Over 21% of homeowners in SD County have paid off houses

[carlsbadworker]

I am agreeing with AN/flu now since they are not really talking about leveraging at all costs and never pay off the house ever.
I actually don’t mind having a mortgage or all in for “risky” assets when I get old, contrary to the conventional wisdom. I don’t believe just because you are in 70s, you should avoid stock market.
The key to me is cash flow. If you have enough cash flow to handle your retirements, you (and your heir) are better off if you are invested in an asset class that over-perform in the long run. For the same reason, I am against over-leveraging, because all you have is quite some assets in your balance sheet with no cash flow to show for it. You probably won’t need the cash flow now but your investment strategy should have a plan for positive cash flow 15-20 years from now, which means that you will start to pay off the houses (investment property first, then perhaps the primary) at certain point of your life. I am against addicting to leverage just because it produces better return because sooner or later you may lose your ability to earn your paycheck…and it could come earlier than you expect it.

That still leaves us one question, AN/flu. What do you guys think is a proper cash holding right now in this kind of environment? I would think there would be some of emergency fund plus enough down payment for the next rental property? I don’t know what’s the magic formula here? Since you are not finding a rental property with the limited inventory in MM and you don’t want to pre-pay the house, you just watch the cash reserve starts to grow? Or just gamble it with the stock market even at the current high valuation?

[an]

[quote=carlsbadworker]That still leaves us one question, AN/flu. What do you guys think is a proper cash holding right now in this kind of environment? I would think there would be some of emergency fund plus enough down payment for the next rental property? I don’t know what’s the magic formula here? Since you are not finding a rental property with the limited inventory in MM and you don’t want to pre-pay the house, you just watch the cash reserve starts to grow? Or just gamble it with the stock market even at the current high valuation?[/quote]
I don’t think there’s a right answer for all or even for 2 people. I think everyone’s situation is very different and the cash holding is very different. I personally would try to hold about 6 months of expense. Beyond that, I don’t think you need to have the down payment of the rental sitting in cash. Assuming you have access to the cash quickly and you have more than you need for down payment, you can have that money in the market to continue working for you. You can also put it in something like AGNC, so even if you don’t have an investment property yet, you’re still participating in RE. It’s a REIT that has been paying ~16% in dividend over the last few years. But I’m a lot less risk averse than a lot of people. If you’re more risk averse, you can keep it it cash and put it in a online savings account and make <1%.

[Coronita]

[quote=carlsbadworker]
That still leaves us one question, AN/flu. What do you guys think is a proper cash holding right now in this kind of environment? I would think there would be some of emergency fund plus enough down payment for the next rental property? I don’t know what’s the magic formula here? Since you are not finding a rental property with the limited inventory in MM and you don’t want to pre-pay the house, you just watch the cash reserve starts to grow? Or just gamble it with the stock market even at the current high valuation?[/quote]

Thanks for making me look and check 🙂
Personally, this is where I’d say it’s a personal preference/comfort..A lot of it depends on where you are at relative to your family,expenses. What’s your risk tolerance. How careful or careless you want to be. What’s the propective of your career, and where you want to go.

Me? I’m getting lazy. I’m getting tired of slaving away as at work work. I’d like to enjoy life a bit now… I have kiddie expenditures and I like cars…
While I have an positive outlook on my economic future, I think right this very moment it’s a shitty time to go all in any one particular thing right at this moment.

If I look over my total net worth (which I feel is worthless…different story) is split roughly

Stock: 40%
Home(s) equity: 35%
Cash: 25%
Total Debt/TotalAssets: 21%…

In a few days, hopefully after refi’s close, it will be more like

Stock: 40%
Home(s) equity: 30%
Cash: 30%
Debt/TotalAsset: 30%

I didn’t include my liquidable cash in a savings/checking account for which I use for day-day bills, because it’s insignificant.

Right now, I’m trying to reduce equity and increase my cash reserves so that I can be ready for the next thing. I am going to wait a bit on the sideline. I’m not thrilled about entering the stock market in any meaningful way right now or buying another property that isn’t already in the pipeline right now, though I still look. I might play a small hand or two in the stock market just to make myself feel better so that I can beat a CD, but that’s about it.

I would feel comfortable “borrowing” up to a debt/asset of 50% and keeping it there, (provided it continued to grow the total asset lol). I figure if the unfortunate event that investments blow up -50% across the board and $0 cash flow across rental properties at the same time, and I’d still be able to cover my debts and hold out and live off of my paycheck without affecting my standard of living.

Meanwhile, I’m trying to break out of the frickin rat race which is the purpose of my borrowing.

