patrick.net

25%

10k additional down:

saves 3K in points (which is the ultimate reason)
Drops interest by 1/8 which is about 2.5%.
5.25% is not a great rate so putting more money down will help your rental yield

The reason is opposite fantastic's, you only put more down if there is a additional value, in this case, the ROI from the incremental is worth it to me. the drawback is the 10k is tied to this investment which is not liquid.

Considering your screenname says "Burritos" I can't really take this question seriously. No offense meant in any way.

ChrisV says

Considering your screenname says “Burritos” I can’t really take this question seriously. No offense meant in any way.

None taken. I throw my hat in the ring here and hopefully get some feedback. You know bounce ideas around, etc... Despite the vitriol that's sometimes thrown around here, I've gained some useful information on this board. This board was the reason why I didn't get a 3rd property in 2006. Unfortunately I wasn't reading this board in 2005 when I got the second property. No biggie, even though I've lost the equivalent of my down payment on the 2005 property, it's giving me a little positive cash flow. But now that prices have dropped 30-40%, I'm gonna take another bite at the apple.

No. Unless you think housing has bottomed. I strongly suspect not. My landlord offered our rental to us for $209K in Feb. Said otherwise he'd get $220K. Now its on the market for $165K. Likewise, I lost over $60K on a flip/rental. Finally let it go for $3k and the back taxes. So, go ahead and pull the trigger if you have lots of money to lose.
Otherwise, put down 0% or so as you'll probably want to walk away in 2015. I'm just saying this is a probable scenario. OTOH, the economy could recover and things could get better. LOL.

Since it is a serious question.... just remember the golden rule.

"Increased leverage on appreciating assets is not income."

I don't think it's the bottom, but to me it makes sense. The cap rate will 8.7% I'll be getting positive cash flow. I'm already getting positive cash flow on a smaller property in which I paid for more in 2005. Being 40, I'm getting kind of old. I don't want to be 80 when these things are paid off. Appreciation is icing on the cake I understand. For me this is a hedge against inflation more than an investment which we all agree will occur over the next 30 years.

I wouldn't call this as a "hedge against inflation" from an economics sense, because it is not a real hedge. But if you can buy it and it will be profitable to rent, it's not a bad idea. Add the numbers up for yourself, make sure you don't get into a liability you'll regret.

Best hedge against inflation are investments into companies that will be profitable regardless of inflation/deflation. You can even buy inflation indexed government papers if you prefer security.

I'll stress it again: “Increased leverage on appreciating assets/liabilities is not income.” So make sure it makes profit today, do not rely on inflation/deflation.

As far as your original question. You can always hand the money over to the bank, but you can never get it back. So if bank will confer a good enough benefit to you for paying more than 20% it might not be a bad idea, otherwise I'd probably prefer liquidity.

Also, kind of important, you have to accept the fact that there is no way to protect yourself 100% against inflation. If there is going to be inflation, people will be building houses, not buying them. Because during inflation labor today is cheap and tomorrow it's fruits are worth a lot less.

ChrisV says

I wouldn’t call this as a “hedge against inflation”

Of course it is. He borrows $150k from the bank on a fixed rate 30 year mortgage and pays back only, let's say $75k in real, inflation adjusted dollars.

As inflation occurrs, he gets to hike up the rent from $2000 per month to $4000 per month. Wow, he wins both ways as a financed landlord, the bank is the loser since they assumed all inflation risk by offering a fixed rate 30 year loan. The renters are also the losers since they're not protected against inflation.

Of course it's a great hedge against inflation, much better than your lousy suggestion for inflation indexed government paper.

Even if there is no inflation he's earning a lot more on the cashflow from the rental than on U.S. government TIPS, so he wins there too.

Mark_LA says

ChrisV says

I wouldn’t call this as a “hedge against inflation”

Of course it is. He borrows $150k from the bank on a fixed rate 30 year mortgage and pays back only, let’s say $75k in real, inflation adjusted dollars.
As inflation occurrs, he gets to hike up the rent from $2000 per month to $4000 per month. Wow, he wins both ways as a financed landlord, the bank is the loser since they assumed all inflation risk by offering a fixed rate 30 year loan.
Of course it’s a great hedge against inflation, much better then your lousy suggestion for inflation indexed government paper.

