Comments on: Free money at last!

By: How much home should I buy?- 7million7years

How much home should I buy?- 7million7years — Mon, 03 May 2010 11:16:32 +0000

[...] who works with RE, Whittier Homes, says: I’m in the camp that you don’t leave too much equity tied up in the walls of a house. That [...]

By: Adrian

Adrian — Sun, 11 Apr 2010 00:28:02 +0000

@ Whittier – I have NOTHING to say about how much equity – as a % of your house value – and, EVERYTHING to say about how much equity – as a % of your Net Worth – you should have tied up in your own home

By: Whittier Homes

Whittier Homes — Sat, 10 Apr 2010 22:49:24 +0000

Adrian, I have to think about this one, I’m in the camp that you don’t leave too much equity tied up in the walls of a house. That being said there is a risk factor or a comfort zone that every investor has to know. The bottom line is you don’t want to get over leverage and get caught on the short end of a declining market.

By: Is your first home a good investment?- 7million7years

Is your first home a good investment?- 7million7years — Wed, 17 Feb 2010 16:23:58 +0000

[...] is a loaded question, obviously, because I just revisited the subject of buying your first home (of which I am now an avid fan) a week or so ago; Rick suggested: Since equities also have a good [...]

By: Adrian

Adrian — Mon, 25 Jan 2010 22:29:01 +0000

@ Jake – We’re talking two scenarios here:

a) Your own home – it matters not how the equity fluctuates as you move it from house to house over your entire life. Of course, rental is not the issue.

And, Neil is right: once you are in your first home, the 20% and 25% rules ‘kick in’, partly to stop you from overinvesting in your home.

b) Investment properties – the 20% and 25% rules do NOT apply here; but, it is sensible to maintain a buffer against future problems (such as vacancies) … I recommend witholding 25% of your rental income for this purpose.

By: Neil

Neil — Mon, 25 Jan 2010 21:31:06 +0000

@Jake,
I agree that knowing (and following) your personal ability to handle risk is vital, espcially with rental property. I think Adrian is assuming you don’t go over his home property limits (20% of income was it?)

And although my wife agrees that we shouldn’t pay extra on our mortgage (since our rate is only 4.5%), she still talks about paying it off early so she doesn’t feel indebted to anyone.

So far I’ve managed to convince that as long as we *can* pay it off, we don’t have to pay it off, and our extra money is better put to use somewhere else.

Heck I even set up an automatic transfer to move out the money we are saving thanks to the timely refi.

By: Jake @ CareerAde

Jake @ CareerAde — Mon, 25 Jan 2010 14:56:26 +0000

I think you need to add another element in the logic here about risk management.

I was just talking to friends this weekend and they have a rental property that has been sitting vacant for 12 mos. First they had to fix up the place after the last tenant trashed it, and now they have had trouble renting it out as local rents softened substantially (price war for lowest rents) and they have been slow to follow the market. They are annoyed by the negative cash flow from the place, but it isn’t killing them. However they have more than 50% equity and could sell the property quickly – even in today’s market – if they had to.

My point here is: if you are low on cash and in a bad position to absorb negative cash flow situations on rental properties, you should have enough equity (i.e. down payment) to be able to sell the property quickly even if the market fluctuates 10-20% up or DOWN.