Could This Be the Bottom? (contracts, advantages, Realtor, residence)

[chuck22b]

Originally Posted by k374

how did you arrive at a 1.95% ROI? using some of your own data and variables:

$665,000:
Downpayment: 10% ($66,500)
Amt. Financed: $598,500 at 7%/30 yr fixed
ITI: $3491 (Interest only) + $630 (T) + $90 (I) = $4211 (Tax at 1.25%/yr, Ins at .15%/yr)
HOA: $200 (usually more in Irvine but...)
Maintainence: $230 (at 10% of median rent per year)
Opportunity cost of downpayment (after tax at 5%/yr): $150
Tax writeoff on interest: -$977 (at 28%)

SubTotal: $3,814

Vacancy risk: +$230 (at 10% of median rent)

Total: $4,044

Median Rent: $2,295

Net Monthly Loss: $1,749

One adjustment is the median rent, a $665k house in Irvine would probably rent for $2800-$3000/month, not at the median so even factoring this, it's still a MAJOR loss!!! Anyway you look at it is losing your shirt big time! There is just no way to get positive cash flow at these prices and expenses in Irvine. If you think you can do it please prove it with numbers.

Hi k374,
For those returns, I was using Humanoid's formula for the 4.5% returns which was basically with full payment without borrowing costs. I know it's not a normal situation for normal home owners to pay in full.

Here are the numbers for Irvine, I took them out in the list since I wanted to do a few cities and didn't want all the clutter:

Median Home: $665,000
Median Rent: $2,295
Yearly Rent: $27,540
Yearly Insurance (.15% of median price): $997.5
Yearly Tax (1.2% of median price): $7,980
Yearly Maintenance (10% of rent): $2,754
Yearly Vacancy (10% of rent): $2,754
Total Expense: $14,485.5
Net Income: $13,054
Return on Initial Payment: 1.96%

I said to draw your own conclusion, I don't think Irvine area would be a good investment either.

Plugging in the numbers into Patrick.net formula I get:

Purchase Price: 665000
Interest Rate: 6.30%
Down (20%): 133000
Remainder: 532000
Income Tax Rate 28.00%
CD Interest Rate5.00%

Yearly Interest Payment: 33516
Tax Deducted Interest: 24131.52
Property Tax: 9975
Maintenance: 9975
Insurance: 831.25
Yearly Lost Interest: 6650
Total Yearly Payment: 51562.77

Rent: 2295
Yearly Rent: 27540

Yearly Income Earned: -24022.77
Return on Down Payment: -18.06%


But, if you take the San Bernardino prices with the Patrick.net calculations you get:
Purchase Price: 148000
Interest Rate: 6.30%
Down (20%): 29600
Remainder: 118400
Income Tax Rate: 25.00%
CD Interest Rate 5.00%

Yearly Interest Payment: 7459.2

Tax Deducted Interest: 5594.4
Property Tax: 2220
Maintenance: 2220
Insurance: 185
Yearly Lost Interest: 1480
Total Yearly Payment: $11,699.4

Rent: 1400
Yearly Rent: $16,800

Yearly Income Earned: $5,100.6
Return on Down Payment: 17.23%

So, there's a reason why investors are piling in to purchase cheap properties in some of the most hardest hit areas. The huge discrepancies between full payment and borrowing is the "Power" and "Pitfall" of leverage

-chuck22b

[Humanoid]

Which I think Humanoid is basing a lot of his information on

Nothing I'm saying is based on Patrick.net. In many respects he doesn't know what he is talking about. Regardless, I will give you my estimates.

Townhome:

Mortgage, taxes, HAO, insurance: $1,450/month
Vacancy rate 5% (since he says its a good area) $77.5/month
Maintenance $100**

** He says this is all covered by the HAO, but I've never heard of them fixing your leaky sink etc before.

With Maintenance: -$1,530/year for a return of -3.5%.
Without Maintenance: $270/year for a return of 0.06%

Either way your the return on your capital investment is really bad. This is a highly speculative investment, it will only work out with fairly rapid appreciation. The declines in the market may entirely wipe him out (He is highly leveraged).

Apartment:

PITI + utilities $2,300
Vacancy rate (10%) $290
Maintenance (10%) $290 (Not only building maintenance, but any legal fees etc).