It varies…Even AN and I disagree on different levels of leverage. He’s a proponent of 30 years and refi with negative points. I get it, but I can’t bring myself to it. I do a 15 year because I’m a wuss. That’s why AN lives a luxury while I live an a crapbox.

[carlsbadworker]

Thank you for sharing, especially flu for your numbers.

I now know why I originally arguing for less debt why you argue for more debt even though we have the same view point. Your debt/asset at 21% is quite low. I do think you can safely increase your debt level.

My family expense is relatively rather significant to my paycheck now. So I have some mental push back when people are saying that more leverage is a good thing at 3.5%. Like you, I don’t want to end up with a debt/asset over 50%, considering the chance of $0 cash flow from rental property, which is so easy to happen as I have only one right now.

[sym]

The thread topic about 21% of homes w/ paid off mortgages caught my attention this morning. Curious to learn about the profile of owners in this scenario I read the entire thread with great interest.

20% of mortgage free homes is a healthy start, but the article did not expand on the type of owners. My guess is the 20% would be a combination of long term owners paying off their loans, parents buying properties for their kids, prudent Piggs, and possibly the cash purchases from investors we hear about.

Not sure how this applies, what happens when a property is purchased by business entities? Will the associated loans (if any) be visible in public records?

I was also surprised by the percentage of 20-25 year old owners without any mortgages! On the contrary, in my neighborhood the few occasions homes came on the market was because the kids could not agree on who gets the place and/or could not afford to take over the relatively low payments.

It was intriguing to read the discussion about paying off the primary residence. I still have one, only for the sake of potential tax benefits.

If possible I would like to hear about tax strategies used by folks in the forum who have paid off their mortgages? Thanks for sharing.

Personally I fall in the camp ‘it takes money to make money’, and that invariably results in using some form of debt. Fortunately the debt level exposure is dictated by a worst case scenario spreadsheet.

Thanks to all for the engaging conversation so far.

[an]

[quote=flu]It varies…Even AN and I disagree on different levels of leverage. He’s a proponent of 30 years and refi with negative points. I get it, but I can’t bring myself to it. I do a 15 year because I’m a wuss. That’s why AN lives a luxury while I live an a crapbox.[/quote]Yep, we do disagree. Everyone have different level of risk tolerance. It might also be where we want to be at financial independence point. Our age also might make a difference too. Keep in mind that while you’re Gen Xer, I’m a little younger and am a Gen Yer :-P. FLU, FYI, I live in Pinoy Thug Life area while you’re in the 1% :-P.

[an]

[quote=flu]
If I look over my total net worth (which I feel is worthless…different story) is split roughly

Stock: 40%
Home(s) equity: 35%
Cash: 25%
Total Debt/TotalAssets: 21%…

In a few days, hopefully after refi’s close, it will be more like

Stock: 40%
Home(s) equity: 30%
Cash: 30%
Debt/TotalAsset: 30%
[/quote]Yep, we’re pretty different here. For me:
Stock: 50%
Home(s) equity: 45%
Cash: 5%
Debt/TotalAsset: 40%

[carlsbadworker]

I am Gen Xer while my wife is Gen Yer. So I am actually in between in terms of risks. I am probably right in the middle for the asset allocation percentage related to you guys (in terms of debt/asset, as well as cash reserve). I will take 30 years with negative points at any day over 15 years, but at the same time, I am not comfortable putting down payment likely needed within 2 years into the stock market in any meaningful way.
I guess everyone has a level of risk tolerance and I also don’t agree with the blank statement that CAR had about debt.

[UCGal]

I’ve been reading this thread with interest. I think part of the differences expressed are because of different ages and stages of life.

I’m hoping to be mortgage free this time next year.
That’s concurrant with my husband retiring.
And I’m hoping, if the market doesn’t tank, to join him in retirement pretty quickly.

As AN said – it’s about cash flow – and our retirement budget works very nicely withOUT a mortgage payment. We need a much larger nest egg if we continue our mortgage. His birthday present next year is the lump sum payoff… But it will be less than $50k at that point.

Trust me – I’ve run every budget scenario past every retirement calculator I can find… It helps that the balance is low following years of dilligent extra principal payments.

We’ve managed to save, including paying down the mortgage, by spending far less than we earned. And this is through unemployment and underemployment during the recession. (Hubby’s an architect and was out of a job for 8 months when the economy imploded.) I think that’s the most effective way to achieve financial independance… spend less, invest more.

