patrick.net

David Losh says

With an interest only 5/1 ARM you aren't buying this property at all, you are renting.

Yes. At that point, you are essentially renting the debt.

David Losh says

Can anybody explain why we are discussing this?

I think the best way to look at this from a financial viewpoint is that he is buying a $175K bond that pays $2,000 per month (savings versus renting). Just under 14% on his money doesn't seem too bad to me.

Sorta overlooks the opportunity cost, which is not nothing at a $175K, but I get your drift.

tatupu70 says

buying a $175K bond

But he's not buying, because he owes the debt. As long as the property stays at current price, or increases with inflation, uh oh, we have a problem because there is no true inflation because our currency keeps getting to be the go to currency in the global market place.

You are making broad global economic assumptions when you say his $175K is safe, like in a bond.

This may be speculation like in oil, gold, cotton, or corn, but it is certainly not safe.

David Losh says

Wait a minute, I just read this premise again, and it makes absolutely no sense.

With an interest only 5/1 ARM you aren't buying this property at all, you are renting.

Not only are you renting you put up $175K of your money to do that.

Not only that, in your best case scenario you get $1000 a month in profit, but it takes you fifteen years to recover your $175K, more, or less.

In the mean time, all of this time, you owe $700K to a bank.

Can anybody explain why we are discussing this?

Someone is finally thinking on this thread. You just nailed it! Kudos to you for actually doing some good math. Unless the rest of the jokers on this site with everything they own tied up in useless wood and nails and their investment strategy being mainly about hope.

David Losh says

You are making broad global economic assumptions when you say his $175K is safe, like in a bond.

Bonds are not guaranteed either. The higher the risk, the higher the return in bonds. So, you can make your own judgment about whether a 14% return is adequate for the risk in this scenario. But I think the analogy is right.

RentingForHalfTheCost says

Someone is finally thinking on this thread. You just nailed it!

lol--no he didn't. Try actually thinking for once.

tatupu70 says

RentingForHalfTheCost says

Someone is finally thinking on this thread. You just nailed it!

lol--no he didn't. Try actually thinking for once.

more blinded lemon replies. Thanks for keeping up the fight. Your dedication and predictability is honorable. ;)

RentingForHalfTheCost says

more blinded lemon replies. Thanks for keeping up the fight. Your dedication and predictability is honorable. ;)

Now that's funny. I posted a pretty detailed explanation as to why Mr. Losh was incorrect. Did you miss that?

tatupu70 says

lol--no he didn't. Try actually thinking for once.

Let's try this again. When you buy a bond you buy it at face value. There isn't a $700K debt that comes along with that.

There are all kinds of bonds that are paying high yeilds, like Greece, Italy, and Spain.

You're ignoring the larger picture to make a point that is questionable. We just saw the price of housing tank, it goes up a little, and goes down again below where it was.

This is an election year when there is a lot of hope, but after the election reality sets in, no matter who gets elected.

David Losh says

Let's try this again. When you buy a bond you buy it at face value. There isn't a $700K debt that comes along with that.

Agreed. What's your point though? He can always walk away so he'll never lose more than the $175K

David Losh says

There are all kinds of bonds that are paying high yeilds, like Greece, Italy, and Spain

Exactly my point. I think we can agree that those bonds are risky, right?

David Losh says

You're ignoring the larger picture to make a point that is questionable. We just saw the price of housing tank, it goes up a little, and goes down again below where it was.

So, you think housing is going to drop further? You're certainly entitled to your opinion, but it's far from a certainty. I guess my larger picture looks different than yours.

tatupu70 says

He can always walk away

He can certainly walk away, but it s a debt. Is there recourse, or no recourse?

tatupu70 says

but it's far from a certainty

Let me take this, and say I am certain that there will be defaults in Europe, or Ireland, or other forms of debt forgiveness.

Sounds good, right? However the price of these leveraged asset will fall, further.

That debt PockyClipsNow has will be a liability to whoever has the paper, and he's just one person.

So it's not the price of the property that concerns me it's the value of the commercial paper, and who will want it, or want to trade in it. Once you take out the common investor, once you take out the banks, you are left with large commercial investors who will clamp up the mortgage market until they can be made whole.