Total $2800

10% for vacancy for a so-so area is a pretty standard figure. 10% for maintenance for an older building is also pretty standard.

Anyhow, estimated cash flow $240/year for a return of .003%. Again near zero return and a speculative thee make.

The only good thing here is that excluding a major drop in rents (which isn't out of the question) he can afford to hold the properties and not go into foreclosure. But there is massive opportunity cost both in terms of lost return on capital investment and time put into matters.

So, there's a reason why investors are piling in to purchase cheap properties in some of the most hardest hit areas.

This is actually not the case. Investors aren't "piling in to purchase". Investor activity over the last few months has increased but its still pretty low. This by itself should tell you your numbers make little sense. Also, buying a house to live in is not the same as buying an investment property. But there is a big problem too with your San Bernardino numbers, a couple buying this house would see no tax benefit. I'm not sure why, but people always exclude the fact that you can always take the standard deduction. A couple buying a home that cheap isn't going to be subject to ATM and the itemized deduction will be around the same as the standard deduction (Remember, you take either the standard or itemized deduction). There is also the fact that this isn't a real case, you need to profile actual properties.

[Humboldt1]

Just so you know I am able to make my payments every month even with total vacancies based upon surplus income I generate from work. I basically invest all that I make from work after spending on gas and food and car repairs (I have never had a car payments as I am conservative and pay cash for cars).

I don't see rents going down in the Chicago market even with lots of units being rented in the suburbs as sellers look to generate cashflow on properties they are unable to unload.

Did you include 500 dollars for the unit I live in now?

Chuck,

Thank you for running the numbers. Regardless of the numbers, I like the Itasca property better as it has less headaches. I appreciate you running the numbers as I have been out of the office all week.

I may never be sure what my actual return is but I do know that even without my work income I am putting money in the bank every month though this has been a tough road to get financially ahead and not one I would recommend for others folks.

[Humanoid]

I don't see rents going down in the Chicago market

I'm just curious if you are paying attention to the current economy? Despite the food and energy increases everyone is obsessed with all other indicators are pretty deflationary. Credit is on the decline and money is being destroyed left and right, this all speaks of deflation. So rents going down all over the country is a real possibility.

Did you include 500 dollars for the unit I live in now?

Yes. that should have been obvious.

Just so you know I am able to make my payments every month even with total vacancies based upon surplus income I generate from work.

Cool so you have a money pit? I wonder how you think you're going to make money off all this.

I may never be sure what my actual return

Um.....you have a calculator right? How can you not be sure? This makes no sense. You just need 1.) Good book keeping, 2.) Calculator. Seriously, you should get out of real estate as soon as possible and never look back.

[shannon94]

Don't waste your time Humanoid....sigh......time will tell... like it already has...

[Humboldt1]

Kinda hard to get out of real estate as I come from a farm where my family has been slowly adding to their acres over the past 200 years.

I may actually return to the farm as my family also has a trucking company that is just ramping up from delivering just grain to possibly other freight in the future.

I admit I have made some mistakes along the way, particularly with putting up with crap from former tenants last year but I have learned a lot along the way which will make me a better investor going forward.

Your negativity is unwarranted but consistent with your other posts. Maybe in a few years when I really get going you can live in one of my buildings. I will be sticking with real estate as I really enjoy it and see a lot of potential with it, particularly in gentrifying neighborhoods in Chicago.

[Humanoid]

I may actually return to the farm...

Please do. And I don't say that to condescending. Rather, you're far more likely to succeed in something your family has been doing for a long time than your current get rich schemes (They are really nothing but such....as I showed).

I will be sticking with real estate as I really enjoy it and see a lot of potential with it, particularly in gentrifying neighborhoods in Chicago.

Well, good luck. You'll need it.

[Humboldt1]

I do not see this as "get rich quick" scheme as I buy and hold. I have intended on flipping anything I buy until at least 5-10 years down the road, maybe longer. I get the whole opportunity cost but I would still argue that because of reduced living expenses (I basically live for free, albeit in a small basement apartment) I am in a much better financial position than had I just kept the townhouse in Itasca.

