Inflation has outpaced the rise in salaries for the first time in 14 years.

[jbooma]

Originally posted by Ignatius J.

What about maintenence? Is that interest deduction more than you pay in interest every year? You have to take all this into acount. That's my point. That's it. You said I that renters have nothing to show for it after 30 years. That's not true. IF the renter is in the better market, it is the buyer who is throwing money away.

It all depends on the market, but even in Cali I don't think the rent is half of someones mortgage, that is a little crazy,

however it might not be worth buying a home, but ANY property is better then none, even a condo.

Maintanence is deductible if you rent out your place, now another thing that Kilmer was pointing out is you have a nice chunk of equity in your home, you can use that to buy another piece of property and then rent that out, so in a way you do gain on someone that is jut renting because they don't have the ability to accumulate property.

[Ignatius J.]

You're saying the same things over and over and then contradicting yourself.

"it all depends on the market" exactly right

"any property is better than none" Not right.

[jbooma]

Originally posted by Ignatius J.

You're saying the same things over and over and then contradicting yourself.

"it all depends on the market" exactly right

"any property is better than none" Not right.

I haven't done the math on LA, but lets do a quick calculation. My apartment is $1500 a month rent. Condos in beverly hills are how expensive? probably around $300,000 for the absolute cheapest. Interest on that is about 30 grand a year. So a mortgage payment would be something like $2500 on a simliar for a comparable apartment. Most of that goes to interest. Now maintenece in a condo isn't as much of an issue, but you do have condo fees.

So you think that $1000 a month in savings won't add up to a better house in ten years if housing prices don't go up?

You do know the mortgage for a 508000 home is 2500 right :doh:

The other thing you need to look at and Kilmer or I haven't mentioned this lets go back to that $500K home, after we pay it off in 30 years the home isn't just $500K lets say it only goes up 2% year which is very low we are looking at an $800K home which crushes your $600K, and that is a low estimate. A normal one is more like 5% which would tack on $750K at the end.

In our area alone the homes have increased double digits the past 5 years. The original owner of this house made $120K in 20 years, which is doubling her original investment, in the last 2 years our home has went up $170K, and that is just 2 years

[Mania]

Originally posted by chomerics

Looks like we're going to see the intrest rate climb and the housing market come tmbling down now. I'd suggest getting your stocks out of real estate funds right now and put them somewhere safe.

Inflation is not good, and Greenspan hates it. I am just suprised it took so long to come around, seeing how intrest rates were so low.

Believe it or not, but the Washington DC area is in a 10,000 shotfall of homes. The supply and demand will keep this areas homes from dropping and it won't do so until the supply catches up to the demand.

This is why this area has only been in 1 recesssion since the 70's and that was 91.

[Ancalagon the Black]

Originally posted by jbooma

You are forgetting the less taxes you pay because of the ability to deduct interest.

However rents will always be close to the price of a mortage, so this is why this makes no sense.

Nope, because I left out maintenance (which, even if it's tax-deductible, is still a cost--unless your tax rate is 100%) and property tax as well to balance out.

I pay less than half in rent what an owner pays in mortgage in my area. That's just a fact, so your assertion is wrong.

(Plus there's no mortgage-interest deduction in Australia, but that's another discussion.)

[illone]

Ig J,

I think you are making the homebuying deal into something that it isnt.

There are many options out there when buying a home. It's not always cut and dry and 100% financing is becoming more and more commonplace in todays market. Investors know that they dont have to tie up ANY cash flow in a property. Why risk your own money when you dont have to?

The example you gave above with 500K vs. 600K that is not a real world example. Some guys have that but the average homebuyer is not at that level. In todays market renting is like throwing money down the tubes. Period. There is no argument against it. Especially if you examine close what exactly you can get for your money.

500K mtg, option arm program Monthly payment is 1608 before taxes and insurance. Throw that in for a grand total of about 2100 give or take a few bucks.

That is with 5-10% down, 80/10/10 financing.

His home goes up lets be conservative, 5% a year. Thats 25000 per year. Even at this conservative Appreciation he is staying in his house virtually rent free because he spent 25K on the mortgage payments.

Realistic numbers here are more like 50K - 75K per year in Appreciation.

The guy renting isnt getting any return on his "rent" payment.

So what if rent is half of the 2100?

You telling me the guy who is able to afford rent at 1100 is saving 1000 per month? Even if the renter was stock piling 1000 per month, where can you get 10% ROI?

