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Renting in Mass
Joined: 26 Jun 2008
Posts: 381
Location: In a house I bought in December 2011
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 Posted: Tue Apr 06, 2010 7:34 pm GMT Post subject: |
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| Quote: | | what is the opportunity cost of not buying into the market again while it's at it's worst? |
On the bright side, there's plenty of evidence that we haven't seen the market at it's worst yet  There are lots of temporary government supports still in place. |
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Kaidran
Joined: 17 Mar 2010
Posts: 289
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| Posted: Tue Apr 06, 2010 8:06 pm GMT Post subject: |
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I think the assumption is always (even from otherwise intelligent people) that the market is going to hit bottom then start going back up at 10% per year.
This is not going to happen unless salaries start increasing at that rate and I dont see that happening any time soon. I would say the opportunity cost of not buying is very low and will be for a long time. Even if we saw the bottom last year (I dont think this is true) the housing market will continue at an anemic pace for years. Factor in buying and selling costs and you are got to have a hard time getting out what you put in. If you have the willpower to save while you rent you will be much better off pocketing the extra cash.
If you are an optimist put your savings in the stock market, not a house. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Wed Apr 07, 2010 1:06 am GMT Post subject: |
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| Anonymous wrote: |
I did some calculations with my real #'s and here is what I found:
Tax consequences:
Anticipated rental income per year of $15K ($1250/month) less deductible expenses (depreciation, mortgage interest, property tax, condo fees, and homeowners insurance) = -$12.5K (loss)
$12.5K @ 25% (tax bracket) = ~$3100 tax credit
Cash flow (as an investment):
$15K rental income + $3100 tax credit - ~$25K payments (mortgage payments, condo fees, homeowners insurance, property tax) = -$7000/yr ($580/month) loss
Am I missing anything in my calculations?
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This looks reasonable to me, but you should check that you can really deduct
all condo fees (part of which go to upkeep) and depreciation. This seems
counterintuitive to me.
| Anonymous wrote: |
So, what does this mean? Am I correct in thinking that if the appreciation of the property plus the amount of principal I pay down equals $7K year over year, then that would be the break even point of the investment as a rental property? The principal paydown is approximately $4K/yr and is increasing every year, so if I am thinking correctly, the property would have to appreciate $3K/year to break even...is this right?
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Right, so assuming no appreciation you are down about $250 per month.
That's a point at which I might consider not walking away, which is
not hassle or risk free either.
| Anonymous wrote: |
Suppose we were to rent it out in hopes of breaking even or better and try to qualify for a new mortgate for a new place in the burbs. What would be the downside of that if we could pull it off? I guess what I'm asking is...what is the opportunity cost of not buying into the market again while it's at it's worst? Does anyone know how the loan process works in this day and age if you own another property and the rent is less than the mortgage? We could always try and put the new place in my wife's name only, but she has a slightly banged up credit history and I'm not sure what size mortgage her salary would qualify us for.
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They take your payments on the other place into account when
computing what you can afford and I think they only add back part of
the rent - maybe something like 2/3 - because you might lose your tenant.
Having gone through it quite recently I can report that the whole
process is excruciating even for someone with a good credit history
and a big down payment. |
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Guest
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| Posted: Wed Apr 07, 2010 12:54 pm GMT Post subject: |
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| Thanks mpr |
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Wed Apr 07, 2010 1:21 pm GMT Post subject: |
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So what are you thinking about doing?
I think getting it on the market and getting your best price this Spring Selling Season is for starters.
On the one hand if you took the loss and had to pay a loan back for $40k it might be a $500 a month note for about 8 years or so, so if your loss is $250 per month, you might be better off just shelling it out as a monthly loss because in 8 years you'd get your condo money back, INCLUDING your DOWN PAYMENT.
The only reason I might sell and take the loss is the opportunity cost in a house purchase where you move to. This is concept here, but one route I'd take is sell the place at a loss, and take out some type of bridge loan, move and rent. Look for a deal on a new place (if renting long term is not an option for whatever reason) and see if you can roll your bridge loan into your new mortgage.
I'm not sure if this product exists, but it seems like it would align with a lot of the current problems |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Wed Apr 07, 2010 1:46 pm GMT Post subject: |
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| mpr wrote: | | Anonymous wrote: |
I did some calculations with my real #'s and here is what I found:
Tax consequences:
Anticipated rental income per year of $15K ($1250/month) less deductible expenses (depreciation, mortgage interest, property tax, condo fees, and homeowners insurance) = -$12.5K (loss)
$12.5K @ 25% (tax bracket) = ~$3100 tax credit
Cash flow (as an investment):
$15K rental income + $3100 tax credit - ~$25K payments (mortgage payments, condo fees, homeowners insurance, property tax) = -$7000/yr ($580/month) loss
Am I missing anything in my calculations?
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This looks reasonable to me, but you should check that you can really deduct
all condo fees (part of which go to upkeep) and depreciation. This seems
counterintuitive to me.
