$3.7m all cash...

how much of the $3.7 million are you ok with losing?

having 37% of my net worth in one apartment in one building in one location in one city in one specific asset class... a little high for me. At least with a mortgage, you can walk away from some exposure.

personally, I think it's aggressive but okay if it's your long term home; nicholas cage thinks it's a slam dunk

Columbiacounty, I guess my nervousness is that I can see a case for losing $1m. I don't think that is likely but it's possible.

Somewhereelse & PMG...I agree, it's aggressive and I'm definitely nervous. Could probably get a mortgage for 70% and put down 30%.

How much would you have to have to be comfortable? $10m + value of home? 4x purchase price?

Personally, I am not up to lose money. At least on purpose.

Columbiacounty, don't disagree at all...I think all the micro data suggests housing has stabilized but the macro outlook is very uncertain. It is hard to find a place at a reasonable price these days given all of the buying interest and lack of inventory.

Nervous, to me a fundamental question is what are the carrying charges and projected taxes. Have you selected a good value that way? Borrowing is, in a way, riskier because the cap rates on NYC condos is often less than mortgage rates, and having debt is just riskier. Just ask anyone who lost a home or business in the 30s. If the monthly costs are low or reasonable, and it is your dream home, you only live once: save a couple hundred thousand a year if you can: you'll replenish your liquid reserves in no time.

i think this is pretty safe, especially if net worth still has plenty of cash...

"Somewhereelse & PMG...I agree, it's aggressive and I'm definitely nervous. Could probably get a mortgage for 70% and put down 30%"

definitely. And definitely keep some of the remainder in bonds. We're not saying take the mortgage to leverage up in the stock market.

Has everyone gone nuts? People who use $200K in equity to purchase a $1M asset, a leverage ratio of 5.0, are telling a person who has $10M in equity to "be careful" in purchasing a $3.7M asset, a leverage ratio of 0.37. That's a 13x difference!

inonada, I have similar cautions for folks doing the mortgage at the lower numbers as well. Its still not great diversification. Of course, going bust loses them less money.

But, absolutely, %s are not a fair comparison at different levels.

Being 100% stock when you are young and have 100k is a FAR, FAR cry from having 100% in when your net worth is $5 mil for instance.

inonad, speak for yourself. He may be multiples richer, but I bought a place at 15%, so I think I know where he's coming from.

"At least with a mortgage, you can walk away from some exposure."

That's a silly. With a 70/30 mortgage, the loan will be for $2.6M with $1.1M of equity. This person doesn't have incentive to walk away until around $2M, or a 46% drop from $3.7M. Is it possible? Sure, anything is possible. Even if that happens, the bank still has a nice fat target to come after which is possible in NY. I.e., the likelihood of "walking away from some exposure" is slim to none.

Now is it worth paying 6% for the capital (most of it not tax-deducitble) to have for use elsewhere? Not if you're going to put it in 10-year U.S. treasuries that pay out a federally-taxable 3.4%.

yeah but you guys are all conveniently ignoring the mortgage tax deduction

"inonad, speak for yourself. He may be multiples richer, but I bought a place at 15%, so I think I know where he's coming from."

What do you mean you bought a place at 15%? As in you put 15% down?

"yeah but you guys are all conveniently ignoring the mortgage tax deduction"

No, dammit, I included a statement on why it was zilch-ish!

yeah, inonada, but you guys are all conveniently ignoring the mortgage tax deduction

(I'm channeling LICcomm today)

inonada knows lots in this case--on all fronts: the ridiculous walk-away comment, the leverage issue, and the what to do with the capital borrowed

if this person likes the re market, he/she should cash this apt

> That's a silly. With a 70/30 mortgage, the loan will be for $2.6M with $1.1M of equity.

inonada, you missed the chronology. My comment was before he even suggested a mortgage amount.

So basing your comment on those % doesn't make a lot of sense.

i have 50 mill and im thinking of buying a place at the powerhouse...cool that??

Got it, SWE.

General FYI on the state of the world, which may not be clear to everyone. If a bank is going to hand the loan and the default risk to taxpayers through the FHA, 3.5% down is a-OK. If they're going to hand it to taxpayers through Freddie/Fannie, 20% down is a-OK. If they've got to keep it on their own books, it's now 30% down.

