Strategies For Generating 25-Year Revenue Stream (Instead of Mortgage Down payment)

Question

I'm about to buy a house. Interest rates are low and I think it might make sense to invest the money I have, instead of buying cash/making a large down payment.

I expect to live in this house for 25 years and will have a fixed 30 year mortgage.

My goal would be to withdrawal money from this account to pay towards my mortgage in such a way that my payment amount is on-par with the amount I would have owed with a larger down payment.

Example: I have $280k cash House is $400k

I would either A.) Borrow $120k or B.) Borrow $320k (to avoid PMI) and invest $200k.

In scenario B, I would want to put that money somewhere and take out however much needed so that I'm contributing the same amount from my income in both scenarios.

What I haven't been able to find are specific strategies or guidelines to facilitate this. I'm worried about things like taxes on this account and tax implications of not deducting mortgage interest, and ensuring that it reasonably would last 25 years.

Say the mortgage rate is 3%

Answer 1

How much risk are you willing to take?

As a first pass, if the investment option is going to work, you'd need to make more than 3% after tax on your money. At this point in time (April 2021), there isn't anything that is going to produce a risk-free after tax return of 3%. In general, it would be unusual if a mortgage-holder's could get a risk-free return in the market higher than could be obtained by paying off the mortgage. If you could, that would imply that you were able to borrow more cheaply than a risk-free entity like the US government.

Practically, it is likely that a reasonably conservative portfolio with, let's say, 50% stocks and 50% bonds (I'm ballparking numbers here) would generate returns of more than 3% after tax while letting you draw down the balance every month. In retirement, when you're drawing down accounts, the standard advice is to plan on withdrawing 3-4% a year adjusting for inflation. If you've got a fixed rate mortgage, you don't need to adjust for inflation. And since this is a mortgage rather than a retirement draw, you don't need to worry about outliving your investments. That would mean that it would probably be safe to plan on getting $200k * 4% = $8,000/ year = $666.67/ month from your $200k investment to pay the mortgage. There is a real risk, though, that if the stock market goes through a serious correction, particularly early in your 25 year horizon, you'd either be selling stocks at a loss or you'd be making the additional mortgage payments out of your salary.

If you're willing to accept the risk of a market correction, you can probably make enough from your investments for that to be financially worthwhile. But that is far from guaranteed-- if the market takes a nosedive the day after you set up the account, you'll probably end up worse off than had you put the money toward the house. If you can comfortably pay the larger mortgage out of your salary if you had to while your investments recover, that may be a very reasonable risk for you to take. If you'd be at risk of missing a mortgage payment in that scenario or if seeing a huge drop in your account balance would cause you to lose sleep at night, the risk may not be worth it for you.

Answer 2

I analyzed S&P data looking at the 100 15 year rolling returns from 1903-2018. No period produced a negative return, and only 5 of the 100 were below 4%. This was to look at the common advice to "take the 30 year mortgage and invest the difference". The difference being the savings from the payment required for a 15 year mortgage.

You're situation is a variation of this, as you have the money up front or much of it. In my case, I was claiming that at the 15 year mark, the saved balance would far exceed the mortgage in a way that blends into your approach, then being able to make no payments out of pocket, just using those funds. I took this approach myself, and despite an average interest of 6% for the 15 year preceding my retirement (2012), at that point we had a mortgage balance of $265K vs $349K extra in the 401(k). Maybe not a huge difference, especially given the $349K is subject to tax. But, by the end of 2014, the numbers were $453K vs $233K. A quick estimate shows I needed to withdraw $166K for payment through the end of 2020, and the balance remaining saw an S&P double, so this year, we are near $110K mortgage balance but $600K in the retirement acct. I wrote about this in 2015, Retired, With Mortgage and should update it to present numbers.

In your case, if you can manage to make payments out of current income and let that money ride, your chance of success is high (because Justin's warning of early plan market drop is super wise). Consider, at the 15 year mark in my own experience, there were 2 crashes, still the numbers worked. The data is available for your own analysis, it's worth learning how to manipulate a spreadsheet.

A note - there are those who suggest that this is risky. Risk is a number, a chance of failure. They are 100% right in one regard. If your finances are arranged so you can't sleep at night, turn the dial down. If it takes 100% investment in CDs or treasury bills to sleep, no argument from me. For sake of disclosure, I'm sleeping great with a 70/30 mix. 30% cash/bonds is over 6 year's spending money for us. [it was 100/0 as we entered retirement, FYI.]

Answer 3

to invest the money I have

in our historical era, "investments" pay basically nothing. So forget it.

It's just that simple.

By all means, if you want to, take a risk on a specific stock or the S&P index. It's a simple coin toss.