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CJ
Posts:52
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| 05/30/2008 4:18 PM |
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Looks like things are getting bad at ELECTRA. A friend of mine just rented a 2/2 unit (above the 20th floor with bay views) for $3,000/month. The owner paid 950K for the unit and is going to take a huge loss each month to keep the unit. Cost to own the unit $6,800 per month: Mortgage payment (assume 760K @ 6%) $4,556/month; Property tax $990/month; HOAs $756/month; lost interest on down payment (assume 3.15%) $500/month. This owner (and probably others in Electra) are getting killed right now. He's losing more than $45,000 a year for this luxury rental. OUCH!!! |
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Brian
Posts:2210
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| 05/30/2008 4:39 PM |
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CJ, that's what I've been saying all along.
In the "luxury" market, your rent money actually goes much further than in the entry-level market. I'm happy for your friend. He/she gets the lifestyle without the expense. ;) I'm doing the same thing. ;)
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ScottSD
Posts:162
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| 05/30/2008 5:22 PM |
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| i'm looking into renting at electra. there are a lot of good deals there right now for rent. i'm trying to identify some good luxury buildings with good units to be rented for around $3000 or less. |
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Brian
Posts:2210
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| 05/30/2008 9:04 PM |
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That's pretty smart, Scott. Renting need not be "miserable." I think of my landlord as my generous "wealthy uncle" who's letting me stay at his luxury condo at reduced rent.
To those wanting to buy, I say, look at your monthly housing budget and, rent or buy, get yourself the best housing that your money can acquire and enjoy life. Save a portion of your income like you normally should; and watch your money grow. Watch the housing market and buy only when you feel it's most advantageous. If you gamble on future appreciation, also be mindful that you could lose your investment. If you lose your ass, you have nobody but yourself to blame.
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Eugene
Posts:256
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| 05/30/2008 9:11 PM |
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He's paying 3800/month in interest (assuming 6% jumbo interest-only ARM with 20% down), and 756/month HOA. Property tax is probably 1% of assessed value or 790/month (unless you have figures that suggest otherwise). After subtracting your friend's rent, his net cost to own is 2346/month. He's allowed to deduct up to $25,000/year in rental property expenses which in 33% bracket would come up to 695/month. He's losing interest on down payment (500/month) but he does not have to pay tax on this interest so net effect is 333/month.
All in all, the owner of that unit bleeds 1984/month or 24k a year + losses from his down payment. |
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Brian
Posts:2210
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| 05/30/2008 10:11 PM |
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Posted By Eugene on 05/30/2008 9:11 PM
He's paying 3800/month in interest (assuming 6% jumbo interest-only ARM with 20% down), and 756/month HOA. Property tax is probably 1% of assessed value or 790/month (unless you have figures that suggest otherwise). After subtracting your friend's rent, his net cost to own is 2346/month. He's allowed to deduct up to $25,000/year in rental property expenses which in 33% bracket would come up to 695/month. He's losing interest on down payment (500/month) but he does not have to pay tax on this interest so net effect is 333/month.
All in all, the owner of that unit bleeds 1984/month or 24k a year + losses from his down payment.
Some convoluted logic here. Why not compute interest only on the whole purchase amount?
You don't get a tax deduction for money you don't earn, buddy.
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Purchase 950,000
Interest 57,000 at 6% assumuing zero down
Taxes 11,400 at 1.2%
Maintenance 2,400 $200/mo
HOA 9,072 756/mo
Before Taxes
Annual Expenses (79,872)
Rental Income 36,000 If no vacancy
Allowance for Vacancy (3,600) 10%
Property Management (3,240) 10% Net of vacancy
Net (50,712)
The tax benefits are debatable. People with AGI of more than $150,000 will not be able to claim tax benefits. I would think that to qualify for a $950,000 purchase at Electra the owner would have AGI higher than $150,000.
bankrate.com Tax Advantages of Rental
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Goingup?
Posts:148
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| 05/30/2008 10:20 PM |
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If you want to make money you have to take risks. You don't want risk, CD's are paying around 3% a year.
If the unit is "bleeding" the investor to the tune of 24K a year, on a 900K condo you only need 3% appreciation for that to be a push.
What's more, if it does appreciate significantly, the investor can move in for two years and then collect 500K in appreciation tax free.
With downtown high rises coming to a halt after next year for at least 4 years, demand should exceed supply by around 5K units by 2013.
My thinking is if the guy has deep pockets, this bet has a very good chance of working out well.
He could have just walked about with a 15% loss (Bosa's required deposit). Since he didn't, my guess he really believes the downtown market will return.
And instead of just posting opinions on message boards, he's placing a million dollars on the line. Someone's wealthy Uncle is wealthy for a reason. |
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ScottSD
Posts:162
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| 05/30/2008 11:03 PM |
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may not be wealthy for long at this rate. comps to his purchase are inching to $800k right now. and there are still a lot of unsold units at electra. people with money and taste may buy there or they may just wait a year and buy at bayside. i see no reason why his comps won't dip to $700k when all is said and done. it'll take some serious appreciation to get that back.
not everyone with money is immune to overextending themselves. my sister bought 3 houses in seattle, assuming the market would go up indefinitely. she should be losing them within the next few months. |
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Aeneid
Posts:34
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| 05/30/2008 11:37 PM |
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Brian seems to be very "bearish" while Goingup seems to be "bullish". This brings a healthy variety to this forum.
