Covering a mortgage without losing your ass(ets).

[DRiP Guy]

Quote:

Originally Posted by Nords At Drip Guy's question, here's an update. Three months is meaningless in the context of a 30-year mortgage but this might really really be the top. IJS paid out a little over 24 cents/share last week and we're now up a total of 40% over 27 months. That looks like about 16% APY even after paying taxes at the 15% rate and reinvesting, although I'm not sure how much of that payout was cap gains. IJS is up another 8% since I accused it of peaking.

Thanks! And also thanks for answering on this thread, which is where I should have asked, since you mentioned the other thread was not for that topic.

[rs0460a]

My - what a thread!

I'm glad I'm "old" and my/DW's mortgage (actually note) days are behind us .

- Ron

[magellan_nh]

Quote:

Originally Posted by LEX I leave you with the last word on topic....good discussion.

I'm with LEX on this one. While it might make financial sense to margin your house and invest the proceeds, it has to be called what it is - leveraged investing. Because of the government subsidy on mortgage interest payments and the low borrowing costs, the economics have been favorable in the past. The question is whether the risks are priced correctly and whether you're retirement plan is able to handle a two or three sigma market event.

I actually like LEX'es way of thinking about the house purchase as a way to mitigate retirement risk by making retirement housing costs more of a known quantity. I've wished I could do this same thing with property taxes ($13k per year and rising) and with healthcare costs ($7k per year and rising), but I can't find anyone to take the other end of that deal.

Jim

[kcowan]

The other aspect to this is asset diversification. If you home has appreciated singificantly, it may not continue forever, so borrowing to invest can make sense for diversification to other asset categories.

Of course, the fallback plan would have to include downsizing if the other categories fail to outperform the mortgage after taxes.

[brewer12345]

What seems to be missing in this discussion is that leverage applies to aportfolio, not just to the incremental assets purchased with leverage (unless the loan is non-recourse). It isn't whether the incremental assets beat the cost of the money, it is whether the bulked up portfolio beats the cost of the money.

[free4now]

This was a good thread to read. My new years resolution is to sell my condo a half hour outside San Francisco, and start renting in San Francisco proper.

I never make economic moves solely for market timing reasons, but when I have other reasons to buy or sell I will pay attention to market timing. Never in my life have I seen so much agreement that the real estate market is not going to appreciate in the next few years. If I had a strong reason to stay where I am, maybe I could justify staying in my condo, but I'm pretty sure I'm going to want to move sometime, and now seems to be the right time.

Given that the value of my condo is about half my net worth, the only way to justify it is to count on appreciation. Since it is very unlikely that we will see significant appreciation in the next few years, and since I'm pretty sure I'm going to want to move in the next few years, it seems time to sell. I considered renting it out for a while, but that seems like more of a "buying time" move, not a sustainable financial strategy.

I'm still young (mid-30's), so I'm willing to pay the premium rents to live in a world-class city. Otherwise I would be moving out to the hinterlands.

Maybe I'll run into OAP in SF :-)

[Lagniappe]

Quote:

Originally Posted by free4now This was a good thread to read. My new years resolution is to sell my condo a half hour outside San Francisco, and start renting in San Francisco proper. ...willing to pay the premium rents to live in a world-class city. Otherwise I would be moving out to the hinterlands. Maybe I'll run into OAP in SF :-)

Free4now,

My resolution is to sell my condo in the city of SF, and move about 30 minutes outside the city (not sure yet if I'll rent or buy). Given the generally good public transportation, why move into the city and pay double the rent? Just curious...

TV

[kcowan]

Quote:

Originally Posted by brewer12345 What seems to be missing in this discussion is that leverage applies to aportfolio, not just to the incremental assets purchased with leverage (unless the loan is non-recourse). It isn't whether the incremental assets beat the cost of the money, it is whether the bulked up portfolio beats the cost of the money.

I agree in general but initially it is useful to look at the incremental returns, if any. Because if moving to leverage reduces overall returns, at least you need to question your asset selection criteria.

This is similar to product pricing. If you adopt a marginal contribution model, you are driving the company toward zero profit margin by not covering the overheads.

[LEX]

Hey, free4now,

Tune in to

http://patrick.net/wp/

You are both on the same thesis which is to cash out of the hyper inflated bay area market now, rent, and enjoy the cheap oppurtunity after the bubble bursts!

You have figured this one out!

[JustCurious]

Nords, you excluded (1) closing costs, (2) trading costs, (3) taxes. So your results are flawed. Not to mention that "past performance does not guarantee future results."

[Nords]

Quote:

Originally Posted by JustCurious Nords, you excluded (1) closing costs, (2) trading costs, (3) taxes. So your results are flawed. Not to mention that "past performance does not guarantee future results."

