Rental Dilemma

[cashman]

This is my first post here, but have been reading Rich’s insights and the forums for many months. To everyone, thanks for a great website and informative reading. I have a situation in which your comments would be appreciated. I sold my home in Nov.’05 here in Diamond Bar, about 30 miles east of LA. It was a large custom home and I got $2M for it. It was paid off, so I put that money in CD’s. Not very exciting, but safe. I have since been renting a house in my old neighborhood for $2700 a month. When I do buy again, it will be a more modest home, probably in the $700K-$1M range (today’s prices). As we all know, the housing market has not unraveled as fast as we hoped it would, so many of us, including myself, have been waiting patiently on the sidelines.

My dilemma is, if this housing market continues to be slow as molasses coming down, I might be renting for several years. The amount of rent I pay each year keeps adding up to levels that might equal the declines in progress, thereby cancelling out the savings of renting. For example, just four years of rent is about $130K. That’s not small change. And it’s not tax deductable, so 100 percent of it is spent. I’ve been questioning whether or not it might make sense to buy a lower priced property during this “correction” phase, and have pride of ownership again instead of renting since it might wash out the same in the end. Any thoughts?

[SD Realtor]

I know what you mean cashman. I am getting ready to go out this afternoon to look at another rental since our landlord is selling our current residence. Our rent is comparable to yours and it is eating my heart out as well. Actually I ran the numbers and all things being equal I would break even if I bought right now cash flow wise given the interest deduction I would get. So the decision becomes quality of life verses depreciation risk. My wife is ready to buy yesterday. I also see at least down here that the San Diego inventory is not picking up as fast as I thought it would. I want to see what happens this spring. NODS, NOTS and REOS are up but not enough to affect the market yet. Sorry for the non advice…. but you are not alone.

SD Realtor

[blahblahblah]

…was a large custom home and I got $2M for it. It was paid off, so I put that money in CD’s…. For example, just four years of rent is about $130K. That’s not small change. And it’s not tax deductable, so 100 percent of it is spent.

Dude, in 5% CDs, you’re earning $100K a year. I’m no math wiz, but in four years that should be somewhere around $400K. And you’re complaining about spending $130K over four years on rent? Sounds to me like you’re up $270K in four years with ZERO RISK and LIVING FOR FREE TO BOOT. Cue the violins and cry me a freaking river.

Seriously though, if you own your own business you can deduct a portion of your rent for your office. I did that after I sold my home and it has helped with the tax issues a bit.

Sorry to make light of your situation, but I couldn’t resist! You’ve got it made, dude! Congratulations!!!

[carlislematthew]

Sorry to make light of your situation, but I couldn’t resist! You’ve got it made, dude! Congratulations!!!

Dilemma:
1. a situation requiring a choice between equally undesirable alternatives.
2. any difficult or perplexing situation or problem.
3. attempting to figure out what to do with $2,000,000 in cash and minimal, of any, debt.

😉

[bigmoneysalsa]

cashman,
You have to look at the interest that the money you would spend on the house would be earning. Run the numbers. Even after taxes, I think the interest on the amount of money it would take to buy a house that rents for $2700/month is going to earn at least $100K in four years. So, you are not really spending $130K to wait, you are spending about $30K to wait. Trust me, a house that sells for $700K now is goint to sell for a lot less than $670K 4 years from now.

[blackbox]

Well, first thank your parents for leaving you their neat spec home, and then do the snoppy dance, and then sit back, live off the interest and chill. Geez, 2 million, and the guy can sit tight for 4 to 5 years. What, you a sports or movie star….geez. By the way, on this site, there is no bragging in real estate. haha, ok, a bit bitter, but at least i’m honest. Enjoy you lucky idiot, and stop and smell the roses. You timed the market perfectly. Very hard to do. Do a victory lap, relax, and keep your powder dry, and most importantly, never, ever post on this website again. Haha. You lucky bastard….

[cashman]

Blackbox, I know there’s some humor in your comments, but let me set the record straight. My parents didn’t leave me a spec home. I am 52 years old and I had that home built for me in 1994. Since I paid it off a few years ago, practically my entire nest egg was represented by that house. That made me uncomfortable, as they say not to put all your eggs in one basket. As my kids grew up and moved out, I didn’t need such a large home anymore, so I sold. Yes, I feel fortunate to have gotten out when I did. But now I feel a little strange renting, since I haven’t rented anything since I was in my early twenties. I am not bragging about anything, just posting numbers so any of you can make informed comments. What I like about this website is how you guys (and gals) don’t hesitate to speak openly. Thanks for letting me be a part of it.

