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I just have a question, because I am confused about how this investment works in the first place. Are these general partnership agreements that the investors are signing? If so, does that have any liability implications for the investors? I had always been told that general partners are jointly and fully liable for the other partners' activities, but I don't understand how it would apply to a situation like this. (I'm not trying to be negative, I'm just asking a question).

In Tennessee it's available online and for free through the state's website (through the tax assessor). You just type in the address and it gives you the owner's name and address. (You can also type in the owner's name and it will show you all the property he/she owns). I'm sure a lot of other states have fairly similar systems.

From the responses I've read here, it sounds like people are getting their 25%, but not the original principal. It will be interesting to see what happens, that's for sure.

Anyone have any comments on this article? I just finished it, and I have to say it reads like an advertisement for a mortgage company. At first blush, I have some problems with some of his assumptions. First, he talks about "risk free" but then ignores the risks involved with "Brother B"'s investments (which, apparently, make 8% a year). 8% not unrealistic, but it's certainly not guaranteed or risk-free, especially over the short term such as the 5 years before the hypothetical job loss.

There also seems to be some finagling with the tax savings calculations (which result in a lot of "Brother B"'s money to invest). First, the author seems to pretend like the standard deduction doesn't exist and that "Brother A" would continue to itemize deductions even though he would have less tax owed under the standard deduction (I think it's $10K/year for a couple, but I'm not sure). Worse, though, is how the author calculates the tax savings over the course of the entire loan and then averages it over that time, and uses the difference of this average as an amount Brother B can invest every year. This gives a much greater (and unreal) cash advantage to Brother B earlier than he would actually have it, and thus gives him more investment return than he would really get.

Let's assume Brother A (whose interest payments never exceed the standard deduction) instead chooses not to itemize but to take the standard deduction every year. Brother B's only tax savings is the amount above the standard deduction that he paid in interest. In reality he's only saving $109/month in taxes (for 15 years). Add that to the lower monthly payment and you get a net after-taxes difference in mortgage payment of $317/month (not $428).

So, what does this get you? Remember, he's getting 8% return, but we have to assume that he means before taxes. Presumably he's paying captial gains tax on this investment. Say capital gains is 25%, so he's really only getting 6% after tax return. Thus, in 15 years, Brother B's extra $317/month will be worth $92,189 and his original $30K will be worth $73,622, for a total of $165,812. He has paid off only the initial $10K of his house (it was interest only for the first 15 years). Brother A, of course, has paid off his entire house. After 15 years, Brother A's net assets are $200K (the value of the house) and Brother B's net assets are $175K. But I bet his mortgage broker got a pretty sum.

Now, it's at 15 years, Brother B still owes his mortgage and will be paying on it for the next 15 years. Brother A, who already has higher net assets, will have no debt obligations and can invest every dime that Brother B will be paying in interest and principal for the next 15 years. He will skyrocket way out of the reach of Brother B in terms of assets.

I've discarded the spurious distraction of Brother A paying an additional $100K/month on the mortgage and Brother B investing an extra $100K/month just to show what the real difference is between paying off your mortgage vs. borrowing on your house to invest. All of this also assumes that Brother B really did get his 8% return.

I also disagree with two over-riding points:

(1) I don't agree that most Americans are trying to own their home outright. If anything, Americans are more in debt (including their homes) than at any time in history (I can't back that up, but I think it's correct).
(2) I don't believe him when he says that paying off your mortgage puts you at greater risk of foreclosure. It certainly seems to me that all the evidence points to the opposite. Again, I can't back this up, but I would love to hear others' opinions on this subject.

I'll confess that these numbers (especially the standard deduction and the tax rates) are off the top of my head, and these are quick calculations. Also, taking the standard deduction also gives up savings in RE taxes and other deductions, but also note that the standard deduction has increased recently and any additional increase over the next 15 years would be to the advantage of Brother A. I'd like to hear what others think about this.

I guess my bottom line is:
(1) I still think it's better to pay off the mortgage
(2) The standard deduction is the dirtly little secret the mortgage-lovers tend to ignore when they do their calculations and
(3) Don't forget to look at the "after tax" return on the invested difference.

What vacancy rate have you assumed to come up with your break-even cash flow? What are your plans if it has a much higher vacancy rate? Could you get by if once side stayed vacant for 6 months and the deal went into negative cash flow, or would you be forced to become a motivated seller? I may be overly conservative, but I always try to look at a range of possibilities, including unexpected runs of below-average vacancy. It helps me understand the risks much better.

Here's an online version by the WSJ authors that doesn't require registration:

http://www.post-gazette.com/pg/06264/723826-28.stm

I like this paragraph:

Of course you have to look at the actual numbers, but in your situation you may be better off renting. It sounds like you graduate in 2 years. My guess is that you will be going through the match and you won't have as much control over where you end up as you would like. Three things you do not want to happen are (1) forced to sell below market because you have to be at your internship halfway across the country on July 1 no matter what, or (2) have your ownership of the house influence how you fill out your match list or (3) be forced to live a year or more away from your wife because of the investment.

Hmmm, while I agree with your conclusion (that the no-closing cost deal costs more in the long run) I'm not sure I agree with the way you got there. You can't just equate a dollar today with one 57 months from now. Would paying $7000 extra in interest over 15 years be a worse deal than paying $6000 right now? Probably not.

The real question is where would that person be in 15 years if he either:

(1) took the no-closing cost loan and invested the $6000 he saved up front

or

(2) paid the $6000 and invested the extra $107 a month.

In either case, in 15 years, he would have the home completely paid off plus the value of the investment (either the original $6000 or the monthly $107). The apples-to-apples comparison would be the values of those two investments after 15 years. To do the calculation, you will have to assume a rate of return. Here's what I get for different rates of return:

If he got a 5% return he'd have:
$12,682.22 from option 1, $28,599.92 from option 2 for a difference of $15,917.69 at 15 years.

If he got a 10% return, he'd have:
$26,723.52 from option 1, $44,348.33 from option 2 for a difference of $17,624.81 at 15 years.

At a rate of 10%, the difference between the two options reaches a maximum, and the difference then heads towards zero, with the two options being equal at about a 20% rate of return and then forever favoring option 1 (the no closing cost) for rates of return above that. Here's a chart comparing the two (click for a larger image):

[URL=http://img236.imageshack.us/img236/8812/optionsqp8.jpg][/URL]

So, unless he feels he feels he can average a better than 20% rate of return over the next 15 years, its better to pay the closing costs. But each deal should be evaluated individually because the options may be different.

For example, if the deal instead were a no closing cost loan at 7.5% vs. the $6000 closing cost at 7%, the difference in monthly payments would be $42.28, or $7609 over the course of the loan. That's "more" than the $6000 up front, but any investment that yields 3.5%/yr or more would make the no-closing cost loan better, because his $6000 would grow to more over 15 years than his extra $42.28 per month would.

Isn't the LLC protection only one-way, though? It protects your personal assets from suits related to the "business," but if you are sued personally (say wrongful death related to a car accident) isn't your ownership of the LLC (or multiple LLCs) a vulnerable asset?

At the bottom of each eBay real estate page it says "By participating, you are not entering into a contract to purchase this property. You are, however, expressing serious interest in the property and in pursuing contract discussions." So it sounds like it really is more of a marketing thing than an "auction."