Fewer mortgages, smaller buyer pool.

tatupu70 says

so he'll never lose more than the $175K

There is a great investment strategy. Lose 175K. Never in my lifetime will that ever be an issue for me. Hence why I am still gladly a renter in the BA, but a buyer in many other places (i.e. NOT phoenix)

RentingForHalfTheCost says

There is a great investment strategy. Lose 175K. Never in my lifetime will that ever be an issue for me. Hence why I am still gladly a renter in the BA, but a buyer in many other places (i.e. NOT phoenix)

If you invest in the stock market then it's an issue for you. Every investment comes with risk.

Also don't forget that 100% of your rent payments go down the toilet.

Home Fart says

Also don't forget that 100% of your rent payments go down the toilet.

I never have gotten this argument about renting. If housing is a place to live, and if every one has to live some place, then the renter is getting everything they are paying for.

The person with the mortgage carries the risk, which I guess, according to tatupu, is what makes housing an investment.

David Losh says

The person with the mortgage carries the risk, which I guess, according to tatupu, is what makes housing an investment

Correct--carries the risk and is entitled to the rewards.

Home Fart says

Also don't forget that 100% of your rent payments go down the toilet.

Also don't forget that mortgage interest payment+property taxes - the deduction go down the toilet too. Hell,the principal part of payment goes down the toilet too if the property is very pricey and if there no appreciation. You'd be lucky if there is no depreciation cuz if it does it is double whammy - worst case scenario,underwater mortgage. So try that argument somewhere,not on a housing bear forum.

tatupu70 says

RentingForHalfTheCost says

There is a great investment strategy. Lose 175K. Never in my lifetime will that ever be an issue for me. Hence why I am still gladly a renter in the BA, but a buyer in many other places (i.e. NOT phoenix)

If you invest in the stock market then it's an issue for you. Every investment comes with risk.

I employ a strategy of capital preservation and take on risk that I understand. I have yet to lose any capital in 20 years of investing. Although, I don't chase after 20-40% returns either. 7-8% has been absolutely fine form me. You can get that easily with some dividend kings and selling calls.

David Losh says

Home Fart says

Also don't forget that 100% of your rent payments go down the toilet.

I never have gotten this argument about renting. If housing is a place to live, and if every one has to live some place, then the renter is getting everything they are paying for.

The person with the mortgage carries the risk, which I guess, according to tatupu, is what makes housing an investment.

Couldn't agree more, and I think everyone would see it this way if they didn't have skin in the game.

tatupu70 says

David Losh says

The person with the mortgage carries the risk, which I guess, according to tatupu, is what makes housing an investment

Correct--carries the risk and is entitled to the rewards.

asset depreciation is no reward.

RentingForHalfTheCost says

I have yet to lose any capital in 20 years of investing.

OK--whatever you say Warren.

RentingForHalfTheCost says

asset depreciation is no reward.

Agreed. Asset appreciation is.

bubblesitter says

Home Fart says

Also don't forget that 100% of your rent payments go down the toilet.

Also don't forget that mortgage interest payment+property taxes - the deduction go down the toilet too.

As Patrick has said before, you either rent the house or rent the money (mortgage). Mortgage ain't too effective at stopping the toilet flush sounds if you move every 7 years or refi every time interest rates tick down another .01 percent.

Philistine says

Mortgage ain't too effective at stopping the toilet flush sounds if you move every 7 years

Most(naive) buyers assume that rent is wasting money and mortgage payment is not. Hell, on a 30 year mortgage it takes beyond 7 years to break even....compared to renting. No wonder,America is falling behind in Math as compared to other countries.

robertoaribas says

BUT,

BUT, Roberto, you realize that Phoenix != USA and USA != Phoenix.

My turn to brag.

I made so much money this year I have to pay taxes out of pocket.

My heloc interest is just over $1,000, plus the property taxes does not exceed the standard deduction (Yes, I filed for extension)

I'm not going to buy crap I don't like or where I think it is not a good ... dare I say 'investment'. How about, where I can't loose my shirt on the deal.

robertoaribas says

the permabears here just can't understand that simple fact!