Mark, I don't think that you understand inflation. Just because it is a bigger number later does not mean it's actually worth it. My aunt bought a place she foreclosed for $650,000. If she waited for inflation to make that crap profitable she'd be long dead before it turned positive. (Add insurance, maintenance, upkeep, taxes, and loan... it was going to be profitable as we calculated in roughly ~68 years if it was still standing). She over-leveraged.

What goes up with inflation is not income. You have to add the numbers up to see if it makes sense.
If I have a dollar today and tomorrow it becomes 2 because of inflation I didn't earn anything. Net profit is 0. If I held it under the mattress than yes I would have lost half its value because it would be 50c. But I don't think Mr. Burrito is holding his cash under the mattress either. Does this make sense?

ChrisV says

I wouldn’t call this as a “hedge against inflation” from an economics sense, because it is not a real hedge. But if you can buy it and it will be profitable to rent, it’s not a bad idea. Add the numbers up for yourself, make sure you don’t get into a liability you’ll regret.
Best hedge against inflation are investments into companies that will be profitable regardless of inflation/deflation. You can even buy inflation indexed government papers if you prefer security.
I’ll stress it again: “Increased leverage on appreciating assets/liabilities is not income.” So make sure it makes profit today, do not rely on inflation/deflation.
As far as your original question. You can always hand the money over to the bank, but you can never get it back. So if bank will confer a good enough benefit to you for paying more than 20% it might not be a bad idea, otherwise I’d probably prefer liquidity.
Also, kind of important, you have to accept the fact that there is no way to protect yourself 100% against inflation. If there is going to be inflation, people will be building houses, not buying them. Because during inflation labor today is cheap and tomorrow it’s fruits are worth a lot less.

I think what you're talking about is hyperinflation. I don't think RE is a hedge against hyperinflation, though rent will go up in that event regardless of new building or not. Though I don't know how much more building you can do cause raw matrieal will become even that much more expensive. No, I'm just talking about a hedge on routine expected inflation. My portfolio holds a 5 percent position in silver/gold/agri commodities. That's my insurance against hyperinflation.

ChrisV says

If I have a dollar today and tomorrow it becomes 2 because of inflation I didn’t earn anything. Net profit is 0. If I held it under the mattress than yes I would have lost half its value because it would be 50c. But I don’t think Mr. Burrito is holding his cash under the mattress either. Does this make sense?

You make absolutely no sense. You're not understanding that he's buying a property that has positive cash-flow from day 1. The fact that your Aunt was a bubble buyer who purchased a property that never had positive cash-flow is immaterial. Inflation or price appreciation due to general population income gains from productivity gains, if they occurr, are just icing on the cake. From day 1, he's getting a higher return from this than he would from the U.S. Government TIPS that you suggested.

Let me make it simple for you:

On the loan:
1. He borrows $1 from the bank.
2. $1 becomes $2.
3. He pays back the bank their $1, (he gains the $1 that the bank loses due to inflation).

On the rent:
1. He rents for $1 per month.
2. $1 becomes $2.
3. He rents for $2 per month (net gain due to inflation is $0, he just breaks even).

You're correct in saying net profit due to inflation is $0 on the rent side, but are failing to acknowledge the $1 that he gained on the loan, because the bank lost $1 thanks to them assuming all inflation risk by offering 30 year fixed rate loans.

In addition, he was making a profit on the rent from day one (positive cash-flow), so he'll continue to be able to make a profit, in real inflation-adjusted dollars, as he adjusts rents to account for inflation in the future.

burritos says

ChrisV says

I wouldn’t call this as a “hedge against inflation” from an economics sense, because it is not a real hedge. But if you can buy it and it will be profitable to rent, it’s not a bad idea. Add the numbers up for yourself, make sure you don’t get into a liability you’ll regret.

Best hedge against inflation are investments into companies that will be profitable regardless of inflation/deflation. You can even buy inflation indexed government papers if you prefer security.

I’ll stress it again: “Increased leverage on appreciating assets/liabilities is not income.” So make sure it makes profit today, do not rely on inflation/deflation.

As far as your original question. You can always hand the money over to the bank, but you can never get it back. So if bank will confer a good enough benefit to you for paying more than 20% it might not be a bad idea, otherwise I’d probably prefer liquidity.

Also, kind of important, you have to accept the fact that there is no way to protect yourself 100% against inflation. If there is going to be inflation, people will be building houses, not buying them. Because during inflation labor today is cheap and tomorrow it’s fruits are worth a lot less.

