Thinking about buying..Am I crazy?

[movielover]

cassiopeia –in response to your comment, I do plan to use the condo as a stepping stone to a bigger place, but I’m also realistic in knowing that I could potentially have to hold on to the place as well. I’ve already factored this into consideration that whatever I buy, I have to be able to say to myself that I can be happy living in it for at least 5 years, and maybe renting it out for another 5-10 years depending on the market.

That’s why I’m looking into areas that are considered desirable for whatever reason, and will be able to rent it out at a fairly high rate when it comes to that point.

[an]

sdcellar, I know you can’t get 6% at 100% financing, but I’m just picking a rough estimate. +/- 1% will change the number about $100-200/month. My point is it’s getting close and deals are finally popping up. Up until now, those same houses were selling for above 500k. That’s all I’m trying to say. Next year, I’m sure you’ll be seeing a lot more in the same situation, which mean we’ll have more choices.

NSR, I understand what you’re saying. I know that there’s still a way to go before we hit true affordability. However, if you must buy now for what ever reasons, you can keep an eye out for deals like the one I mentioned. I actually put in an offer @ $375k, which is $25k less than $400k, which is their low end. But 2 other buyers right now think it’s worth $440-450k. I those 2 buyers are not there and seller is desperate, it might be possible to get it under $400k which is very favorable, # wise.

[no_such_reality]

Without the prospect of capital gains through appreciation, as an investment, it won’t make sense until it gets to the $300,000 range. That’s at 6%, 20% down, 1% tax, 1% maintenance & mgmt expense, that generates about a 5% return with positive cash flow and a 10% return if you can carry the depreciation loss forward against your personal income (wages).

For living in, the $350K number looks about right. However, that add in costs are typically over look by would be owners.

[sdcellar]

1% will increase the interest payment by $375. I understand what you’re saying though, and I too hope that prices will continue to approach reasonable levels. (and then go right past them!)

You have piqued my curiosity a bit though. Do you know of any comparable active listings to the house you’re talking about? I did a quick search and didn’t find anything close to that. I was looking for anything built after 2000.

[scripps]

Movielover,

There is a great rent vs. own calculator on the eloan web site:
http://www.eloan.com/s/show/calc_rentvsown?sid=hYg8zBMtVhvV-qUOS-0N3moI9ss&user=&mcode=

Here is what I got using the figures you gave:

Assumptions: (you can adjust these assumptions)
Monthly Rental Payment: $ 1200
Purchase Price of the Home: $ 200,000
Anticipated Down Payment: $ 40,000
Mortgage Interest Rate: 6%
Number of years you plan on keeping the home: 5 years
Yearly Appreciation on the Home: 0%
Closing Costs to Buy the Home: 2%
Annual Property Taxes: 1.25%
Annual Home Maintenance: 0.8%
Closing Costs to Sell the Home: 6%
Income Tax Rate: 28%
Your Savings or Investment Rate: 5%
Monthly Renter Insurance: $30

Rent versus Own
Rent
Total Payments in five years: $77,491.13
Tax Savings: $0
Investment or Appreciation: $10,210.25
Own
Payments: $97,637.20
Tax Savings: $20,550.22
Investment or Appreciation:$5,613.57

Conclusion
By renting your home versus buying you will have saved $4,192.54 over the next 5 years.

[an]

All the comps around that size are starting $525k to as high as $575k right now. Those houses were built in 1997-1998. Here’s the MLS# of the exact same size house 2-3 short blocks away in the same complex: 066064784.

Here are some comps:
9471 COMPASS POINT DR S 4/2 1,726 null 07/24/06 0.09 $552,000 $320
9485 COMPASS POINT DR S 4/2 1,726 null 01/24/06 $567,000 $329
9481 COMPASS POINT DR S 4/2 1,726 null 07/10/05 0.13 $594,000 $344
9517 COMPASS POINT DR S 4/2 1,726 null 07/09/05 0.09 $560,000 $324
9523 COMPASS POINT DR S 4/2 1,726 null 06/28/05 0.09 $585,000 $339
9527 COMPASS POINT DR S 4/2 1,726 null 05/11/05 0.08 $600,000 $348
9461 COMPASS POINT DR S 4/2 1,726 null 03/12/05 $570,000 $330

So it got as high as $600k in 1.5 years ago.