I'm a bear in this market, and have been since the tax credit. Nothing good will come from that. Then there is QE 1, 2, and now 3 that are giving us, and speculators these historically low interest rates.

It's not just housing that is propped up. It's all commodities, and the stock market that is buoyed by paper profits.

That bring me to....

robertoaribas says

Historically, in a normal market

We don't have a normal market. We have a weird marke that is volitile on all fronts.

David Losh says

I'm a bear in this market, and have been since the tax credit. Nothing good will come from that. Then there is QE 1, 2, and now 3 that are giving us, and speculators these historically low interest rates.

So you have been a bear since 2009 - how's it working out for ya?

Since you are so convinced I am assuming you have shorted homebuilder stocks, bank stocks, real estate stocks. Right? And how much money have you made being a bear?

:)

In the meantime, you have spend 4 years of rent and pumped it down the drain.

So in essence, if you add up those 4 years of rent then you know how much you have lost on that deal.

Darrell In Phoenix says

Less than losing 4 years of inflated principal, interest, taxes and insurance on a rapidly depreciating house.

If I rented my house for $2700.- (I am using a low number) - then 4 years of rent are $130k...

my house has not lost 130k of principal - but based on actual sales in my neighborhood my house is up in price.

Sorry Darrell. You just have to do the math. It's not that hard.

and btw,...

my hownowners insurance = $1000.-/y

when we rented our renters insurance for the house was $950.- /y

--

interest and prop tax is a deduction, while rent isn't. In our case it works out that the break we get on our taxes covers 95% of prop tax costs.

So at this point we are paying 300/month less than when we rented for a much bigger house in a much nicer neighborhood.

Like I said before, even if this house is worth $0. Does not matter to me. I am living in it. And I can always rent it out for more than what I pay monthly. And thats frozen in for 30 years. I am not planning on selling this house ever.

Darrell In Phoenix says

Dump it while you can still get something out of it.

...we just bought it almost 2 years ago - duh! - best move so far.

Darrell In Phoenix says

Sure it does. You wouldn't invoke "it doesn't matter to me" if it didn't.

what kind of logic is that?

SubOink says

So you have been a bear since 2009 - how's it working out for ya?

Actually it is working great. Our company provides services to the Real Estate agents in our area, so I'm very familiar with what the market is doing.

All my budies laughed at me about my quiting the business until last year when it was clear I was adding business while they tread water.

We have 20% growth and are on track to that again this year.

We've expanded, and have hardly scratched the surface of what we can do. Contractors who worked with us in the past are struggling, and we have added one person each of the past two years.

We have trucks that haven't moved since 2008 that we will put back in service next year.

Our growth is slow, but steady, and yes we could have maxed out our capacity within the past year, but we are making money, and I have time to sit here with you.

Good to hear your business is up but how would that be different if you bought a house in 2009/10/11?

Darrell In Phoenix says

"homes"?

You're pathetic.

Darrell is such a hater, it makes me laugh every time. No pun. It's just funny how you go against everything by principle. I'd love to know your story.

SubOink says

how would that be different if you bought a house in 2009/10/11?

Number one is that the cash out lay; for me t's next to nothing. I compare that to people who have done two, or four flips in the Seattle area to net $150K.

The margins are tight, and the cash flow is low.

My potential on the other hand is a matter of adding more employees. My cost is fixed, but the more people I add the higher my income.

When I say my cost is fixed I mean the taxes, and insurance per employees who is producing income. No income, the employee goes, along with that cost.

I'm saying that my risk is also high, it is challenging, but compared to going to the auctions which are dismal, and in my opinion way over priced, having sub contractors, and dealing with renters, it's kind of a wash.

The difference is I have more potential than my buddies. They see it while telling me they will be building additional housing units. Here in Seattle we have A Pod Ments which are small, and cheap, for the working single, and three bedroom apartments being built by the thousands. There are big money players in our town, how about yours?

I'll take my end; cash paid at the time of service.

David, are you renting?

Darrell In Phoenix says

And you're no better my underwater debtor.

other than not being underwater..