Ye gods, man, are you sure that you read the whole thread? Here, wait, I'll get the relevant parts of it for you:

Quote:

Originally Posted by Nords Dividends (~1%) & cap gains (if any) will be reinvested free of charge. The closing price on 8 October 2004 was $110.06. Since closing costs will be recouped by the lower payments in just eight months, I'm not going to count that against the returns. The Fidelity brokerage fee is minimal (one really big trade in a frequently-traded account) so I'm not counting that either.

Quote:

Originally Posted by Nords We refinanced again this month-- barely nine months after the last refinance (which has already paid for itself). This time we went from NFCU's 5.5% to 5.375%. Zero points, less than 80% LTV, no cash out, applying online, no documentation or appraisal, and haggling with the title company brought the total refinancing cost down to $1151. Our payments dropped by $44 so this time it'll take 27 months to pay back the refinancing costs. Back in Oct 2004 (the beginning of this thread) we moved a large chunk of our portfolio, including the refinancing proceeds, into the S&P600/Barra Small-cap Value ETF (IJS). I'm tracking this on a spreadsheet with the assumption that we subtract 15% from dividends (to pay taxes) and reinvest the remainder (which Fidelity brokerage does for free). The ETF is up 18% since then and reinvesting dividends has boosted the return to 18.7%. Sure it looks smart now, but let's give this another 29 years before making a judgment call. We could look equally stupid next spring but we'll keep reinvesting those after-tax dividends.

Quote:

Originally Posted by Nords Annual update: The latest quarterly dividend was just paid and we're up 31% after-tax over two years or about 14.5% APY. I'm assuming that dividends are taxed at the 15% rate and reinvested.

Quote:

Originally Posted by Nords At Drip Guy's question, here's an update. Three months is meaningless in the context of a 30-year mortgage but this might really really be the top. IJS paid out a little over 24 cents/share last week and we're now up a total of 40% over 27 months. That looks like about 16% APY even after paying taxes at the 15% rate and reinvesting, although I'm not sure how much of that payout was cap gains.

And I'll recap:

Quote:

Originally Posted by JustCurious Nords, you excluded (1) closing costs

The lower mortgage payments have more than taken care of the closing costs. I'll also point out that the total sum of all the closing costs we've paid (getting the loan and then refinancing it) are less than 1% of the loan a couple percent of the profits. Hawaii mortgages are pretty hefty and we haggled hard on the closing costs.

Quote:

Originally Posted by JustCurious (2) trading costs,

So far that's a Fidelity commission of three $8 trades. We could've done it one trade but I suspect that the share volume would've driven up the price. Since we paid that commission (Oct 2004) all dividends have been reinvested for free.

Quote:

Originally Posted by JustCurious (3) taxes.

Well, so far I've been paying the taxes out of other funds, as I suspect that anyone else would do in the real world. I'm not going to liquidate shares for an $8 commission to pay a few hundred in taxes. But I've tracked the numbers on a spreadsheet, and on that spreadsheet I've been paying tax on the dividends at what I feel is an extremely conservative 15% rate before reinvesting them. The returns I've quoted in this thread are after-tax returns. If dividend tax rates change then I'll change the spreadsheet.

Quote:

Originally Posted by JustCurious So your results are flawed.

Yes, and extremely profitable. I suspect that the "flaws" don't invalidate the two points that have been made so far:
- mortgage arbitrage can be profitable, and
- a bigger ER portfolio is more survivable.

Of course we'll know the full results in another 28 years.

Quote:

Originally Posted by JustCurious Not to mention that "past performance does not guarantee future results."

You're absolutely right. The best data I could find was Dimson & Marsh's study on a century of investment returns claiming that there's a small-cap value premium. I feel that conclusion has been adequately validated by Bernstein and others. Of course the next couple decades could prove that past is no longer prologue, but I'm going with the best information available.

When you have a better system then I'd be happy to use it.

[free4now]

Quote:

Originally Posted by Travelingval My resolution is to sell my condo in the city of SF, and move about 30 minutes outside the city (not sure yet if I'll rent or buy). Given the generally good public transportation, why move into the city and pay double the rent? Just curious...

Well the main reason is to get it out of my system. All my life I've lived just outside big cities and have always had fantasies of actually living in the city itself. I find that living in an isolated condo out in the burbs just isn't stimulating enough for me.

The other way I look at it is that living in a city as a FIREd person with time on my hands is actually a great way to efficiently consume the cultural resources the city provides Most people who live in cities pay the high rents just to be able to enjoy the city for a couple of hours a week in their free time. But as a FIRE'd person I can reap the benefits of living in a city hours every day, without having to put up with the commute hassles that plague workers.

