'We think we know where and how much we want to spend on a house, but we don't know how we should buy that house.'
Dear MarketWatch, My wife and I are Americans living in London. We currently rent, mainly because London real estate is hugely expensive but also because we know London is not our long-term future. In the next year or so, we have plans to move back to the U.S., where we’ll purchase a house and start settling down a bit.
For those who can buy a home outright, it can very much be a tough call — especially in today’s market. The low supply of homes for sale throughout the country has created a situation where listings are attracting multiple offers. As a result, many prospective buyers are opting to make all-cash bids to come out on top.
But there are drawbacks to buying a home outright, to be sure. Top of the list is the potential opportunity cost involved: If you’re cashing out around two-thirds of your investment portfolio to purchase a home, you’re missing out on the money those investments might earn. The average annual return on the S&P 500 is around 10% historically — and those earnings compound over time.
Even setting potential earnings and portfolio diversity aside, going this route would mean drastically reducing the amount of liquid funds at your disposal You’d have only $180,000 left in your investment portfolio — so how would you pay for furniture, renovations and ongoing maintenance — not to mention any other non-home-related luxury you might want to spend money on?
There are many other options you could consider. Since you do have the funds necessary to buy the home outright, you could waive the financing and appraisal contingencies from any offer you make. This means that you’d cover any gaps caused by issues with the mortgage lender you chose.
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