Rental Dilemma

[jztz]

Cost of rental = monthly rent x 12 – after tax interest income from downpayment
Cost of ownership = after-tax cost of all payments (mortgage, property tax, HOA fee, maintenance) + potential depreciation.

Cashman, it looks like you’re comparing month against potential depreciation only.

Of course, your decisions may involve more than these numbers. As others have said — congratulations. All your options are good, so having some difficulty making up your mind is a good problem to have.

[no_such_reality]

Unforuntately no. Housing is extremely leveraged in SoCal.

If you buy a target home at $900K any depreciation accelerates your loss over renting at $2700/month.

If over the next 3 years, housing loses 10% total ( a slow 3.5% loss per year), rent appreciates at 5%, you’ll save $105,000 by renting. That’s if you put 20% down and are in the 40% tax bracket.

If you put nothing down, you save $85,000 by renting.

Neither are shabby over three years.

If housing is completely flat, at 20% down, you save $10,000 by renting. At nothing down, it appears to cost $9,600 more to rent. That’s total over three years.

I’d post my little spreadsheet, but I’m not sure where to put it on the board.

[calidesigner]

Cashman, I lived with my folks in Diamond Bar from 1991 to 1998. While it was only a townhome, granted, they bought at the worst possible time, 1991, and saw the value of their home plummet a good 20%, and this on top of the loss of value that had already occurred between 1989 and 1991. Ultimately they (we) rode out the downturn, it wasn’t easy or pleasant and it wasn’t fun living with my parents, they were a grumpy frustrated mess. All this despite the fact that they could afford their mortgage. They felt trapped, and that’s what kills you…you can afford a bigger place, a better place, but anyone with sound economic judgement will never sell their upside-down negative equity home until it either regains it’s value, or else they are forced to. You will probably never be forced to sell, but you will be trapped in that house for a good number of years.

I must stress that my experience as a non-owner, but living with homeowners (my folks) during the last downturn leads me to conclude that losing value in one’s home affects people psychologically and emotionally in a very negative way. You have a lot of money in the bank, but so did my folks at the time (they didn’t have millions, but a few 100k), and my dad was about your age at the time, so you’re already entering the cranky middle-age phase that I’ve seen my dad go through (and I will go through too in a few decades), as someone who is a son, to someone who is a father, do yourself and your family a favor, and don’t go down that path of negativity and frustration which is sure to follow in a collapsing housing market. Home-ownerhsip pride isn’t everything. Spend your time and money connecting to your children and grandchildren. And make a lot more money; don’t throw it away for the sake of pride. Regards.

calidesigner

[sdcellar]

Thanks for sharing your experience, calidesigner. I’ve never really put a lot of thought a lot of thought into the emotional and pyschological effects of a downturn on those who can “afford” to stick with the property they’ve decided to purchase in the face of a prolonged decline.

Something to consider for those of us who think we just need to run the numbers and make sense out of those. I know I really hadn’t considered being “priced in forever” (or at least a long time).

[blackbox]

Hey Bob007, haha, you idiot! . Don’t expect Diamond bar to fall that much. Haha. Yeah, let me guess. Are you running out of land. Okay, reality check. In california, from 2003 to now, there has been nothing to support the increase in pricing. Geez, that’s why it became a bubble. Homes went into commodity mode. They are no longer shelter, home sweet home. They are a commodity right now like pork bellies, like nasdaq 5000. Geez. You take average income (in your area) X (2 or 3) and that should equal medium home prices in your area. Geez, I’m sorry I called you an idiot, but really, it’s time everyone hit reality. Your area is not special, not running out of land, and it’s not the schools. Once prices hit insane mode, like thet have been since 2003, all that goes out the window. It’s what people can afford with conventional down payment, fixed loans. The upward momentum is over now, and now there is no where else but down. Geez, Japan actually has limited land, and it’s an island nation (Nowhere to go), and they had 0% interest mortgage loans, and there real estate pricing has gone down 14 straight years. Geez, really, have we lost prospective. Long term pricing trends and home appreciations never, ever stay out of wack for long. They always go back to 2 to 4% home appreciation per year, accounting for inflation. That’s it. That’s all. No schools, no special land, no nothing. Medium income has to afford a medium housing price. SD has 37.5 ratio. I’m sure diamond bar has less. If you don’t like what your long term ratio is, sell, sell sell as soon and for as much as you can. You made a great profit out the greatest real estate bubble our generation has seen. Great going, but stop the insanity about Diamond Bar not getting hit as bad because of the schools.

