[(former)FormerSanDiegan]

The general strategy you are contemplating boils down to borrowing in today’s $ and paying back in future dollars that re worth less because of inflation.

Most of the world is in the process of deleveraging right now, so you are going against the grain (sometimes that’s the best thing to do).

If you think this is the case, however this works best with fixed rates.

Credit card rates are subject to change, making them a poor choice.

[(former)FormerSanDiegan]

The general strategy you are contemplating boils down to borrowing in today’s $ and paying back in future dollars that re worth less because of inflation.

Most of the world is in the process of deleveraging right now, so you are going against the grain (sometimes that’s the best thing to do).

If you think this is the case, however this works best with fixed rates.

Credit card rates are subject to change, making them a poor choice.

[(former)FormerSanDiegan]

[quote=sc_alum]

Silly question, but rental income is taxable income AFTER you’ve deducted mortgage costs, right? It’s net, not gross?
[/quote]

Yes, it’s net, not gross, and it is figured on Schedule E with some “real” expenses as well as “phantom” expenses such as depreciation, which ultimately results in a decent tax advantage.

Here’s the long-short of it ..
Net income = Gross Income – Expenses

Gross Income = rent

Expenses:
Mortgage Interest
Property Taxes
Insurance
Maintenance
Property Management fees
advertising
Travel to/from property (with some limitations)
utilities while vacant (or if paid by owner, which I don;t recommend)
Some other stuff I am probably leaving out
Depreciation **

** You get to take a paper loss of ~3.63% of the value of the structure (not including land), since it is depreciated for tax purposes over 27.5 years. Assuming the place is worth 350K and 275-300K of that is the actual house, you are looking at a Depreciation (phantom, paper only for tax purposes) loss of ~10K per year.
Or in other words if you were able to pay down the mortgage such that you netted 10 K a year (not including depreciation), the depreciation would allow you to collect that 10K tax free. You do have to pay depreciation recapture when you sell, so this phantom loss is essentially a temporary tax loss for as long as you own this property.

So, most likely, for tax purposes you will be “losing” about 12K per year, though your out of pocket loss might only be $2000-3000 per year.

If you are married and make less than 150K this loss can be taken against ordinary income (it phases out at gradually starting at 100K). If you make over 150K, then it becomes a carryover loss for use in future years or when you sell.

Keeping the house as a rental can make a lot of sense if you keep it for the long haul. However, you need to read up as much as you can and decide if that is what you want to invest a few hundred per month into for the foreseeable future.

Also, if you are considering this solely as a financial necessity brought on by current market conditions, rather than part of a well-thought out financial strategy than it is unlikely you will be satisfied with the result.

[(former)FormerSanDiegan]

[quote=sc_alum]

Silly question, but rental income is taxable income AFTER you’ve deducted mortgage costs, right? It’s net, not gross?
[/quote]

Yes, it’s net, not gross, and it is figured on Schedule E with some “real” expenses as well as “phantom” expenses such as depreciation, which ultimately results in a decent tax advantage.

Here’s the long-short of it ..
Net income = Gross Income – Expenses

Gross Income = rent

Expenses:
Mortgage Interest
Property Taxes
Insurance
Maintenance
Property Management fees
advertising
Travel to/from property (with some limitations)
utilities while vacant (or if paid by owner, which I don;t recommend)
Some other stuff I am probably leaving out
Depreciation **

** You get to take a paper loss of ~3.63% of the value of the structure (not including land), since it is depreciated for tax purposes over 27.5 years. Assuming the place is worth 350K and 275-300K of that is the actual house, you are looking at a Depreciation (phantom, paper only for tax purposes) loss of ~10K per year.
Or in other words if you were able to pay down the mortgage such that you netted 10 K a year (not including depreciation), the depreciation would allow you to collect that 10K tax free. You do have to pay depreciation recapture when you sell, so this phantom loss is essentially a temporary tax loss for as long as you own this property.

So, most likely, for tax purposes you will be “losing” about 12K per year, though your out of pocket loss might only be $2000-3000 per year.

If you are married and make less than 150K this loss can be taken against ordinary income (it phases out at gradually starting at 100K). If you make over 150K, then it becomes a carryover loss for use in future years or when you sell.

