35 replies to this topic

[Redone]

If you're expecting the value to climb, it's not a good investment.
If you're buying a rental for Cash flow, then it's a good investment.

You can buy many houses now with 25% down in the $ 120K to $ 150K range now that rent for $1200 to $1600 a month. Basically they're renting for the same as when they were over $ 200 K.

There are also several condos in the $ 55K to $ 75 K range in the greater Sac area that would rent for $ 900- $ 1000 because they are nicer than an apartment and have clubhouses.

[M.E.G.]

We have bought our house May 1997. Even in today's market, it is worth double what we paid for it. Of course, some things have been upgraded since we first moved in.

You need to remember, yes some of these homes are not worth what they were paid for. BUT, a lot of the short sales and foreclosures are also because owners took cash out of their homes increasing the debt on the home. So when they did get in trouble financially they did not have any other option but to short sale or foreclose. If they had not taken money out, and they had owned for several years, they probably could have gotten out without a short sale or foreclosure.

M.E.G.

[ducky]

If you're expecting the value to climb, it's not a good investment.
If you're buying a rental for Cash flow, then it's a good investment.

You can buy many houses now with 25% down in the $ 120K to $ 150K range now that rent for $1200 to $1600 a month. Basically they're renting for the same as when they were over $ 200 K.

There are also several condos in the $ 55K to $ 75 K range in the greater Sac area that would rent for $ 900- $ 1000 because they are nicer than an apartment and have clubhouses.

The problem with those clubhouses and pools at the condos is they usually come with a HOA fee which could eat up some of that rental income. It also makes it hard for a low-income person to qualify to buy.

This comment probably belongs on the other thread and I'd love for the real estates experts on here to enlighten me. Are there any lenders that do loans under $50,000 with a reasonable interest rate?

[Steve Heard]

My rent is completely reasonable and it's a lot easier to budget my income and invest in diverse investments knowing that housing is a fixed cost, no furnaces or windows or leaks to fix. I have a cushion to lean on should something disastrous happen, important in a single income family. So, I rent. Works for me. Frees my money to work better for me.

Like I said, ownership is not for everyone, and having a cushion or emergency fund is important for everyone. What pushed me over the edge toward buying many years ago was when we were on the fence about buying, my wife asked our Realtor 'what happens if we buy a house and Steve loses his job?'. He replied, 'what happens if you're renting and Steve loses his job? If you own a home, the law protects you. The bank can't kick you out for missing up to 6 months of payments. Try missing a rent payment and see what your landlord does.'

That did it for us, and yes, I lost my job a couple of weeks after we bought our house.

I was basing this on a $1500 mortgage plus tax, plus insurance, plus maintenance/upkeep costs.

Would you say the best way to make money on a house investment is to flip it and move often? or is it more profitable to stay in it for 20-30 years as a long term investment to eventually own it outright, to later pass on to our kids?

Well, except for those guys who can afford to flip houses for short term quick profits

In the scenario's I was using, a $1500 mortgage payment includes tax and insurance. As for maintenance costs, they can vary widely, but some use a 1 to 2% per year average, so if you buy a $200K place, figure $2000 to $4000 per year, making your monthly cost $166 to $333 per month. Using Average Joe's example, you save $250 per month due to taxes.

As for the buy and flip vs. buy and hold, it depends on the market. Be careful though, flipping is risky and should not be entered into lightly. People can get burned by taking on too much in repairs or paying to much to acquire the property. Studies of American families' net worth show that home ownerships is the way most families pass wealth to their kids, not home flipping. Mom and dad buy a house, stay in it and pay it off. They pass that home off to the kids who can rent it out, borrow against it, or sell it.

I'm curious about how short sales and foreclosures effect the value of other homes in the neighborhoods they're located in.

For example, if the average value of a neighborhood home is 400k, then a short sale that turns into a foreclosure occurs and the house is sold for 200k (just an example). Does that 200k sale now bring down the average value of those nearby homes? I think it does but I'm not sure and want to confirm that with those of you in the realty business.

When factoring in local sales to assess a homes current value - are those short sales and foreclosures counted as part of the neighborhood home value?

