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To Buy or Not to Buy; Comments please...
Old 06-30-2008, 12:27 PM   #1
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To Buy or Not to Buy; Comments please...

I know this is vague... info but let me know what u think anyway. thanks

this house sold for $499.000.00 3 years agao i might be able
to get it for $379,000.00.

Condition: almost spanking new
Tax: $9000.00/year
Insurance: $1500/year
Upkeep and maintenance: $3500/year
Rental: $1500/month + headache...

The house is huge so, anyone move out i would need $5000.00
of repair and painting...


to Buy or Not to Buy??

assume, we can finance 6.75% for 30yr, 20% down or pay cash.

enuff
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Old 06-30-2008, 12:53 PM   #2
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I am no expert, but basically the vast majority of the rent you'll receive will go to pay for taxes, insurance, maintenance and other costs (I am assuming you buy the house outright because otherwise you will start running into negative cash flow and that would be a big no-no for me). So everything pretty much rides on capital appreciation and that depends heavily on location. Since you don't say where the house is located and how long you plan on keeping it, I can't tell you whether I think it's a good buy or not.
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Old 06-30-2008, 12:55 PM   #3
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Quote:
Originally Posted by Enuff2Eat View Post
this house sold for $499.000.00 3 years agao i might be able to get it for $379,000.00.

Condition: almost spanking new
Tax: $9000.00/year
Insurance: $1500/year
Upkeep and maintenance: $3500/year
Rental: $1500/month + headache...

The house is huge so, anyone move out i would need $5000.00
of repair and painting...

to Buy or Not to Buy??

assume, we can finance 6.75% for 30yr, 20% down or pay cash.

enuff
Let's see -- $18K in (assuming 100% occupancy), $14K out (by your own estimates). That's a theoretical $4,000 annual return on a $379K house.

Ignoring the long-term appreciation potential, that's maybe a 1.1% return on investment. And you financed, you would have VERY negative cash flow as you're probably looking at more than a $2,000 monthly payment even with 20% down. Plus the hassles of being a landlord.

Unless there's something I'm missing, I smell a strong "don't buy."
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Old 06-30-2008, 12:57 PM   #4
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With that type of expenses with the minimal amounts of revenue, you would DEFINITELY, as stated above, be in a negative cash flow situation, even assuming 100% occupancy. Not knowing where the house is, it is tough to speculate, but on a more macroeconomic level, with the real estate market the way it is, I would not wanted to be tied up in any negative cash flow situation, as it could turn into even more losses and headaches and sleepless nights.
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Old 06-30-2008, 12:58 PM   #5
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thanks dreamer, the house is located at outside (whitemarsh) of baltimore. i plan to keep it for about 5 years or so. what attract to me was the equity in the house, yes over $100,000.00 in equity. One of the family friends lives about 6 doors down and told me about the property. he paid $560,000.00 for his, the house that i am looking at is smaller and smaller lot.



enuff
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Old 06-30-2008, 01:03 PM   #6
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Quote:
Originally Posted by Enuff2Eat View Post

this house sold for $499.000.00 3 years agao i might be able
to get it for $379,000.00.
Is the only reason you're interested because someone paid more at an earlier time? I would vote not to buy in a market that experiences over 20% negative value swings especially when you're negative cash flow by such a huge amount unless you anticipate a big upswing.
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Old 06-30-2008, 01:09 PM   #7
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Originally Posted by Enuff2Eat View Post
thanks dreamer, the house is located at outside (whitemarsh) of baltimore. i plan to keep it for about 5 years or so. what attract to me was the equity in the house, yes over $100,000.00 in equity. One of the family friends lives about 6 doors down and told me about the property. he paid $560,000.00 for his, the house that i am looking at is smaller and smaller lot.



enuff
Then I go with don't buy. The DC area had a pretty hot RE market and it will probably come back but five years is too short.