For us – paying off our mortgage was not an either/or to investing in other areas. We still maxed our 401ks, funded 529’s, and saved in taxable accounts. AND made extra principal payments. But we don’t eat out a lot, we do our own labor (housework, lawn work, etc.) We borrow books from the library rather than buying them… It’s amazing how much you can save that way.

[Coronita]

Ucgal, i think you hit it on the nail. Finance plans change over time, as your age, wealth, health, family situation changes.It depends where you are at… There are a lot of people who are post retirement in their 60/70ies still playing the stock market in a significant. I shake my head going WTF, are you nuts?

there are these funds which I call basket funds (not necessarily I think there are good/or bad) but they are like

Fund X for Retirement in 2036
Fund Y for Retirement in 2046, etc,etc

The difference in these funds is the mixture of asset allocation ,where the later date ones take on considerably more risk and the former considerably more in cash/dividend/short term bonds.

More importantly..How urgently do you need the cash now…

There will be a time when personally I think having a house paid of makes sense. For me, now isn’t the time.

[CA renter]

Good post, UCGal. You’re right, it really does depend on one’s stage in life, familial obligations, future employment/income prospects, etc.

What ER said is true about the yo-yo types who make incredible amounts of money on a lucky streak, but then double down and lose everything (and then some). Sometimes, they actually manage to come back again, but they usually crash again, too. Some might view this is “successful” because when these people are at the top, they can really fly high, but they can crash just as dramatically; and seeing this — more often than not — is what makes me want to do the exact opposite of what these people do, and what they invariably do is use leverage…lots of it (and get into really convoluted deals that don’t make any sense).

[earlyretirement]

[quote=UCGal]I’ve been reading this thread with interest. I think part of the differences expressed are because of different ages and stages of life.

.[/quote]

I think you make an excellent point UCGal. I do think you’re going to get a lot of different chains of thought on this depending on your stage in life, age, if you have kids vs. no kids, etc. I don’t even think there IS a right or wrong answer on this. What might be right for one person might not be right for another. Also, people have different tolerances of risk and also financial comfort.

I’m really loving the different answers on this thread. Several of the responses are quite interesting.

[quote=sym]The thread topic about 21% of homes w/ paid off mortgages caught my attention this morning. Curious to learn about the profile of owners in this scenario I read the entire thread with great interest.

20% of mortgage free homes is a healthy start, but the article did not expand on the type of owners. My guess is the 20% would be a combination of long term owners paying off their loans, parents buying properties for their kids, prudent Piggs, and possibly the cash purchases from investors we hear about.

[/quote]

I was also curious at the breakdown of the profile of the 21.5% that have their homes paid off. I posted the same thread on another forum and it was interesting to read from some long-time posters that explained how most of their neighbors have their homes paid off as their neighbors are mostly older.

One guy in La Mesa said in his neighborhood 16 out of 20 homes are all paid off with all the owners in their 70’s or older. One of my friends in Lemon Grove said his neighborhood is in a similar type situation. So it seems like there are a huge number in this category.

I know here recently there are a lot of cash sales but I guess that number is dwarfed by the amount of older people that have paid off their mortgages and are free and clear.

[quote=carlsbadworker]I am agreeing with AN/flu now since they are not really talking about leveraging at all costs and never pay off the house ever.
[/quote]

I also think that I misunderstood some of what was being discussed about perpetually refinancing and leveraging over and over. I guess that doesn’t seem to be the case but I also don’t think CA Renter should take too much flack for her comment. When she said “avoid debt at all cost” I think that is more of an expression not that someone would never take on any debt but that those that do have debt want to quickly pay it off and get rid of it as soon as possible. This sounds like it has served her and her husband well and it’s also served me very well and served other clients and friends that I have in this same category.

Also, I think It’s important to note the difference in thinking as well. Some terms were thrown around that make it sound like some people consider a paid off house as a potential liability or mention the possibility or need to possibly just “send in the keys” or walk away from the property. The thing is that guys like me would NEVER even consider or even think about this sort of thing. It doesn’t even compute in my mind.

I do realize that it might be wise for some people to probably do that with their lender. (Although quite honesty I truly believe in the majority of the cases it was one’s stupidity or greed or ignorance in buying something that they couldn’t or shouldn’t have bought in the first place). People have different opinions on moral hazard but that chain of thought doesn’t even enter my mind or probably others that strive to avoid all debt.

I guess I’m a Generation X (I missed Generation Y by a few short years as most definition I see online mention Generation Y starts in the late 1970’s). But I probably have the mentality of someone much older. Growing up I kept getting hammered into my head to take advantage of compound interest, stay out of debt, pay off your house as soon as you can.