Unfortunately, yes. Think of it from a buyer's perspective; there is an elliott model out in the Chelsea neighborhood of 1468 square feet. The ones built in about 2005 are now selling as short-sales and foreclosures for $260K to about $280K. Elliott has some brand new ones they are trying to sell for $325K to $350K. Which would you buy? Is a brand new home worth $90,000 more than a 6 year old model of the same home?

Although appraisers and lenders may consider a difference in value between short-sales, foreclosures and equity sales, the bottom line is 'what did the comps sell for?'

[bookwom]

Another benefit from home ownership vs. renting is that a portion of your payment goes towards the loan, so eventually when you or your heirs sell the house, you get that money back. Also, eventually you have the potential of owning the home outright, thus having no rent or payment. Both my parents and my husbands parents had their homes paid off by the time they retired - no rent nor mortgage payment made a fixed income go a lot faster.

Here is a graph I found of the median home prices in Sacramento -
Graph

As you can see, although the prices do boom and bust, the trend overall is up.

So here are ways that home ownership is beneficial vs. rent:

Some of the payment is tax deductible - rent is not.

Some of the payment comes back to you in equity when the house is sold, rent does not.

Over the long term, the price of the home goes up. The profit you make up on selling the house (price you get minus price you paid) is tax free under some restrictions.

[bookwom]

Thank you Steve and everyone for your feedback, it is very helpful.

Steve you wrote "I bought it in 2001 for $327,000, and today it's probably worth about $375,000".

Here's the way I see that, it took 10 years to make 48k in profit on that house, if you were to sell it now, it would cost a few thousand to sell so lets just say you end up with 40-45k in profit once it's sold. 45k in profit over 10 years time. But also keep in mind that the market likely hasn't hit the bottom yet, so it could potentially go lower thus lowering your profit even further. Are there any taxes on selling a house for profit? I know there are when you sell a rental for profit but I'm not sure about a personal home.

If I were to rent a place for $1500 instead of buying a place, that with all the other previously mentioned costs would equate to about $3000 a month, I could then save that extra $1500 a month - by renting instead. (1500 for rent 1500 into savings)

$1500 x 12 month x 10 years = $180,000 that's not counting the additional interest income from a savings account or similar.

This is why I am questioning my house as an investment. 40k in 10 years, or 180k in 10 years... I honestly don't know if I'll get to the point of having 180k in profit from my house. Even when the market maxed out I didn't have that kind of profit in this house investment.

Don't get me wrong, I like my house and enjoy home ownership, and I agree with your statement about land, I'd like more myself. I'm just thinking about the math, what I'm making or losing, future savings and future retirement. Mostly I'm just thinking out loud, please don't take any of my questioning negatively, it's just my curiosity and quest for knowledge.

You're numbers are questionable. I'll take my house as an example. My mortgage payment is about 2K, tax and insurance included. I budget around $200/month for home repair/supplies that I wouldn't pay if I rented.

Lets say I'd have to pay $2000/month to rent this place, I think thats reasonable for a 4 br house. Utilities would be the same. Say the landlord pays water - another $100/month. So far we have rent $2000/month, own $2300/month. Now lets look at tax savings. All together my itemized deductions are about 10K more than the standard deduction. At 15% tax rate, saves me $1500/year. So, $125/month. So now the renter is saving roughly $175/month. Say the renter is diligent about putting that in savings, and earns 5% per year compounded monthly. At the end of 30 years, the renter will have around $150,000 in the bank, BUT will have paid taxes on the interest earned throughout the time. I, the homeowner, will have a house that I no longer make payments on, that will be worth much more than that. When I or my heirs sell the home, any profit will probably be tax free. So, over the long haul, I think ownership is the better deal.

[Johnny_come_lately]

Interesting thread. I'm a happy renter, which two years ago was not the case.

Happy renter here too. I'd like to comment on some the discussion related to the infamous tax advantages of home ownership. I'm not a tax expert, so take this for what it's worth (basically nothing) and discuss any and all tax matters with your tax guy and/or attorney. Everyone's situation is different. Ok....

