patrick.net

Show me on my calculator:

http://patrick.net/calculator.php

Sounds too optimistic.

calculator says actual property value is 1.6m
and 'ok to buy'. not sure what intrest rates you put on that link.
one large factor is that I AM NOT MAKING PRINCIPAL PAYMENTS which I believe are for chumps. That would add 1k a month to the payment and its not a tax write off. also zero HOA on this house (hoa is not a write off)

Also I believe getting a 30 year fixed at a higher rate (it would be liek 3.6% for me) is for chumps.

IO ARMS are the way to go since if rates rise or the payment adjusts up you can always get a loan mod - they are doing 2% intrest only loans with 100k principal reductions by the million right now. That is not likely to change. If I were more daring I would quit my job, get a low paying job, get a loan mod, then get a better paying job but that is too much ifs lined up for me.

bubblesitter says

Sounds too optimistic.

what is optimistic? I locked the loan in already.
the rent might be optimistic. who is paying 4k in rent? i guess people who own horses or want a 5 bedroom custom home with the big tits kitchen remodel.

"I AM NOT MAKING PRINCIPAL PAYMENTS.... IO ARMS are the way to go"

Zombie needs to eat more brains.

That does make them smarter right?

No? Oh well.

Principal payments in a loan are stupid for two reasons:

1. If prices tank and you walk away you lose DP+all principal payments made
2. Most people just get a heloc anyway after a number of years to buy a dumb car or send kids to school.
3. the principal payment will blow up your debt to income ratio which limits your acquistion of other loans/mortgages. (we are year one of the next up cycle of real estate, time to buy quality properties located well at a good price - if you can find them, not easy)
4.If you think you can pay off a gigantic 500k+ loan rotsa ruck buddy, i am relying on future price appreciation then selling to make money.

PockyClipsNow says

the rent might be optimistic.

Yes. That's what I mean...come on 4K continuous flow? I doubt it...

I also seriously doubt the $4K rent for an $875K place. Even around here you'd pay only $3K for that place.

Even at $4K it doesn't work though, unless you put in unrealistic appreciation assumptions, as bubble buyers are wont to do:

http://patrick.net/calculator.php?uaddr=%2C+&rent=4000&price=875000

Congrats Pocky. Sounds like a beautiful house. I'm jealous. :)

Bubble sitting is a tough game. My friend sold in 2002 to bubble sit and had a really hard time watching prices double when he was betting for a crash. Only this year did he buy back in..... at 2003 or 2004 prices. Basically a complete waste of 10 years unless he couuld 'save money' or get stock gains with his wad during that time.

Heres another intresting detail. There was a bidding war.

I won.

How? I used listing agent to represent me, other bidder had a paid chaeffuer who wanted 2.5% of the deal.

Also there is a granny flat attached with sep entrance, thus the 3800 to 4200 in rent estimate might be correct and its in the good schools(code word) area.

PockyClipsNow says

total pmt after tax write off = $1992

The total payment seems optimistic to me. What about maintenance? You mentioned fire insurance, but what about flood or earthquake insurance? Does the mortgage payment include mortgage insurance?

PockyClipsNow says

rates spike in 5 years I will simply pay off the loan, refi, or get a loan mod

If you have $700k parked safely with which to repay the loan, then that would be simple but you're paying 2% while 5-year Treasuries are below 1% so you're losing $ on the spread. If you don't have $700k parked safely, then you're risking a worrisome loss, especially if you need to refi at a higher rate. What happens if prices continue to fall and you can't refi at the same rate so you need to sell? Do you lose "only" your $175k down payment or does the lender have the right to go after your other assets?

How far away from work is this property? The days of living out in the sticks with long commutes to and from work are over with.

Its way way closer to work. (that why its so much $)
Commute now is 30 to 60m now it will be 15 max.

Maintenance is a cost. Its been remodeled, so should be low.
Im not getting flood nor quake insurance. There is no mortgage insurance, i put 20% down.