Keeping the house as a rental can make a lot of sense if you keep it for the long haul. However, you need to read up as much as you can and decide if that is what you want to invest a few hundred per month into for the foreseeable future.

Also, if you are considering this solely as a financial necessity brought on by current market conditions, rather than part of a well-thought out financial strategy than it is unlikely you will be satisfied with the result.

[(former)FormerSanDiegan]

[quote=sc_alum]

Silly question, but rental income is taxable income AFTER you’ve deducted mortgage costs, right? It’s net, not gross?
[/quote]

Yes, it’s net, not gross, and it is figured on Schedule E with some “real” expenses as well as “phantom” expenses such as depreciation, which ultimately results in a decent tax advantage.

Here’s the long-short of it ..
Net income = Gross Income – Expenses

Gross Income = rent

Expenses:
Mortgage Interest
Property Taxes
Insurance
Maintenance
Property Management fees
advertising
Travel to/from property (with some limitations)
utilities while vacant (or if paid by owner, which I don;t recommend)
Some other stuff I am probably leaving out
Depreciation **

** You get to take a paper loss of ~3.63% of the value of the structure (not including land), since it is depreciated for tax purposes over 27.5 years. Assuming the place is worth 350K and 275-300K of that is the actual house, you are looking at a Depreciation (phantom, paper only for tax purposes) loss of ~10K per year.
Or in other words if you were able to pay down the mortgage such that you netted 10 K a year (not including depreciation), the depreciation would allow you to collect that 10K tax free. You do have to pay depreciation recapture when you sell, so this phantom loss is essentially a temporary tax loss for as long as you own this property.

So, most likely, for tax purposes you will be “losing” about 12K per year, though your out of pocket loss might only be $2000-3000 per year.

If you are married and make less than 150K this loss can be taken against ordinary income (it phases out at gradually starting at 100K). If you make over 150K, then it becomes a carryover loss for use in future years or when you sell.

Keeping the house as a rental can make a lot of sense if you keep it for the long haul. However, you need to read up as much as you can and decide if that is what you want to invest a few hundred per month into for the foreseeable future.

Also, if you are considering this solely as a financial necessity brought on by current market conditions, rather than part of a well-thought out financial strategy than it is unlikely you will be satisfied with the result.

[(former)FormerSanDiegan]

[quote=sc_alum]

Silly question, but rental income is taxable income AFTER you’ve deducted mortgage costs, right? It’s net, not gross?
[/quote]

Yes, it’s net, not gross, and it is figured on Schedule E with some “real” expenses as well as “phantom” expenses such as depreciation, which ultimately results in a decent tax advantage.

Here’s the long-short of it ..
Net income = Gross Income – Expenses

Gross Income = rent

Expenses:
Mortgage Interest
Property Taxes
Insurance
Maintenance
Property Management fees
advertising
Travel to/from property (with some limitations)
utilities while vacant (or if paid by owner, which I don;t recommend)
Some other stuff I am probably leaving out
Depreciation **

** You get to take a paper loss of ~3.63% of the value of the structure (not including land), since it is depreciated for tax purposes over 27.5 years. Assuming the place is worth 350K and 275-300K of that is the actual house, you are looking at a Depreciation (phantom, paper only for tax purposes) loss of ~10K per year.
Or in other words if you were able to pay down the mortgage such that you netted 10 K a year (not including depreciation), the depreciation would allow you to collect that 10K tax free. You do have to pay depreciation recapture when you sell, so this phantom loss is essentially a temporary tax loss for as long as you own this property.

So, most likely, for tax purposes you will be “losing” about 12K per year, though your out of pocket loss might only be $2000-3000 per year.

If you are married and make less than 150K this loss can be taken against ordinary income (it phases out at gradually starting at 100K). If you make over 150K, then it becomes a carryover loss for use in future years or when you sell.

Keeping the house as a rental can make a lot of sense if you keep it for the long haul. However, you need to read up as much as you can and decide if that is what you want to invest a few hundred per month into for the foreseeable future.

Also, if you are considering this solely as a financial necessity brought on by current market conditions, rather than part of a well-thought out financial strategy than it is unlikely you will be satisfied with the result.

