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Old 04-17-2015, 11:53 PM
 
Location: Southern California
4,350 posts, read 4,939,435 times
Reputation: 2129

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-If the rate on a 30 is 4.5% and the rate on a 15 is 3%, the choice to borrow a 30 year cost how many percent more?

This would depend on what the limiting factor is - down payment or DTI. If down payment is the limiting factor, then yes. However, if DTI is the limiting factor (as your earlier argument seemed to imply) then it is different.

I don't imply DTI is the limiting factor, a downpayment, saving for a down payment is a "given" in an investment property. Anyone who has ever thought of a mortgage knows that the down payment factor. If you want to interpret my intentionally very short very general statement as limited to the income portion of a loan app, that is up to you.

I agree that if you can assume such high appreciation rates, then you'd be crazy to take a 15-year loan. Where I disagree with you would be in your assumption of reliable 5% annual appreciation in the first place.

Actually it was focusing more on the lack of appreciation and the declining market that lead to rapid appreciation. The bubble burst, properties lost value. The 5% appreciation is actually a curve ball. If the 1st property was purchased at $200,000 and there is a decline of say 20%, the purchase of the second property can even be nicer than the first property and purchased at $200,000. No settling for a cheaper property occurred. The "Cheaper" property now turns out to be the first property.

A lower priced property, because your DTI would be computed including both mortgage payments.

Who would you want to buy bigger and require more of your earned W2 income to go toward a rental property? I don't think that is a good strategy. Lets say I make $300,000 an can afford to buy a rental property, does it really make sense to buy a property where I need to throw an extra an extra $2,000 a month on a rental property because the rents are upside down? It doesn't make sense in most domestic area.

Why must it be scalable for an individual (NOT institutional) investor?

Because individual make poor emotional decision. Nothing is really stopping them. Okay, it isn't a MUST, it just becomes higher risk.
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Old 04-18-2015, 06:35 AM
 
Location: Cary, NC
31,636 posts, read 55,362,882 times
Reputation: 30188
Quote:
Originally Posted by AmFest View Post
An emergency fund does not help when the income is reduced permanently, for example, by the elimination of a highly specialized job. Even not being able to work for a year due to whatever reason will put dramatic stress on the emergency fund.
You are defining the specific purpose for having an emergency fund. To absorb unpredicted financial stresses.
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Old 04-18-2015, 07:21 AM
 
2,409 posts, read 2,492,415 times
Reputation: 1807
Quote:
Originally Posted by MikeJaquish View Post
You are defining the specific purpose for having an emergency fund. To absorb unpredicted financial stresses.
Exactly.

A 15-year mortgage will increase the magnitude of possible financial stresses and thus will call for a significantly larger emergency fund.
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Old 04-18-2015, 01:58 PM
 
12,404 posts, read 9,212,610 times
Reputation: 8868
Quote:
Originally Posted by AmFest View Post
Exactly.

A 15-year mortgage will increase the magnitude of possible financial stresses and thus will call for a significantly larger emergency fund.
Ok, but a 6 -month emergency fund will only have to be $2400 larger to accommodate a $400 higher mortgage payment. At a 6% interest/opportunity cost rate, this costs $144/year or $12/month. This is much, much less than the saved mortgage interest - and thus hardly a reason not to get a 15-year loan!

If you lose the job permanently and cannot get a replacement at all with comparable income, then you can sell the property.
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Old 04-19-2015, 02:41 PM
 
Location: Southern California
4,350 posts, read 4,939,435 times
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Losing a tenant and having a unit house vacant for a month is common. Let's say you tap that 6 month reserve for a month. To build it back to 6 months using the rental income will be more challenging when paying a 15 year loan over a 30 year loan.

IF the property could self sustaining with a 30 year loan versus a 15 year loan, wouldn't that be better than having to sell the property?

When you sell the property, you'll have to recapture that depreciation, not only will you have no job, no, income, but you'll get hit with more income taxes. If timing is wrong and you are forced to sell in a down market, you'll lose your down payment and equity.
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Old 04-19-2015, 03:23 PM
 
12,404 posts, read 9,212,610 times
Reputation: 8868
Quote:
Originally Posted by thelopez2 View Post
Losing a tenant and having a unit house vacant for a month is common. Let's say you tap that 6 month reserve for a month. To build it back to 6 months using the rental income will be more challenging when paying a 15 year loan over a 30 year loan.