Lender does not have right to go after other assets on purchase money loan in california. so max loss if the pocky clips happens is 175k + 3k in loan fees + all maintance. But it takes 2 years to foreclose so I could rent it at 4k per month for 2 years which is 96k in rents while I play the loan mod/pretend to short sale shuffle with the bank in that scenario.

Keep in mind the risk of renting is that prices will go up. (they just did, the bottom was in 2010 and 2011). We might revisit that bottom, but not in 2013 or 2014 there is simply no inventory.

man it gets old. all those vacants are out in BFE not near job centers.
I realize the inventory is artificially low, so are intrest rates. Nothing to be done about it.

Well you are welcome to rent my house or one like it for 4k a month!

PockyClipsNow says

Well you are welcome to rent my house or one like it for 4k a month!

Sorry bud, can't afford it. Can't afford to buy it either. But we can help you squat it. :)

War says

Don't be silly. There is excess inventory in Manhattan.

Dude, do your homework. You don't know what the hell you're talking about. There is excess inventory everywhere, not just Manhattan. Wake me up when excess inventory is down to 1M.

PockyClipsNow says

I hope this is a real world math lesson for some of the 'should I buy now' crowd. Its a tough decision.

Price: 875k
$ Financed: 700k

Pocky, where is this in LA, exactly? Not many hoods w/horse digs, and any of the decent areas in actual LA are $1.2+ for 5 beds. I take it your math is pivotal on the 5/1 ARM?

PockyClipsNow says

one large factor is that I AM NOT MAKING PRINCIPAL PAYMENTS which I believe are for chumps.

WTF?

PockyClipsNow says

Principal payments in a loan are stupid for two reasons:

1. If prices tank and you walk away

In my opinion, that is a real great reason to buy (NOT) with the exit plan of adding to the nightmare created by others? doing the same thing!

Sorry, this type of "walk away" mentality still being said in 2012 disgusts me.

Pocky...did the same thing 75 days ago: 7 year, 2.9% interest only JUMBO (no points) from First Republic. With QE to infinity in play and $40 billion in mortgage backed securities being bought each month and issues in Spain and Italy festering...the greenback will be a safe haven for the short term and the securities bought will exert pressures on the other end ratcheting down interest rates.

I consider it like locking in to a 7 year lease on a place that costs 30% less than immediately comparable homes renting in the area. That's a big money difference - held hostage by our 20% down payment of course...but we thankfully had that to park for the next 7 years. I work from home - so renting 3 prior places in past 10 years was shitty: the permanence of 7 years in one place makes sleeping a bunch easier.

The place was custom built 12 years ago - 2nd place built from scratch by prior owners - so they knew every pratfall and designed it well inside and out. Save an earthquake, not a lot of maintenance needed here (it was built earthquake ready, too...the home inspector was much impressed with the care that went into it)

I fully expect to refinance at 2.5% pretty soon - payback is right damn quick on even 400 basis points on a JUMBO when total refinance costs are under $3k. Each 100 basis points is ~$90 a month saved.

I found Union to be a Big Bank-like pain in the ass to work with so I ditched them for First Republic and they treated me right kindly. If you look to refinance, try them out (I think they have 4 branches in LA....S. Monica, Bel Aire and a couple others north of LAX)

Horses sound nice - only place for horses in LA I know are Palos Verdes, or Eastern or Northern reaches of the county in good neighborhoods. Enjoy - I will be, too.

I don't recommend buying for everyone...but, for Pocky and I it seems to be the best decision. I totally agree if you have 20% down payment and good assets and safe earning prospects for the future...getting interest only is the way to go. I know home costs are being kept high by the artificially low rates...but this is the game one plays on the statists. With so much being saved its either going to a nice cash war chest or gold, silver or precious metals miners - asset classes that rise as the purchasing power of $USD is quantitatively eased away.

Bold.

Your strategy is bold, and as you correctly point out, not for everyone. I hope it works out well for you.

