Pay cash or finance

I forgot, by keeping the cash on hand I can make 5% using commercial paper and between minimum rental revenue and the interest on the cash, I can just about cash flow. by keeping the cash she remains liquid, and keeps the waterfront appreciation. By paying cash she is out the liquidity and makes a little income.

I say pay cash and keep it simple…I don’t see any increase in her current or future QOL to make it worthwhile to finance.

Go get your CFP, then you can help your mom.

She'll be gone before someone w/the handle ezmoney gets his CFP, even that might be the rightway.  Not a good sign when you can't spell princpal or advice when asking for advice.  I could be reading into it a little too much, but "...I can make 5%....I can just about cash flow" seems odd when it's not his money.  Plus, aren't you supposed to make financing decisions BEFORE you buy...?

I'm awaiting the results on my CFP exam...which is a bit annoying but at least I'm not studying.

Cowboy-



You will log on 24,000,000 times between now and when it gets
posted.  They will email you letting you know its out there, then
it the sight will be blocked up for about 6 hours.  THAT is
annoying!

[quote=rightway]Go get your CFP, then you can help your mom.
[/quote]

That is neither useful advice nor funny.

C’mon guys…the guy asked for some serious input.

I say pay cash and keep it simple.  The tax deduction is of minimal use to her.

[quote=rightway] Go get your CFP, then you can help your mom.

[/quote]



That’s f**kin’ funny.





I’ll get back to you tomorow with some input. Is it pre-construction? Don’t

freak out. Okay?

After reading your post a second time, it sounds like she has a negative

amortization mortgage. The difference between the loan rate and current

mortage rates is added to her outstanding balance. That’s not Kosher.



I don’t think the unit can rent for enough money to cover a conventional

mortgage. P/E ratio is too high. But there are too many other factors to

consider. Maybe she can flip it quickly, less than 2 years, etc.



Good Luck,



SKEE

[quote=skeedaddy]After reading your post a second time, it sounds like she has a negative

amortization mortgage. The difference between the loan rate and current

mortage rates is added to her outstanding balance. That’s not Kosher.



I don’t think the unit can rent for enough money to cover a conventional

mortgage. P/E ratio is too high. But there are too many other factors to

consider. Maybe she can flip it quickly, less than 2 years, etc.



Good Luck,



SKEE [/quote]

Dude are you seriously implying he should consider trying to flip property in this market?

Have you heard of hurricanes?

good post, EZ. shame you got such terrible responses. Good luck to you, I have no advice unfortunately.

[quote=joedabrkr]

[quote=rightway]Go get your CFP, then you can help your mom.
[/quote]

That is neither useful advice nor funny.

C’mon guys…the guy asked for some serious input.

I say pay cash and keep it simple.  The tax deduction is of minimal use to her.
[/quote]



I think in the big picture it is useful.  CFP certificants must be
able to address all areas of finances, not just simple investment
products.  The CFP classes will have case studies working through
just such situations, analyzing various options.  EZ has been
quick to toss daggers at those that have the designation, well here is
an example in his or her own life where it comes into play. 

...or at an absolute minimum know who to call on for HELP w/such analysis, another than anoynomous message board people.

Just for the record, I thought rightway's comment was both useful advice and funny.

rightway--so, I guess you're not surprised that I logged on yesterday just in case the 10th could be construed as the "end of April"?  Oh well, it's outta my hands now.

[quote=joedabrkr]

[/quote]Dude are you seriously implying he should consider trying to flip

property in this market?Have you heard of hurricanes?[/quote]





So what gives? Are you now a Florida Real Estate guru? Who knows what the

next 2 years will bring? Besides, Boca Raton is not Hicksville, L.I.

I had my financing straight when she bought the property. I told her to pay cash . But now I'm thinking why not leverage the property when I can get a loan with a rate that is less than the current interest only rate even after the principle add on. She keeps liquidity of 350k making 5%. The rental income will generate another 1-2% covering a 6% loan.

For example I know water front property will appreciate at 15-20% average for the next 20 years. I have seen this with my mother's other waterfront property over the last 30 years. Let's assume the loan averages 6%. 15%-6%=9% worst case net appreciation. Using 20% appreciation she nets 14%.

Worse case if the interest rate got out of hand to where it was costing me more than the market interest only rate, she could pay off the loan. My point is she has the money to pay cash. BTW I have heard of huricanes. That's what insurance is for. That's why I'd rather finance to keep the hard cash invested in the property to a minimum in case the insurance co. decided not to pay up.

I don't need a CFP for that!