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One further thought:
If you can really deduct depreciation it surely reduces your cost basis
in the property. Usually this would mean that when you sell you have to
pay taxes on a larger profit, but this shouldn't effect you if you sell at a loss.
However this raises another interesting point. If you sell at a loss now
the loss is not tax deductible as a personal loss. But if you sell a rental
the loss should be deductible as an investment loss. You should find out
how this squares with you having lived in it for a while - that is, if you
convert it to a rental do you get to then deduct the whole loss, or is
it pro-rated for the time it was a rental ?
In either case you should take that into account in your planning.
(But dont double count the savings for depreciation which will reduce your
deductible loss). |
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Kaidran
Joined: 17 Mar 2010
Posts: 289
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| Posted: Wed Apr 07, 2010 2:56 pm GMT Post subject: |
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| Sorry, I confess I have not read the whole of this argument but I thought that if the bank forgives a certain amount of loan by going through a short sale, the owner actually had to PAY taxes on that amount, since it is technically extra income for the owner to cover their debt obligations. I'm sure I've read something about that and it being an obstacle to some short sales. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Wed Apr 07, 2010 3:06 pm GMT Post subject: |
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| Kaidran wrote: | | Sorry, I confess I have not read the whole of this argument but I thought that if the bank forgives a certain amount of loan by going through a short sale, the owner actually had to PAY taxes on that amount, since it is technically extra income for the owner to cover their debt obligations. I'm sure I've read something about that and it being an obstacle to some short sales. |
In this discussion, I imagined that "selling for a loss" meant he would
really eat the loss. But actually there is no contradiction even if its a
short sale. If its a rental he gets to deduct the loss on the sale, but this
is reduced (possibly to less than 0) by the amount of debt the bank
forgives.
Another thing to consider in the endless list of variations is that the forgiven
debt is not taxable if the property is owner occupied but is if it is a rental
(knowing the IRS this probably isn't pro-rated), so you really need to make
the decision now whether walking away is an option. |
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Wed Apr 07, 2010 3:21 pm GMT Post subject: |
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Is holding on to it and taking a bit of a monthly loss really that bad?
I mean the couple could live in a cheaper rental, presuming that they don't need that much space and even with the monthly loss of say $300 or so, they could still save and either build for a new down payment or wait until the market comes back (a year or two).
Don't forget, the Realtor gets a piece of the deal too. |
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Kaidran
Joined: 17 Mar 2010
Posts: 289
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| Posted: Wed Apr 07, 2010 3:36 pm GMT Post subject: |
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Writing the bank a check for 40k is a pretty hard pill to swallow. I certainly can see why inventory is low if more people are in the same situation.
Do we have a good definition of what the recourse law is and how it is applied? |
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Guest
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| Posted: Wed Apr 07, 2010 5:02 pm GMT Post subject: |
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| Quote: | | So what are you thinking about doing? |
John p, that is an excellent question! Here are what I see as my options in what I see as my order of preference (keep in mind, this could all change 100 times before I actually make a move and as I learn more):
1. Go to the bank and try to arrange for a "no penalty" short sale (aka try to finagle my way into Obama's newest band-aid plan), move into a rental in the burbs for less rent than my currently mortgage payment, save for a 20% down payment for my next place, and pay off some debt at the same time. This is probably a ridiculous pipe dream. Some strategies I have thought about are threatening to walk away, or agreeing to assume some of the loss myself. Even if they could meet me half way, forgiving $20K and I could take out a loan for the other $20K (if that's even possible), it may not be that bad. Certainly better than eating $40K, and better in my mind than renting it out and waiting 8 years to recoup my investment (considering I would not have to deal with the headache of being a landlord and put myself at the mercy of the market dropping even further). This seems like it would free up my cash flow too, which will allow me to pay off debt faster and save more. The downside is that if the market does rebound sooner than later, I am giving up the potential upside of making a profit (or at least recoup my initial investment) in the future. The one thing I am not willing to do in this situation is take a credit hit...I've worked too hard to have the score that I have and I don't want to give that up. That is why I think this is a pipe dream, but worth a shot. What's the worst that will happen? They will say "NO".
2. Rent it out, and move to a rental in the burbs for about the same price that I would be charging for rent. In this situation, my monthly cash flow out would not decrease, but it seems like I would be gaining more tax benefits. Granted, I could be losing $250+/month on the investment if the market never recovers, but if the market does recover even slightly (~2%/yr) then it looks like I would break even on the investment.
3. Sell it at a loss and eat the $40K now (via loan, if that's even possible), move to a cheaper rental in the burbs, and just be done with it.
4. Traditonal short sale, take the (smaller) credit hit.
5. Walk away. Not really an option in my book.
One other questions I have is how does one determine the amount of depreciation that you can claim on a rental property? I've calculated it based on the original purchase price, but is it based on the original purchase price, the original assessed value of the structure, the current market value, the current assessed value of the structure, or something else?
What do you guys think? Does this make sense? Am I missing something?
