9/18/10

so my old man sold his house back home and now has 500k USD cash. looking to buy a 400k house. His plan was...put down 100k cash and remaining 300 will be mortgage. he'll get around 4.5 to 5 % rate.

so was thinking, out of that 500k he got, he'd use 100k for down and put remaining 400k in an investment that returns 5 % after tax year after year. not a risk-taker at all.

watever income his 400k investment will generate, he'll use that interest to pay off the house payments.

suggestions/comments/ideas pls. if someone has a better idea, feel free to shoot.

Comments (16)

9/18/10

short RIM: its the new palm
long GS: their cap lost $25B due to the SEC thing and they only paid $500 mil for that loss, so numbers don't add up and its an unfair trade...hence highly undervalued

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9/18/10
SuitedWolf:

short RIM: its the new palm
long GS: their cap lost $25B due to the SEC thing and they only paid $500 mil for that loss, so numbers don't add up and its an unfair trade...hence highly undervalued

100% agree.

RIM is the new palm. Downgraded by a couple firms just recently. JPM is trying it out for corporate communication. Once that market is cracked what are they going to do? DOA baby DOA

9/18/10

if he's not a risk taker at all he should just buy the house with 100% cash

9/18/10

I would buy Ford. I believe it will be a $15 or $16 stock with lower volatility in the coming months. It too, was upgraded recently by a couple of banks.

9/18/10

how much does low risk bonds pay, for ex GE, GS, JPM, Disney etc...not looking for extravagant return, 5 % after tax is more than enough. preservation of capital is most important.

9/18/10

IG debt does not pay enough to hit your target - there's a very narrow spread against treasuries in high-grade debt these days.

9/18/10

None of those trades come close to answering the questions. I'd look at municipal debt, which is yielding close to that for longer-tenured notes, and is tax-free. It's not completely risk-free, but a diversified muni debt portfolio should be fairly close to such. The yield on low-risk corporate debt is absurdly low right now; some highly rated borrowers have been pricing at very tight spreads to treasuries; I believe Berkshire Hathaway priced an offering at a negative spread to treasuries a few months ago.

If you don't want to go in the fixed income direction, historically speaking, timber land has been the best yielding asset class on a very long time horizon.

9/18/10

how about going long bp

9/18/10
Ivysaur:

how about going long bp

Bingo. Great call Ivy. People always overreact. Look at Merck years ago. Vioxx happened and people said they would go bankrupt. They had amazing reserves set aside for the lawsuits and had like a 10% yield because the stock price was so low and they refused to cut the div. Fast forward and those Vioxx lawsuits got thrown out and things are fine.

Carnival cruise lines tanked when sickness broke out on their ships. Chicken little syndrome. Stock climbed right back.

BP is a perfect example of this. I think a lot of the concern was valid, but you never hear about it now. Old news. That is the nature of people in this country and investors are the same. Yesterdays news. BP will rebound and I think being long will pay off very well. Once they re institute the dividend you can expect a nice pop in the stock price.

Long BP.

9/18/10

Disney and GE are not in the same league as GS and JPM in terms of riskiness.

There's no such thing as a risk-free investment paying 5% annualized return at the moment. The US long bond is only yielding 3.5%. It's always considered the proxy for a risk-free security in the market, and I would argue that with our current debt-to-GDP ratio, it's not a particularly good proxy.

If you want a higher return, you'll need to take on additional credit risk if you want to deal in the bond market. And if you want to piss about in equities, there is absolutely nothing that will assure you a 5% return. Please don't make the mistake of believing that past performance is an indication of future returns.

If your father is looking to buy a $400k house with $500k of equity, and he has no risk tolerance, then he needs to buy the home outright, and just play the markets with the $100k remaining. If he has some risk appetite, then we can talk about his existing plan (which I think is ill-conceived unless he needs to keep $300k of equity in liquid securities).

To be truthful, I don't think he should be buying a house at all right now, but that's not my call to make. Regardless, why don't you explain to me why he thinks it's a good idea to choose to pay interest when he doesn't have to. Why buy something on credit when you can afford it on equity? Unless he's worried that the housing market is going to collapse, and he wants $300k of gold, water, ammunition, and long-dated foodstuffs, I don't see the logic in his plan (specfically because he's so risk averse).

9/18/10
brotherbear:

Disney and GE are not in the same league as GS and JPM in terms of riskiness.

There's no such thing as a risk-free investment paying 5% annualized return at the moment. The US long bond is only yielding 3.5%. It's always considered the proxy for a risk-free security in the market, and I would argue that with our current debt-to-GDP ratio, it's not a particularly good proxy.

