Home › Forums › Housing › Advice needed on mobile home purchase – right choice for first time buyer?
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powayseller.
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March 6, 2006 at 4:43 PM #6401March 6, 2006 at 5:59 PM #23588
bubble_contagion
ParticipantAs a renter you have a tax deduction. It is called the standard deduction.
“Even if it loses half its value, wouldn’t that be better than not having a tax deduction?”
Only the interest can be deducted which, for the first year, is about $1200 a month for 120K at 12%. At the most the tax deduction is $550 (If you are in a high tax bracket of 35%). Of course you cannot claim the standard deduction anymore which would be about $300 a month for the same tax bracket. Net tax deduction $550-$300= $250
Let say it looses half it’s value in 5 years and it is now worth $60,000:
Total deductions: 60 months x $250 = $15,000
You are down $45,000.
March 6, 2006 at 9:17 PM #235894plexowner
ParticipantFrom my perspective as an investor, mobile homes are even worse than condos.
You think you are a ‘homeowner’ but you don’t own the land you are sitting on.
My electrician has owned his mobile home in east county for many years. When rents were rising so quickly in 1998-2004, the rent on his trailer pad increased by a factor of 4. He is paying $600/month to rent the pad that his free-and-clear home sits on.
And don’t kid yourself about a mobile home being mobile after it has been placed onsite and lived in for a few years. If you buy a used mobile home you should assume that it is going to sit right where it is for the rest of its life.
The ‘tax deduction’ is one of the many real estate myths that have been fed to the American people for years. Forgive me for being long-winded but …
The reality is that there is no tax benefit to owning real estate until the mortgage interest you pay exceeds the standard deduction that everyone gets when filing their taxes.
As a single person I get a $5000 standard deduction on form 1040. If I choose to itemize my expenses in order to claim mortgage interest, I GIVE UP THE $5000 DEDUCTION. And therein lies the myth.
Let’s use some example numbers to clarify.
Your friend pays 100K for the mobile home and gets 100% financing at 6.5% interest only. That means he will pay $6500 in mortgage interest each year and will enter this amount on schedule A of his tax return. He loses his standard deduction of $5000 but reduces his taxable income by the $6500 paid in interest. At a 30% tax rate that means a tax savings of $1950. But don’t forget that he has spent $6500 on interest so his net position at the end of the year is: DOWN $4550.
If the same person remains a renter and keeps the standard deduction he saves $1500 in taxes and doesn’t spend any money on interest. His net position at the end of the year: UP $1500.
I’m being very simplistic in this example. There are other reasons for itemizing deductions besides real estate and everyone’s tax situation is different. My point is that owning real estate is not the tax paradise that it is portrayed to be. Don’t use the ‘tax benefit’ as a reason to buy real estate.
(And the reason these cheap units aren’t getting snatched up is because no investor wants them. If it made economic sense to own the units an investor would buy them. The only way mobile homes make sense is if you need a place to live and you’re willing to live in a trailer.)
March 6, 2006 at 10:05 PM #23590powayseller
Participant4plexowner – Can you give a response, with the actual scenario I described. First, financing on mobile homes is more like a car, thus at a higher interest rate and shorter term. I was told 15 years max, 12% interest.
It would be a primary residence, so no investor considerations.
My friend says the land is basically rent-controlled, and is $600/month. It can be increased monthly, but in small increments. He figures as the value of land increases, the limits in lease increases make the mobile home even more valuable, as you have the right to live on that land at the old rate. Is the limit of lease increases individual to the park? Does it change at time of sale? I wonder how your friend’s lease went up 4x.
About your calculations: yes, he would pay $12K/year in interest (12%, 15 yr fixed, 25% down on a $125K mobile home), but he pays double that in rent. So how is he down $4550? Besides, once he exceeds the standard deduction, he can deduct medical and professional expenses and charitable contributions.
