My husband and I are buying a large piece of land (in the States, not here), which we are going to split up and sell. We have done this before, and the profits from that venture have put us in the fortunate position of having about five times the amount of cash needed for the down payment on this other property.
That cash is sitting in a savings account earning 5% interest right now and the loan will be at 8.5% interest (because it’s investment property). We aren’t planning on using the money in savings for anything before the loan for this new land is payed off (in maybe a year to 18 months), but you never know, right?
The question is whether to put down a larger down payment than the bank requires or not.
It’s counter-intuitive to me to borrow (and pay interest on) money when we already have money in the bank, but a lot of people don’t seem to think so, seeing it as more of a buying-power issue.
The idea behind using other people’s money is that you invest in higher yeilding investments. You appear to be savvy about real estate but not so much about other investments. I suggest you spend some time educating yourself. Your money may be safe in a saving account, but there is no growth potential. There are tons of books out there, some better than others, but you will learn which are best by reading and using common sense.
Generally speaking you want to put your money into the highest yielding “investment” first. Investment is in quotes because that also includes paying down debt.
Credit card - 15%
Car loan - 10%
Stock market - 12% (risky)
Mortgage 8.5% (tax deduction makes actual rate lower)
Bonds/savings - 5%
Pay down the credit card before the car loan and the car loan before investing in the stock market (exempting your retirement investments) etc.
Not a hard and fast rule, of course, and you have to account for the fact that investments like stocks are variable return while paying down debt is 100% guaranteed return. Taking out a Home Equity Loan to invest the money in stocks may pay off, or it may be a financial disaster. You also don’t want to eliminate all your assets in paying down debt, having some savings or investments you can liquidate in a pinch is always good.
In your case, it’s more or less two guaranteed return “investments” against each other, Mortgage vs. Savings. If you get a tax break on the mortgage, factor that into the total cost, it will then be less than 8.5%. If the cost of the mortgage falls below 5% you will make more money in savings than you’ll spend on the mortgage, so keep as much as you can in savings. If it’s higher than 5%, use a bigger down payment, but keep a safe amount saved for a rainy day.
We have money in IRA’s and stocks too, but we knew we would be needing this money for this deal and possibly others, so we didn’t want to tie it up for now. Would you like to recommend one of the better books so I can educate myself, or should I just wade in?
Money held in liquid accounts (i.e.: where you can access it in a very short period of time) is rarely going to return a high return rate. Investing for growth is a long term proposition. Five years minimum, but ten years or longer is a more realistic goal. The trade off is risk vs. security, w/ the higher risk returning the bigger reward.
I’ve mentioned this book before. It was published around thirty years ago, but it’s a good basic primer and the basics don’t change: The Money Book, by Sylvia Porter. I’m sure there are newer books on the siubject that are just as good, but I’m not familiar w/ them.
Here’s a good site for info. on equities, but I’d still recommend reading several basic investing books: http://www.fool.com/
If there’s a requirement for mortgage insurance while the loan-to-value ratio is above a certain percentage, it might be worth looking into how much you spend/save by putting enough money down to avoid that. It’d also be a very good idea to talk to a US tax professional to see how various approaches will affect your tax burden. Finally, keep in mind that if you’re earning more interest in the 5% account than you’re paying on the 8.5% loan, you’re still ahead.
Haven’t you answered your own question? If you might need the money, don’t invest it in stocks. That should be a long-term thing.
If you think there will be other deals or needs for the money, keep it in your savings account. That plan, while not maximizing your return, provides flexibility. In this case, the difference between 5% and 8.5% is what you are paying to have your money handy if you need it.
The question was not whether to put the money in stocks, it was whether to put more down on the loan than required. I’m trying to understand the logic of only putting down the minimum and borrowing money we already have, because I’ve been told by some people that this is the way to go.