Hey pocky, one input to your plan I don't understand is

"If rates rise, I'll just refinance"

What am I missing here, because that doesn't sound like much of a game plan

I know we are in agreement that rates will only ever go lower, but in the event we are wrong and they magically spike, how is refi a gameplan for you?

Yup says

Housing Bulls on this forum are only bullish when they consider that they can default and walk away!

You just saved me from writing the same.

.
ptiemann says

Suggesting interest-only financing on a perma-bear discussion board takes more than just guts.

Right in the face of those demanding legally enforced minimum down payments, less than 30 year amortization or ideally they wish for an all-cash only market.

Congratulations, to your guts, and to the purchase.

I think a lot demand 20% down regulations only because they know that the system is so corrupt that the TBTFs get bailed out time and time again with their money. In reality there is nothing wrong with his purchase/gamble, because the banks engaging in such loans would go belly up within a couple of years when the rug is pulled again and the people would flock to banks that engage in more solid lending practices (which would then end up with more capital). However it would be much wiser to demand that banks can only lend one dollar per dollar of capital in backed assets they have (no fractional lending) - then those bubbles would either never form or pop much sooner without creating any significant distortions.

The entire system is rigged. We all (should) know that. If you play by the ethical, moral, and societal rules that are in place for the common folks, you will lose. The banks, the government, the major corporations.... They do NOT play by these rules. "If you can't beat 'em, join 'em" has never been truer than the housing market of the last few (and future many) years. The fact is "We" the people, CAN NOT beat them. They have power and secrecy and printing presses. It's a sad state of affairs, but I will not smugly sit on my mound of principles, and watch life pass me by. I am trying to buy a short sale now. Been renting for over 6 years. If I get it, and things go badly down the road, I will stick it to the bank as hard as I possibly can. Thank you. :)

I might call First republic to check rates out. When I say 'if rates rise I will just refi' im mean that if rates were say 7% I could get the same payment as now by paying down 400k of the loan and having a 7% loan - it would be ok. (zero chance we will ever see a 7% mortgages again IMO -other than subprime/hard money loan)

I was perfectly happy back in 06 and 07 when I was renting to bubble sit- making 5-6% on CD's - now they crashed rates to under 1% and RE prices are headed up- so that strategy is dead. I feel like I'm being herded like cattle out of cash and into hard assets by Bernanke (which is his plan of course) but it makes zero sense to pay 1400 in rent for a 1 bd apt when for like 1992 a month I can have 5 times the property. Remember cash is earning zero now and RE is going up in price for the next 2 years for sure (low inventory will last at least 2 years-foreclosures are way way down, bernanke says 3 years of super low rates and he aint lying)

I know my girlfriend is sure happy as hell now. Never seen her this happy! lol (of course I'm only buying in my own name and will never get married....fastest way to go broke is to get married/buy house/have kids/get divorced but thats a different message board!)

My friend just bought a house for 550 vs my 875. we both put 20% down and have same payment. The difference is the IO ARM i have vs his 30 year fixed. My attitude about the 30 year fixed is that you are going to the bank and saying 'give me the highest intrest rate you currently have!'. lol

You know what you're doing and it doesn't sound like bad strategy. Any plan is only as good as its implementation. And I agree that rates are never going up, and should continue lower.

Women love all that sq ft, regardless of what it costs nor what you have to sacrifice to afford and maintain the big spread, but there ain't no arguing with um. Just keep um happy. The girl I'm seeing has her eyes set on buying the place she's renting. Rent =1400 per month, purchase price =265k. Now by my math, if you think the rent is pricey at 1400, then shouldn't you figure the purchase price to be expensive at anything north of 150k?? However, I haven't bothered running the numbers because its not my money, but id imagine an I/O mort at current rates would probably make some kind of sense. If it was me, id be ecstatic renting such a nice place for 1400/month (if I felt the place was worth 265k,,,,,

PockyClipsNow says

1. If prices tank and you walk away you lose DP+all principal payments made

As long as you plan on walking away some day how can you lose?