I do agree that living in a gentrifying neighborhood on the west side of chicago after living in a fairly affluent suburb has been quite a change with lots of challenges. Kicking my tenants out last year was pure hell and about broke my spirits but I got thru it and learned some tough lessons. I am a much better person for having lived this experience and will make better investment decisions going forward, whether it is expanding the family farming or trucking business or buying additional properties in Chicago.

Regardless of all of this, I still basically agree with your assessment that we are at least a year from hitting bottom price-wise. I am thinking summer 2009 nationally and here in chicago as well.

I may get along with fmv much better than you humanoid but I agree more with your predictions that we are still headed down and have not hit bottom yet and won"t for awhile.

[Humanoid]

I do not see this as "get rich quick" scheme as I buy and hold.

What you are doing is more gambling than "get rick quick" although the two are connected.
From the numbers you gave its very clear that you are gambling on two things 1.) Rent prices, 2.) Asset prices, in particular housing (As a side note, the new Madrid fault could wipe you out too, I bet you didn't price in that risk!). If either of these go the wrong way you are screwed, holding for 5-10 years isn't going to fix it. What you did is analogous to what people did just 8-9 years ago in the dot-com bubble. People were buying up stocks regardless of dividends, they bid them up to ridiculous heights. Needless to say holding the stocks for 8-9 years didn't solve things.

Personally, I think you are going to get double trouble. Rents are likely to go down (Here in Southern Cal I've seen rents go down in many cases and have seen landlords have trouble raising rents) and prices are likely to decline greatly.

Regardless of all of this, I still basically agree with your assessment that we are at least a year from hitting bottom price-wise. I am thinking summer 2009 nationally and here in chicago as well.

I actually don't think we see eye-to-eye, at least form what I can tell. You seem to have accepted the reality that prices are declining, but seem to believe that in 1-2 years things will "bottom" and start "recover". I do not believe prices will rebound, because hmm..."peak credit" has been reached. The credit bubble is not going to get re-inflated as a result prices will not "rebound", in real terms the prices seen during the peak of the bubble won't be seen again. Additionally, I don't think housing is going to bottom in 1-2 years, but more on the scale of 10 years. Although the major declines are likely to stop in the next couple of years. After that you will see near zero nominal increase/decline in home prices, but prices in real terms will go down for many years. The much smaller bubble in the 90's took around 6-7 years to "bottom", this one was dramatically bigger so its unclear why it would bottom faster. You also seem to think the current economy is just "weak", where as I think a depression is plausible (Although, not the most probable). I have tried to stick to real estate in this thread, but obviously my views about the direction of the economy make my predictions less optimistic than someone that thinks we will only have a mild recession.

Although, you say you are going stay in real estate I think in a few years when you realize how much money (and time) you've lost you'll walk away from it for a very long time.

[chuck22b]

Originally Posted by Humboldt1

Chuck,

Thank you for running the numbers. Regardless of the numbers, I like the Itasca property better as it has less headaches. I appreciate you running the numbers as I have been out of the office all week.

No problem Humboldt1,
Just FYI, the guy at Patrick.net is against home ownership and that's why I took his formula to show that even with his formula, your numbers still work out.

His formula is all about the Interest payments and doesn't include the principal. His idea basically is that paying interest is equivalent to paying rent (Interest = Rent). I'm guessing that the principal payments aren't included because the principal payments are equivalent to putting your money into a brokerage account (because the value of your house fluctuates like stocks increasing/decreasing value by market forces). Ultimately though, the behavior of real property would increase at the rate of inflation (nominal housing appreciation or zero real appreciation) like a savings account.

Humanoid's calculation includes the principal payment and gives it zero value - an automatic loss with zero value indefinitely. That is why with his calculations you have near zero returns. Of course in the current housing market that may be the case but in the long run the principal payment would increasingly be more of a savings vs. a brokerage account.... and that is where this statement and ideology makes the biggest difference:

I have tried to stick to real estate in this thread, but obviously my views about the direction of the economy make my predictions less optimistic than someone that thinks we will only have a mild recession.

At the end, it's all about the individual's world view and foresight of what the future beholds. If you believe the U.S. is inline for a long depression, then holding any U.S. market based product (Stocks, Bonds, Property, Business, Renting, and even living here, etc.) will have adverse effects on your finances and well being.

-chuck22b