[(former)FormerSanDiegan]

[quote=sc_alum]

Silly question, but rental income is taxable income AFTER you’ve deducted mortgage costs, right? It’s net, not gross?
[/quote]

Yes, it’s net, not gross, and it is figured on Schedule E with some “real” expenses as well as “phantom” expenses such as depreciation, which ultimately results in a decent tax advantage.

Here’s the long-short of it ..
Net income = Gross Income – Expenses

Gross Income = rent

Expenses:
Mortgage Interest
Property Taxes
Insurance
Maintenance
Property Management fees
advertising
Travel to/from property (with some limitations)
utilities while vacant (or if paid by owner, which I don;t recommend)
Some other stuff I am probably leaving out
Depreciation **

** You get to take a paper loss of ~3.63% of the value of the structure (not including land), since it is depreciated for tax purposes over 27.5 years. Assuming the place is worth 350K and 275-300K of that is the actual house, you are looking at a Depreciation (phantom, paper only for tax purposes) loss of ~10K per year.
Or in other words if you were able to pay down the mortgage such that you netted 10 K a year (not including depreciation), the depreciation would allow you to collect that 10K tax free. You do have to pay depreciation recapture when you sell, so this phantom loss is essentially a temporary tax loss for as long as you own this property.

So, most likely, for tax purposes you will be “losing” about 12K per year, though your out of pocket loss might only be $2000-3000 per year.

If you are married and make less than 150K this loss can be taken against ordinary income (it phases out at gradually starting at 100K). If you make over 150K, then it becomes a carryover loss for use in future years or when you sell.

Keeping the house as a rental can make a lot of sense if you keep it for the long haul. However, you need to read up as much as you can and decide if that is what you want to invest a few hundred per month into for the foreseeable future.

Also, if you are considering this solely as a financial necessity brought on by current market conditions, rather than part of a well-thought out financial strategy than it is unlikely you will be satisfied with the result.

[(former)FormerSanDiegan]

[quote=peterb]Unemployment rising to record levels, homes losing value and getting below mortgage amounts. And we’re only 1 year into this contraction. This is a deadly combination. Even if ARMs reset low now that the rates are quite low, it does little to mitigate job loss and being upside down on your mortgage.[/quote]

I think the point he made above is that ARM resets will not be the same catalyst that the subprime resets were. Being upside down might be. It depends on the monthly carrying costs versus dumping and renting. If it costs someone a few extra hundred $ per month to stay in their house with their adjusted rate, they are likely to stay put instead of walking away until there is some other catalyst for them to leave (change in job status, etc).

Most prime or alt-A loans from the 2004 – 2005 time frame are at the 12-month LIBOR plus 2.25%.
The 12-month LIBOR is currently around 2%.
So, the fully-indexed rate would now be 4.25 to 4.5%

These would reset today at or below their original rate (which was typically in the 5-6% range).

[(former)FormerSanDiegan]

[quote=peterb]Unemployment rising to record levels, homes losing value and getting below mortgage amounts. And we’re only 1 year into this contraction. This is a deadly combination. Even if ARMs reset low now that the rates are quite low, it does little to mitigate job loss and being upside down on your mortgage.[/quote]

I think the point he made above is that ARM resets will not be the same catalyst that the subprime resets were. Being upside down might be. It depends on the monthly carrying costs versus dumping and renting. If it costs someone a few extra hundred $ per month to stay in their house with their adjusted rate, they are likely to stay put instead of walking away until there is some other catalyst for them to leave (change in job status, etc).

Most prime or alt-A loans from the 2004 – 2005 time frame are at the 12-month LIBOR plus 2.25%.
The 12-month LIBOR is currently around 2%.
So, the fully-indexed rate would now be 4.25 to 4.5%

These would reset today at or below their original rate (which was typically in the 5-6% range).

[(former)FormerSanDiegan]

[quote=peterb]Unemployment rising to record levels, homes losing value and getting below mortgage amounts. And we’re only 1 year into this contraction. This is a deadly combination. Even if ARMs reset low now that the rates are quite low, it does little to mitigate job loss and being upside down on your mortgage.[/quote]

I think the point he made above is that ARM resets will not be the same catalyst that the subprime resets were. Being upside down might be. It depends on the monthly carrying costs versus dumping and renting. If it costs someone a few extra hundred $ per month to stay in their house with their adjusted rate, they are likely to stay put instead of walking away until there is some other catalyst for them to leave (change in job status, etc).

