Very $$$ Homes - All Cash?

[traceimage_IHB]

I've read that really rich people buy houses for all cash instead of financing them. Does anyone know what the cut-off is in terms of home price for doing this? Obviously it would depend on the buyer, but probably people buying $5 million homes just cash them, right? Like Jennifer Aniston, for example...she probably doesn't have a mortgage, right?



I'm just wondering. Unfortunately, I'm not in a position to know the answer myself. I wish!

 

[acpme_IHB]

no idea how you would measure something like this... generally speaking, when you're talking about people with extreme level of wealth, their homes tend to be a smaller % of their net worth than the avg homeowner. after all, there's only so much house you can buy even if your wealth is growing exponentially. also, that kind of money typically tends not to be income-based, therefore buyers who can spend that much often have that money readily available to begin with. not to mention, homes of those levels historically would have been extremely difficult/expensive to finance.



traditionally speaking of course... the bubble changed a lot of that as you had move-up buyers taking home equity gains and flipping them into bigger properties that their income-based wealth alone couldn't support.

 

[cletus_IHB]

[quote author="traceimage" date=1245721835]I've read that really rich people buy houses for all cash instead of financing them. Does anyone know what the cut-off is in terms of home price for doing this? Obviously it would depend on the buyer, but probably people buying $5 million homes just cash them, right? Like Jennifer Aniston, for example...she probably doesn't have a mortgage, right?



I'm just wondering. Unfortunately, I'm not in a position to know the answer myself. I wish!</blockquote>


I've asked a friend of mine who is a money manager on this at once (after seeing a specific high profile foreclosure)... he said it really varies from person to person.



Realize in "wealthy people" you got two types: the people who have a large cash flow, and the people who have a large amount of money. (So for example, a brain surgeon versus a Kennedy). Yes... a Kennedy gets income from other sources, including returns from investments... that's not my point.



A brain surgeon might make $500k per year, but not have tons of money in the bank relative to his cash flow (AKA he makes more money from his profession than from his investments). So while he might be able to easily afford a bitchin house, he might not be able to pay cash for it. Whereas a Kennedy could easily afford to plop down the cash for the house.



So lets assume you got a chunk of cash sitting around... do you buy the house with cash or not? At this point, what you look at is return on investment and your asset allocation. Buying a $5mil house cash means you have $5mil invested in real estate, and its not available to be used elsewhere. Buying a $5mil house and putting $2mil down and getting a $3mil loan, means you got $5mil in real estate, $3mil to invest elsewhere (and minimize your exposure to real estate by dilluting it with other investments) at the expense of some leverage. Another argument is you do a cheap arbitrage... can you borrow that $3mil at a cheap enough rate that you can get more money elsewhere (say, borrow at 5% from Countrywide, and invest with Madoff getting 15%)... again, you do this at the expense of risk.



If your house is a small portion of your net worth, then it probably makes sense to pay cash and be over with it. (although at some point, these people start having multiple homes)



In general... its comes down to a personal choice... what your hunger for leverage is, and how much exposure to real estate you are willing to take.



Delroy