Buy in cash, take out a HELOC and invest the money.
See: Nord's extensive reports on this.
I think this is a really bad idea in most cases. Unless you can get a fixed rate non_callable heloc
Er, sorry, I believe Nord's is a traditional mortgage on his primary, which he has refi'd a few times over the last 10 years or so to lower the rate, but specifically to invest the money, even though he could pay it off.
clifp on the e-r.org forums, otoh, I believe is using the low rates afforded by a HELOC to invest in real estate, so that does happen as well, just realized when I came back and read your reply that I misspoke and needed to clarify. :)
To atone for that, I will offer a link with relevant reading: http://www.early-retirement.org/forums/f28/covering-a-mortgage-without-losing-your-ass-ets-15237-6.html
Only the two final posts are necessary to read, but as Nords notes, there's some other fun stuff in there too, you can click to go back to the beginning of the thread if interested.
I know another military retiree who's financing his rental properties with PenFed's cheap 5/5 HELOC. However he's also working at a civil service job and he's been paying them down with that employment income. He's planning to pay them off before they get to a reset point.
In 2000 we took out a 30-year fixed-rate mortgage to buy our residence. My spouse and I were still on active duty so we had enough income to qualify. When the stock market fell apart in 2001 we realized that it made cash-flow sense to take out another 30-year fixed-rate mortgage on our rental property as well. (We invested that mortgage money in shares of Berkshire Hathaway which were on sale...) I retired to my active-duty pension in 2002.
In 2000-2001 the logic was that we had easy access to mortgages while we were on active duty, and during ER I'd have the annuity income (military pension) to cover the payments. At the time we also expected that after retirement we'd never be able to qualify to refinance a mortgage. Yet when my spouse and I were both ER'd and mortgage interest rates were dropping, our pension/rental/dividend income also enabled us to refinance the rental mortgage twice and our residence mortgage six times. Each time we were absolutely positive that interest rates couldn't possibly get any lower-- but after the new smaller payments had paid for the refi costs, we'd end up doing it all over again. It was a lot of "fun" doing refis in 2003-2007, but it's been painful since then. Now we're paying 3.625% (residence) and 4.625% (rental) and those loans will be paid off by the time I'm 80 years old.
I started that E-R.org thread nine years ago to track the 2004 refinance on our residence. At the time, FIRECalc gave a 74% chance of beating the stock market (the small-cap value index ETF IJS) with the mortgage's 5.5% interest rate. Like most leverage that went great until 2008, then not so great for a couple years, and now it's back to great again. The key to mortgage arbitrage is cash flow (in my case, a pension with a COLA) and no bonds in the retirement portfolio (unless their return exceeds the mortgage rate). If interest rates keep going up over the next year or two we'll cross a point where we might be able to arbitrage the mortgage interest rate with long-term CDs at 4.5%, but that's a mighty thin profit margin with mismatched durations.
The mortgage on the rental has worked out fine, too, because it's been constantly rented to military tenants and rents have steadily risen while the mortgage payments remain fixed. But again, Hawaii real estate ties up a tremendous amount of capital. We can also handle a surprise vacancy out of pension cash flow for a few months.
Just to beat this concept into the ground, I believe that mortgage arbitrage is only appropriate when an investor has long-term low-risk annuitized income (like a federal pension) to offset the payments and is willing to invest the remainder of their capital in higher-risk assets (equities, no bonds). I essentially sold 30 years of my pension to mortgage companies.
One of the keys to ER is that you have more time & opportunities to figure out how to buy dollar bills for 90 cents. I never would have had the time, energy, or mental bandwidth to do that during my working years.
I'm going to have to update that thread for 2013 data, but here's a summary of the overall APY of the invested mortgage funds from 2004 to the date:
2005: 17.1%
2006: 13.3%
2007: 13.5%
2008: 5.3%
2009: 2.0% (IIRC it actually turned negative for a few months during this period.)
2010: 3.27%
2011: 2.3%
2012: 5.9%