If the true market value for this house was $480K, it would not sell for $380K. So I would not be so confident about having 100K in equity in that house.
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Old 06-30-2008, 01:12 PM   #8
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Originally Posted by Enuff2Eat View Post
thanks dreamer, the house is located at outside (whitemarsh) of baltimore. i plan to keep it for about 5 years or so. what attract to me was the equity in the house, yes over $100,000.00 in equity. One of the family friends lives about 6 doors down and told me about the property. he paid $560,000.00 for his, the house that i am looking at is smaller and smaller lot.

enuff
There isn't $100,000 of equity. Equity is the difference between what you owe and the market value of the property. The property is not worth $500,000 if you can get it for $380,000.

It sounds like you want to buy it. What could this house rent for?
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Old 06-30-2008, 01:18 PM   #9
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IMO I would not "bite". From what you say I assume this "family friends" is their (former or current owners) friend, not yours? Who owns this house? Why is it going "so cheap"? As has been said you would be "upside down" when you purchase it with a mortgage; without a mortgage you would be giving up over $18,000 of annual income @ a reasonable 5% return. IMHO unless you can get AT LEAST a 1% monthly return in rent ($3,790 per month) I do not see how it would work out very well. I assume you plan to sell at a BIG GAIN in 5 years - which may or MAY not be a reasonable ASSUMPTION. A set of CD's would give you about a $100,000 return (excluding taxes AND ignoring compounding). I also believe you are drastically overstating the equity - if this is an "arms length" transaction you will not have equity beyond the purchase price on day one; only the satisfaction of getting a "good deal" by purchasing, it "below the market price" which may only be realized IF you sell it.
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Old 06-30-2008, 02:41 PM   #10
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IMO I would not "bite". From what you say I assume this "family friends" is their (former or current owners) friend, not yours? Who owns this house? Why is it going "so cheap"? As has been said you would be "upside down" when you purchase it with a mortgage; without a mortgage you would be giving up over $18,000 of annual income @ a reasonable 5% return. IMHO unless you can get AT LEAST a 1% monthly return in rent ($3,790 per month) I do not see how it would work out very well. I assume you plan to sell at a BIG GAIN in 5 years - which may or MAY not be a reasonable ASSUMPTION. A set of CD's would give you about a $100,000 return (excluding taxes AND ignoring compounding). I also believe you are drastically overstating the equity - if this is an "arms length" transaction you will not have equity beyond the purchase price on day one; only the satisfaction of getting a "good deal" by purchasing, it "below the market price" which may only be realized IF you sell it.
OAG, r u saying that i need approximately $45480.00/year in rental for me to make it worthwhile?? aren't that 12% return minus expenses... that't too good to be true.

most of u saying that it's not real equity since the house is what's its worth today. i agree, but the fact is that everybody else in the neighborhood pay much higher price, to me it's somewhat of a "legit" equity.

the story i heard is that the house was forclosured, sold at auction nobody bought it and then the bank listed for $399k several months and the agent told me that it would sell for $379... is it accurate info? i doubt it.
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Old 06-30-2008, 03:30 PM   #11
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As I said that is an old rule of thumb and it worked pretty well - I managed about 40 rentals in this range (a long time ago). Pay $100,000 for a rental the rent would be $1,000 a month - it was reasonable and after PITI (Principal, Interest, Taxes, and Insurance) BEFORE repairs, vacancies, depreciation most would be barely positive (cash flow) income (which could be charged to "lost opportunity costs"). I agree today at these prices it may not be reasonable to expect (in your example) 1% a month which makes these deals IMHO tough to work (remember you are giving up MORE than $1,500 a MONTH in "lost opportunity costs" on a cash deal). Another point on this REO is that the RE agent is getiing 3-6% of the sales price also and I am sure he (and his supervising Broker) has an exclusive contract which means you MUST deal through him or her - you can't deal directly with the bank. It would have been nice to know what the bank actually has in the property and how much of a "haircut" they would take but that is hindsight and the only way to know that was to be at the court house on the auction.
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Old 06-30-2008, 03:45 PM   #12
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the story i heard is that the house was forclosured, sold at auction nobody bought it and then the bank listed for $399k several months and the agent told me that it would sell for $379... is it accurate info? i doubt it.
There is no hidden equity in the house. Just because it sold for $499k a year ago and you can get it for $379k doesn't mean there's some hidden $100k to be had... trust me, if there was, the agent would have bought it already.