Most prime or alt-A loans from the 2004 – 2005 time frame are at the 12-month LIBOR plus 2.25%.
The 12-month LIBOR is currently around 2%.
So, the fully-indexed rate would now be 4.25 to 4.5%

These would reset today at or below their original rate (which was typically in the 5-6% range).

[(former)FormerSanDiegan]

[quote=peterb]Unemployment rising to record levels, homes losing value and getting below mortgage amounts. And we’re only 1 year into this contraction. This is a deadly combination. Even if ARMs reset low now that the rates are quite low, it does little to mitigate job loss and being upside down on your mortgage.[/quote]

I think the point he made above is that ARM resets will not be the same catalyst that the subprime resets were. Being upside down might be. It depends on the monthly carrying costs versus dumping and renting. If it costs someone a few extra hundred $ per month to stay in their house with their adjusted rate, they are likely to stay put instead of walking away until there is some other catalyst for them to leave (change in job status, etc).

Most prime or alt-A loans from the 2004 – 2005 time frame are at the 12-month LIBOR plus 2.25%.
The 12-month LIBOR is currently around 2%.
So, the fully-indexed rate would now be 4.25 to 4.5%

These would reset today at or below their original rate (which was typically in the 5-6% range).

[(former)FormerSanDiegan]

[quote=peterb]Unemployment rising to record levels, homes losing value and getting below mortgage amounts. And we’re only 1 year into this contraction. This is a deadly combination. Even if ARMs reset low now that the rates are quite low, it does little to mitigate job loss and being upside down on your mortgage.[/quote]

I think the point he made above is that ARM resets will not be the same catalyst that the subprime resets were. Being upside down might be. It depends on the monthly carrying costs versus dumping and renting. If it costs someone a few extra hundred $ per month to stay in their house with their adjusted rate, they are likely to stay put instead of walking away until there is some other catalyst for them to leave (change in job status, etc).

Most prime or alt-A loans from the 2004 – 2005 time frame are at the 12-month LIBOR plus 2.25%.
The 12-month LIBOR is currently around 2%.
So, the fully-indexed rate would now be 4.25 to 4.5%

These would reset today at or below their original rate (which was typically in the 5-6% range).

[(former)FormerSanDiegan]

[quote=Scarlett]what year’s nominal price?

1997 price adjusted for inflation is equivalent to which year’s nominal price (for the upper tier)?
[/quote]

I plugged Dec 1996 and Dec 2008 into the calculator below and I got an accumulated inflation of 32%.

So, take your 1997 price, multiply by 1.32 and that is what this guy is predicting. Of course, you’ll have to tack on your own guess for future 2009 and 2010 and 2011 inflation rates.

http://tinyurl.com/6r3bob

One item to note is that while the US in general was at a long-term trend line in 1997, Southern California was below it’s long-term trend line at that point.

[(former)FormerSanDiegan]

[quote=Scarlett]what year’s nominal price?

1997 price adjusted for inflation is equivalent to which year’s nominal price (for the upper tier)?
[/quote]

I plugged Dec 1996 and Dec 2008 into the calculator below and I got an accumulated inflation of 32%.

So, take your 1997 price, multiply by 1.32 and that is what this guy is predicting. Of course, you’ll have to tack on your own guess for future 2009 and 2010 and 2011 inflation rates.

http://tinyurl.com/6r3bob

One item to note is that while the US in general was at a long-term trend line in 1997, Southern California was below it’s long-term trend line at that point.

[(former)FormerSanDiegan]

[quote=Scarlett]what year’s nominal price?

1997 price adjusted for inflation is equivalent to which year’s nominal price (for the upper tier)?
[/quote]

I plugged Dec 1996 and Dec 2008 into the calculator below and I got an accumulated inflation of 32%.

So, take your 1997 price, multiply by 1.32 and that is what this guy is predicting. Of course, you’ll have to tack on your own guess for future 2009 and 2010 and 2011 inflation rates.

http://tinyurl.com/6r3bob

One item to note is that while the US in general was at a long-term trend line in 1997, Southern California was below it’s long-term trend line at that point.

[Author]

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