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coxta
Ultramundane
Premium
join:2000-07-15
LALALALALALA | reply to nightdesigns
Re: Homeowners: Mortgage Interest, Property Tax & Uncle Sam
Almost everyone who owns a home, owns stocks. Not everyone who owns stocks, owns a home. | |
dogma
Premium
join:2002-08-15
Boulder City, NV
| reply to coxta
OK, this is a good Off-Topic topic, but I think it needs qualification. At least for my 2¢ input.
First, a home (that one lives in) is not really an "investment". It is a necessary expense, however, once the mortgage is paid off, it can lower the overall cost of living for the owner. Lowering expenses is a better benefit than increasing income, and could be looked at as a "type" of investment.
So, lets make sure we are not clouding the issue between investments. A stock/equity is usually an "appreciating" asset over time. Investment real estate can be both an "appreciating" asset and a "performing" asset. Stocks only "perform" if they happen to pay dividends. Generally these dividends are re-invested. About 66% of the S&P index companies pay dividends. But the reality is an investor would need to invest in each dividend paying company individually, vs. a S&P fund.
Now, Equities vs. investment real estate. I would not include REIT's as investment real estate at all, as a REIT is a company, usually traded publicly, that manages a portfolio of real estate to earn profits for shareholders. Therefor another equity.
Let's also be realistic about individual "investment windows" and "management time". The days of Buy-and-forget stocks like AT&T, IBM, GM are long gone. To minimize the management time, and equity investor would need to invest in a managed portfolio, such as one based on the S&P.
said by wikipedia--> »en.wikipedia.org/wiki/Passive_management :
Mutual fund investors
Dalbar Inc., a market research company, found that during the 20 years from 1984 to 2004, the average stock fund investor earned returns of only 3.7% per year, while the S&P 500 returned 13.2%. On an inflation adjusted return, the average equity fund investor earned $13,835 on a $100,000 investment made in 1985, while the inflation adjusted return of the S&P 500 would have been $591,337 or 43 times greater.
If one is seeking the type of return coxta  is speaking about, I would think it only fair to say "management time" would be equal between an equity investment and an income real estate investment. With respect to "investment window"; we all would like to have $100K to invest, and have that sit untouched for 50 or 75 years, where it becomes $10 Million. But that isn't reality either. Most of us have an investment window of 20-30 years. From the time at dawns on us that one day we will be old, and may not be able to work, or want to work, to that day. I will use a 25 year timeframe. Moreover, we need to equalize the investment for a better apples-to-apples comparison.
So, lets look at 2 investments, with 16-year Horizons. One in S&P individual stocks, which must be managed, and the other in income real-estate, that must be managed as well.
Investment A: S&P stocks, amount: $100,000
Over 16 years @ 10.6% (with dividends reinvested) based on--> »www.financial-planning.com/pubs/···007.html )= In 16 years, the investment appreciation" will be worth $541,165.
Investment B: Investment real estate, (20%)down payment: $100,000
Over 16 years @4.4% this investment "appreciation" will be worth $215,215.
However, Investment B has a "performing" component that should be added. Rents will rise 5% every year, so this investment will kick off an additional $222,185 in gross profit, therefore putting Investment B at $437,000
If we move our investment window's out to 25 years, when Investment B's mortgage is fully paid off, we have:
Investment A: Over 25 years @ 10.6% will be worth $1,399,030.
Investment B: Over 25 years @ 4.4% will be $299,813 + the original principal value (now retired debt) $400K = $699,813 + Performance over 25 years of $348,129 = $1,047,942.
Additionally, Investment B now performs to the tune of $108,000 in gross profit per year.
Investment A can become performing now by raking off the interest every year; kicking off $148,297 per year.