It's hard to say that $379k is fair market value. Fair market value is established when a willing buyer and seller enter into contract when neither is under duress... not sure if the bank is under duress or not .

Tax: $9000.00/year
Insurance: $1500/year
Upkeep and maintenance: $3500/year
Vacancy rate (you didn't account for this, but it might be wise to): 5%

So, $3,100 a year minus the mortgage.

Or, all-cash. $3,100 a year straight. Opportunity cost on $350k (assume you can beat the seller down another $29k, wouldn't think that'd be a problem). Personally, I wouldn't do it, but if you go forward, just keep a level head about what you think a fair market price is for the house. And, what the house sold for at the market peak is pretty much irrelevant in that thought process as far as I'm concerned.
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Old 06-30-2008, 03:57 PM   #13
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OAG, r u saying that i need approximately $45480.00/year in rental for me to make it worthwhile?? aren't that 12% return minus expenses... that't too good to be true.

most of u saying that it's not real equity since the house is what's its worth today. i agree, but the fact is that everybody else in the neighborhood pay much higher price, to me it's somewhat of a "legit" equity.

the story i heard is that the house was forclosured, sold at auction nobody bought it and then the bank listed for $399k several months and the agent told me that it would sell for $379... is it accurate info? i doubt it.
It doesn't matter what everyone else in the neighborhood paid for their houses in the past. The only thing that matters is what it is worth now. Also, I think that real estate hasn't bottomed out yet. If you decide to proceed, I would recommend that you disregard the realtor's comments and knock about another $100k off your offer price. Don't do this unless you are serious because there is a pretty good chance you might get it. Most banks are hurting bad and need cash (read the thread about neighbors getting bailed out by bank). My recommendation is not to do it.
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Old 06-30-2008, 03:57 PM   #14
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Clearly not a good idea to purchase, at least at 379k. The heavy negative cashflow should be enough, but on top of that, you only want to hold it for 5 years, which is way too short a time period for making a RE purchase without taking on a huge amount of risk. Also, large houses are pretty much the least ideal for renting purposes, they have large overheads and there is only a small market for renting them.
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Old 06-30-2008, 03:59 PM   #15
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My property taxes and mortgage combined are about the same as the taxes on that bad boy....
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Old 06-30-2008, 05:42 PM   #16
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Quote:
Originally Posted by Enuff2Eat View Post
I know this is vague... info but let me know what u think anyway. thanks

this house sold for $499.000.00 3 years agao i might be able
to get it for $379,000.00.

Condition: almost spanking new
Tax: $9000.00/year
Insurance: $1500/year
Upkeep and maintenance: $3500/year
Rental: $1500/month + headache...

The house is huge so, anyone move out i would need $5000.00
of repair and painting...


to Buy or Not to Buy??

assume, we can finance 6.75% for 30yr, 20% down or pay cash.

enuff

I had to do some calculations on a rental property, so I'm just plugging in your numbers here.

Your NOI (net operating income) is

gross rent 18,000
- insurance 1,500
- real estate tax 9,000
- maintenance 3,500
- 1 month vacancy 1,500 Note 1
= NOI 2,500

Note 1: You have to assume some vacancy between tenants

Your income tax on the rental income

NOI 2,500
- depreciation 13,781 Note 2
- interest 20,360 Note 3
= taxable income (31,641)

income tax payable 0

Note 2: 379k over 27.5 straight line according to MACRS. You can also use the MACRS table in publication 527 page 14.