[blahblahblah]

Seriously cashman, start your own home-based business and write off a bit of that rent as your office. It doesn’t have to be a super-successful business to make it worth your while, tax-wise.

Note that I am not a tax attorney (although I play one on TV).

[bob007]

It really depends on your financial situation.

5% CD on $2 million yields 100k a year. He would lose 30-35k annually to taxes.

Inflation @ 4% would wipe out 200k out of his $2 million principal in 4 years.

Do not expect a huge fall in real estate prices in Diamond Bar. It has a nice school district compared to Pomona.

[lendingbubblecontinues]

Attention:

C’mon, people…expect huge drops in real estate everywhere; “nice school districts” included.

If a place had a “nice school district” 5 years ago, yet was selling for 25-40% of what it sold for at the peak, guess what…it had abso-f**king-lutely nothing to do with the “nice school district”.

I live in a nice school district now and there is blood in the water. Can’t wait for Spring and Summer to watch all the smug idiots of just last year begin to have all their sh*t thrown out on the front lawn by the sheriff’s department.

It’s a great time to be “short” housing.

[bigmoneysalsa]

Seriously bob007, lendingbubbleco is right. That was a pretty asinine thing to say.

Gold is more expensive than silver. Why? Any number of reasons. It’s rarer, it makes better jewelry, it has more industrial applications, whatever. If both gold and silver are temporarily overvalued by 50%, then they are both going to fall in value by 50% when the market returns to normal. The fact that gold is better than silver has absolutely NO RELEVANCE to the price of gold. All that matters is gold’s intrinsic value.

[bubble_contagion]

Cashman,

It seems that you need to simplify your question. The dilema is to rent for $2700 or buy a $700K-$1M home. You could have $2M or $10M in the bank and it shoudn’t make a difference in your rent-vs-buy financial decision.

[Blissful Ignoramus]

I sold my home in Nov.’05 here in Diamond Bar, about 30 miles east of LA. It was a large custom home and I got $2M for it. It was paid off, so I put that money in CD’s. Not very exciting, but safe. I have since been renting a house in my old neighborhood for $2700 a month. When I do buy again, it will be a more modest home, probably in the $700K-$1M range (today’s prices).

Sounds like you might be able to buy your old house back!

[no_such_reality]

Cashman, few thoughts.

$2700 hopefully has you in a REALLY nice place in Diamond Bar. I know what $3000/month rents by the beach in HB and it’s pretty sweet, 3/4 BD 3BA, pool, spa, 3 car gar, good size yard…

$2700 is a lot of expense, after tax, it’s even more assuming your income won’t walk you into AMT. Assuming you’re in the 31% Fed rate zone, $2700 in rent is equivalent of $4500 in interest and taxes which puts you about in a $900K home with 20% down or a $750K home with nothing down. Again, assuming $50,000 of deductions doesn’t walk you into AMT.

In the end, spent is spent. Your choices:

1. Live in a $2700/month rental. Downside, rents might go up, slight non-premenant feel.

2. Live in a $750K-$900K house, downsides: live in a house not as nice as your rental, watch it depreciate and lose the downpayment or equity. $100K, $200K or $300K plus worth of equity. Of course, there is an upside, houses could go up. (unlikely but possible)

Probably the best thing for you to do is go out to the open houses today and look at homes in the $800K range to see how you like them compared to your rental.

[cashman]

nsr, I guess my main concern is that if we have a prolonged slow bleeding in the housing market, will the cost of my rent equal the depreciation of any potential house that I may buy now. In that case, wouldn’t it be better pschologically to live in your own home vs. a rental during the “bleeding” years. I think that might apply to anyone in this situation. It seems like the wild card is how much will housing drop. Obviously if we’re going down greater than 30 percent, then no one should be owning. But if it’s a slow bleed, like it’s been the past year or so, then maybe a lower priced home with a lower dollar downside might equal the loss of renting.

[Author]

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