people want much more stability, even at the risk of loosing spending power over the years. Since OP stated he was worried about having the $11,000 available for making the payments in the future, with $335,000 in 401K/investments, it is also safer to assume that OP is very risk adverse. Some people are so risk adverse that they keep their money under their mattress. Risk adverse is more an investment slider scale to determine the riskiness of investments a person is comfortable with than relating to ultra high risk.

I was responding to the quoted text, not you. While I appreciate that the OP might be risk averse, my experience tells me it is more likely that he is simply in a high fee investment vehicle peddled by a brokerage or a bank that pays high commissions to salespeople but underperforms. Any kind of balanced fund should beat the 4.2% mark.

I admit that I am making a lot of assumptions, for all I know the OP has a special need that changes investing strategies, but most people in the OP's situation have a risk misunderstanding rather than a risk aversion. If the market is beating your portfolio by 300% at age 29, you probably have a portfolio problem. What happens when the market calms down a bit? He is currently approaching a negative return on investment because of inflation, a bit of a drop in the market or an increase in inflation and he will lose all his gains rather quickly.

Currently the OP is only beating the inflation rate by 1.2%...

My man. So correct. It is like breathing oxygen and the mental clarity that follows just reading your posts.