*edit spelling:doh:

[jbooma]

Originally posted by Ancalagon the Black

Nope, because I left out maintenance (which, even if it's tax-deductible, is still a cost--unless your tax rate is 100%) and property tax as well to balance out.

I pay less than half in rent what an owner pays in mortgage in my area. That's just a fact, so your assertion is wrong.

(Plus there's no mortgage-interest deduction in Australia, but that's another discussion.)

read my other post, thats sucks for Australia though

[Ancalagon the Black]

Originally posted by jbooma

read my other post, thats sucks for Australia though

I did! This is what you said:

Maintanence is deductible if you rent out your place, now another thing that Kilmer was pointing out is you have a nice chunk of equity in your home, you can use that to buy another piece of property and then rent that out, so in a way you do gain on someone that is jut renting because they don't have the ability to accumulate property.

I addressed the first part by saying that maintenance is still a cost, even if you can deduct it from taxes. Deducting something from taxes doesn't make it free.

You can accumulate property by renting just as easily as you can by leveraging your equity, because you will be saving cash. (At least, in the hypothetical examples we're talking about.)

[jbooma]

Originally posted by Ancalagon the Black

I did! This is what you said:

I addressed the first part by saying that maintenance is still a cost, even if you can deduct it from taxes. Deducting something from taxes doesn't make it free.

You can accumulate property by renting just as easily as you can by leveraging your equity, because you will be saving cash. (At least, in the hypothetical examples we're talking about.)

I meant the post about the value of the home. Maintenance is not a big thing, it is routine and not to expensive, yes you have major purchases, but not a lot.

[Ignatius J.]

Illone,

so I can do some math, what is the average interest rate on that mortgage you quoted me, and how much of that was down payment?

it seems like with a 10% down payment it's something like .05?

[illone]

The loan program I am referring to is called an Option ARM.

1% for the first 12 months. After the initial teaser period, the payment increases by 7.5% of the previous years payment.

Year 2 = 2687 and so on.

lets do 10% down to make things easy.

50K down, 500K loan, 2500 a month payment. Rounding up to make things easy.

[Ignatius J.]

I really appreciate this by the way.

Are there penalties for getting out early?

The mortgage payment changes as well as the interest rate?

Year two the payment increases right, does it increase in year three as well?

[chomerics]

Originally posted by jbooma

It all depends on the market, but even in Cali I don't think the rent is half of someones mortgage, that is a little crazy,

however it might not be worth buying a home, but ANY property is better then none, even a condo.

Maintanence is deductible if you rent out your place, now another thing that Kilmer was pointing out is you have a nice chunk of equity in your home, you can use that to buy another piece of property and then rent that out, so in a way you do gain on someone that is jut renting because they don't have the ability to accumulate property.

Booma, It is in Boston. It USED to be as much as a mortgage, but not ay more. In 2000 an apartment in the North End would cost you $3500, now it is just about $1500. A mortgage in the north end will still cost you around $3500 a month.

I think you are underestimating the ability of a market to crash. Sometimes it is not right to buy a house, now may be one of those times, at least here in Boston. Rents have been cut in half, yet the houses are still going for big bucks.

[jbooma]

Originally posted by chomerics

Booma, It is in Boston. It USED to be as much as a mortgage, but not ay more. In 2000 an apartment in the North End would cost you $3500, now it is just about $1500. A mortgage in the north end will still cost you around $3500 a month.

I think you are underestimating the ability of a market to crash. Sometimes it is not right to buy a house, now may be one of those times, at least here in Boston. Rents have been cut in half, yet the houses are still going for big bucks.

Wow that is a lot, however is that a fix morgage or an arm or interest only? That makes a big difference.

I know markets can crash, had friends in cali during the internet boom. I agree it all depends on the market, however if the market was crashing in Boston then the prices of the homes would drop and the mortages go down.

[Ignatius J.]

Once the mortgage comes down, you'd better believe the smart money is in buying! We're just saying that a crash may happen in these areas, because housing prices are so high compared to rents.

[jbooma]

Originally posted by Ignatius J.

Once the mortgage comes down, you'd better believe the smart money is in buying! We're just saying that a crash may happen in these areas, because housing prices are so high compared to rents.

Isn't there a rule that your mortgage should never be more then 36% of our salary and you should never rent more then 20% of our salary or something like that??

[Ignatius J.]

If you insist on making up silly rules, you will never maximize your money.

If that rule made sense, why would anyone need an accountant?