Obviously, there are a ton of assumptions here. But I would say the equity investment is much more risky (and therefore a greater return overall). The best thing to do is take your $200,000 and invest in both? | |
jig
join:2001-01-05
Hacienda Heights, CA
| there are larger tax benefits to investing in the property, especially when you sell, and i think if you could get 10% a year for 16 years, off of investments, you'd be a superstar/it would be 100% of your time. and i don't think you'd need to be anything special to get the return on the property.
but, getting the full rent out of the property might be the mitigating comparison factor.
stocks are much better if you can invest in them with some kind of retirement fund that won't charge you tax once you retire, but of course those are limited as to investment.
i think we're missing something in the calculation, but i can't put my finger on it right now. i do like the analysis.
--
A man compounded of law and gospel is able to cheat a whole country with his religion and then destroy them under color of law. -Ben Franklin | |
coxta
Ultramundane
Premium
join:2000-07-15
LALALALALALA
 ·Pacific Bell - SBC
| reply to nightdesigns
All that sounds well and good, but in practice it happens this way.
You save money and acquire a down payment and then obtain a long term mortgage. On average 30 years (although now I'm seeing 40 years mortgages). When your house is paid off, all your money is in your home. You may be able to take some of this equity out, but you still have to pay back the loan amount. So your house rich and cash poor.
Having a home isn't bad, it's just not a terrific investment and it's probably best not to think of it as an investment - it's a place to live.
If you want to sell you home when you retire and move to another location with a lower cost of living then it makes a great investment. You can cash out and live well. If you lease it out, then you've got all your principle tied up or you can take out a 2nd mortgage and have a bolus of cash, but pay it off with the lease. However, you have to always have a renter, because the mortgage is always due every month.
I can have equities that pay dividends or I can cash out a portion each time I want cash. You can't sell part of your house each time you want cash. Also, when you buy real estate, you purchase something real and unless you're involved in some special investment scheme, you purchase the entire house, not a portion of it. That is to say, you can buy 1 single stock or 10,000 stocks, but you can only buy a multiple of one house each time.
--
Experience is the knowledge that enables you to recognize a mistake when you make it again. | |
Kibbles
Premium
join:1999-07-31
Mission Viejo, CA
| reply to dogma
said by dogma :said by nightdesigns :We're starting to look at the housing market for our first place... All I can say is wait. Give it 12 Months at least. Hmm...have you read/seen any articles supporting that...and what do they think the house prices will be... 3-5 years from now ? | |
dogma
Premium
join:2002-08-15
Boulder City, NV
| I don't know what they will be 3-5 years from now, but I am satisfied the values will continue to decline for the next 24 Months. Look at this:
Orange County Inventory (Sales)
Tracking Orange County, California
Population 2006: 3.07 million
1/02/2006 Listing per population ratio 1:422
7/30/2006 Listing per population ratio 1:176
01/2006: 8,430 (2,868)____01/2005: (2,903)
02/2006: 10,420 (2,928)___02/2005: (2,890)
03/2006: 11,762 (4,203)___03/2005: (5,033)
04/2006: 13,268 (3,276)___04/2005: (4,547)
05/2006: 15,048 (3,113)___05/2005: (4,548)
06/2006: 16,692 (3,608)___06/2005: (4,898)
07/2006: 17,458 (2,779)___07/2005: 6,656 (4,341)
08/2006: 17,758 (3,203)___08/2005: 7,209 (4,708)
09/2006: 17,475 (2,664)___09/2005: 8,044 (4,072)
10/2006: 16,650 (2,715)___10/2005: 8,565 (3,614)
11/2006: 15,188 (2,475)___11/2005: 8,520 (3,503)
12/2006: 13,220 (2,719)___12/2005: 7,583 (3,826)
Population 2007:
01/01/2007 Listing per population ratio 1:244
01/01: 12,600
01/31: 13,302 (2,400)___01/2006: 8,430 (2,868)
02/28: 13,704 (2,449)___02/2006: 10,420 (2,928)
03/31: 15,324 (3,130)___03/2006: 11,762 (4,203)
04/30: 17,094
05/10: 17,612
-ziprealty resale inventory includes SFR/Condo/MFR/Land Parcels
-(sale figure) includes new and resale homes from Data Quick News
1.The number of new listings on the market in Orange County are more than twice what they were 17 Months ago. Plus, many of the homes listed in the interim have gone into foreclosure.(more inventory)
2. The mortgage rates are a full percentage higher now for borrowers with sterling credit. The higher the rate goes, the less potential buyers can afford to pay. (less buyers)
3. Credit quality is sneaking back in lending, so no more "exotic" loans to folks that really couldn't afford it in the first place. (Even less buyers)
4. The Default & foreclosures are steadily rising (more inventory)
5. The existing exotic loans that trigger automatic payment increases will come month after month now for at least another 5 years. Many borrowers who were hoping against hope that magically their "income" would rise, or there would be continued "appreciation" in the home market, allowing them to re-fi into yet another exotic loan will wind up in REO status as well. (more inventory and less buyers)
Law of supply and demand*.