It is partially true that there are great tax advantages to owning. It's true for high-income couples with expensive houses and big mortgages, but not for moderate-income couples in modest houses, especially if there is no mortgage. Every married couple filing jointly automatically gets to subtract an $11,400 deduction ($5,700 for singles) from their adjusted gross income to arrive at their taxable income. Alternately, you may add up additional deductions in other categories: Medical, Taxes, Interest, Charity, Casualty and Theft, Job Expenses, and Other Misc. If the total of your expenses in these categories exceeds the standard deduction, you can itemize them on your tax return to reduce your taxable income. But you only get to realize a tax savings (via a net reduction in your taxable income) on dollars spent over and above the $11,400 standard deduction. If your deductible expenses were $11,401, you "saved" one dollar that comes off your adjusted gross income. Good job.

For most people (but not all) their only deductible expenses fall into the Taxes and Interest categories. Let's use the previous example of a $200k mortgage at 5%. That gets you to $10,000 dollars in interest annually, but you haven't exceeded the standard deduction yet, so that $10K has saved you nothing so far. Add in the $2K or so in property taxes and now you end up at $12K. Ok, good job, you can now itemize your deductions instead of using the standard deduction. So under this scenario, owning a home reduced your taxable income by $600. Most people will then probably have other deductible expenses like charity (donations to Goodwill or your local Church) and probably some medical expenses that they can throw in there, but in most cases it's no more than a few thousand dollars. You don't get rich spending a dollar to save 30 cents.

For couples with modest incomes and mortgages, the first $11,400 of taxes and interest saved them nothing. The real question is whether or not all of the "extra" deductible expenses (donations, medical, etc) were enough to drop you down to the next lower tax bracket, say from 28% to 25%. If not, then your tax "savings" is nominal. A few dollars less in "saved" taxes is easily doubled or tripled by other homeowner expenses for things like maintenance and insurance.

If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.

Even if you pay outright, you're still renting the house to yourself, losing alternative uses of that money, and taking the risk of falling house prices.

[rpo]

I'm curious about how short sales and foreclosures effect the value of other homes in the neighborhoods they're located in.

For example, if the average value of a neighborhood home is 400k, then a short sale that turns into a foreclosure occurs and the house is sold for 200k (just an example). Does that 200k sale now bring down the average value of those nearby homes? I think it does but I'm not sure and want to confirm that with those of you in the realty business.

What bothers me about that is those folks who got in over the heads are screwing us who didn't get in over our heads. Their short sales and foreclosures seem to be seriously hurting our home values.

I just doesn't seem right that someone elses financial hardship becomes everybody's in the neighborhood because their house prices become affected by those losses.

When factoring in local sales to assess a homes current value - are those short sales and foreclosures counted as part of the neighborhood home value?

Even with a home selling as a short sale or after a foreclosure, it is still selling at what the market will accept. The banks and real estate agents will place a home on the market for well under what the comps support, but that will result in multiple bids ABOVE the listing price. I have seen some go for 20-25% over listing. In the end, it all comes down to what buyers are willing to pay.

The people who purchased homes 5+ years ago (who are now being foreclosed on or are completing short sales) are now truly affecting the value of YOUR home. It is a sale like any other. If the value of your home is dropping due to sale prices continuing to drop, then it is simply false equity disappearing that should never have existed to begin with. If incomes can only legitimately support median home prices at $250,000, but the median price is still at $300,000, then $50,000 is falsely existing and will disappear regardless of foreclosures or short sales.

In October of 2005, over 90% of homes purchased in California used stated income or no documentation loans. The entire bubble was predicated on fake income that never existed, which in turn allowed most buyers to purchase homes priced above their means. When the real estate market collapsed, it was due to those mortgage products being discontinued. That happened over the course of about two years until just legitimate income based mortgages were left in 2007. At that point, home prices were still much higher than today. Once the market has weeded through the buyers with above-average incomes, home prices will be back at their true income-based levels. That has not quite happened yet.

[rpo]

Saying one can miss six months in house payments is pretty much saying you are going to lose your investment in the house in money you paid down, plus all the closing cost. Add into that any anything you did that can't be taken with you. Also, that would ruin your credit and you'll have a hard time renting anything with bad credit.
So that's not a very good deal.