I’m just trying to help him figure out if this would be worthwhile. He believes housing prices will go down 30% – 50%, and is bearish on the dollar. He’s a real sharp guy, and trying to find a way to keep from paying almost half his money to taxes. The CPA had no ideas for him. It seems buying a house could be the biggest help, but I figure unless he has a $1mil mortgage, with a $60K/yr interest expense, the interest deduction will barely make a dent in the taxes anyway. What to do?
March 7, 2006 at 5:21 AM #23591denis4x4
ParticipantSeveral years ago I purchased a single wide on 1 acre of land in Durango CO for $93,000. It was the definition of trailer trash! I replaced it with a cedar sided double wide at a total cost of $72,000 (net after selling the singlewide). By installing the unit on a permanent foundation, we qualified for conventional financing. As a rental, I used a 12 year depreciation schedule. We sold the property for $235,000 two years after the intial purchase.
Moving a trailer isn’t all that difficult, even units on a permanent foundation. As more and more parks enforce CC&R’s and set up co-ops to own the ground, mobile homes are fast becoming affordable entry level housing.
Quite frankly, I’d rather see the mobile home park on east Mission Bay than another highrise hotel.
March 7, 2006 at 9:52 AM #23592Anonymous
GuestOne thing to remember when itemizing is that your state taxes paid are deductible on your fed return.
In the case of home ownership, simply calculating based on the interest paid is very misleading. Once you enter the land of itemization, things change quickly. For someone who may not itemize because their state taxes are too low, home ownership (even a mobile at < $150k) will vault them into a deduction that exceeds $10,000. Whether the resulting $1500 or so in tax 'savings' is relevant is up to the individual. What I'm really curious about is how your friend pays half his income in taxes. To get to that figure, is he including sales tax paid throughout the year?
March 7, 2006 at 10:04 AM #23593ParticipantHe earns about $200K/year, is single, and rents. The IRS really takes advantage of people like him. It’s so unfair.
He’s trying to get a tax deduction, more than get into a home, because he believes there’ll be a major correction in housing prices.
March 7, 2006 at 10:39 AM #23594GuestOk, in that case he’s already itemizing and deducting his state taxes, etc… I had a very different financial picture in my head for someone looking into mobile homes…
I see what you’re saying. He basically wants to “rent” but get a tax deduction for what he pays in rent… and thinks the mobile home is the closest he could ever get to that…
My gut reaction is that it wouldn’t be worth it. The biggest factor here is that the mobile home is virtually guaranteed to depreciate. Think of it as a camper, not a home. The loss of value over time will ultimately screw him upon resale. At least with a condo (even in this environment) there’s a chance that prices will appreciate, even if you had to wait 20 years to see it rise to current levels again.
You can handle depreciation and still come out ahead over time vs. renting… but the depreciation (and interest paid over time) can’t exceed the amount you would’ve paid in rent over that same time period. (Correct for tax savings, here.)
And don’t forget to consider rent on the slab, too.
I bet the tax savings would barely compensate for the slab rental, and then you’re left with a depreciating camper and 12% interest payments.
Of course, I’m a scientist. Not a real estate expert. So take ALL these comments with a great big boulder of salt!
Good luck!
March 7, 2006 at 12:09 PM #23595ParticipantI gave up several years ago trying to talk people out of doing stupid things in real estate.
If your friend thinks he will have tax benefits by buying a mobile home he should go for it. Life is the best teacher. Hopefully he won’t pay too much for the lessons that are being offered here for free.
My point is that the supposed tax benefits to owning real estate are overblown. Tax savings ARE NOT a reason to buy real estate.
And it boggles my mind that someone earning $200K would even talk about paying 12% interest on a mortgage. Has he never heard the saying, “rich people collect interest and poor people pay it?”
March 7, 2006 at 12:20 PM #23596ParticipantMobile homes are financed different from houses w/ a foundation, so the lowest financing rate is 12%. His tax rate is higher than that.
What ought to amaze us is not his choice, but his limited options!
Just curious – do you have any suggestions? You say that tax savings are not a reason to buy RE, but it’s the only way he can reduce his taxable income. With a larger loan amount, the savings would be much bigger.
