But are you actually making money from this imputed rent? No.

In Europe they are considering taxing imputed rent so it is real to somebody somewhere; also, it is somewhat like interest on a zero coupon bond. Every month, the house gives me a value, tax free. It is not money you put in the bank, yes, but, if I want to live in this house, this is the market price. So that part is real; it's not just a dumb house, but a very crafty house. Just nobody sees the monthly gift and nobody taxes the benefit, except the property tax, but the mortgage guy pays that too, along with maintenance, as do I. It's like a company car type benefit, imputed. See William Bernstein in

The Investor's Manifesto, page 37.

The person doing the mortgage, is paying the bill every month and pays with after tax money, so that is a cost to that investment in taxes. At 25% marginal tax, that's 4/3 times the principal and interest 360 times. That is the cost of that option, plus any transaction costs. If we compare after tax returns, the imputed rent is hard to beat.

If both the paid for house person and the investor start out with $203K, they just do what they want with the money. One pays for the house in cash; the other gets a mortgage and buys financial products. So each starts out with the same initial conditions.

Paying off your mortgage is the equivalent of investing in a vehicle which pays the mortgage rate.

For simplicity, I was assuming that the person just paid cash for the house. Each investor has the same amount of $ on day one. One bought the house; the other got a mortgage and invested the 80% remainder. If I paid off the mortgage on day 1 of the experiment, I got a paid for house free of the mortgage lien. The mortgage is just a document then, not a financial vehicle for me.

No matter what the other investment happens to be, if it is capable of producing returns higher than the mortgage rate it is a better investment. Ramping up the risk of the investment is not changing the comparison. You are still looking at what it the most efficient use of your money. If you do not like risk I can understand what you are saying. And that is fine, you should invest in a manner which is consistent with your risk tolerance.

The mortgage investor is competing against the imputed rent, not the 3.5%

**cost** of the mortgage. If one return on investment number is bigger, that is better. But is the investor in equities going to go all hedge funds or oil futures? I think MMM's example of matching apples to apples is a point well taken. Can you point me to vehicles that gives me 9.6% tax free?

You may see it simply as an arbitrage, but it is not just that. Risk/reward calculations are important. For me, cost efficient means using Vanguard like mechanisms. Risk tolerance was intended as a part of the deal, as I think it is with all investors.

Now, if mortgage buyer invests in a taxable account. he will have the advantage of the capital gains tax rate for the count up at the end of the experiment. But he has to get the money home, so that is another charge. That means the taxable account would have to yield better than the lowest of my imputed rent projections, or 6%. So that means a net taxable gain of over 7.05% plus the cost of the mortgage and all the taxes he paid paying the 360 mortgage payments.