LI Housing (Nassau, Montauk: rentals, mortgages, credit)

[cmv138]

Foreclosures in 3rd quarter up nearly 23% from 2008 - USATODAY.com

[scottzilla]

Originally Posted by cmv138

Foreclosures in 3rd quarter up nearly 23% from 2008 - USATODAY.com

Of course foreclosures are up. People have been living in houses and not paying mortgages for over a year now.
Florida had over 100,000 foreclosures. WOW.

[I_Love_LI_but]

Originally Posted by scottzilla

I completely agree with you. However, the house may indeed need to be worth 275K but if the seller paid 400K (And therefore would need 400K just to break even) one of two things will happen:
1-The house will sell for 275K and the homeowner will be in a 125K hole. This is happening right now and it's been my contention that this will end shortly. Probably within a year.
2-The homeowner will not sell his house because he can't get what he needed to get to break even. 1980 all over again. Lot's of houses for sale but no buyers.

This is why I believe we are damn close to bottom on LI house prices.

Another thing might happen:

3 - The seller will stay in his house for several years if he bought it as a home, not a flip, and by the time he goes to sell it prices will have caught up with and surpassed what he paid for it and he will be okay in the end!

*As for the seller in the hole: not totally in the hole as when short sales occur, often the debt remaining is forgiven. I think the banks were, however, reporting the forgiven amount as income on 1099s to the IRS. I think I read somewhere that they stopped that and the forgiven amount is tax free.

[llama8]

Originally Posted by dman72

When you look at how much money you shell out in interest to a bank, don't be so quick to say that renting is throwing money away in the same sentence as saying that buying a home always returns equity. That may be true if if you pay off the home in 5 years at a low interest rate, not true if you take 20 or 30 years to pay it off. Even at low rates you're paying double the price of the house over the long run.

You don't start getting a return on real estate unless you see huge appreciations or move a lot of volume in a short period of time. It's nice to have YOUR house, that you can do what you want to with, I can't argue with that, but financially, it ISN'T the slam dunk that everyone would tell you, just looking at pure numbers.

Although a good point, it does depend. I have a 30 yr fixed, but the amount I pay each month in my mortgage is still the amount I would pay on rent anyway. Unless you have a high rate, that is probably the case for a lot of people. I walk away with equity at the end. If I shelled out the same amount in rent, i walk away with nothing and spent the same in 30 years. Plus I get the huge tax deductions and I get to fix up my own place!

[dman72]

Originally Posted by llama8

Although a good point, it does depend. I have a 30 yr fixed, but the amount I pay each month in my mortgage is still the amount I would pay on rent anyway. Unless you have a high rate, that is probably the case for a lot of people. I walk away with equity at the end. If I shelled out the same amount in rent, i walk away with nothing and spent the same in 30 years. Plus I get the huge tax deductions and I get to fix up my own place!

...or you overpaid for your house.

If between taxes, mtc, and mortgage, less your return at the end of the year that you wouldn't have without a mortgage...if between those things you pay around the same you would for rent...and you have stable income...then buying is the way to go. If it's even slightly more, you're cool.

If any of those things are lacking, then it's not a slam dunk. There is a difference between $1700 a month rent..that you can basically bail out of anytime..and $2000 a month in debt for basically THE REST OF YOU LIFE, especially at this point when we really don't know when real estate will start appreciating again, and to what level if will ever reach. 2002-2007 is not going to happen again in our lifetime.

Sure, you have to live somewhere, but what if you want to get off LI and pay $600 a month rent somewhere else?

[LIBoy]

Originally Posted by dman72

When you look at how much money you shell out in interest to a bank, don't be so quick to say that renting is throwing money away in the same sentence as saying that buying a home always returns equity. That may be true if if you pay off the home in 5 years at a low interest rate, not true if you take 20 or 30 years to pay it off. Even at low rates you're paying double the price of the house over the long run.

You don't start getting a return on real estate unless you see huge appreciations or move a lot of volume in a short period of time. It's nice to have YOUR house, that you can do what you want to with, I can't argue with that, but financially, it ISN'T the slam dunk that everyone would tell you, just looking at pure numbers.

I think that scenario was true two years ago. But, definitely not for most homes sold earlier this year. Just look at closing prices from Jan to May. The market was so depressed, these properties were sold for less than potential rental income.

For example, if a 500k house (assuming it is the closing price in May) with 10k annual property tax. It is a decent size house and probably has 3 or 4 bedrooms. From a renter’s perspective (or a potential buyer), he may be paying 3k monthly to rent a 3-4 bedroom house.

If that is the case, it may worth the while for this renter to buy instead of renting. Since, at 500k with 10k tax, 20% down payment (minimum to avoid PMI), 5% interest (average 30 years rate in May). The monthly mortgage will be $2147 + tax $834 = $2981 per month. Also, interest income loss for the 100k (100k at 1% in May, $83 per month minus tax) is about $58 per month. Thus, preliminary cost to own is $3039 VS $3000 to rent a comparable size and quality house.

It appears renting is still better (in terms of cash spend, $39 saving per month) for the using the comparable house. However, it is actually better (for most people) to buy, base on this scenario. Here is why:

1. First year’s mortgage payment of $25,767 ($2147 x12) consist of $19866 interest and $5901 principal. The $19k interest can be deducted in Schedule A (this is why 1040 > 1040EZ). While the deduction is below the line, it is still very good. A saving of 19k translates to $497 monthly net saving (assuming effective tax rate is 30%) for the first year.