Once I have a good idea of what my options really are I plan to go to a professional (accountant, financial planner, etc) for a reality/gut check, but I feel like I'm getting closer.
Thanks. |
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Guest
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| Posted: Wed Apr 07, 2010 7:32 pm GMT Post subject: |
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| Quote: | | 2. Rent it out, and move to a rental in the burbs for about the same price that I would be charging for rent. In this situation, my monthly cash flow out would not decrease, but it seems like I would be gaining more tax benefits. Granted, I could be losing $250+/month on the investment if the market never recovers, but if the market does recover even slightly (~2%/yr) then it looks like I would break even on the investment. |
Another thing I didn't think about is that in Massachusetts, you can deduct up to $3K for rent paid out during the year. So, if rented out the condo, and moved to the burbs where I was paying rent for another property, I could further reduce my tax burden (I think)... |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Wed Apr 07, 2010 8:47 pm GMT Post subject: |
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| Anonymous wrote: | Again, thank you all for your advice and contributions.
JohnP, unlike others that have come before me in this forum, I appreciate what you have to say. Like I said before, I'm fine with being scorched a little bit, I do it to myself every day. When I purchased the property I was young (mid 20's), single, and naive. Everyone around me (friends, parents, etc) encouraged me to go for it, and I was not able to see the writing on the wall. Even so, I did my homework & calculations, got into a 30 yr fixed loan at a good rate, rented out one room to a roomate, and did not stretch myself too far financially.
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If it makes you feel any better, I (and I think we all) have gone through this as well. I considered buying a 1br in Natick for $160k in the mid oughts. I then considered buying another place in Waltham a few years later for ~$415k. Fortunately, both times I backed up. You, it seems, were not so lucky.
Unfortunately, most of the advice out there doesn't address buying in a financially sustainable way over time. It was not obvious to me at the time, for example, that when I got married and wanted to have kids that my income would not double but my expenses would so really I should have been looking for places at 1.5x income. I suppose that homebuyer education course could cover this topic but people will always be dumb so enforcement by toughening standards makes more sense, especially since no one is actually harmed except those who already bought (and assumed that risk along with potential for profits whether they recognized it at least). If we don't fix the system, then as I said your younger self (your children) will likely fall into the same trap, not to mention that the economy likely keep hitting the same potholes. |
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CC
Guest
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| Posted: Thu Apr 08, 2010 1:50 am GMT Post subject: |
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| Anonymous wrote: | | Quote: | | So what are you thinking about doing? |
John p, that is an excellent question! Here are what I see as my options in what I see as my order of preference (keep in mind, this could all change 100 times before I actually make a move and as I learn more):
1. Go to the bank and try to arrange for a "no penalty" short sale (aka try to finagle my way into Obama's newest band-aid plan), move into a rental in the burbs for less rent than my currently mortgage payment, save for a 20% down payment for my next place, and pay off some debt at the same time. This is probably a ridiculous pipe dream. Some strategies I have thought about are threatening to walk away, or agreeing to assume some of the loss myself. Even if they could meet me half way, forgiving $20K and I could take out a loan for the other $20K (if that's even possible), it may not be that bad. Certainly better than eating $40K, and better in my mind than renting it out and waiting 8 years to recoup my investment (considering I would not have to deal with the headache of being a landlord and put myself at the mercy of the market dropping even further). This seems like it would free up my cash flow too, which will allow me to pay off debt faster and save more. The downside is that if the market does rebound sooner than later, I am giving up the potential upside of making a profit (or at least recoup my initial investment) in the future. The one thing I am not willing to do in this situation is take a credit hit...I've worked too hard to have the score that I have and I don't want to give that up. That is why I think this is a pipe dream, but worth a shot. What's the worst that will happen? They will say "NO".
2. Rent it out, and move to a rental in the burbs for about the same price that I would be charging for rent. In this situation, my monthly cash flow out would not decrease, but it seems like I would be gaining more tax benefits. Granted, I could be losing $250+/month on the investment if the market never recovers, but if the market does recover even slightly (~2%/yr) then it looks like I would break even on the investment.
3. Sell it at a loss and eat the $40K now (via loan, if that's even possible), move to a cheaper rental in the burbs, and just be done with it.
4. Traditonal short sale, take the (smaller) credit hit.
5. Walk away. Not really an option in my book.
One other questions I have is how does one determine the amount of depreciation that you can claim on a rental property? I've calculated it based on the original purchase price, but is it based on the original purchase price, the original assessed value of the structure, the current market value, the current assessed value of the structure, or something else?
What do you guys think? Does this make sense? Am I missing something?
Once I have a good idea of what my options really are I plan to go to a professional (accountant, financial planner, etc) for a reality/gut check, but I feel like I'm getting closer.
Thanks. |
#4 is probably easiest solution. Actually $40k is not a lot of money these days, especially if you are still young. Traditonal short sale is not bad, but it's stressful for some. |
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Guest
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| Posted: Thu Apr 08, 2010 1:51 am GMT Post subject: |
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| Sorry, I mean #3 is the easiest one. |
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