[an]

Scripps, does that number also take into consideration of rise in rent? Also, it took into consideration of selling in 5 years @ 6% closing cost. If he stay in it for 10 years, wouldn’t that number change quite a bit?

[scripps]

Yes. The number also takes into account 2.5% rise in rent annually.

And if he stays for 10 years instead of 5 years, the conclusion is quite different:

By buying your home versus renting you will have saved $17,889.46 over the next 10 years.

You can try changing the assumptions on the site and see different results. It’s quite fun!

[sdcellar]

scripps– That’s a pretty sweet calculator. Much better than a lot of the simple ones you see out there. (at least I think it is, I want to sanity check some of the calculations, but it does seem to factor in most everything).

an– You might want to run your numbers. That property isn’t looking so good, even if you live in it for 10 years.

[sdcellar]

an– I thought it might be one of those listed on Compass Point because the square footage tied. The only thing that threw me was the only reference I could find to your subject property indicated it was built in 1996. Does that sound right?

Also, these are closer to what I’d consider detached condos and I think you can find the same thing in better areas for what these comps and the $575K listing come in at, so your property was definitely more “realistically” priced. Any idea why?

It is *crazy* to me that any of these places ever sold for $600,000. (sorry if anybody reading this is an owner…)

[PerryChase]

AN, I just looked at that Compass Point property you mentioned. I’ve been in that neighborhood once. A friend of a friend of a friend lives there. Yeah, It’s more like detached townhouse to me also.

Bright lime green walls? Interesting decoration for sure. Someone really has to love that house to put in an offer. It does have the advantage of a corner lot.

ZipRealty MLS#066064784

[an]

At first, I thought it’s a detached condo too, but according to Zip, it say SFR, so I have to take their word for it.

[sdcellar]

Detached condos are typically listed as SFRs. I read somewhere what technically defines a detached condo, but I don’t recall exactly. I know it involves things like zero lot lines, very small or non-existent backyards, shared driveways, things like that.

The practical difference is that they are worth less money.

It makes sense though, that they list as an SFR because the structure does indeed (or is at least intended to) house a single family.

[no_such_reality]

The eloan calculator is one of the better ones.

Their default settings though significantly favor housing. Still, it’s highly useful to show that housing appreciation is the only thing that makes owning worthwhile at this point.

With their base settings, my current rental says I’m better off buying ($575,000, 6%, 20% down) with $21K in savings over 7 years. Adjusting my tax rate up to 40% marginal, it get’s even better, $32K.

However, if I correct some assumptions for SoCal, first rent with rent appreciation of 5% (was 2.5%) for worst case, I get savings of $46K. (Actually I think rent will stay flat, but I’ll do that at the end.)

However when I correct the housing and investment rates it changes dramatically:

If housing slows to 2.5% appreciation, essentially on par with inflation. The savings from buying disappears for a $22K loss. Even if rents increase 5% a year, I hold for 7 years, if the house only appreciates another 19%, I lose $22K compared to renting.

If I hold a shorter 5 years, naturally, I do worse, $32K loss.

If change my savings rate to 10% from 8%, I would lose $52K by buying over seven years.

If rents appreciate slower, say the default 2.5% and housing is 2.5% annual appreciation, I would lose $36K by buying with a 8% ROI on savings and $66K with a 10% ROI on savings.

If housing actually goes flat near term, maintaining nominal current prices for 5 years, it gets really bad even with 5% annual rent increases, with a $103K loss from buying. (Over a mere five years, that’s $20,000 a year)

If housing slightly corrects over the next 5 years with a 2% loss annually (~10% total nominal loss over five years) and rents increase at 5%, I’d lose $155K to $180K at 8% and 10% savings ROI.

Finally, my last scenario, rental crunch, 10% annual rent increases, 2.5% appreciation on housing, add HOA fees, and a 10% savings ROI with 40% tax bracket for 5 years…

I still save $50,000 by renting.

Even using a mere 8% savings rate, I still come out saving by renting.

When it’s all said an done, I break even by buying the townhouse I rent if in the next five years, the townhouse goes from $575K to $700K and my rent goes from $1950 to $2850.

Anybody care to put odds on either one of those two requirements happening?

[sdcellar]

I’ll say 5%. I’d say zero, but there are no sure things.

[Author]

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