Guy like me don’t think about tomorrow or next year or even 5 years from now. Guys like me project and think about far from now. And in almost every scenario I would always want to have a house paid off. Again, not saying it’s right or wrong. It works for me as I already have enough in the stock market and already own several investment properties.

I’m the type that pre-pays off my Mello Roos taxes ahead of time even though I just purchased the house in 2011. I like to think out longer term and I’d rather be too conservative.

I really appreciate all the great posts. They have been really interesting to read.

[flyer]

[quote=CA renter]Good post, UCGal. You’re right, it really does depend on one’s stage in life, familial obligations, future employment/income prospects, etc.

What ER said is true about the yo-yo types who make incredible amounts of money on a lucky streak, but then double down and lose everything (and then some). Sometimes, they actually manage to come back again, but they usually crash again, too. Some might view this is “successful” because when these people are at the top, they can really fly high, but they can crash just as dramatically; and seeing this — more often than not — is what makes me want to do the exact opposite of what these people do, and what they invariably do is use leverage…lots of it (and get into really convoluted deals that don’t make any sense).[/quote]

Exactly, CAR.

Making your fortune is one thing, hanging onto it throughout your lifetime is another. I’ve seen people make and lose fortunes all my life. Our goal has always been to preserve ours for the long-haul.

[CA renter]

[quote=AN]CAR,no, taking 80% LTV does not mean I’m less likely to be underwater. Choosing to buy when everyone is selling and selling (or not buying) when everyone is buying makes me less likely to be underwater. I could have bought in 2005 w/ 20% down, but that would put be in major hurt and big time underwater. So, I made the calculated risk to wait. I leverage to bought my primary and I leverage to buy my investment property. Both are up significantly. There’s NO WAY I could have save that much that quickly without leverage and calculated risk. Beyond appreciations, I’m getting over 10% cash on cash for my investment, so every month, I’m getting paid to take that calculated risk and using both my capital and leverage to get me there. There’s absolutely no way I can retire early if I didn’t use leverage. I’m doubtful I can even retire at 65 if I don’t use leverage.

You like to count out housing/home loan but that’s a HUGE source of leverage. Again, you can’t say this: [quote=CA renter]The one difference I’ve noticed between successful people and unsuccessful people (my definitions, not necessarily mainstream) is that the successful people have tended to avoid debt at almost all costs.[/quote]and then remove the biggest source of leverage MOST American use. We’re talking about borrowing hundreds of thousands here, not just a couple of grand. You ask for data, just look at the past and tell me how many people gotten richer by leveraging and borrowing money to buy their 1st, 2nd, etc. house(s). We’re talking about hundreds of millions of people who each borrow hundreds of thousands of dollar and through inflation and fixed interest rates have been rewarded handsomely. I’m sure you can dig up the data if you don’t believe me.

You can disagree all you want but feel free to run the numbers and posted here. My number for financial independence is $5M (nice and round). How long and how much do you think I have to save to get me to that number without leveraging? Assuming I start from $0. A sure way to be broke is to not leverage and depend on the man (when you’re working) and the government (when you “retire”). I can guarantee you most who do both usually don’t have anything left to leave to their heirs when they die.[/quote]

AN,

The reason you and I probably don’t see eye to eye is because I have seen people use maximum leverage to “gamble” on various business proposals, investments (other than buying houses during a low point or in a “normal” cycle), etc. I have seen multiple people totally ruin their lives, and these are people who were once fairly high-profile and very wealthy who’ve lost their money, their houses, their families, etc.

As I mentioned above, using self-liquidating debt in a conservative way (minimum levels of debt that you can easily pay back, knowing what you’re getting into, and being in control of it) is fine, but that is different from leveraging up to buy multiple properties, stocks, futures contracts, or getting into “partnerships” or investing with fast-talking salespeople, etc. which is a recipe for failure more often than not, IMHO. And consumer debt is something that should be avoided whenever possible.

Right now, I think a lot of people and entities are using “cheap” leverage to get into a variety of asset classes because they are expecting inflation to “wipe away” their debts in the future. IMHO, we are still in an asset price bubble because the credit bubble that has been causing the asset price bubbles has yet to burst. Investors have been using more leverage to move further and further out on the risk curve and I don’t see how this can end well.

[cvmom]

[quote=UCGal]I’ve been reading this thread with interest. I think part of the differences expressed are because of different ages and stages of life.
[/quote]

+1 on this

I and my husband are (younger) baby boomers, older than many on this thread. I bet this does have a lot to do with why we feel more conservative and debt-averse.

[Author]

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