I think what you’re talking about is hyperinflation. I don’t think RE is a hedge against hyperinflation, though rent will go up in that event regardless of new building or not. Though I don’t know how much more building you can do cause raw matrieal will become even that much more expensive. No, I’m just talking about a hedge on routine expected inflation. My portfolio holds a 5 percent position in silver/gold/agri commodities. That’s my insurance against hyperinflation.

Sort of.

Just make sure you are have income from the start or your rental incomes are close enough to a point where you are not hemorrhaging money. Don't rely on inflation/deflation to be positive, you'll over-leverage if you do. If you are positive early on, you should be all right.

I just noticed you live in NP. My wife and I go there all the time, Sycamore Canyons is really beautiful.

how can you purchase in your area and make money every month on rent? Oh wait thats right another slum lord. wonderful. Also I'd sure love to here some of these tails a year later after the buy. I must admit it all sounds so f##king sexy talking all your fancy numbers and stuff. The Bankers must love you guys.

ChrisV says

burritos says

ChrisV says

I wouldn’t call this as a “hedge against inflation” from an economics sense, because it is not a real hedge. But if you can buy it and it will be profitable to rent, it’s not a bad idea. Add the numbers up for yourself, make sure you don’t get into a liability you’ll regret.
Best hedge against inflation are investments into companies that will be profitable regardless of inflation/deflation. You can even buy inflation indexed government papers if you prefer security.
I’ll stress it again: “Increased leverage on appreciating assets/liabilities is not income.” So make sure it makes profit today, do not rely on inflation/deflation.
As far as your original question. You can always hand the money over to the bank, but you can never get it back. So if bank will confer a good enough benefit to you for paying more than 20% it might not be a bad idea, otherwise I’d probably prefer liquidity.
Also, kind of important, you have to accept the fact that there is no way to protect yourself 100% against inflation. If there is going to be inflation, people will be building houses, not buying them. Because during inflation labor today is cheap and tomorrow it’s fruits are worth a lot less.

I think what you’re talking about is hyperinflation. I don’t think RE is a hedge against hyperinflation, though rent will go up in that event regardless of new building or not. Though I don’t know how much more building you can do cause raw matrieal will become even that much more expensive. No, I’m just talking about a hedge on routine expected inflation. My portfolio holds a 5 percent position in silver/gold/agri commodities. That’s my insurance against hyperinflation.

Sort of.
Just make sure you are have income from the start or your rental incomes are close enough to a point where you are not hemorrhaging money. Don’t rely on inflation/deflation to be positive, you’ll over-leverage if you do. If you are positive early on, you should be all right.
I just noticed you live in NP. My wife and I go there all the time, Sycamore Canyons is really beautiful.

You think the bank would loan me the money if I couldn't cover?

Yes. I also love Sycamore Canyon. I live about a mile and a half from there. I mountain bike through there every chance I get.

Katy Perry says

how can you purchase in your area and make money every month on rent, Oh wait thats right another slum lord. wonderful.

I'm not purchasing in my area. I'm purchasing in the Puget sound. The home I'm buying is was built in 2006. My property manager fixes everything within a day. I rent out properties to people who could otherwise not afford buy. I don't think this makes me a slum lord. I think it's a win win situation.

burritos says

I’m not purchasing in my area. I’m purchasing in the Puget sound. The home I’m buying is was built in 2006. My property manager fixes everything within a day. I rent out properties to people who could otherwise not afford buy. I don’t think this makes me a slum lord. I think it’s a win win situation.

funny how you come to this site.

maxweber says

No. Unless you think housing has bottomed. I strongly suspect not. My landlord offered our rental to us for $209K in Feb. Said otherwise he’d get $220K. Now its on the market for $165K. Likewise, I lost over $60K on a flip/rental. Finally let it go for $3k and the back taxes. So, go ahead and pull the trigger if you have lots of money to lose.

Otherwise, put down 0% or so as you’ll probably want to walk away in 2015. I’m just saying this is a probable scenario. OTOH, the economy could recover and things could get better. LOL.

5 months ago my tenant offered to buy my rental property for the price I purchased at. He said if I didn't sell, he'd move out and buy something similar. I said no. 2 months ago, he renewed his lease. Go figure.

