A question was recently posted on a real estate forum that I frequent. The question asker wanted to know: "To pay cash for a home or get a loan - which way saves more money if I plan to sell it in 7 years?"
My answer:
The best way to make your decision on cash v. mortgage is to measure the risk on return for both scenarios (with a financial adviser!).
Obviously, paying cash for a home means relatively few risks because a paid-for asset remains just that: paid-for (until, in the case of real estate, there is enough equity in a property to start making the property work for you).
But putting all your eggs in one basket does expose you to some risk: Liquidity Risk. Your cash is all tied up in one place -- what if you need it? Life emergencies do happen! One way to be proactive about this is to always have that 'emergency fund' of 6-12 months of living expenses set aside.
Another risk: There is always a chance that a "should not pass up!" investment opportunity might present itself, and with all your money tied up in the house, there goes the opportunity (opportunity risk ties in with the liquidity risk).
Paying cash also means losing out on the tax-deductible interest rate of a mortgage. If you stay in your home for minimum of 2 years, you will be sheltered from up to $250,000 in capital gains if you are single, and $500,000 if you are married. Returns on other investments are taxable, which minimizes your return.
In the end, it will take an analysis with a CPA to determine your personal best route. It depends on so many things: If you take out a mortgage and have lots of cash on hand, are you actually going to invest it wisely or blow it? If you do invest it, how much risk can you tolerate? It's not always easy to predict return and risk level on stocks and bonds, whereas real estate, though at the mercy of the market, is a bit more stable and predictable.