[(former)FormerSanDiegan]

blackbox –

Your message may be right on. However, calling someone an idiot in the same paragraph as using the terms “medium” income and “medium” home prices multiple times does not aid your cause.

… Unless of course, you actually mean medium prices. If so, what about Extra Large Home Prices and Small Income ratios ? Why isn’t the press reporting these. 🙂

[blackbox]

Hey
Formersandiegan, I get your point, and I do appreciate the fact that you sort of asked me the context in which I delivered the message rather then the actual message I tried to convey. I did appologize for calling him an idoit. Maybe I should stop from blogging a message in couple of minutes between sales meetings in the frozen wasteland that is Denver. God, I hate that town. I love SD. I just went to my favorite Real estate blog, and didn’t really plan to respond, but my blood reached my “idoit alarm” threshold. I did mean to say, however, that real estate prices in CA have gone beyond the rational. In fact, beyond any mathematical model that can be produced using data points of the past 50 to 60 years as a basis to determine where pricing should be considering incomes in those areas, and this……id…., i mean person, is here talking about how good the schools are in the their area, and how that will put a floor of support for home prices in the area, when the floor is probably in 2001 ~ 2002. By the way, thanks for shooting the messenger, you idiot! haha

[Chance the Gardener]

jztz’s formula is on spot… If you forget about depreciation and only consider the average monthly mortgage interest over the comparison period in the ‘Cost of Ownership’ calculation, you’ll get a flat-market number for comparison purposes. And to be even more buy-bullish, you could multiply the monthly rent by a factor to approximate the average effect of a 10% per year rent increase (1.34 for a 3-year window) [(1.1^number of years/number of years)+ 1]. Once you have a spread sheet set up, start looking at places to buy that could reasonably replace the house you’re in. Plug in the purchase price, the HOA and the amount of your down payment. For me, I can’t find a place that even comes close to Cost of Ownership being less than Cost of Rental. How does this get any better if I have to add depreciation to the Cost of Ownership? How can the rate of depreciation (slow or fast) make any difference. If I rent and continue to invest my rent over ownership dollars in a CD (5.4% at Countrywide), it should compensate for even a mild rate of INFLATION. Even if it comes out that buying is slightly better, consider all of the risks of ownership… repairs, special assessments, etc. Given today’s prices, I can’t understand why anyone would buy for financial reasons. The difference in cost is the cost of your non-financial justifications. If pride in ownership is worth it, then go for it. Just know how much you are paying for it!

[(former)FormerSanDiegan]

blackbox – Just having some fun (at your expense), couldn’t resist. I agree that good schools can only support prices relative to other areas, but not at ridiculous levels. The reason is that at some point it becomes cheaper to live in an area with supposedly inferior schools and simply pay $15 grand per year for private schooling.

[Anonymous]

Cashman,

I share a similar situation, but I have about 1/10th of the cash. My advice is let the numbers tell you what to do. There’s a lot of emotion in the market right now and it’s a very uncertain time. Conservatively assume 0% home price increase over the next year or two, and compare your after tax income of renting versus purchasing the house you want. I know people may not agree with the 0% appreciation, but no one has a crystal ball. There are numerous rent versus buy calculators out there. Play around with some of them until you are comfortable with one decision.