If you want a higher return, you'll need to take on additional credit risk if you want to deal in the bond market. And if you want to piss about in equities, there is absolutely nothing that will assure you a 5% return. Please don't make the mistake of believing that past performance is an indication of future returns.

If your father is looking to buy a $400k house with $500k of equity, and he has no risk tolerance, then he needs to buy the home outright, and just play the markets with the $100k remaining. If he has some risk appetite, then we can talk about his existing plan (which I think is ill-conceived unless he needs to keep $300k of equity in liquid securities).

To be truthful, I don't think he should be buying a house at all right now, but that's not my call to make. Regardless, why don't you explain to me why he thinks it's a good idea to choose to pay interest when he doesn't have to. Why buy something on credit when you can afford it on equity? Unless he's worried that the housing market is going to collapse, and he wants $300k of gold, water, ammunition, and long-dated foodstuffs, I don't see the logic in his plan (specfically because he's so risk averse).

House val : $400k
down payment: $200k
amount financed : $200k
i rate: 5 %
period : 30 years
Monthly payment : $1200 (roughly). 12 payments x 1200 : 14,400 / year.

after paying 200k down, he's left with 300k. wants to put that 300k in an investment that will earn him 5 % / yr i.e. $15,000 ( 5 % of 300k). That 15k, he will use to pay for the monthly mortgage. Over time, his principal of 300k wont be consumed/spent/lost AND would own a new house.

that's why, looking for risk-less 5 %...or with very very very little risk, get 5 % ...or even 4 is fine....he's got monthly pension as well. that's what he thinks.

9/19/10
Don Corleone:
brotherbear:

Disney and GE are not in the same league as GS and JPM in terms of riskiness.

There's no such thing as a risk-free investment paying 5% annualized return at the moment. The US long bond is only yielding 3.5%. It's always considered the proxy for a risk-free security in the market, and I would argue that with our current debt-to-GDP ratio, it's not a particularly good proxy.

If you want a higher return, you'll need to take on additional credit risk if you want to deal in the bond market. And if you want to piss about in equities, there is absolutely nothing that will assure you a 5% return. Please don't make the mistake of believing that past performance is an indication of future returns.

If your father is looking to buy a $400k house with $500k of equity, and he has no risk tolerance, then he needs to buy the home outright, and just play the markets with the $100k remaining. If he has some risk appetite, then we can talk about his existing plan (which I think is ill-conceived unless he needs to keep $300k of equity in liquid securities).

To be truthful, I don't think he should be buying a house at all right now, but that's not my call to make. Regardless, why don't you explain to me why he thinks it's a good idea to choose to pay interest when he doesn't have to. Why buy something on credit when you can afford it on equity? Unless he's worried that the housing market is going to collapse, and he wants $300k of gold, water, ammunition, and long-dated foodstuffs, I don't see the logic in his plan (specfically because he's so risk averse).

House val : $400k
down payment: $200k
amount financed : $200k
i rate: 5 %
period : 30 years
Monthly payment : $1200 (roughly). 12 payments x 1200 : 14,400 / year.

after paying 200k down, he's left with 300k. wants to put that 300k in an investment that will earn him 5 % / yr i.e. $15,000 ( 5 % of 300k). That 15k, he will use to pay for the monthly mortgage. Over time, his principal of 300k wont be consumed/spent/lost AND would own a new house.

that's why, looking for risk-less 5 %...or with very very very little risk, get 5 % ...or even 4 is fine....he's got monthly pension as well. that's what he thinks.

That's a retarded thought process. If he paid the 200k now, he'd have 100k left. If we assume 5% returns, he'd have 432k in principal at the end of 30 years (100*1.05^30), with significantly less risk. It makes absolutely no sense to do what he is thinking of, which is basically an attempt to earn an interest spread of zero.

9/18/10

Some big utilities/pipelines have a 7% to 7.5% dividend yield on their stocks, after taxes that should be about 5%. You would have a risk of dividend cuts. Other than that muni bonds are the only thing I can think of.

9/18/10

Yo municipal bonds qualify for tax exclusions under the regular income tax, but not the alternative minimum tax. More and more Americans are going to fall into the AMT in the coming years as it, unlike the reg tax, is NOT indexed for inflation. We are going to see a lot more people taxed under the AMT, and a lot of municipal bond prospects are going to suffer because of it (good news for corporate bonds?)

Anyways, I'd seriously consider going long on both F and GS. Should be fine.

Unfortunately, I think what really will happen is that he'll just buy muni bonds. Which appears sensible and apparently, if we're going to agree with the folks at CNBC, "risk-free".

9/19/10

General obligation munis

9/19/10
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