Roth IRA... a good time?

[tsptalk]

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thinks wrote:

Tom, it would be interesting to hear about your real estate plans for investments... maybe starting another thread? Are you thinking along the lines of renting or more like a 2nd home, land or something else? I'll have to look at that link when I get time and look into getting his books.

thinks -
For about a year now my wife and I have been toying with the idea of buying somesort of investment property. Wefound areally neat100+ year old retail building in the downtown area where I live. Italso has a couple of apartments in it. We plan to lease it out and maybe use the retail spaceourselves someday if we can retire from our day job while we're still young.

I'm noreal estate investment guru but I've been reading about thebenefits ofRE and so we decided to take the plunge. We still haven't closed on the deal. It's been one of those catch 22 situations. I don't want to get tenents to sign leases because I don't officially own the building yetthe bank is hesitant to lend money without leases signed. I have people interested and I just need to get them to sign letters of intent.

It's a much bigger hassle than investing in stocks, but it's that OPM that I like.

 

[tsptalk]

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To answer your question, I believe up to $500K of the sale of your residence is exempt from capital gains. I think this is a one-shot deal, probably created for the very reason of which you speak. I'll consult my Ernst & Young Tax Guide when I get home.

I don't know the limits but I believe the exemption can be used once every two years! Big tax benefit.

:' I see you already answered that one.

 

[Pete1]

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Rolo and Tom, Thanks!



Rolo, I may end up doing as suggest, ie, investing the proceeds from the sale of the house and starting out with a new mortgage. It would depend on mortgage interest rates, expected return on investments, etc., - 14 years from now. :shock:yikes.... It's nice to know that thereshould be options.

 

[Rolo]

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Glad to hear it! Yes, always weigh all your options, even if they "don't sound right", do the math anyway.

Unless we see a return of the Misery Index, there should be no problem finding low-risk investments that have a greater return than your mortgage interest.

How to get a house for "free":

• $100K 30-year mortgage @ 6% = $600/mo. expense
  
• $100K investment @ 8% compounded annually =$676/mo.income +$100K at the end of the mortgage, you still keep your principal.
  
• $100K investment @ 8% compounded annually =$600/mo.income +$156K at the end of the mortgage, your principal grew
  
• $100K investment @ 8% compounded quarterly =$600/mo.income +$200K at the end of the mortgage, your principal doubled.

I used the same reasoning when I bought my car. Based on what I would have paid in cash and my car payment, an 18.4% rate of return during the five-year loan would make my car payment whilst keeping my cash. Having an asset (income-generating cash) to counterbalance the liability (car loan, which would not have existed if it weren't for having the car ) keeps my cash flow from being negative. My requirement before I would let myself buy a car was that I had to have the purchase price as excess cash on hand in order to keep my finances healthy--basically "save up for it" only without actually spending what I had saved.

Will I sustain an 18.4% rate? I dunno, but it is fun trying. (Since I started, my IRR ranged from 8% to 80%.)

 

[azanon]

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We were going in circles already with my post. Nothing changed with yours. I definitely dont regret buying my house. The alternative is paying someone else's mortgage. That's something i just cannot do. And think of the value and pride in owning's one home? How does that commercial go? .... Priceless.

Ever read the Millionairre Next Door Rolo? Lots of stats on those millionairres. One that stands outwith regard to our discussion ismost 1. own their own home 2. Dont move. I think its clear from that book most all those millionairres would agree with you that cash is indeed king. But most of them still bought a house.


You are obviously a very bright guy Rolo. But what you are suggesting is no different than setting up margin/leverage accounts, if you ask me. Renting (mathematically) is no different than buying a house, but not paying off the loan, and using theprincipleto invest in the market or some other investment, as opposed to paying off the loan. If you're a super investor, you will win big going this route. Conversely, if you're poor at it, you'll end up cashless, AND equityless.

 

[azanon]

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Will I sustain an 18.4% rate? I dunno, but it is fun trying. (Since I started, my IRR ranged from 8% to 80%.)

Well gollie gee. If i could get 18.4% consistently, i'd never pay for anything with cash. If you've pulled that off the past 5 years, i'm with your approach100%.