IF the property could self sustaining with a 30 year loan versus a 15 year loan, wouldn't that be better than having to sell the property?
It depends. If the margin between what you can realistically afford with some room to spare and the actual monthly outlay is too small, then take the 30 year. You will get no argument from me on this one.

However, if you can afford the 15-year payment with no tenant and still save some each month, why is this bad? You wouldn't deplete your reserve. The reserve would be for unemployment. I mean we could all live in fear of unlikely worst case scenarios, but if you're going to approach things like this then why buy property at all? Your neighborhood might go to the dump or your city might go the way of Detroit. All these low-odds scenarios don't scare you right?

Quote:
Originally Posted by thelopez2 View Post

When you sell the property, you'll have to recapture that depreciation, not only will you have no job, no, income, but you'll get hit with more income taxes.
Actually you will be in a low bracket when unemployed, unless it is a very high-priced property. If your income had been (for example) $125K per year and then it drops to $0, even a $70K depreciation recapture on top of a $30K capital gain is still a lower bracket than when working.

Quote:
Originally Posted by thelopez2 View Post
If timing is wrong and you are forced to sell in a down market, you'll lose your down payment and equity.
Which only means that with the 30-year loan you would have been underwater, which can be a problem as well.

Last edited by ncole1; 04-19-2015 at 03:55 PM..
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Old 04-19-2015, 03:39 PM
 
12,404 posts, read 9,212,610 times
Reputation: 8868
Quote:
Originally Posted by thelopez2 View Post
-If the rate on a 30 is 4.5% and the rate on a 15 is 3%, the choice to borrow a 30 year cost how many percent more?
My calculation gives a 6.99% internal rate of return for the difference between 15 and 30 year. With a loan amount of $165,000 the 15-year payment is $1139.46 and the 30-year payment is $836.03 so the IRR expressed as a percentage is:

100*((836.03 / (1139.46 - 836.03))^(1/15)-1) = 6.99025509142

Quote:
Originally Posted by thelopez2 View Post

This would depend on what the limiting factor is - down payment or DTI. If down payment is the limiting factor, then yes. However, if DTI is the limiting factor (as your earlier argument seemed to imply) then it is different.

I don't imply DTI is the limiting factor, a downpayment, saving for a down payment is a "given" in an investment property.
And DTI is also a "given".

Quote:
Originally Posted by thelopez2 View Post
Anyone who has ever thought of a mortgage knows that the down payment factor. If you want to interpret my intentionally very short very general statement as limited to the income portion of a loan app, that is up to you.

I agree that if you can assume such high appreciation rates, then you'd be crazy to take a 15-year loan. Where I disagree with you would be in your assumption of reliable 5% annual appreciation in the first place.

Actually it was focusing more on the lack of appreciation and the declining market that lead to rapid appreciation. The bubble burst, properties lost value. The 5% appreciation is actually a curve ball. If the 1st property was purchased at $200,000 and there is a decline of say 20%, the purchase of the second property can even be nicer than the first property and purchased at $200,000. No settling for a cheaper property occurred. The "Cheaper" property now turns out to be the first property.

A lower priced property, because your DTI would be computed including both mortgage payments.

Who would you want to buy bigger and require more of your earned W2 income to go toward a rental property?
It wouldn't, because the first property would be paid off, so you could use the rental income from the first property to cover "out of pocket" payments on the second property, without dipping into W-2 income.

Quote:
Originally Posted by thelopez2 View Post

I don't think that is a good strategy. Lets say I make $300,000 an can afford to buy a rental property, does it really make sense to buy a property where I need to throw an extra an extra $2,000 a month on a rental property because the rents are upside down? It doesn't make sense in most domestic area.

Why must it be scalable for an individual (NOT institutional) investor?

Because individual make poor emotional decision. Nothing is really stopping them. Okay, it isn't a MUST, it just becomes higher risk.
What type of poor decision?
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