Katy Perry says

burritos says

I’m not purchasing in my area. I’m purchasing in the Puget sound. The home I’m buying is was built in 2006. My property manager fixes everything within a day. I rent out properties to people who could otherwise not afford buy. I don’t think this makes me a slum lord. I think it’s a win win situation.

funny how you come to this site.

Why so?

burritos says

You think the bank would loan me the money if I couldn’t cover?

What I'm saying, they will loan you money as long as they make money from the loan, they don't care if you make money though.

Banks own a lot of homes right now, if they could make money off these themselves they would do it. Instead they are selling them. And it's not like banks don't have access to Federal Reserve and Senators, they do know where the economy is headed.

burritos says

5 months ago my tenant offered to buy my rental property for the price I purchased at. He said if I didn’t sell, he’d move out and buy something similar. I said no. 2 months ago, he renewed his lease. Go figure.

This will only be impressive IMO if you're around singing the same song 1-2 years from now.
also a tenants lack of perceived options is nothing really to brag about bro.

One year ago today we wanted a new lease. my landlady said "OK but we have to raise your rent " from $1650 to $1800 ( built in 2002 4/3 2800sq shit box in Riverside Ca.) I said I'll think about it. haven't heard from her and I'm still month to month. guess we're both lazy? sigh.

Sorry didn't mean to brag. I want people to tell me what I'm doing is wrong. That way I can learn stuff.

So we've reached mutual acceptance. The purchase and sales agreement contract has been executed.(I'm assuming that's both the same thing). They've cashed my earnest money. Now my realtor is going to hire an inspector. It's kind of exciting I guess.

You seem very trusting of this realtor friend of yours. Is he your good friend that you trust?

How do you know this inspector isn't giving kickbacks? Just make sure that you get the best price/inspection you can.

Also your purchase and downpayment are "CONTINGENT" on succesful inspection right?

Chris_In_LosAngeles says

You seem very trusting of this realtor friend of yours. Is he your good friend that you trust?
How do you know this inspector isn’t giving kickbacks? Just make sure that you get the best price/inspection you can.
Also your purchase and downpayment are “CONTINGENT” on succesful inspection right?

Not a friend of mine. But I feel like I can trust her. I chose her via the internet in 2003. Since I'm in Southern Cal and was/am buying in the Puget Sound area, I need a trustworthy point person. This is the third property we've purchased through her. We find her due diligence very thorough. I can't be sure the inspector isn't getting kickbacks, but in my dealings with her she doesn't seem dishonest.

I feel like we're getting a pretty good price. Could I have negotiated for a few more bucks? I guess so. But it's been 8 months since I started and honestly, I just want to get a property going. My realtor actually recommended that we wait for another larger REO for around the same price that was becoming available, but for me, i didn't want to chance losing this one. I've lost out on 3 earlier.

The purchase is contingent on a successful inspection. If there are any major defects, I could pull out, but since it was built in 2006, I think it's unlikely.

Inspection is set for 8AM tomorrow.

Please, keep us posted w/ your inspection result.

seaside says

Please, keep us posted w/ your inspection result.

Need a couple of new light swiches, dishwasher not secured, and the furnace is not working(wtf?). House is only 4 years old, but now we gotta get a HVAC guy out there.

My mortgage broker is now stating that my loan options is 20% down will cost 2.875%(1% origination +1.875% discount point). That'll get me a 5.75% 30 year fix. A 25% down will cost 2%(1% orig.+1% origination). That'll get a 5.5% 30 year fix. Now I'm leaning toward the 20% down payment. I'll have to pay an extra $1700 as opposed to bringing an extra 10k. Here's the actualy email:

Here is where we are on rates based on discount points and down payment

On a 30 year fixed investment property bringing in 20% down($39200), we are looking at an interest rate of 5.75%,costing the standard 1% origination and 1.875% discount points ($2940) for the cost of that rate. P and I payment of $915.04.

The same scenario bringing in 25% ($49000) we are looking at an interest rate of 5.5% with the 1% origination and 1% discount points ($1470) P and I payment $834.65. Let me know your thoughts. Might be better to pay the discount points rather than bring in another $10000 plus the smaller discount. Let me know your thoughts

What do you all think? If I pay an extra 10k on the down payment, then I save essentially $1470 in extra fees. I also buy myself a slightly better rate plus $964 a year(difference in the 2 mortgage payments) in extra cashflow. What do you think?