 

[azanon]

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Either you reinforce what you know or learn what you didn't know, a true win-win situation.I think it is necessary to thoroughlyconsider contrary arguments to keep from getting locked into your own mentalities and stagnating, a check-and-balance.

I fully agree. I carefully read and considered your viewpoint towards home ownership. I hope your heavy cash leveraging with minimal (paid for) hard assets continues to work to your advantage. My early going in investing hasnt been very glowing so i'm more inclined to put cash into these sorts ofinvestments.

 

[Rolo]

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azanon wrote:

We were going in circles already with my post.

What's this 'we', white man?



azanon wrote:

I definitely dont regret buying my house. The alternative is paying someone else's mortgage. That's something i just cannot do.

In your circumstances, and likely in most scenarios, buying is the way to go. All I am saying, andillustrating with very real numbers *ahem*, is that is not always the case, for you have to look at the buyer/renter's financial statement and circumstances, not just a rent vs. buy graph.

As for myself, I agree, I would have to be forced somehowto pay rent before I purchased a home. Now and henceforth. But not when I was 22. And not for a while forthe aforementioned gentleman filing for bankruptcy.



azanon wrote:

And think of the value and pride in owning's one home? How does that commercial go? .... Priceless.

How can a person feel pride when they are broke? Sooner or later, a person in prolonged poor financial condition will not feel very proud, and Quicken telling them they are building "net worth" will be of no consolation when they cannot afford to do the things they need or want to do because they sacrificed cash flow for net worth.



azanon wrote:

Ever read the Millionairre Next Door Rolo?

I am reading it right now...sorta...I started reading another book...I'll get back to it as soon as I find it under the pile, hehe.



azanon wrote:

Lots of stats on those millionairres. One that stands outwith regard to our discussion ismost 1. own their own home 2. Dont move. I think its clear from that book most all those millionairres would agree with you that cash is indeed king. But most of them still bought a house.

And I still do not agree with paying it outright, except: The majority of said first-generation millionaires are business owners. It is easier to get business financing if you do not have a mortgage, for you have collateral. Using a paid-for home to finance a sound business would definitely be a way to go. Again, you must consider context.

As far as "Don't move", I will have a hard time with that because I get boredquickly and I am still sampling areas in which I want to live. I have a question, however, if buying a home is "good" for finances, then why do they refrain from moving, as if to avoid having to buy a house again? That is what I infer from #2...

BOO...aaah...nevermind, it is getting too easy. :dude:

 

[Rolo]

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azanon wrote:

We were going in circles already with my post.

What's this 'we', white man?



azanon wrote:

I definitely dont regret buying my house. The alternative is paying someone else's mortgage. That's something i just cannot do.

In your circumstances, and likely in most scenarios, buying is the way to go. All I am saying, andillustrating with very real numbers *ahem*, is that is not always the case, for you have to look at the buyer/renter's financial statement and circumstances, not just a rent vs. buy graph.

As for myself, I agree, I would have to be forced somehowto pay rent before I purchased a home. Now and henceforth. But not when I was 22. And not for a while forthe aforementioned gentleman filing for bankruptcy.



azanon wrote:

And think of the value and pride in owning's one home? How does that commercial go? .... Priceless.

How can a person feel pride when they are broke? Sooner or later, a person in prolonged poor financial condition will not feel very proud, and Quicken telling them they are building "net worth" will be of no consolation when they cannot afford to do the things they need or want to do because they sacrificed cash flow for net worth.



azanon wrote:

Ever read the Millionairre Next Door Rolo?

I am reading it right now...sorta...I started reading another book...I'll get back to it as soon as I find it under the pile, hehe.



azanon wrote:

Lots of stats on those millionairres. One that stands outwith regard to our discussion ismost 1. own their own home 2. Dont move. I think its clear from that book most all those millionairres would agree with you that cash is indeed king. But most of them still bought a house.

And I still do not agree with paying it outright, except: The majority of said first-generation millionaires are business owners. It is easier to get business financing if you do not have a mortgage, for you have collateral. Using a paid-for home to finance a sound business would definitely be a way to go. Again, you must consider context.

As far as "Don't move", I will have a hard time with that because I get boredquickly and I am still sampling areas in which I want to live. I have a question, however, if buying a home is "good" for finances, then why do they refrain from moving, as if to avoid having to buy a house again? That is what I infer from #2...