[jbooma]

Originally posted by Ignatius J.

If you insist on making up silly rules, you will never maximize your money.

If that rule made sense, why would anyone need an accountant?

:laugh:

What I meant is a bank will not let you borrow more then 36% of your monthy net salary (loan people help), however when you do rent you don't want to be paying clost to that, so in reality you always want to rent less then a mortgage, that is what I was saying.

[Ignatius J.]

That at least seems true enough. Although, I am paying about half of my salary in rent, and while I would like to be paying less than that, this is one of the cheapest places in this area.

[illone]

Originally posted by Ignatius J.

That at least seems true enough. Although, I am paying about half of my salary in rent, and while I would like to be paying less than that, this is one of the cheapest places in this area.

See what I mean man?

This was my point earlier when you mentioned paying rent and investing the difference between the rent payment and the "supposed" mortgage payment.

Not many people can do that, realistically.

Now, back to the loan scenario.

The payment goes up 7.5% of the previous years payment for the initial 5 years.

2500 year one

2685 year two

2899 year three

3116 year four

3350 year five

It's a risky loan in reality because your Principal on the loan can increase over time, however the reward in todays market greatly outweighs that risk.

For example, let's say the interest only payment in year one is 3000. Potentially over time you would defer about 6K in interest back onto the loan. 6K in cash flow in your pocket can be used to re-invest in other areas or better yet more real estate, cant go wrong there right?

So, what you'd be looking at after year one would be potentially starting out with a Principal Balance of 500K when you started out, then in twelve months its 506K.

Who cares if your property appreciated 70K and you took the money you saved in cash flow every month and bought a small condo that was going up 10K a year? It's a wash, and a sound investment! Not only did you save money but you put your money to work for you. More property = more appreciation = more net worth:)

Everyone and I mean EVERYONE in Cali has this type of loan. People over there don't even know what a 30 yr Fixed is anymore. A 30 year loan is becoming obsolete nowadays because everyone buys a bigger home in 4-5 years anyways.

Just for argument sake, that same 500K loan is about 4900 per month on a typical 30 year loan, maybe more. I'm shooting from the hip here as I went home for the day. 730 am - 8pm was a long enough work day for me:D

Hope some of this helps, although I think we got sidetracked from the initial question.

[Ignatius J.]

If your property is appreciating at a modest rate, then buying land is a no brainer. I would never, and have not contested that fact.

Just to make sure I'm doing this right, the payments are like you have them for the first five years. I can do this with a constant intrest rate right?

[illone]

Well, dont get consumed by the rate.

The actual "cash flow" benefit is what is most important.

Payment is what you look at.

I dont care what the rate is, it could be 8% interest only. If your property is going up 25% who cares what the rate is as long as you can make the payments and create equity!

[Ignatius J.]

Based on a 5% interest rate, a 5% rate of return on investment of capitol and a 5% appreciation of the house, I get that after 5 years, I get 260,000 vs. 170,000 buy vs. rent, just as I would expect. The model included a rent increase correlated to the house appreciation, so rent increased as well. So this is definately what we expected here.

The two choices are just about even (the renter a little ahead, but not enough due to tax deductions so we'll call this a wash) if the appreciation is 2% which I think is pretty possible in LA.

If the appreciation drops to 1%, the buyer is behind about $40,000, wheras the renter has about $180,000.

How realistic is this? Not very. The fact is tthat owned homes are typically far nicer than rented homes. Rented homes are cheap not just because of the math, but also because everything about them is worse. The plumbing is crappy, the managers or landlords are lazy etc.

But the idea that rent is somehow throwing money down the drain is wrong. Especially if you think that there is a bubble in your area where growth is going to slow down over the next five years. It makes sense to take the money you would have put in a mortgage and save it. Is it always practical? No. But the point here is that in these situations, if you can rent the same place you should consider it.

Notice, I never had to assume that the property value went down. We're just talking about a slowdown here. That's all it takes to make rents a good deal. If the property takes even a small dive, the renter is laughing his way to the bank.

So, do my calculations seem plausible? I just threw a spreadsheet together compounding everything monthly, 5% interest, paying off at the payments you gave me.

[Ignatius J.]

illone, the whole point is what happens if the house doesn't appreciate! then interest rates become very important.

[illone]

Originally posted by Ignatius J.

illone, the whole point is what happens if the house doesn't appreciate! then interest rates become very important.

Housing has ALWAYS appreciated, even if it had some slow times.