Since you know that waterfront property will increase 15-20%,why don't you borrow every cent that you can and buy every piece of waterfront possible? 

If one knows that they can get 15-20%, they should be able to borrow and invest their way to being a millionaire. 

Waterfront property is gold. not making anymore of it.

[quote=ezmoney]Waterfront property is gold. not making anymore of it.[/quote]

I wouldn't bet the ranch on that. It wouldn't be the first time that <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Florida condo pricing got ahead of itself. If I knew more about the location and the specifics of the market, I would consider flipping it. Otherwise I'd say hold the cash, but don't allow her to take the payment option that exposes her to negative amortization.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

I live in an area where retirees are drawn like moths to a flame to buy condos, waterfront and otherwise, with full boat mortgages expecting to have rental proceeds that come close to covering the cost of carry. It just doesn’t happen. First, rents haven’t kept pace with property pricing. Second, buyers often forget the costs of taxes, rental management and vacancy rates (btw, are we talking long term or short term rental?).

Ordinarily the best to can ask for is an income stream that partially offsets the cost of carry, but not all. That leaves you to make your money on price appreciation, which has been sky rocketing the past few years. However, as is often said about the market, trees don’t grow to the sky. I don’t expect the housing “bubble” to burst, but some hyper-inflated parts of it (and that includes some Florida condo markets) will cool considerably.

The question becomes, if you can flip it now for a profit you can be happy with, would you rather do that or face negative cash flows while you wait for still higher condo prices?

[quote=Cowboy93]

…or at an absolute minimum know who to call on for HELP w/such analysis, another than anoynomous message board people.

Just for the record, I thought rightway's comment was both useful advice and funny.

rightway--so, I guess you're not surprised that I logged on yesterday just in case the 10th could be construed as the "end of April"?  Oh well, it's outta my hands now.

[quote=skeedaddy] [quote=joedabrkr]

[/quote]Dude are you seriously implying he should consider trying to flip

property in this market?Have you heard of hurricanes?[/quote]





So what gives? Are you now a Florida Real Estate guru? Who knows what the

next 2 years will bring? Besides, Boca Raton is not Hicksville, L.I. [/quote]

ROFL…no it certainly isn’t Hicksville.  For one thing the train service in Boca SUCKS from what I understand!

I lived about 10 minutes from Hicksville until last summer.

No I am not a Florida real estate guru.  I am, however, an avid observer of markets and human nature.  Consider:

We’ve now seen constant rate increases for about a year and a half now.  Ultimately this is bad for real estate prices.

More folks have financed their purchases by using variable rate(ARM) products than ever before.  Too, investment purchasers as a percentage of real estate transactions are at historic levels over the last year, and climbing rapidly.  Both of these factors make real estate prices even more vulnerable to rising rates.

Florida coastal real estate has been one of the ‘hottest’ markets, which would suggest in any sort of correction it would have the farthest to fall.  For long-term investors this isn’t such a big issue.  For ‘flippers’…well it could be a bit more challenging.

Prices for coastal real estate have continued to climb despite a VERY active hurricane season the last two years.  Totally irrational.

In my opinion-supported by the writings of others-interest in and allocation to real estate by investors-both institutional and individual-is much higher the last 5 years than in the past.  No doubt this is due to low interest rates and a ‘punkish’ equity market environment.  Real estate seems very attractive to stocks because it is tangible and prices are climbing.  Folks tend to invest by looking in their rear-view mirrors.  If those trends reverse-if stock prices start to climb a little more consistently-it could spark folks to reconsider their allocation decisions and hurt real estate valuations.

For whatever it’s worth-I’ve noticed that the advertisements for the “How to Make Big $$ in Real Estate Seminars” are quite evocative of the “Make Big $$ Day Trading” seminars of the 99-00 season.  When ‘everybody is making money doing it’ it usual means that the ‘stupid money’ has gotten into the game to become the buyer of last resort.

Look at what is going on out there.  People are buying ‘futures’ on high-rise condos on the Las Vegas strip with the sole expectation of flipping them before construction is finished.  In Miami they’re having HUGE parties at new condo openings.  It’s a freak show out there people.

If she’s interested in flipping the property but willing and able to hold it for the long term, then things should be fine.  I think it’s dangerous, however, to get into this with the expectation of immediate profits.  That’s why I think it makes sense to use a conservative financing strategy.

EZ,

From your math, it doesn't seem that holding the cash out and investing it makes you anything, and that you basically net zero by doing so.  She is in a low tax bracket, so the deduction isn't all that valuable either.