Actually, very few landlords care about bad credit due to a mortgage foreclosure or short sale. I say "few". because I have yet to hear of someone who could not rent due to letting their home go.

I had a client that passed away and her son got her house, after buying out his brother. It cost him $15,000 to buy a house that was worth $30,000 at that time. Yes, a long time ago and the house is in Del Paso Heights. Her son, being not too ambitious, lived in the home for 25 years and let it get run down. Just the other day I saw where he had not paid property taxes for five years, and the house was bought by a bank.

I am going to guess this was not in the nice part of Del Paso! I would hate to own a home in one of the run down areas there while actually putting money into repairs/upgrades. It would seem fruitless if none of your neighbors care about the appearance of their own homes.

[Darth Lefty]

Strange, I was looking for a response to my post in this thread but can find no sign I made a post... anyhow, the point was,

What does it mean to say the value of your house has gone up when all the other houses you might buy have gone up essentially the same amount? When you buy a second house it's probably going to need to be bigger and more expensive than the prior one. It seems like there's no way to cash out, unless you go live somewhere horrible that you hope is going to improve, and call it an investment. And meanwhile every couple of months you buy a new $200 power tool that you use three times ...

[ducky]

Strange, I was looking for a response to my post in this thread but can find no sign I made a post... anyhow, the point was,

What does it mean to say the value of your house has gone up when all the other houses you might buy have gone up essentially the same amount? When you buy a second house it's probably going to need to be bigger and more expensive than the prior one. It seems like there's no way to cash out, unless you go live somewhere horrible that you hope is going to improve, and call it an investment. And meanwhile every couple of months you buy a new $200 power tool that you use three times ...

If you live in a 50-year-old house, you use those tools a lot more than three times.

The big stuff you don't want to buy, you can rent. Just FYI.

[mac_convert]

I bought my first house in January 2001 for $198,000. I sold it in the fall of 2005 for $430,000. I put my profit into my current house and still have equity, but way less after the housing surged downhill and the economy went bust.

Strange, I was looking for a response to my post in this thread but can find no sign I made a post... anyhow, the point was,

What does it mean to say the value of your house has gone up when all the other houses you might buy have gone up essentially the same amount? When you buy a second house it's probably going to need to be bigger and more expensive than the prior one. It seems like there's no way to cash out, unless you go live somewhere horrible that you hope is going to improve, and call it an investment. And meanwhile every couple of months you buy a new $200 power tool that you use three times ...

[folsom500]

Strange, I was looking for a response to my post in this thread but can find no sign I made a post... anyhow, the point was,

What does it mean to say the value of your house has gone up when all the other houses you might buy have gone up essentially the same amount? When you buy a second house it's probably going to need to be bigger and more expensive than the prior one. It seems like there's no way to cash out, unless you go live somewhere horrible that you hope is going to improve, and call it an investment. And meanwhile every couple of months you buy a new $200 power tool that you use three times ...

I love fixing things up so I get new tools... Never spent $200 on one though except for a lawn mower.
And the Tools I do buy get used quite often.
The only one I bought and only used once was a wire feed welder to move an iron fence.

With respect to Value increasing you are somewhat right if you are staying in an area and moving into more expensive houses.
On the other hand- in the past you could make a very good chunk of cash selling at the right time and moving to another location or into a lower cost house.
My first home in San Jose cost me $122K in 1984 and sold for $375K in 1998 and we moved to Rocklin and bought a MUCH larger house with more property and better schools for $258K and sold it in 2003 for $425K.
Other than the last 5-6 years,( and a few times for short periods in the 80s and early 90s) historically home values have increased. While I do not think the wild ride in prices that occurred in each location will happen to the same level again- Over time the values will increase.
Renting a house is risky business as you never know when the owner will decide to move back in or decide to sell the place. Plus you are at their mercy for rent increases and hassles to get things repaired. When I was renting we did 90& of the repairs ourself and took the cost ( including new tools needed) off the rent with the owners agreement.