I explained that if you have an empty glass, worth $100 (let’s say it’s a collectors’ item) representing your house then it makes no difference how much fine wine (also a collector’s item at $100 a glass) you have poured into it as to the future value of the glass …
… the glass can be full or empty, but if collectors’ glasses double in value every decade, it will still be worth $200 in 10 year’s time.
Of course, after consuming a few glasses of that fine wine, another question arises:
What happens if I put less money into the house (or other real-estate)?
Simple, you have to borrow the rest: less deposit, more borrowings/mortgage … more deposit, less borrowings/mortgage.
Then, in deciding exactly how much wine to pour into your glass, you think of the next logical question:
What’s the ideal amount (or %) to borrow against the property i.e. how much deposit should I put in?
Given the current ‘crisis’ in domestic RE values, it’s popular to imagine a high number: 20%? 50%? 100%?
But, it’s not so long ago (and, I wager it won’t be more than a decade before it comes around again) that it was popular to imagine a low number: 10%? 0%? Even negative 10% (as people borrowed 100% of the property PLUS closing costs)?
But, what’s the right number?!
Surprisingly, at least to me, there’s no magic ‘right’ number …
… once you realize that it matters not what equity you have in the house as to how your future wealth increases – based on the appreciation of such fine real-estate.
So, another question forms instead:
What does it cost/save me if I put in more/less money into the RE purchase?
Well, we know it does not cost you future capital appreciation, but it does cost/save you exactly what the bank would charge in you in mortgage interest and ancillary charges … circa 4% – 5% these days.
So, let me ask you two closing questions:
1. Do you think that you can do better than getting ‘free money’ by owning real-estate that appreciates, perhaps even doubling every 7 to 18 years (depending upon whom you believe), leaving you with virtually ALL the excess over the original purchase price?
2. Do you think that you can invest money that would otherwise cost/earn you only 4% – 5% for more than that [Hint: how about some more of that yummy real-estate? Failing that: stocks; business; P2P lending; etc; etc; etc? But, we covered this question last week ]?
… at least those are the questions that I put to our house guests 🙂
What do you think?