I do appreciate all the advice, and have been forwarding your responses.
March 7, 2006 at 5:19 PM #23598ParticipantThe tax laws in this country are written for business owners. W-2 wage earners take it in the shorts when it comes to taxes.
Yes, real estate is one of the few ways for a W-2 wage earner to reduce his taxes.
I think we are still failing to communicate here. My point is that NO MATTER how much taxes your friend ‘saves’ because of mortgage interest deductions, he is only ‘saving’ this money because HE HAS TAKEN MONEY OUT OF HIS POCKET AND GIVEN IT TO THE BANK IN THE FORM OF INTEREST. This interest money is real income that your friend had to earn so he could give it to the bank. The bank is never going to give this money back – it is gone for good.
Your friend will get a 35% (max) offset (from the IRS in the form of tax savings) from this out-of-pocket expense BUT HE IS STILL OUT THE MONEY HE SPENT ON INTEREST. So does he have more money or less money at the end of the year? (Hint: the answer is “less”)
Now, there are other benefits to owning real estate. If it makes sense for your friend to buy vs rent then the tax savings offset the expense of owning. In my opinion, however, the tax ‘savings’ by themselves do not justify buying real estate.
And in particular, in a market where real estate values are likely to decline by 40-50% in the next 5 years, why would anyone buy ANY real estate much less a mobile home?
I am also a high-income, single, W-2 wage earner. When I first started buying property I thought there would be significant tax bennies. My experience with 6 multi-unit properties has taught me that the tax bennies of owning real estate are limitted at best and certainly don’t justify the purchase if that is the only reason the purchase is being made.
My financial advice: remain (or become) a renter, pay down debts, buy silver and gold bullion and kick back for the next few years. Let the real estate market correct while some of the geo-political crises resolve themselves (one way or the other). I believe we are currently at a point in history where being liquid and mobile is the ideal financial state. That’s one of the reasons I sold 5 of my properties. Real estate is neither liquid (especially in a declining market) or mobile.
March 7, 2006 at 8:03 PM #23600Participant4plexowner – if the mobile home purchase payment is equal to the rent payment, but the former has a portion which is tax deductible, then you come out ahead.
How much you end up ahead also depends on how much the mobile home depreciates in general, and how this market does. The idea was, with a cheap “home”, it couldn’t lose too much in value.
However, a 15 year payment plan will not have a tax benefit for too long, as the interest payments get small very quickly. I think w/ his income, he will benefit only by paying large interest payments, like $60K/year.
On $200K/year income, you would pay $53K in federal, and about $10K in state taxes, and then of course the $7K FICA. So it’s not quite half, I guess I had misunderstood the actual percentage. But it’s still too much, and makes him not even want to try for those bonuses, because at the highest combined rate of 33%+state income tax, you really start to feel like you’re helping the gov’t more than yourself.
March 8, 2006 at 8:25 PM #23611sdduuuude
ParticipantYOU SAID:
“As a single person I get a $5000 standard deduction on form 1040. If I choose to itemize my expenses in order to claim mortgage interest, I GIVE UP THE $5000 DEDUCTION. And therein lies the myth. ”You only give it up if you don’t already have other itemized deductions that total $5,000.
March 8, 2006 at 8:34 PM #23612ParticipantI think the question that hasn’t yet been asked by your friend or any other respondent is – how much would it cost to rent a comparable trailer vs. buy this one AND rent the pad? Comparing the purchase / rent cost of a trailer to a property that rents for $1650 per month is just wrong.
I mean, if the guy is willing to live in a trailer to save money, seems like renting a trailer is the way to go. The cost difference will be pure after-tax savings and he has no depreciation concerns.
What he really needs to do to lower his taxes is incorporate and become a contract employee and write off stuff that he can’t write-off now.
March 8, 2006 at 9:38 PM #23614ParticipantExactly. Once he itemizes, he can deduct medical and professional expenses.
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