When you start feeling bad about wasting money on rent, just pull out your bank statement and look at it for a while. That’s what I do.

[cashman]

BigRig, thanks for the prescription. I’m sure that will make me feel better. Let’s be honest, no matter what anybody says, when you’re a renter, you just don’t feel secure. For example, a few months ago, my landlord put this place up for sale. Obviously, no takers, yet. And I know I can always move to another rental, but that’s not the point. At age 50+, I just want to settle down and relax. I’ve even entertained thoughts of moving out of state to a more “normal” area, but I still have a good business to run here, which nix’s that idea. What’s killing me is how slowly this market is deteriorating. I’m not trying to time the bottom perfectly, I just don’t want to feel stupid by buying again near the top, which is where we still are. If this cycle plays out anything like the last, and I suspect it will, then we still have about five more years to go. I’m going to try to hang tough, keep in touch with this board regularly, and keep looking at those bank statements!

[no_such_reality]

Cashman, why don’t you just sign a long term lease with option to subrent and strike the transfer of ownership excape clause of the owner?

[JJGittes]

A very close friend of mine was recently in your position. He sold his house in early/mid 2006, pocketed a good chunk of $ (he’d owned it for 8 yrs), and had to decide what to do next. He rented back the house he sold for a few months, but when moving day approached, he decided he just did not want to be a renter again. He said his wife looked queasy when they were looking at a rental application on a house they were thinking of leasing. So, he bought in coastal north county. But he drove a hard bargain and made the seller meet a lot of demands, and even squeased the RE agents to make the deal happen. I saw him last weekend and he said sometimes he regrets that he did not rent for another year or two, but the reality for him was that he had school age kids that needed stability, he has pets that were an issue for renting, he did not want to move twice or even more, and he considered his down payment to be ‘house money’ that was simply moved laterally from the first house to the second house. Basically, six in one, half dozen in another. However, he also said that if he was closer to retirement (and moving out if SoCal)he would have viewed the profits from the first house less as simply a ticket into the next family house, and more as retirement funds to be preserved and even arbitraged.

[Bugs]

Cashman,

There are two reasons you’re looking at housing depreciation vs. rental income in equal terms. One of them is a mistake. The investment in your home wasn’t leveraged, but it also didn’t represent 100% of your housing costs. You still had some housing costs because of the money you were spending on taxes and insurance + maintenance costs, which at the $1,000,000 level you started from would still have been about $1,400/month or so. Your $2,700 rent includes all that, so really, that $2,700 only represents a net monthly loss of $1,300 to you, even on your 100% cash basis.

Had your equity been only 50% of the total value of the home and had you been spending $6,000/month on a mortgage payment (+ another $1,400+/month in taxes and insurance) you’d be looking at your $1,300/month additional housing expense as being a complete gift, even when considering the tax writeoff for the interest. And when you look at the combined costs of maintaining that mortgage + the continuing losses from price declines and then compare that total loss to your total losses as a renter pale in comparison to what you’d be looking at had you been a typical leveraged mortgagee. And this is were 95+% of all recent buyers are.

By the way, I really don’t understand how you’d feel less secure as a renter than as a property owner. You have more than enough cash to make the jump back into home ownership again and you’re obviously paying attention to the markets so you’ll recognize when that time will be right for you. As I see it, your situation couldn’t possibly be more secure so long as your cash isn’t parked in some high-risk investment. It seems to me that if you had been holding your property and watching your equity bleed out (at faster than $1,300/month) THAT would make you feel less secure.

Seeing as how you’re interested in downsizing to what is now a $1,000,000 price range, your other alternative is to do that now and only lose half as much of your investment dollars (+ property taxes). Even that would represent a lesser loss to you than you would have experienced holding the $2mil property. In your place I wouldn’t even consider this alternative, but then again, I wouldn’t be experiencing angst just because I was losing (much) less as a renter than I would be if I had a 50% mortgage.

Personal perspective counts.

[Author]

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