Note 3: 303k loan at 6.75% with 20% down


Your cash flow after tax

NOI 2,500
- debt service 23,591
- income tax payable 0
= CFAT (21,091)


Do you want sustain this much negative cash flow per year?

I have some questions on whether a real estate rental loss can be used to offset other passive gains. Tryan and others who have many rentals can jump in. I got kind of dizzy after reading publication 925's at-risk rules.

I also see on the IRS web site that vacancy loss cannot be deducted, but for this particular case, it doesn't matter because your depreciation and interest payments are much larger than your NOI.
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Old 06-30-2008, 09:00 PM   #17
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I had to do some calculations on a rental property, so I'm just plugging in your numbers here.

Your NOI (net operating income) is

gross rent 18,000
- insurance 1,500
- real estate tax 9,000
- maintenance 3,500
- 1 month vacancy 1,500 Note 1
= NOI 2,500

Note 1: You have to assume some vacancy between tenants

Your income tax on the rental income

NOI 2,500
- depreciation 13,781 Note 2
- interest 20,360 Note 3
= taxable income (31,641)

income tax payable 0

Note 2: 379k over 27.5 straight line according to MACRS. You can also use the MACRS table in publication 527 page 14.

Note 3: 303k loan at 6.75% with 20% down


Your cash flow after tax

NOI 2,500
- debt service 23,591
- income tax payable 0
= CFAT (21,091)


Do you want sustain this much negative cash flow per year?

I have some questions on whether a real estate rental loss can be used to offset other passive gains. Tryan and others who have many rentals can jump in. I got kind of dizzy after reading publication 925's at-risk rules.

I also see on the IRS web site that vacancy loss cannot be deducted, but for this particular case, it doesn't matter because your depreciation and interest payments are much larger than your NOI.
thanks buns for the detail explanation. I feel that the neighbor paying $100,000.00 more for the same property. Ain't I technically $100,000.00 ahead? Now, some of u suggested that i offer another $50,000.00 lower than the asking price and IF it get accepted. Wouldn't i be the Most Hated New Kid on the block? I can not see why wouldn't anyone jump at it??

What do u guys think if i sell my current house and move into this one? Current house worth ~300k.

enuff
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Old 07-01-2008, 01:21 AM   #18
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enuff,
....Some of the folks in this thread seem pretty savvy about real estate as investments and they are telling you that houses in that neighborhood are not worth what they paid for them in the last few years. Houses all over the country have lost value over the last year or two. Real estate will probably come back but it may go down for another 6+ months before it comes back up and even then will likely come back up slower than it went up in the period from 2000 to 2005. The neighbors to that house would hate you a lot more for renting it out than they would for the price you paid for it. If I was looking at buying rentals and all the work and headache associated with them I would consider really cheap ones that might be able to generate the 1% per month that OAG mentioned.
Jeff
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Old 07-01-2008, 06:46 AM   #19
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I know this is vague... info but let me know what u think anyway.
The numbers don't work at $1500 per month rent. I wouldn't touch it with a ten-foot pole at that price. Also, prices are still falling up there and you will need to hold it for longer than five years. I agree with the other posters who pointed out that what the neighbor paid for his house is irrelevant. If you really, really want the house, I'd offer the bank $250k for it and they can take it or leave it.
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Old 07-01-2008, 08:37 AM   #20
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Ain't I technically $100,000.00 ahead?

----

Read all of the above explanations again. The answer is NO, and won't change, no matter how many times you ask.

I live in the DC metro area and have seen the drop in prices - our market was way overinflated for years and probably still is. Your time frame is too short to hope for significant appreciation in market value, and your cash flow will be significantly negative in the meantime.

As for moving into it, well, that depends on what you want. Why you would want to do it. Is your current house not to your liking? New house in better neighborhood? Etc. And, in this market, would your house really sell for $300K, or less?
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