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It is a common opinion that a person should not buy a house for cash even though the funds to do so are available.

My understanding is that investing cash and paying mortgage with the interest or other forms of appreciation is a winning strategy. However my attempts to research what financial vehicle would be suitable for this transaction failed

With current mortgage rates (say 30 y. fixed 4%) it is difficult to come up with a savings account or a CD that would match this rate. Perhaps some bond index funds ?

What would smart options to keep these funds?

Extra details:

This is United States, end of 2014.

Please assume that there is no need to invest into retirement anymore, there is no debt of any kind and there is a separate fully funded emergency fund.

Decision has been made to get a mortgage and keep the cash. What would one do with this cash ?

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    What happens when you have a major stock market downturn (like in 2008) following a major real estate market downturn? If your home is underwater and your stocks are down, how do you deal with a temporary liquidity problem like losing a job. Weird how that triple whammy hit so many people who were thinking just as the "conventional wisdom" teaches them. – Nathan L Oct 30 '14 at 14:01
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    @NathanL: Exactly. Anyone who buys a house as an investment (ie. not as a home) is an idiot who deserves everything they've got coming to them, and it is coming again, just like 2008 only probably worse this time. If you can buy your home for cash, without breaking the bank, do it. If you can't, put as much down as you can without making trouble for yourself, and then pay down the loan early. The sooner you get out from under your mortgage, the better. – Mason Wheeler Oct 30 '14 at 16:35
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    Nathan and Mason: Depends on what your other resources are. Real estate downturns are meaningless if you aren't forced to sell during the downturn. Market downturns likewise. You need enough liquidity to ride those out, certainly, but beyond that it really is a matter of comparing alternative ways of using your money and deciding what timeframes and what risks make sense for YOUR needs. I've seen it done wrong, but I've also seen it done right. Ya pays yer money and takes yer cherce. – keshlam Oct 31 '14 at 0:18
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The common opinion is an oversimplification at best.

The problem with buying a house using cash is that it may leave you cash-poor, forcing you to take out a home equity loan at some point... which may be at a higher rate than the mortgage would have been. On the other hand, knowing that you have no obligation to a lender is quite nice, and many folks prefer eliminating that source of stress.

IF you can get a mortgage at a sufficiently low rate, using it to leverage an investment is not a bad strategy. Average historical return on the stock market is around 8%, so any mortgage rate lower than that is a relatively good bet and a rate MUCH lower (as now) is that much better a bet. There is, of course, some risk involved and the obligation to make mortgage payments, and your actual return is reduced by what you're paying on the mortage... but it's still a pretty good deal.

As far as investment vehicles: The same answers apply as always. You want a rate of return higher than what you're paying on the mortgage, preferably market rate of return or better. CDs won't do it, as you've found. You're going to have to increase the risk to increase the return. That does mean picking and maintaining a diversified balance of investments and investment types. Working with index funds makes diversifying within a type easy, but you're probably going to want both stocks and bonds, rebalancing between them when they drift too far from your desired mix.

My own investments are a specific mix with one each of bond fund, large cap fund, small cap fund, REIT, and international fund. Bonds are the biggest part of that, since they're lowest risk, but the others play a greater part in producing returns on the investments. The exact mix that would be optimal for you depends on your risk tolerance (I'm classified as a moderately aggressive investor), the time horizon you're looking at before you may be forced to pull money back out of the investments, and some matters of personal taste. I've been averaging about 10%, but I had the luxury of being able to ride out the depression and indeed invest during it.

Against that, my mortgage is under 4% interest rate, and is for less than 80% of the purchase price so I didn't need to pay the surcharge for mortgage insurance. In fact, I borrowed only half the cost of the house and paid the rest in cash, specifically because leveraging does involve some risk and this was the level of risk I was comfortable with. I also set the duration of the loan so it will be paid off at about the same time I expect to retire. Again, that's very much a personal judgement.

If you need specific advice, it's worth finding a financial counselor and having them help you run the numbers. Do NOT go with someone associated with an investment house; they're going to be biased toward whatever produces the most income for them. Select someone who is strictly an advisor; they may cost you a bit more but they're more likely to give you useful advice.

Don't take my word for any of this. I know enough to know how little I know. But hopefully I've given you some insight into what the issues are and what questions you need to ask, and answer, before making your decisions.

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    Very nicely written, a great example of weighing various situations and risk + personal preferences - +1! – BrianH Oct 30 '14 at 14:46
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You could use the money to buy a couple of other (smaller) properties. Part of the rent of these properties would be used to cover the mortgage and the rest is income.

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    This assumes you have the time and fortitude to manage the other properties, not to mention assuming a good rental market. The relative risk of this approach vs. mutual fund investments is high. – Carl Witthoft Oct 31 '14 at 12:35
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    @CarlWitthoft don't know in your country. but here in the UK there's plenty of agencies who would manage the property for you for a few hundred pounds. I think it's easier to deal with a property than banks and financial promoters. – algiogia Nov 3 '14 at 9:08
  • or we can factor in the cost associated with hiring a professional property management company – AstroSharp Jan 11 '18 at 17:10
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Pay cash for the house but negotiate at least a 4% discount. You already made your money without having to deal with long term unknowns. I don't get why people would want invest with risk when the alternative are immediate realized gains.

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