I paid 20% down. Total cost was 15% of my liquid net worth. I bought a small place.

"i have 50 mill and im thinking of buying a place at the powerhouse...cool that??"

Nope. The building is worth $100M, and you might start a fire and be held liable for everything you have. Best to borrow $100M from the bank to purchase the apartment.

Got it, PMG. My relationship with risk is significantly different than that of most people, perhaps...

This is actually getting to an interesting place.

I've often thought about the apartment value vs. net worth conversation.

When my net worth wasn't very large, I focused on getting enough to have a down payment when I was ready to buy (more about life spot than timing investment). Then I got there (before I could commit to staying in NYC) and my next goal became having enough to put down so that mortgage payments are fairly small (risk mitigation). Say 40-60% down. Then I got past that point where my net worth equalled the value of places I was looking at... and I thought, do I really want to bet my net worth on it.

Then I got to an amount over that... and I start thinking.... we're now talking about a fairly expensive apartment given my lifetyle / net worth. What's the ratio that I want to have? Do I buy a place 1/3 of net worth? 1/2? 1/4? Its something I think about a lot.

Its something I think about a lot.
lol somewhereelse. no, its just part of the OP's question

at todays rates what would motivate you to part with so much cash?

Nervous10014,

I hate to say it but, if the premise was true....are you Lady GAGA?

I would think that anyone else would have at least some form of higher education.

Wait a minute....Lottery winner?

Dope smoking Trustafarian?

Depends. And I might not pay all-cash. Here's my thinking.

Leverage as much as you can. Park a large chunk of your cash in an unreachable safe haven. If things go tits up, leave U.S. right away (and be prepared to never step ashore again). The answer is yes, then I'd spend 3.7m on a cool pad. Maybe even 5m.

Nervous: If you are (nervous) don't do it.

You have a nice financial situation. What do you do to pull in all of that money?

Are you in show-biz?

Want to meet me for $21 coctails at the St Regis? The Cole Room?

It's on you.

Sorry, not in showbiz...just another finance guy (sorry again everyone). Carrying costs with a conforming $729k mortgage probably a little under $100k/annually. Carrying costs with a max-out 70% LTV mortgage probably a little over $200k/annually.

Falcogold1, I guess the reason for parting with a lot of cash would be family first (i.e. getting on with life, not wanting to have to move again, wife has been patient renting for some time, etc). The only way I can even think about it financially is in the small chance our system/$ goes berzerk given all of the debt, quantitative easing, etc that at least I have one real asset--but then again as it has been pointed out there are easier ways to protect against that without taking on this kind of concentration/lack of diversification. So it's really family first and then even though I look at housing as consumption, there is some value in having a real asset as well.

I don't think home prices will drop significantly but I don't think anyone can be sure. I think the one thing I probably believe is that it will take a significant second shock (Europe/China implosion, etc) for home prices to drop dramatically...that's hard to handicap and perhaps the governments will find a way to quantitatively ease again in concert so we're all left again with the lowest common denominator currency choices.

I also don't think home prices will go up much although I do think getting what you want in the location you want is going to get more difficult without a second significant shock. People are reluctant to sell at these prices unless forced to--a lot of the forced selling was absorbed in 2009 which caused the market to correct about 15% down.

Somewhereelse, that's exactly the question I'm struggling with. What is the right ratio 1/3, 1/4, 1/5, etc? Ultimately it should be a small as possible (e.g. if one were a billionaire) but practically what is the right risk profile vs consumption/enjoying life. This would be a lot easier if we lived in a more affordable area...we have no interest in buying a showy place...we just want a great location that fits our family comfortably...unfortunately that costs an arm and a leg these days.

NYC10023, somewhereslse & inonda, yes those are the two polar opposites...both ideas have merit...lever up and have less equity at risk vs. minimal mortgage and save an extra $100k+ annually to replenish liquidity/cash. The big issue with the lever up strategy is you still have to put in $1m+ of equity and I think the odds of something like this falling much more than that (so that you would walk away as inonda pointed out) is so small that you may not want to take on the extra carrying cost of the mortgage...at $729k after tax you are making money on the spread in munis...at the larger numbers you won't.