Unless you hold out the cash because really think the insurance company might not pay up in case of a hurricane (which then wouldn't it be your debt anyway?) I would just pay cash, and either rent it, keep it, or flip it, based on whatever you and your mom wants to do. 

EZ,

If it's a long term purchase just to keep it, and mom can cover collection and vacancy losses, and any other deficit between cash flow and debt service, then go for it, just don't plan on making quick money on it.  It'll eventually be profitable.

Ace

[quote=joedabrkr] ROFL…no it certainly isn’t Hicksville. For one thing

the train service in Boca SUCKS from what I understand!I lived about 10

minutes from Hicksville until last summer.[/quote]



Now I’m the one on the floor! Sometimes I amaze myself. I nailed

you down within 10 minutes just from what I now about you on this

forum. I used to live in Glen Cove (talk about lousy train service). Moved

to Miami in '92.



But seriously, you and MikeB do make very good points. I fixed my

mortgage a year and a half ago and I am pleased about that. No

question, there will be a few casualties in real estate, but nothing like the

internet bubble.   



Take care.

[quote=ezmoney]Waterfront property is gold. not making anymore of it.[/quote]

Are you sure about that EZ?  Louisiana has a bunch of new waterfront homes...

yea , yea, yea. Ocean front property will always do well. Where do you think all these babyboomers are heading? That’s right the Florida coast and they have the jack to keep prices going up. 

[quote=ezmoney]yea , yea, yea. Ocean front property will always do
well. Where do you think all these babyboomers are heading? That’s
right the Florida coast and they have the jack to keep prices going
up. [/quote]



This is an interesting perspective.  Makes sense in theory. 
I remember similar discussions about the tech stocks in 1999. 
What is the difference EZ?

I’m not fully agreeing with EZ (hence my previous post) but you have to admit there is a difference in a 2000 sf waterfront condo in Naples (obviously has a value) and some tech company that lost 37 million last year and has a P/E ratio of 3 gobzillion/1.

That’s the difference. 

The difference is unlike stock and new issues that have an endless supply. God only made so much coastline to be developed. Babyboomer demand will continue to drive up prices.

My father bought a waterfront condo that was built back in 1975 about 7 years ago for 100k today it is worth 400k. In 1975 they were selling for 17k. Do the math. That's over 30 years of history.

It does make me nervous to put so much cash upfront, but by doing so my mother saves about 25k/yr in interest cost.

[quote=ezmoney]

The difference is unlike stock and new issues that have an endless supply. God only made so much coastline to be developed. Babyboomer demand will continue to drive up prices.

My father bought a waterfront condo that was built back in 1975 about 7 years ago for 100k today it is worth 400k. In 1975 they were selling for 17k. Do the math. That's over 30 years of history.

It does make me nervous to put so much cash upfront, but by doing so my mother saves about 25k/yr in interest cost.

Well, my daddy bought Microsoft in 1986, Cisco in '92 (and sold Jan '00), Google in Aug '04, GE in 1982, and Starbucks in '95.  "Do the math."  Good thing he wasn't wasting his money in Floriday real estate with those low returns.  Why don't you go buy those stocks now?; even better, borrow to do so!  NOTHING "will always do well."  That's just a dumb statement.

If and when people realize the prices are ridiculous or they really can't afford an area, they decide somewhere else is the next cool place and the reasonable real estate draws people in.  Basic stuff.

Who knows which is better. Both produce very good results. I only know in trying to look out for mom’s money water front real estate seemed to be a pretty good bet.

They’re both good. The difference is…you can’t take a shower with your

stock certificates.

nor can you sit on your certs and catch a nice buzz while over looking the beach.

It’s a nice addition to her assets for diversification…just giving you grief for sh and grins.

PS hopefully it was clear I made up the stock purchases of my father; if he was that smart (and/or lucky), I think I’d be much brigther.

If it were my money I would have invested it in a diversified port. However, I felt better putting it into real estate. no doubt the start up costs are a bit more, since I could have invested her at nav using funds.

I also thought about a VA with a living benefit, however my deceased father's trust would own it. I elected real estate. A VA owned by the trust would have been a good choice as well I think, and if I had to do it over I might have thought more about the VA option. Any negatives about he VA you can think about vs. real estate ??

[quote=skeedaddy]They're both good. The difference is...you can't take a shower with your
stock certificates. [/quote]

Then again, unlike rental property, no stock cert is evr going to;

1) call you at 1AM about a stopped up toilet

2) Cause a negative cash flow due to vacancies

3) Cost you bundles in up-keep, taxes, mortages, and surprise condo assessments