Right now the supply of homes for sale is increasing, and the demand of people that are "qualified" to buy, and want to buy is decreasing. Therefore the prices will continue to drop IMO.
*For some unknown reason [/sarcasm], this "law" does not seem to apply to the Oil companies. | |
Kibbles
Premium
join:1999-07-31
Mission Viejo, CA
| said by dogma :I don't know what they will be 3-5 years from now, but I am satisfied the values will continue to decline for the next 24 Months. Look at this: Well next year is an election year..I wonder will that effect the market if say we get a multi-billion dollar national health care program...and/or the now defunct sub-prime lending companies still around next year get bailed out? | |
dogma
Premium
join:2002-08-15
Boulder City, NV
| said by Kibbles :Well next year is an election year..I wonder will that effect the market if say we get a multi-billion dollar national health care program...and/or the now defunct sub-prime lending companies still around next year get bailed out? Can't be much worse than the current Trillion $ Iraq oil program. | |
Kibbles
Premium
join:1999-07-31
Mission Viejo, CA
1 edit | China could sell off all their T-bills  all 200+ billion dollars worth. | |
FutureMon
OW My Eyes
Premium,ExMod 2002-05
join:2000-10-05
Colorado Springs, CO
clubs: 
1 edit | reply to dogma
The company that handles the sale of much of the real estate in my area seems to think that over the next 24 months, based on their knowledge of the local market and their recent activity, it's either going to stay about where it is, or get worse. It will not get better.
Why couldn't we have something in place that could protect homeowners that aren't in default - or at least segregate them?
For instance. I'll assume most of you know how "comps" work. The appraisal value of a home is based on a number of factors such as lot size, # bedrooms, # bathrooms, square footage, etc.
Why don't foreclosures of a particular set of properties only affect properties of similar type? So a foreclosure of a 5 bedroom home doesn't affect the 3 bedroom homes, and vice-versa. Or for that matter, have it only affect the homes that are financed by that lender. If they lend to a risky borrower it could affect their whole portfolio - so it might have the same effect as what is happening to the lending rules today - only limited to the companies who took the risks in the first place.
It wouldn't solve the problem - but it might even the spread a little bit. Why should the foreclosure of a 2 bedroom bungalow affect the price of my 5 bedroom mansion?
Just a thought. I am just throwing it out there.
- FM
--
Undisputed BBR Karaoke Champion! Care to challenge me? | |
Kibbles
Premium
join:1999-07-31
Mission Viejo, CA
4 edits | said by FutureMon :The company that handles the sale of much of the real estate in my area seems to think that over the next 24 months, based on their knowledge of the local market and their recent activity, it's either going to stay about where it is, or get worse. It will not get better. Why couldn't we have something in place that could protect homeowners that aren't in default - or at least segregate A Realtor that specializes in this area e-mailed me the same opinion that prices will stay the same or even drop...I read that the prices are expected to drop a total of 7% over the next 2 years...yikes...there goes ~ 50k.
With the amount of Foreclosures,dropping prices,..you can use those as comps and ask for a reduced property assessment...thus reducing your property taxes.
The question I have is where the rental/lease prices will go...up or down?
