Q: Can you help me settle a family debate? I’m thinking about buying a house as a rental. My brother-in-law says I should take out as big a mortgage as possible. My gut tells me to use my cash just sitting in the bank. How do I decide?
I get this question often and, in fact, I touched on this concept early last year in these very pages. My answer is always, it depends. I know that’s not totally helpful, but let me explain!
When a person has both investments and a mortgage, they are basically investing on margin. I know it might not feel this way, but it is precisely what’s going on.
Let’s say you spot a home to purchase for $200,000 and you decide to pay cash for it. However, after a year, you change your mind and opt to take out a mortgage for the full $200,000. Of course, for the sake of simplicity I am assuming you can borrow 100 percent of the home’s value - a rarity in today’s environment.
So, while you would still own a home, you’d also now have an investment portfolio on the side worth $200,000 funded completely with borrowed money.
To help settle your family debate, if you have the ability to buy your home with cash, it’s only smart to choose a mortgage if you feel you can earn a higher return than you’ll be paying on the mortgage. You should feel flattered, your brother-in-law obviously has confidence in your investment abilities!
For readers interested in the deeper math behind my answer, visit www.frontstreet.com/yourmoney.
Q: My financial adviser recently mentioned that the management fees I pay him are tax deductible. Is this true?
Unfortunately, your question is also best answered with a convoluted, yes and no.