Articles filed under 'Real Estate'
So Kim and I are in the process of buying a house. We’re going through a lot and learning tons of stuff that would be great to share with all of you.
Perhaps more importantly, there are a bunch of folks smarter than me who occasionally read this. So I’m hoping we can get some good advice here and there.
But to start I’ll just try to give a little background in this post before I get into some more specific topics later. For those who don’t know, I do web development with my wife Kim. We work for our own company Stranger Studios and work from home (our apartment right now). This is all going very well. Work is good. Making your own hours is great. Spending every minute of every day with the woman I love is truly incredible. I doubt most couples could do it, but Kim and I pull it off with style.
Life is good. Ok.
Because we work from home, we could live anywhere. And we’ve been conscious of this. We’ve considered a number of places to settle down for the next 5 years or so: Arizona, New Mexico, Mexico Proper, San Francisco, Napa, Oregon, Idaho. One fun game we had was to open up Google Maps and just zoom into a random spot on the map. We’d look for lakes, rivers, small towns, or anything else that looked interesting to live near.
My father-in-law is nearing retirement and looking to get into some real estate plays to diversify his investments. I’ve already referred him to The Millionaire Maker: Act, Think, and Make Money the Way the Wealthy Do and Start Late, Finish Rich: A No-Fail Plan for Achieving Financial Freedom at Any Age (Finish Rich Book Series), both great books on general wealth-building.
I was hoping someone out there might point us towards some good online resources though, especially ones dealing with real estate investing in particular. Thanks for the help. If we get some good info, I’ll do a round up later.
Wednesday, Oct. 10, 2007
by Jason
The consumer is tapped out. After consistent 25 basis point increases to the Federal Funds Rate, we are finally starting to see the effects on the stock market.
Yesterday morning we saw three headlines that caught my attention. The first detailed Sears’ guidance for this quarter – a reduction from $2.12 to from $1.06 to $1.32 per share. These revisions are, at best, a 30% reduction and, at worst, a 50% reduction from their previous optimistic estimates.
Notably, declines were across all categories. If you follow the theory that the consumer is on thin ice, then it is hardly surprising to find big ticket items are not being purchased. Sears is having trouble selling new stainless steel fridges and widescreen TVs because consumers do not feel confident about their financial situation. The only sector that wasn’t hit as hard was women’s apparel and footwear – suggesting stressed housewives may be engaging in retail therapy.
One of the things that I do to rationalize positions is take the opposite side and create my own debate. I often do this when my head says one thing, but my gut feeling is saying something else. So for this blog entry I am going to spill my guts and hope somebody wants to add their own two cents.
Ok, here is my problem that my gut keeps telling me, and its from from a comment Greenspan made.
Alan Greenspan said the housing downturn is more of a problem than credit quality and said the lending worries would be fixed if house prices rose 10 per cent.
Greenspan has been saying quite a few things lately with some things being that we may have a recession in the fall. I was reading in Business Week Greenspan is behaving the way he is because Bernake can’t tell the truth.
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Saturday, Mar. 17, 2007
by Christian
My original version of this blog entry has been deleted because I did find some errors in my spreadsheet. I saw them when I was explaining what I thought I had found while doing my calculations. The new calculations are not as I thought they were, but still some interesting things can be extracted from it.
I was reading a blog entry where one couple in Seattle had a hard time trying to find a place where they could take out a mortgage for 15 years. One woman in another blog commented that 15 years is a bad idea, and better would be a 30 year mortgage because it lets you buy more house.
Comments like, “ooh better get a 30 year mortgage than 15 year mortgage” raise my hackles! I don’t believe such comments and decided once and for all to figure out what the numbers are.
There are two variations to this scheme:
1) Get the same mortgage, but invest the monies
2) Get a bigger monies for the same amount that you would pay monthly.
Ok, so I created an Excel spreadsheet that anybody can download to verify if I am right or wrong. Folks, please verify my spreadsheet because I want to know if I accounted for everything, because I found out something very very interesting.
I made the following assumptions for variation 1:
- 300,000 mortgage
- 30 year mortgage at current rates (5.75%)
- 15 year mortgage at current rates (5.52%)
- Interest only mortgage at current rates (5.53%)
- Renting at 2,000 per month
- Income of 90,000 with tax rate of 25% with interest paid deducted from yearly income.
