Want to buy Bluebird

[Ryan Wright]

On Nov 23, 2007 1:35 PM, martingregg598 wrote:
>
> Financing may be the way to go. Let's say that you are going to buy a
> $100,000 plus BB. If you get a 20 year note at 6% interest for 100g,
> the unit qualifies as a second home and you can deduct the interest,
> and you leave your 100g properly invested returning an average of say
> 10 %, you are making a 4%- plus gain every year on your 100g
> (depending on your specific tax situation).

Sort of, not exactly. You need to take money out of that $100g every
month to make the payments on the coach, so you're going to slowly
dwindle it down, reducing your return. Unless you make the payments
out of your income, in which case I don't think you'll be all that
well off. Follow me here:

In your example the payment would be $716.43 per month. If you take
that same money and invest it at 10% over 20 years instead of paying
it to the bank, compounded monthly you'd have almost $550k.

On the other hand, if you leave your $100k in the bank for 20 years
and don't pay any extra into it because you're making payments on the
coach, at the end of the 20 years you'd have about $730k.

Now 730 - 550 = $180k. Interestingly enough, at the end of the 20
years you'll have sent about $172k to the bank to pay for your $100k
coach. Which leaves you only $8,000 ahead by financing it and keeping
your money in the bank.

Let's look at the risk you get for your $8,000: You risk an income
crisis and not having the ability to repay your loan. If the market
happens to be down about the same time, which is often the case in
financial hardships (Murphy's Law), you risk losing your portfolio as
you yank everything out in a down market to get the creditors off your
back. You risk huge spikes in interest rates and fees should you miss
a payment by accident.

Is it worth it? Not to me. Assuming you have the discipline to
re-invest the money you would have otherwise sent to the bank, I'm
paying cash for the coach and rebuilding my portfolio out of my
income.

Now, if you're actually able to itemize the interest out on your
taxes, you might -- MIGHT -- be able to recover enough to make it
worth the effort. Typically, though, that isn't the case. The standard
deduction will typically be higher than the interest on the coach so
unless you have other major things to itemize, you're no money ahead
with the tax man.

In my experience, financing for the interest or tax savings is usually
a negative to zero sum game, or otherwise close enough as to make it
not worth the risk and/or the hassle.

-Ryan