PockyClipsNow says

(zero chance we will ever see a 7% mortgages again IMO -other than subprime/hard money loan)

Famous last words - never discount anything - people who are extremely wealthy don't care either way (although hedging against hyperinflation requires more effort) and there comes a time where deflation is the lesser of two evils compared to hyperinflation. Also, walking away at least destroys your credit, which is not a big issue if you have enough reserves to weather bad times and know you won't depend on credit by the banks.

PockyClipsNow says

I know my girlfriend is sure happy as hell now. Never seen her this happy! lol (of course I'm only buying in my own name and will never get married....fastest way to go broke is to get married/buy house/have kids/get divorced but thats a different message board!)

Well no sh_t sherlock. Of course she's happy. If your girlfriend is happy, you will be inversely happy eventually because you have been subliminally conditioned by her over time to want what she wants yet you think it's what you want.

To help break the spell, before you sign the papers drive far far away to a luxury resort and get yourself an 18 year old call girl. Then relax and ask yourself, "do I really need this house?" See if your true inner being tells you yes. :) If that doesn't work simply imagine yourself living there alone.

War says

Rents are falling my friend.

War, why don't you actually address these facts this time?

http://online.wsj.com/article/SB10001424052702303933404577505260835025948.html

Wow, from my viewpoint where I am standing, that is ballsy.

But, appreciate the different viewpoints.

Who knows? someday I may post some much lower end property I bought. As of yet, haven't come close.

$4k/mo rent for a horse property in LA is reasonable. The house right across the street from mine is renting for $3k/mo and I am in Riverside. It's a horse property, and it's a 4000 s/f tract home on an acre. This home was bought for $420k in late 2010. It also has ZERO landscaping, basically just like it came from the builder in 2004. Nice homes in this area are easily renting for $3500/mo. Again I am in the IE! Down here buying is currently WAY, WAY cheaper than renting.

soopercommuter says

Down here buying is currently WAY, WAY cheaper than renting.

Good luck to you.

2.875% on an ARM isn't realistic over the long term either. Surprised nobody's mentioned this. When that goes up, not only is your monthly carry going to be significantly worse, but the price of the house should decline as well.

Long term assets should always use long-term financing in the calculations.

PockyClipsNow says

Principal payments in a loan are stupid for two reasons:

1. If prices tank and you walk away you lose DP+all principal payments made

2. Most people just get a heloc anyway after a number of years to buy a dumb car or send kids to school.

3. the principal payment will blow up your debt to income ratio which limits your acquistion of other loans/mortgages. (we are year one of the next up cycle of real estate, time to buy quality properties located well at a good price - if you can find them, not easy)

4.If you think you can pay off a gigantic 500k+ loan rotsa ruck buddy, i am relying on future price appreciation then selling to make money.

You are advocating maximum leverage, one of the main causes of the real estate mess. If you always leverage yourself to the max, it will only be a matter of time before you go bankrupt with the very next down turn.
The best strategy is to ensure enough cash flow to see you through a downturn.

I don't know what rental rates are doing in LA. I'm in Riverside and they are not falling here. Average rents went up 3.5% in 2011 and another 2% up so far this year. When I bought my current home in 2010 I kept my old house as a rental. That home would be worth about $140k and I have it rented for $1600/mo. And that is why the low end properties out here were selling in a matter of hours. Currently there is nothing to buy at the low end.
I don't know what will happen to rental rates. They might go up, or down or stay the same. I don't really care as my rental will be paid off soon. I really do think the rates have to come down with the ownership costs being so much less than the cost of renting. It's likely the only thing keeping them up is the fact that so few people can qualify for a mortgage. But as of right now, rents are going up and there is no shortage of people looking to rent. Believe what you want, but that does not change the facts.

soopercommuter says

Down here buying is currently WAY, WAY cheaper than renting.

Can you give an example with my calculator?

So the best case scenario to convert it into rental and recoup your $175K downpayment in 15 years, 30 years if you include maintanence/fixing on that huge house?

I don't think this is a good deal.