If you are worth $10M and make $1M a year it is absurd to have a mortgage. Mortgages, by definition, are for people who can't afford to pay cash. Buy the apartment in cash and don't bother over-analyzing the situation as some of the folks above.

It's definitely not "aggressive" compared to what other people are doing. I mean, in the good old days a subprime strawberry picker making 40k could buy a 700k apartment in california. LOL.

If I were you, and I loved the property and area, I'd probably do it in all cash, but obviously negotiate. Why? Even if the property went to ZERO, you could double down and just buy another one! You'd still have over 6M in the bank!

In all seriousness, keep in mind that a lot of first time buyers only have 6-12 months of cash flow post purchase... you have years.

But food for thought:
1) What will you do with the $3.7M otherwise? Not a lot of options... Stocks-volatile, Bonds-the new bubble, muni-bonds-illinois defaulting already?
2) Will the mortgage give you any material tax benefit? Likely not, it may be better to lock in the 5-6% opportunity cost "gain" by paying all cash.

Nervous, the fact that you were even asking the question made it clear that you have little risk appetite. If you buy, you've got a $3.7M exposure regardless of how you finance it. Now if Uncle Sam in its infinite wisdom decides to subsidize you with an effective 30-year 3% mortgage rate, I think even a pretty risk-averse person can see use for that sort of cheap money. On the other hand, 6% on a non-conforming loan is another thing from your risk-averse viewpoint: I doubt you'd be willing to invest in anything from which you could expect a higher return.

OP, it's true that real estate is the only investment you can raise children and puppies in. :)

But in a way I think you are asking how much of your portfolio ought to be invested in real estate.

If you entire net worth is in liquid investments, Wall Street vehicles, that would be different than if a major chunk is in commodities--art, gold--and you already own a lot of real estate directly.

I am just a great believer in diversification. There is a powerful human tendency to find an investment, or a class of investments, that pays rewards and then to just keep making it a bigger and bigger part of your portfolio. But there's too much risk in doing that for me, whether it's individual stocks or real estate or mutual funds or vintage musical instruments.

Another consideration: If you pay all-cash, it's very possible you can negotiate harder and get a better deal than if you go the mortgage route. This would ultimately improve your return on investment.

And remember that you can take some cash out of your real estate investment with a home equity line of credit. Interest rates are good, and often lower than prevailing mortgage rates. I personally have done things this way, I don't like having mortgages. I feel I have more control with a line of credit.

Karla Harby
Charles Rutenberg Realty
kharby@rutenbergrealtyny.com

At this ratio of income/asset the discussion should be about your psychology. You are seeking an advice from strangers who do not have the full benefit of knowing who you are, your marriage, kids (now or in the future), life style ( do you drink Laffit or Malbec) and so many other variables that contribute to your neurotic debate and obsession with money. I guess you can lose your job (go cash), I guess you can lose money in the stock market (hopefully your 10mil (?) is not in cash). Finally, you need to address your pessimistic/ depressive tendency so you can at least enjoy what you achieved so far. Making a decision based on your wife's satisfaction without understanding who you are will only end with the apartment staying with your wife post divorce. Good luck with your search for insight elsewhere and not on SE.

"How much net worth & income do you think you would have to have to be comfortable buying a $3.7m condo in all-cash?

Would $1m/year in income and $10m net worth be enough?"

YOU'RE APPROVED!

Nervous10014...The good news is that you are in the driver's seat with this decision; it's a good time to buy. I would converse with my accountant, and possibly a lawyer friend, then I would make the BEST deal imaginable (ie make 10 lowball offers and take the BEST deal). In the long run, you will do fine. Best of luck ith your decision, this is a good problem.

Why would you want to go all cash? Don't you want a million-dollar mortgage for the tax advantage?

That said, the question is very revealing of the original poster's psychology. Some people sleep better at night as owners, and some people are made very, very nervous by the risk of buying. If, honestly, it makes you nervous to tie up 40% of your net worth in your home at a time when you're still earning a robust income, you should never buy.

