Calling The Bottom

[30ashopper]

What caused you to pick a 10 year note? Did I miss something that Flyguy posted about that in his scenario?
Cutting through much of the above: a %20 down payment of $245,000 is $49,000. In the propsed scenario $20,000 collected annually pays the mortgage/int/taxes, breakage etc.-All costs associated with owning. Let's disregard rent increases or decreases and consider it breakeven throughout Flyguy's ownership. If at the end of 10 years we use your 3% appreciation and have a sales price of $329,000, less your commision rate, we end up having turned $49,000 into $120,000. Using my nugget and the rule of 72 that seems to be a pretax return of a bit more than 9% annually over the course of 10 years. Significantly higher if the appreciation rate is upped.

Maybe this is the difference in our calculations, my assumption was that the debt service was not included in the 20K? If that's the case, then his carry costs are not 20K, they are 6K per year. That changes things a bit -

appreciation - after tax return
3% - 11.4%
4% - 13%
5% - 14.6%

Which is a good investment. Is 6K a year for all ownership costs outside of the interest on the 30 year loan reasonable for a condo? I've never seen anything that low in the few condos I've looked at. It's usually much higher, around 10K-17K annually for a new development.

 

[flyguy]

Maybe this is the difference in our calculations, my assumption was that the debt service was not included in the 20K? If that's the case, then his carry costs are not 20K, they are 6K per year. That changes things a bit -

appreciation - after tax return
3% - 11.4%
4% - 13%
5% - 14.6%

Which is a good investment. Is 6K a year for all ownership costs outside of the interest on the 30 year loan reasonable for a condo? I've never seen anything that low in the few condos I've looked at. It's usually much higher, around 10K-17K annually for a new development.

30ashopper,

I too consider myself a numbers person. I don't want to go into hashing out all of the assumptions and what ifs. If you and I were sitting at a table we could easily do it in 10 minutes. On this board it could take a dozen posts. But to answer your question cash flowing in my example includes the principle and interest and everything else with zero appreciation..

The tax angle is what makes this whole thing work for me. Before taxes the cash flow is negative, it is after taxes where the money shows up. Depreciation, tax bracket, and how the ownership is structured makes a difference. And if I ever decide to sell I don't plan to pay any capital gains taxes (based on current tax law which could change).

JMHO
Flyguy

 

[spinDrAtl]

I think if one buys at these current prices and subtracts carrying costs (and considering the "ownership aggravation" will cancel out "ownership joy"), in 10 years I think the condo will return somewhere between "in-the-hole" to "lucky to be breaking-even."

.

We have had our place for 10 years now and I can tell you that the 'ownership aggravation' is nowhere close to the 'ownership joy' for us.

I'm sure it varies by owner, the amount of use you get out of it, and what types of 'aggravation' crop up.

 

[30ashopper]

30ashopper,

I too consider myself a numbers person. I don't want to go into hashing out all of the assumptions and what ifs. I you and I were sitting at a table we could easily do it in 10 minutes. On this board it could take a dozen posts. But to answer your question cash flowing in my example includes the principle and interest and everything else with zero appreciation..

The tax angle is what makes this whole thing work for me. Before taxes the cash flow is negative, it is after taxes where the money shows up. Depreciation, tax bracket, and how the ownership is structured makes a difference. And if I ever decide to sell I don't plan to pay any capital gains taxes (based on current tax law which could change).

JMHO
Flyguy

Sorry didn't mean to try and tell you your business, I just like running numbers.


What's your plan on avoiding capital gains? Home-sale exemption which I think is still on the books?

 

[flyguy]

Sorry didn't mean to try and tell you your business, I just like running numbers.


What's your plan on avoiding capital gains? Home-sale exemption which I think is still on the books?

No apology needed. I appreciate your posting as I am always open to different ways of looking at things.

We may very well be considered full timers in a few years for the home sale exemption and then there is also the 1031 exchange.

Flyguy

 

[traderx]

I will state up front that I am not a real estate agent nor am I a stock broker. I don't hold a Series 7 license or any other kind of license.

We, as a collective society, have decided that agents should be compensated on a contigency basis. Another way to spell contigent is risk. An agent has to sell his/her services, advertise and beat the bushes just to get a client. Then, the agent is expected to pull surveys of available properties, comparables and have full and complete knowledge at their fingertips. After all this effort, there is no assurance that their client will buy a property or even quality for financing. For every closed sale of a property there are others which evaporate after a lot of effort.