BOO...aaah...nevermind, it is getting too easy. :dude:

 

[azanon]

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style="BACKGROUND-COLOR: #f8f8f8"

What's this 'we', white man?

The'we' was me being modest :dude:

What color are you? hehe

In your circumstances, and likely in most scenarios, buying is the way to go. All I am saying, andillustrating with very real numbers *ahem*, is that is not always the case, for you have to look at the buyer/renter's financial statement and circumstances, not just a rent vs. buy graph.

That's all i'm saying. Of course there's exceptions to every rule; one being if you can average 18.4%ROI with cash in hand!

How can a person feel pride when they are broke? Sooner or later, a person in prolonged poor financial condition will not feel very proud, and Quicken telling them they are building "net worth" will be of no consolation when they cannot afford to do the things they need or want to do because they sacrificed cash flow for net worth.

I guess that applies to someone.... definitely notme, but I guess someone out there. The onlyperson a home mortgage will break is a fool with finances. For the rest of us, we'll have 100% ownership of a home approximately the time we retire or sooner; and that is to say nothing of the 10-15%, cash, us savy folks invest in retirement.Home or big bank accountat retirement? Both please

I am reading it right now...sorta...I started reading another book...I'll get back to it as soon as I find it under the pile, hehe.

The book's only so-so, IMHO. Sure, if one followed it religiously, they have a huge chuck of cash by 60+ (if they started young). Me? I'm shooting for equal consumption during my working years, and instead of focusing on retiring early, I'm shooting for physical health and wellbeing, make sure I excell at my job, found a job i love, and hope that i'll want to continue to work well into my 60s, by choice.

And I still do not agree with paying it outright

Well, neither do I. I just bought my home over a year ago, and my loan is at 5.96% for 30 years. I'm fully ok with just paying it normal for 30 years, and taking the tax break on the interest portion. I bought in a great location, so I should see unrealized gains on the principle flowing into the house over time.

As far as "Don't move", I will have a hard time with that because I get boredquickly and I am still sampling areas in which I want to live. I have a question, however, if buying a home is "good" for finances, then why do they refrain from moving, as if to avoid having to buy a house again? That is what I infer from #2...

Well, there is a cost for moving, closing costs, and all the other miscellaneous fees that one incurs by moving. Remeber that rent vs buy graph I referenced earlier? Well, it suggest renting if you're only going to live in one spot 3 years or less (give or take) cause it takes that long for the house to appreciate enough to make up all the entry fees. Think of buying a house as a mutual fund with a pretty heafty front end load .

If you really mean that, then you might very well be one of those exceptions that's better off renting a house or an apartment. Even I really dont advocate buying a house unless you really think you will stay put. My wife and I have been married 11 years, but we waited till last year to buy our first home because my early career had me running all over the place.

BOO...aaah...nevermind, it is getting too easy.

Wish i could say the same. I tried to explain how an equity that produces unrealized gains is anything but a liability earlier, but clearly I failed. Cant say that I blame you cause i couldnt even fathom a rebut. I have about 70K in cash invsestments right now, mostly stock, and i'd have to say 85% of my profits are unrealized gains that only become visible as cash when i sell. Oh sure, you may say I can clearly see my share price rising on a daily basis. Well, what difference is that and a third-party surveyer that reassess the value of my house? Sure I can dump a stock within a day, and a house might take a few months, but what's even a few months for any long term investment. Besides, if i was really hurting for cash at the time, they have these really neat things called home equity loans. Now I dont ever intend to get one, but they are there and worth pointing out.

 

[Rolo]

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azanon wrote:

Think of buying a house as a mutual fund with a pretty heafty front end load

haha! I like that.

Yes, 2-1/2 years was the break-even point over renting an apartment when I calculated buying my first home 8 years ago. I planned on staying about four years, but stayed a little longer for various reasons, working on my businesses and finances uninterruptedwere the chief ones.

Interesting thing back then: my house payment with taxes and insurance was actually less than rent for an average apartment half the size. Odd. Oh, and it was a brand new house--I had to wait for them to finish building it.

That is not the case now, however; my house increased in value 30 to 45 percent, depending on who appraises it (another arbitrary variable), so the no-brainer buy scenario no longer exists. That suits me just fine because I bought this place with the intent of converting it to investment property. Yes, my rental income will exceed my mortgage, insurance, and taxes, creating positive cash flow and converting it to a true asset.