2. The property tax and school tax can be deducted too. The 10k translates to $250 monthly net saving (30% effective rate)

3. If it is an investment grade, forget 1 and 2, the entire amount is above the line. Then again, commercial loans are very different than mortgages.

4. Rental risk. (personally, I think it’s the biggest potential cost) From a renter’s perspective, the owner can raise $50 monthly rent every year. From the owner’s perspective, renter is source of income. If owner can not get the desired return or not worth the headach, the property can be converted to other forms of asset. (thus, selling the property and evict the tenant)

So, from 1 and 2, cost to own is actually $3000 to rent VS roughly $2292 to own.

Above scenario looks great on paper. But, here is the catch. It is very hard to find a lender to do 20% down for the first 6 months of this year. The banks weren’t lending or simply, don’t want to lend. For those did close, many were closed with 30%+ downpayment or cash deal. That was a huge downward price pressure.

Negotiate, negotiate and negotiate. I think some sellers need to be more realistic. 100k in home improvement (or desperately needed repairs) don’t always translate to 200k value. That $8000 subzero is now used and 5 years old. Besides, if the buyer wants a subzero, a new one can be had for less (if they spend the time to negotiate).

Also, the cost of finance can be sheltered for the most part. However, cost of ownership can grow into a real burden. Property tax, school tax, repairs, garbage collections, insurance are things that defy gravity and always go up in time.

That being said, I think there are many good properties out there and many good sellers asking for a very reasonable price in today’s market. It is too bad it is mixed in with all other mess. But, it is out there. I believe it, I found mine.

[LIBoy]

Originally Posted by dman72

...or you overpaid for your house.

If between taxes, mtc, and mortgage, less your return at the end of the year that you wouldn't have without a mortgage...if between those things you pay around the same you would for rent...and you have stable income...then buying is the way to go. If it's even slightly more, you're cool.

If any of those things are lacking, then it's not a slam dunk. There is a difference between $1700 a month rent..that you can basically bail out of anytime..and $2000 a month in debt for basically THE REST OF YOU LIFE, especially at this point when we really don't know when real estate will start appreciating again, and to what level if will ever reach. 2002-2007 is not going to happen again in our lifetime.

Sure, you have to live somewhere, but what if you want to get off LI and pay $600 a month rent somewhere else?

While I agree we really don’t know if real estate has bottomed or heading toward another free fall. But, learning from the past, it probably will over appreciate again in our life time. Just look at real estate valuations back in the 87-90 or stock market crashes. With the help of our government, home prices will be inflated back…very soon. Well, dollar amount, not purchasing power.

Sure, you can live somewhere, like getting off LI and pay $600 a month. But, house in those areas are lower than a new car. Then, we are back to the old math. Except, comparing apples to oranges.

Nothing in life is a sure thing. But remember, commitment is well rewarded.

[dman72]

Originally Posted by LIBoy

I think that scenario was true two years ago. But, definitely not for most homes sold earlier this year. Just look at closing prices from Jan to May. The market was so depressed, these properties were sold for less than potential rental income.

For example, if a 500k house (assuming it is the closing price in May) with 10k annual property tax. It is a decent size house and probably has 3 or 4 bedrooms. From a renter’s perspective (or a potential buyer), he may be paying 3k monthly to rent a 3-4 bedroom house.

I have to stop you there on your otherwise well thought out analysis. 3 to 4 bedroom houses that routinely sell for 450-500K are in most cases not renting for 3K..more like 2500, some can be had for less now. Look in areas like Kings Park, Northport, Bayport-Blue Point, etc..there are some really nice deals for rentals now.

Of course, you can get a deal on a house also, but short sales and foreclosures are a whole different ball game in terms of the work in involved with getting them.

[LIBoy]

Originally Posted by dman72

I have to stop you there on your otherwise well thought out analysis. 3 to 4 bedroom houses that routinely sell for 450-500K are in most cases not renting for 3K..more like 2500, some can be had for less now. Look in areas like Kings Park, Northport, Bayport-Blue Point, etc..there are some really nice deals for rentals now.

Of course, you can get a deal on a house also, but short sales and foreclosures are a whole different ball game in terms of the work in involved with getting them.

Sure, why not, 450k house renting 2500? or maybe 500k renting for 2250?

Remember, the numbers in the example was based on first half of 2009. Sure, 3-4 bed can be had today for 2500. But, its been 6 months later.

What I am trying to say is, the math is important. In fact, it has to make some sense. But, it should never be the only reason to buy. And whatever that reason is, there is a premium to it. It is up to the buyer to decide how much that premium is worth.

Or, you can look at it as an investor. If the math makes 100% sense and it is a guarantee cash cow. Chances are, it will be sold very quickly. Because, there are a lot of unhappy people with tons of cash earning 1% interest.

[MikeyKid]

Originally Posted by dman72

I have to stop you there on your otherwise well thought out analysis. 3 to 4 bedroom houses that routinely sell for 450-500K are in most cases not renting for 3K..more like 2500, some can be had for less now. Look in areas like Kings Park, Northport, Bayport-Blue Point, etc..there are some really nice deals for rentals now.

Of course, you can get a deal on a house also, but short sales and foreclosures are a whole different ball game in terms of the work in involved with getting them.

I was going to point this out, as well... I'm renting a large 4 bedroom with an acre of property for 2,300 per month.