Perhaps we could emulate what agents do in Britain. You want an agent? Hire one. Whether you are a buyer or seller, hire an agent, negotiate the agency agreement and pay the fee. My guess is that most buyers and sellers would not feel good about paying an agent an hourly rate for services rendered or even a stipulated fee. Suppose you are a buyer and an agent quotes you $125 per hour or say, a flat fee of $7,000 to represent you. Assume the same if you are a seller. You want an objective agent? You now have one. Problem is, whether you buy a property or not, you pay the $7,000. If your home sells or not, you still pay the agent's fee. I can hear the thunderous hooves stampeding to sign up for this program.

Yet - yet - we have no issue paying lawyers $200 per hour. If we hire a lawyer to represent us in a civil suit on a contingency basis, the lawyer keeps one-third for his or her trouble. I am afraid that as human beings, we can only see the glory is what others do and what they earn. My guess is that it has been that way since Neanderthal man looked out his cave and evaluated others. We don't see the would-be buyers who are not serious, who want to kick tires and have no compunction about using an agent to show him where the cars are. And when times are good, nobody complains: everyone makes money and that makes everyone happy. When the systems slows down however, we start looking out that cave. If you are being pinched as a seller, talk to your agent. There may be flexibility in the equation. To summarily dismiss an industry because the tide has turned is just plain wrong.

 

[30ashopper]

Oh boy, I always hesitate making detailed posts becasue you then have to defend the numbers.

Anyway, the tax records are not up to date with the latest sales. 104 and 402 sold in the last month for $244,900 and $250,000 respectively. There is also at least one 3 bedroom that sold for much higher.

It is without a doubt a trainwreck. They are selling at less than 40 cents on the dollar from the peak. (WWWBD)

Flyguy

You know the more I think about it, the more I'm thinking you might have something here. Since condos are cheaper than housing, the condo market here was probably hit hard by the subprime implosion (peaking right now). Housing on the other hand around here is mostly 3/7/5 teaser rate or pick-a-pay ARMs, which should have three "default" peaks. One that is building right now on loans that reset in 07/08 (3 year), another major peak that will hit 09/10 (5 year) and yet another that will hit in 11/12 (7 year). So who knows, maybe the smart investor today is shopping condos instead of single family homes since housing is "just getting started"?

 

[elgordoboy]

In light of:

Maybe this is the difference in our calculations, my assumption was that the debt service was not included in the 20K? If that's the case, then his carry costs are not 20K, they are 6K per year. That changes things a bit -

appreciation - after tax return
3% - 11.4%
4% - 13%
5% - 14.6%

Which is a good investment. Is 6K a year for all ownership costs outside of the interest on the 30 year loan reasonable for a condo? I've never seen anything that low in the few condos I've looked at. It's usually much higher, around 10K-17K annually for a new development.

and:

You know the more I think about it, the more I'm thinking you might have something here. Since condos are cheaper than housing, the condo market here was probably hit hard by the subprime implosion (peaking right now). Housing on the other hand around here is mostly 3/7/5 teaser rate or pick-a-pay ARMs, which should have three "default" peaks. One that is building right now on loans that reset in 07/08 (3 year), another major peak that will hit 09/10 (5 year) and yet another that will hit in 11/12 (7 year). So who knows, maybe the smart investor today is shopping condos instead of single family homes since housing is "just getting started"?

I would think that

30A's calculation makes more sense than yours in this situation. Your calculation assumes the only amount at risk is the initial down payment. In actuality, the entire purchase price of $245k is at risk--the lender has full recourse against the borrower for the amount of the mortgage. If the value of the condo sinks to $150k, the borrower has lost not only the equity investment but also part of the borrowed capital.

Therefore, the return calculation should be based on the total capital invested--not just the equity investment. The return on equity calculation works in a situation where there is no recourse to the borrower for the borrowed capital.

Some folks might would feel silly. I don't mean 30a.

 

[fisher]

A stock's value can fall to zero, a shorted stock can rise forever, a bond can be defauted on etc.. The full recourse you mention would be the equivalent of a big margin call, no? If you want to calculate without leverage then please do so but that isn't what was demonstrated.

If I did the math correctly, 30A did his return analysis based on total invested capital--not simply the cash invested in the down payment.

And, yes, I believe it is most appropriate to compute returns on total capital placed at risk on any investment.

Full recourse debt is the same as taking your own cash and plunking it down to make an investment. On the other hand, I think looking at returns on equity is appropriate where the only at risk amount is the cash you put in (and non recourse debt is utiltized to finance the remainder of the transaction).

 

[fisher]

As I stated in another post, as a pure investment you can probably do better than this. But if you are an end user you would have a gulf front condo to enjoy for part of the year, and that has to be worth something.


JMHO,
Flyguy

No doubt about it--the enjoyment factor is definitely worth a lot! You can't place a value on the memories built from ownership of a beach/lake/mountain home.