My original mortgage was 6.55%, which was very good at the time. I refinanced at the 6-year point at 5.5%. It does not sound like much, but there are other positive ramifications to that move:

• Obviously, my monthly payment decreased, making less negative cash flow for the next 30 years.
  • The difference goes right into my portfolio, which, at the moment is making 13.45%, my crummiest return by far, but it beats 5.5%.
  • This also makes my debt-to-income ratio better for when I buy another home.
• The closing costs were only a few hundred dollars. That did not come out of my pocket. Lolligag after you fill out the application andhad gottenthe process started. I was able to skip two mortgage payments, and my refinancing balance was dated, so it was higher than what I actually owed, effectively skipping three mortgage payments. I got a few refund checks, which paid for the closing costs and the rest went straight into my portfolio.
• They try to sucker everyone with a lower rate by adding points. I did not object so I can let the salesman present his flawed argument on how his offer is better than what I have. Themainflawis that he compared his 30-year loan to my 30-year loan. That is incorrect, because I did not have a 30-year loan, I had a 24-year loan at that time since I already paid it for six years. I let that go until the day before the closing. I called the refinancing company to cancel the closing because their offer was not better, therefore I had no reason to refinance. They nixed the points and some of the closing costs. :u

 

[azanon]

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Well, i want to reiterate (in support of your position) that buying a personal home "only" for investment purposes is probably not the best reason to buy one. If it means nothing else to you beyond that, you might very well be better off renting permanently.

Borrowing from Gordon Williamson in "Low Risk Investing", : "Home ownership has three advantages: psychological comfort, appreciation potential, and tax deductions.... Owning a home carries a kind of satisfaction, an inherernt pride that cannot be valued monetarily. Until you buy your first house, you cannot fullly appreciate the difference between renting and owning. These feelings are different for each one of us and impossible to measure, but not to be underestimated, nevertheless..... A second reason people buy homes is - they hope - to own something that keeps pace with inflation."

He lists 3 disadvantages: 1. First, it will cost you more than you expect. By that he didnt mean initial fees, he meant things like replacing appliances, having the place painted every few years, maintaining a yard, etc. 2. Second, you should not buy a home purely as an investment. If this is your sole motivation, then you are making a big mistake, for one simple reason: There is no guarantee the house will appreciate in value, and if you end up selling such a large asset for a loss, it may have a profound effect on your financial security. 3. Third, from a strictly financial perspective, home ownership makes sense only if you assume a modest or moderate rate of appreciation. And then it only makes sense if you accept paper profits. (He then goes through a rent vs buy example that shows buying is only smart if the value of the home gues up by at least 5 percent per year).

Towards the end, he admits.. "The economics of ownership may not be as appealing as being a renter, but the pride of home ownership is hard to beat..... By doing some basic homework, you shouldn't get hurt owning your primary residence."

....

I think that assessment falls somewhere in the middle of our discussion and is probably a pretty good characterization of this choice we all face. For me, ultimately my wife wanted a house we could call our own, and i wasn't going to deny her. I kind of like it too considering my interest rate isn't so bad.

Azanon

 

[vethost.com]

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I believe azanon meant to say the EARNINGS on a ROTH are also TAX-FREE upon withdrawal.


azanon wrote:

Roths only help a current year's taxes in that the earningsgrow tax deferred. There is no allowable deduction for Roth IRA contributions. Hope you didnt take a deduction for a Roth IRA contribution .

If you're wondering why the IRS keeps up with Roth IRA contributions, its because you are allowed to withdraw the contributions tax free (not the earnings) simply because you already paid taxes on them...... or you should have .

Azanon

 

[azanon]

response

I believe azanon meant to say the EARNINGS on a ROTH are also TAX-FREE upon withdrawal.

No i didn't mean to say that, because that would be incorrect if you "withdrew" them before you were 59 and 1/2 years old. Earnings are certainly tax-free after that age.

This was all besides the point i was making in 04'. We were discussing withdrawal options before the qualifying age (59 1/2). If you are going to dredge up an old thread, make sure and catch up with the conversation instead of just reading the last post.