I have a subspecialty in high-end rentals, email me if you have any questions.

ali r.
DG Neary Realty
ali [at} dgneary {dot] com

why pay interest if you don't have to? even with the so called tax advantage - and news flash, say goodbye to that if you are upper income.

a subspecialty lol

"Somewhereelse, that's exactly the question I'm struggling with. What is the right ratio 1/3, 1/4, 1/5, etc? Ultimately it should be a small as possible (e.g. if one were a billionaire) but practically what is the right risk profile vs consumption/enjoying life. This would be a lot easier if we lived in a more affordable area...we have no interest in buying a showy place...we just want a great location that fits our family comfortably...unfortunately that costs an arm and a leg these days."

Yeah, I wish I knew. The challenge is, you can't just pay what you want to pay for an apartment... my beeds/tastes/desires have gotten more expensive.

But I have to figure in an intelligent investment / diversification sense, I have to figure its got to also factor in some future income. Maybe its 25% of your projected net worth in 5 years?

gcondo: "why pay interest if you don't have to?"

If you can get a better return on investing that cash yourself than you have to pay to your mortgage lender, then it certainly makes sense. If you can make a 10% return on your investments while having to pay your lender 6%, then I'd say your in a better position than parking millions into a real estate asset that may or may not (probably not) generate those kinds of returns for you in the long run.

Its also why a lot of wealthy people rent...

You have $10mm net worth and your asking this question on an anonymous message board? Something doesn't make sense with this picture.

"You have $10mm net worth and your asking this question on an anonymous message board? Something doesn't make sense with this picture."

It's like Warren Buffet asking for stock advice from a yahoo finance stock message board.

walterh7 & ericho75, obviously this is the internet so sorry to make you guys so skeptical...it's obviously not worth any of our time debating so it really doesn't matter what you believe just as it doesn't matter to you really whether I am who I say I am.

Money is a greater taboo subject than sex in our society...there are only so many people you can talk to about income, networth, etc. Yeah, I've talked to family, some close friends, and an accountant. I'm not necessarily looking for advice but just some more perspective. I've always operated under the assumption that getting more input is always helpful before you then make your own decisions.

I had figured on getting a lot of flames since it's the web and I'm grateful for all of the sincere responses and the perspectives & feedback were helpful.

...also, I realize that I am in a fortunate position to have this question and am grateful. I grew up middle class and perhaps part of my psychology is just the enormous amount of money I am contemplating relative to what I am familiar with.

As to some of the posts about risk profile...point taken and all fair comments. My career is a risk based career where I need to deal with risk on a regular basis. It's why I try to keep my personal financial situation more conservative--not because I'm not comfortable taking risks but as a "diversification" since so much of my income is already risk derived.

Ericho therez you are.

Hey about your stmt above.
If you are such the gifted trader why are you on a re board dispensing said 'skillset' for free?

And btw, you've been wrong on commodities, oil is in tank (us$) wise, lic re is even worse, manhattan activity is cooling faster than a gin and tonic in the carribbean sun, I'd like to point out again copper is in the tanker, oh euro shucks (but your world of influence ends at our borders), and on and on.

Me, I've said all along the greatest credit bubble in modern history is not cleared in 18 months. And my FDIC holdings are doing just dandy thk you and I've slept well and smugly this entire 2 yrs. I know bankers who are taking sleeping aids in this mkt, can you afford sleeping pills?

Yep. That makes sense to me, Nervous. Risk OPM and be conservative with your own.

>>> You have $10mm net worth and your asking this question on an anonymous message board? Something doesn't make sense with this picture.

Managing money doesn't get easier when you have more money... I think it get harder, particularly right now, because you have more to lose.

Nervous, it's pretty clear you have a low risk appetite. I would talk to a few financial planners and feel them out, see if you click with any of them. (If you do, throw them maybe a bone with some life insurance or something.) To an inflationist, you don't want to be in cash and may preserve wealth and maybe make some cash. To a deflationist (which many here are), you're going to get hurt with Real Estate. Place your bet. I'm kinda curious what your asset allocation is for that 10M. :)

At $3.7 million all cash there's a few townhouses which could be less risky since you wouldn't be tied to your immediate neighbors' fortunes or misfortunes. When you nabes stop paying maint and taxes then your share rises until their day of reckoning. Just another variable to consider.