I was thinking that a lot of Foreclosures could be avoided by leasing the house out...the owner could be taking a small loss per month..but they could be able to keep it long enough to sell it when the prices rise.
Too bad there is no state/federal program that could help a homeowner stay out of a Foreclosure. | |
aztecnology
O Rly?
Premium
join:2003-02-12
Murrieta, CA
 ·Verizon FIOS
| said by Kibbles :said by FutureMon :The company that handles the sale of much of the real estate in my area seems to think that over the next 24 months, based on their knowledge of the local market and their recent activity, it's either going to stay about where it is, or get worse. It will not get better. Why couldn't we have something in place that could protect homeowners that aren't in default - or at least segregate A Realtor that specializes in this area e-mailed me the same opinion that prices will stay the same or even drop...I read that the prices are expected to drop a total of 7% over the next 2 years...yikes...there goes ~ 50k. With the amount of Foreclosures,dropping prices,..you can use those as comps and ask for a reduced property assessment...thus reducing your property taxes. The question I have is where the rental/lease prices will go...up or down? I was thinking that a lot of Foreclosures could be avoided by leasing the house out...the owner could be taking a small loss per month..but they could be able to keep it long enough to sell it when the prices rise. Too bad there is no state/federal program that could help a homeowner stay out of a Foreclosure. In a declining market, rents typically go down, because of the increased supply in rental units. Secondly most people don't have enough money to carry a second residence without relying on MEW, and most rentals don't cash flow above $200/sqft
I'd expect a lot of market areas to decrease 3%-7% per year for the next 3 years, or about 15%-20%. What will trigger the snowball effect will be banks and their non-performing assets.
There used to be a program that did a decent job of preventing foreclosures, they use to call it Traditional Lending Standards
You know, where you could comfortably afford a home that was 3x-4x your income - When the median income for most of SoCal is in the $50k-$75k range, it's easy to do the math.
For housing to get back to a normal equilibrium, prices have to fall further than the 15-20% I'm predicting. We'll just have to wait and see...
--
"Independent thinkers tend to ALWAYS have someone not agreeing with them. It's The non-thinkers that always come in legions." John Callari .:|:. Say no to the IRS Yes to the Fair Tax | |
coxta
Ultramundane
Premium
join:2000-07-15
LALALALALALA
·Pacific Bell - SBC
| reply to nightdesigns
Rent's don't always decrease. As housing prices increased, the rental prices stayed close to the same, the had already increased. Now, as fewer people are able to purchase homes, rental prices increase. It seems a bit counter-intuitive, but that's the way it seems to have worked here in L.A.
Where do I come about this information? I have connections with a group that does all types of real estate ventures, residential and commercial property sales, and property management.
--
Experience is the knowledge that enables you to recognize a mistake when you make it again. | |
FutureMon
OW My Eyes
Premium,ExMod 2002-05
join:2000-10-05
Colorado Springs, CO
clubs:
1 edit | said by coxta :Rent's don't always decrease. As housing prices increased, the rental prices stayed close to the same, the had already increased. Now, as fewer people are able to purchase homes, rental prices increase. It seems a bit counter-intuitive, but that's the way it seems to have worked here in L.A. Where do I come about this information? I have connections with a group that does all types of real estate ventures, residential and commercial property sales, and property management. It makes sense though. As more people lose (or leave) their homes, what do they do? If they can't afford to buy another home, they rent. So as foreclosures rise, rental availability decreases. Due to the increased demand, rental rates increase.
- FM
--
Undisputed BBR Karaoke Champion! Care to challenge me? | |
coxta
Ultramundane
Premium
join:2000-07-15
LALALALALALA
·Pacific Bell - SBC
| Right. They are all sort of out of sync. As mortgage rates from ARMS increase, those people can't afford their homes any longer. When they first were buying homes with no money down, then rents were comparable to purchasing to a home. As time went own, rent's stayed constant - you can't increase the rent during the lease - and home prices increased. Now homes are declining somewhat and people cant' pay their mortgages and rent will rise. It's going to make life very difficult for many people. Right now, my mortgage payment is about what rent is. If I rent an apartment, I pay the same, but I get no equity.