- 1.5% of 300,000 charge per year for maintenance, etc
- 9% return on alternative investments
- 5% return on the price of housing
- The difference in monthly payments are invested into alternative funds
For variation 2 I made the following assumptions:
- 300,000 mortgage for the 15 years
- 530,000 mortgage for the interest only
- 420,000 mortgage for the 30 years
- 30 year mortgage at current rates (5.75%)
- 15 year mortgage at current rates (5.52%)
- Interest only mortgage at current rates (5.53%)
- Renting at 2,000 per month
- Income of 90,000 with tax rate of 25% with interest paid deducted from yearly income.
- 1.5% for yearly fees of the original price of the property.
- 9% return on alternative investments
- 5% return on the price of housing
- The difference in monthly payments are invested into alternative funds
Running the numbers I decided to sell after 10 years. At that time I decided that I would buy another house using the same prices.
Here is what I found for variation 1:
It does pay to get an interest only mortgage and invest the monies. At year 10 you pocket with the interest only 374,000, and the 15 year mortgage 323,000. This means you get 50,000 more by investing. However, this implies that you will invest the monies and get 9%. Granted both returns I searched and found on the Internet so they are averages over a time span of about 35 years.
If you only invested half the monies that the interest only gives you then you will be at a disadvantage. If you invest none of the monies then you will be at a massive disadvantage. In other words you will see the same amount less per month whether you use interest only or 15 year mortgage.
The tax advantage of the interest only vs the 15 year mortgage in year 10 is barely 200 USD, which in my opinion is nothing to write home about.
Here is what I found for variation 2:
Variation 1 was not what the original blogger was talking about. Variation 2 where you buy more house for your money was what the original blogger talked about. This means you would be investing nothing, and doing the numbers for this variation the results are not good.
Yes you can afford more house eg 530,000 vs 300,000, but after ten years it means you pocket less money 292,000 vs the 15 year mortgage 322,000. What I found particularly interesting about this variation is the associated risk. Your tax advantage in year 10 is greater (400 USD), but you have more costs since a more expensive house has higher taxes, etc. Additionally if you purchase a higher priced house there is a greater liklihood that you will not be able to sell your house.
Conclusion:
In my original blog entry, which I deleted, I said that the money you pocket is greater by paying off the mortgage. When I fixed my calculations for Variation 1 it was not the case, but it was the case for Variation 2. Though, what is extremely important to realize is that interest only or long term mortgages only apply if in the long term the markets and housing prices go up. If during the 10 year period you don’t get the required returns you are buggered. For example I did the calculations when both the investments and housing prices only increased by a mere 2% per year over a 10 year period. At that point the money that you pocket goes way up for the 15 year mortgage, and for the others you are left straddling quite a bit of debt.
So in the end it might cost more per month, but it is better to get a 15 year mortgage…
Tuesday, Feb. 20, 2007
by Christian
I was going to write an individual post reviewing in depth each of the six books listed below. But since I’m a bad citizen and have given in to the fact that I will never find enough time to do so, I’m going to give a quick review for each of them here. So in the order I’ve read them…
Included are reviews of:
On Saturday afternoon, a friend of mine called me and said “You don’t have to watch the Illinois game.” I said, “They lost right.” He said, “They were up 25-7 and the quarterback had 175 yards passing in the first half. He ended up with 190 yards passing for the game because they kept running the ball to milk the clock.” I said. “They were playing not to lose.”
I think all fans hate it when teams play not to lose. Every sports fan wants their team to continue pouring it on, go for the jugular, forget the prevent defense!
What is a cap rate? A cap rate (or capitalization rate) is the net operating income divided by the price of a property. If you have a $100,000 property and its net operating income is $10,000 the cap rate for this property is 10%.
What does this mean to you? How have cap rates affected the current real estate boom?
Real estate investors have become a cliché during the past 3-4 years. It seems like everyone you talk to is a real estate investor or knows someone who is. What makes real estate investing so popular? In the past few years you could do no wrong with real estate. With profits in the five and six figure ranges, one profitable real estate deal would exceed most people’s yearly pay.
An ARM can be a huge money saver, or a time bomb. Unfortunately, there are a lot of time bombs out there.