Just be careful buying a TH that your neighbors have the $ and/or desire to keep up their property. Vermin respect no human boundaries.

Nervous: call me gullible. I believe that you have 10m w/ 1m yearly income and that you're posting on SE. Why not?

Your wife (where is w67 on this) wants you to spend, baby, spend. Isn't that just 7 years of post-tax income? So just do it, baby. Keep her happy. Or (ala) W67, buy her a giant diamond ring instead of the kondo.

"Managing money doesn't get easier when you have more money... I think it get harder, particularly right now, because you have more to lose. "

Agreed. Ability to "make back" any losses is harder. Also, you just have more to put somewhere. If you have $20k, putting it all in a index fund, not so hard. Have $2 mil, thats just seems like too big a chunk to do it with. And the private wealth options, they're another shady bunch, and trying to apply logic and common sense to it isn't easy. I find that they're as shady as "regular" brokers, only they have more ways of getting you to buy things you shouldn't. Funds of funds, what a scam. Managed accounts, all the problems with a mutual fund but higher fees!

Nervous: Oh, if you're married -- just do what makes the wifey happy.

If you don't, she will make you nervous and unhappy.

Swe: do you think Blackrock Global Allocation (MBLOX) is a scam?

2% in fees when its 80% long equity and bonds.... absolutely a scam.

15% seems to be hard asset, and a fun in those alone should be maybe 2% tops.

So you're paying all the extra on your equity because you can't spend $500 on a decent allocation strategy? Or $10 on a good book?

hell, get the ben stein portfolio free online, and rebalance every 6 months... and save yourself 1.75% a year.

Know what another 1.75% compounded 30 years looks like? And try that over REAL returns.

I thought/think it is kinda scammish - it is a just a mix of various large-cap equities and bonds. Is it better to slowly go back into an index fund now? Or is it too late? I've been reading investment articles saying that (obviously) the easy gains have been made for the next 10 years ... Or wait in all cash until the next buying opportunity?

Nervous10014, I understand you perfectly (my story is the same; not even middle class though).
I bought the place I love, all cash. No debt, no strings attached. Just pure joy and enjoyment of my home.
Do it.

"I thought/think it is kinda scammish - it is a just a mix of various large-cap equities and bonds. Is it better to slowly go back into an index fund now? Or is it too late? I've been reading investment articles saying that (obviously) the easy gains have been made for the next 10 years ... Or wait in all cash until the next buying opportunity?"

If your goal is to log term be invested, in some stocks/bonds allocation, the stats actually show that NOW (whenever now is) is the best time to put things in historically. Basically, in that folks rarely time it right, and the cost of being out of the market exceeds those few gains. Its a risky time, but you did just get a 10% discount... and risky times are when money is made.

But I get that you might want to play it a bit safer... so consider putting in 5 or 10% in today, and sort of dollar cost average in over the next few months to hedge a bit, to when you get to your target allocation. Pick a fixed schedule and pop it in, so you aren't going crazy trying to pick your spots.

SWE: that is exactly what I'm doing (dollar-averaging into the market). Feeling a lot better about it, esp. in view of recent market movement. Spreading it out over the next 6 months. The rest is now in laddered munis (most due in <5 years). Large chunk in TIPS.

I am enjoying the strengthening of USD as I missed the last bottom - trying to buy some CAD.

"SWE: that is exactly what I'm doing (dollar-averaging into the market). Feeling a lot better about it, esp. in view of recent market movement. Spreading it out over the next 6 months. The rest is now in laddered munis (most due in <5 years). Large chunk in TIPS"

I like it. I also starting picking up TIPS a year ago. Its funny how folks mistake gold as the safe haven....

Aren't TIPS tied to the government's bogus inflation numbers? The same ones they use for COLA on SSI, military & civilian pensions, pay rates?

Yes, but they're OUR bogus inflation numbers.