Last but not least, one reason for moving to the city is dating. Where I currently live on the edge of Silicon Valley, it seems most of the women are looking for and finding the spendy breadwinners (not me). The interesting women to me have always been in San Francisco (and Berkeley). In my experience women in the city can't be bothered to make the drive to date someone outside the city.

[Nords]

Update after December's dividends:

Still up 27% after the dividend (at a share price of $67.80).

At 39 months, with a share price of $64, up a bit over 20%. That's an annualized after-tax return of 6% on a 5.375% mortgage.

NFCU's zero-points zero-origination-fee 30-year fixed mortgage appeared to bottom out at 5.5% (it's back up to 5.625%). We probably won't see 5.25% but the year is young...

[liveitup]

I'm a big fan of paying off a mortgage asap.I paid off my first home in 8 years and have no regrets in doing so.

Several years ago,I purchased a home with a mortgage payment of $920 per month @ 5.5%. $743 is interest $177 is principal.

IN MY MIND by making an extra principal payment of $177,I'll get a $743 return on my investment.That's over a 400% return in one month!

That return will come down over as more money is allocated to principal an less toward interest.

I will use a HELOC occasionally to purchase investment property,but I always try to pay if off ASAP.

[cute fuzzy bunny]

Nords -

Your strategies and backups ARE a little different from the way most folks would go about it...

A 100% or nearly 100% allocation to equities, a cola adjusted income, and the professed set of brass ones to ride that out through a multiyear bear market can definitely produce a larger, more survivable portfolio and a higher income level.

With the knobs turned to 11, the more you put in one side, the more comes out the other.

Where it gets dicey is when its done the way almost everyone else does it. Carry a higher spending load from the mortgage. Set the asset allocation around 60/40 so the equity volatility doesnt scare the pants of you when its time to make the monthly bill payments. Then set aside 3, 5 or 7 years of cash "just in case".

Once you factor in the return drawdown of the higher bond load and the cash thats losing value to inflation, the arb upside is pretty limited.

In fact, the Firecalc runs I did showed that someone with a paid off mortgage, the smaller portfolio, and an 80/20 allocation would easily run down someone with a mortgage, the commensurately larger portfolio and a 60/35/5 portfolio.

Much better survivability, far fewer "near deaths" due to low balances that came back at the last minute, and much higher terminal portfolio sizes on the no debt version.

So sure, you take a high equity load, get a rate around 5%, and can stare down a long bear with a vulcanlike steely eyed gaze...then you can arb a gain out of the equation. No brainer.

Spending risk, portfolio risk, rates of return, success rates, terminal portfolio sizes...seems to me that the best bet is to find out how to minimize as many of them as possible and still have a certain good outcome.

[Nords]

Quote:

Originally Posted by cute fuzzy bunny A 100% or nearly 100% allocation to equities, a cola adjusted income, and the professed set of brass ones to ride that out through a multiyear bear market can definitely produce a larger, more survivable portfolio and a higher income level.

I'm not hiding it but I don't recite it every time I post. Maybe I'm gonna have to add some sort of standard-disclosure disclaimer to my signature...

[cute fuzzy bunny]

I'll bet Yahoo has one you could copy.

Just make sure to take all the references to Yahoo! out of it before you post it.

[Nords]

Quote:

Originally Posted by cute fuzzy bunny Just make sure to take all the references to Yahoo! out of it before you post it.

Eh, I can't have more than two Yahoo! lines or 250 Yahoo! characters:

"I'm ER'd since 2002 on a COLA'd military pension & TRICARE with a spouse who expects the same in 2022, a rental property, two mortgages, and a kid who's leaving the nest in 2010. What works for us may not work for you."

[Nords]

Update after June's reinvested distribution:

Still up 17% after the dividend (at a share price of $64.62) and Friday's close was $61.86. At 45 months the annualized after-tax return is a tad over 4%, which officially sucks behind a 5.375% mortgage.

Only a bit over 26 years left... I hope there's enough time for performance to catch up!

[Nords]

As of 30 Sep 08, IJS issued a 29 cent/share dividend and closed at $65.05/share.

We've had this experiment running for just under four years now, and the after-tax APY is still 5.44% in the midst of what would appear to be a pretty sucky market. Our mortgage is a fixed-rate 5.375% so even without the mortgage deduction (exceeding our standard deduction) we're ahead of the game. The reinvested dividends should pay off quite well in the next two decades.

For those who haven't yet read the earlier posts in this thread, in our situation the FIRECalc run with a mortgage has a higher success rate than the FIRECalc run without a mortgage. (The larger portfolio created by a big Hawaii mortgage has a higher survival even with a higher withdrawal rate.) We also have the tolerance for volatility and the annuitized income to be able to take on this risk. See my profile for more details.