By It always surprises me that 40% of all homeowners in America own their home free and clear. I’ll be the first to admit that I saw that stat years ago; the number is probably lower today.
Still, a mortgage banking consultant I know up in Berkeley just bought a home all cash, and we all know that lots of older people also own their home free and clear. I’ll guess he and the vast majority of “free and clear” owners have no interest in getting a new mortgage, but here’s an idea for all my Realtor friends.
Maybe this mortgage-free person would be better served to take out a mortgage and buy rental property. (1) Mortgage rates are insanely low (did you ever in your wildest dreams think you’d see rates in the low 4’s?) and (2) buying a rental all cash can generate very attractive returns.
I heard of one couple whose neighbor walked away from their mortgage, leaving a boarded up eyesore next door. Although he had never been a landlord, he contacted the bank and bought the house at a bargain price. I should add that he bought it all cash.
He fixed it up, rented it out to some nice people, and not only did he eliminate the vacant eyesore, he now is making almost 10% cash on his cash. In another case, my father just did this very same thing. Turned $34.00 a year in interest he was earning at the bank into $1,100.00 a month in rent. He thought for $22,000 a year it was worth the hassle of finding a new renter every couple of years and receiving the occasional call about the garbage disposal.
For those who own their home without a mortgage but who don’t want to be landlords, there are other opportunities. Someone in this situation could buy California General Obligation bonds yielding 5%, and being tax free, this is the equivalent of getting about 8% on your money.
If this person needed to take out a mortgage to do this, the math is simple. He’d pay around 3.75% for the mortgage and receive 5% from the bonds. That’s a 1.25% spread, and because it’s tax free income, the real yield is closer to 3% and I don’t think bond rates will be going down in a few years when it’s time to renew the bonds.
I’m not a tax expert, but (1) the income on the bonds is tax free and (2) the homeowner could write-off his mortgage interest, so let’s just say that the true yield is closer to 3%.
It might be worth exploring this with people who are mortgage free.
Good luck, and let us know how this works out if you do try it out on some people. Any of our mortgage bankers would be happy to help you put together a plan.
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