--
Experience is the knowledge that enables you to recognize a mistake when you make it again. | |
aztecnology
O Rly?
Premium
join:2003-02-12
Murrieta, CA
·Verizon FIOS
| reply to coxta
said by FutureMon :It makes sense though. As more people lose (or leave) their homes, what do they do? If they can't afford to buy another home, they rent. So as foreclosures rise, rental availability decreases. Due to the increased demand, rental rates increase. As I just mentioned in my previous post, when rental supply increases, rent decreases...and rental supply is currently increasing.
This country has some 2 million vacant homes out there today, and supply is increasing everyday, this gives the consumers lots of choice and forces landlords to compete, and they can only compete on price...
"With so many vacant homes for sale, owners will begin to offer them for rent, said Asha Bangalore, an economist for Northern Trust. If the supply of rentals rises, rental prices should begin to come down, helping to bring down core inflation."
»www.marketwatch.com/news/story/n···9E74D%7D
--
"Independent thinkers tend to ALWAYS have someone not agreeing with them. It's The non-thinkers that always come in legions." John Callari .:|:. Say no to the IRS Yes to the Fair Tax | |
dogma
Premium
join:2002-08-15
Boulder City, NV
| During the last Real Estate Bubble/Crash, I didn't see any REO's for "rent". Don't think lending institutions holding REO's are in the rental land-lording business. Doesn't make any sense for them to rent out homes they have taken back in foreclosure. At least they were not renting them out last go round.
And very unlike last time, I would imagine most owners in trouble are so upside down in equity, and screwed with escalating payments, that "renting it out" would be a non-option. How can one carry a $3500/Mo note + all expenses and maintenance, and the rental market is $2K/Mo?
The "so-called" RE experts of the last few years, you know, the guys who speculated "Flipped" properties, are walking away from the ones they had left on the table when the music stopped. Those wont be "rented" either. Just left in the trash basket for the new RTC to dispose of.
I say that to say, there may be fewer rentals on the market, not more. And there will dang sure be more folks looking to rent after being shown the eviction door. (Not many landlords will rent to anyone that has an eviction on their record) Thus increasing the cost of renting. | |
aztecnology
O Rly?
Premium
join:2003-02-12
Murrieta, CA
·Verizon FIOS
| said by dogma :I say that to say, there may be fewer rentals on the market, not more. And there will dang sure be more folks looking to rent after being shown the eviction door. (Not many landlords will rent to anyone that has an eviction on their record) Thus increasing the cost of renting. There is huge built-in oversupply in the market. Flippers and specuvestors bought housing with no intention of ever living in them, so they are mostly vacant anyway.
Sure some of them will carry with a loss, and REO's will eventually get worked back into the system, not to mention the housing units that are completing now and those coming online in the near future.
Builders are writing off losses and land options as fast as they can, but, they still have to keep building to stay in business.
Supply will keep rents in check...
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"Independent thinkers tend to ALWAYS have someone not agreeing with them. It's The non-thinkers that always come in legions." John Callari .:|:. Say no to the IRS Yes to the Fair Tax | |
sholling
Premium
join:2002-02-13
Hemet, CA
| said by aztecnology :Supply will keep rents in check... Which is why rents in Orange and LA counties are going up 8-9% an year? It must be all that new land that they are making isn't it? Seriously, rents may go up or down in less desirable areas with tons of available land and housing, Ohio might be a good example. But for those in LA and OC, and the less remote inland areas the choices are simple - pay skyrocketing rents or drive for hours to get to a job that pays anything. Add in the refusal of many cities to accept more apartment construction, plus the slow-growthers and you have a sure fire formula for rising rents.
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"Government is the great fiction, through which everybody endeavors to live at the expense of everybody else."
--FREDERIC BASTIAT--
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jig
join:2001-01-05
Hacienda Heights, CA | rental supply is not going up anywhere near the same rise in demand. and won't, till some zoning things happen. | |
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