Something just does not make sense to me about investing in real estate as Goingup claimed. Assuming that the investor of the unit has a deep pocket and can hold this unit. To make a profit, s/he must sell something to get the "profit". Otherwise, it is just on paper-"paper" wealth. This brings to my next question/curiousity. Who has the money to buy such investment and be the next investor of this unit. Even if there is someone with deep pocket. It is still like a musical chair sort of thing. Someone will lose some money. If there is enough money around, then real estate will always go up according to this thinking.There isn't.
Real estate investment aside, as for actual primary residence, who has this kind of money for these units. Are there that many millionaires around? |
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Eugene
Posts:256
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| 05/30/2008 11:43 PM |
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Taxes are normally 1%, these units don't require much maintenance (certainly not to the tune of $200/month), and he can try to rent the thing directly without any intermediary property managers.
$150,000 AGI cap applies only if you "actively participate" in rental activity. For the definition, see instructions to the form 8582, page 2. As far as I understand, for the purposes of this discussion, it's only an active participation if the owner is an “real estate professional” i.e. he's a realtor or he rents properties for living.
In the current situation (or rather, when the market bottoms) it makes sense to put some of your own money down. CDs are paying peanuts anyway, condo ownership burns more than 25k a year for tax purposes (so you meet the cap), and reduction of interest payments helps to reduce the burn.
One more important thing to consider - you're allowed to claim a "depreciation" deduction for your rental property. So, if you buy a property that's worth 950k, even if you break even on rent because you put enough money down and rent is sufficiently high, you can deduct 1/27.5'th of its value or $34,500 every year. For all intents and purposes, buying a high-end condo downtown comes with an automatic $700/month tax rebate from Uncle Sam. (I'm assuming 33% tax bracket again) |
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jakob
Posts:472
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| 05/31/2008 4:13 AM |
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| The real "wealthy uncles" unloaded their real estate in 2006 when clear signs of a top came. They have long since moved to other investments. Commodities maybe. This landlord most likely isn't of that variety and will take a large loss on his electra condo. Props to putting his money on the line as goingup says, but having balls and having brains isn't the same. |
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philtheconqueror
Posts:36
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| 05/31/2008 8:11 AM |
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Just a question... I'm possibly interested in renting in Downtown instead of buying but where do you go to find rental listings in downtown?
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Brian
Posts:2210
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| 05/31/2008 9:06 AM |
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1) Property Taxes are certainly more than 1% with other bond measures and fees that are tacked on -- between 1.1x% to 1.2% downtown. But that's minor.
2) About management fees, we are talking about opportunity costs, unless the landlord's time is not valuable. But again that's a minor item. I suppose agents work for free in your world.
3) Maintenance of $2,400/year on a $1 million property is generous. Don't you have to change the carpet, and call the repairman out when the appliances break? A reserve for repairs of $2,400/year is very low in my view. If that property stays a rental for 5 years of more, it will need some expensive remodel -- ertainly more than the $2,400/year reserve. How much is a bathroom remodel? Renters are known to call the landlord for every minute little thing. ;)
4) Active participation and real estate professionals are different classifications. You are conflating the two in error (active participation and material participation are different). Read the rules again. "The rental losses of real estate professionals are allowed fully against other income." So if anything, for tax purposes, you want to be a real estate professional and not a accidental landlord. As I said, the tax benefits are debatable depending of your AGI and your professional situation.
5) Down payment, or not, if you compute interest only on the whole purchase amount, for math purposes only, you can ignore the opportunity cost of the down-payment. You can get to the same result in one step instead of two.
6) Depreciation needs to be recaptured. You're just deferring the inevitable. That is unless, of course, you think that the properties will never appreciate. And I doubt that you're saying that.
7) Remember to add the opportunity cost of the $150,000 deposit for the 4 years it took to build the building. I doubt Bosa was paying interest on that money.
8) Most importantly, you need offsetting income in order to take advantage of tax deductions. For example, Realtors who have no income and are living off of savings and debts, effectively pay more for more of everything since they lose the tax benefits.
9) If you spend $1 to save 33 cents, you'd better have 77 cents in your savings account.
10) Whatever your paper net-worth maybe, an illiquid position can easily cause insolvency and bankruptcy.
Eugene, please show your itemized math calculations. I have. You sound like a Realtor who knows just enough to be dangerous but gives wrong advice.
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Brian
Posts:2210
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| 05/31/2008 9:14 AM |
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| I should have written, "if you spend $1 to save 33 cents, you'd better have 67 cents in your savings account." |
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Brian
Posts:2210
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| 05/31/2008 9:35 AM |
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Posted By Goingup? on 05/30/2008 10:20 PM
He could have just walked about with a 15% loss (Bosa's required deposit). Since he didn't, my guess he really believes the downtown market will return.
And instead of just posting opinions on message boards, he's placing a million dollars on the line.
It's just the psychological reaction of greed. The negative utility of walking from his 15% deposit was too much to bear. And people were telling him that prices would go up.
Look at these two who closed on their electra purchases just to sell at a loss.
#2503
List Price: $925,000
Purchase: $1,051,500 closed 1/29/28
Minimum loss = $126,500
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4 years of opportunity lost on 15% deposit + transaction costs +
carrying costs = Pride of ownership + bragging rights to a losing
investment..... And you don't even get to live in it.
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Now listed for $895,000
So much for the millionaires with unlimited staying power.
Minimum loss = 87,400
+
4 years of opportunity lost on 15% deposit + transaction costs +
carrying costs = Pride of ownership + bragging rights to a losing
investment..... And you don't even get to live in it.
Parcel Number: 533-532-10-57
Property Location: 700- E ST WEST #1503
Purchase Price: $982400
Living Area: 1370
Bedrooms: 2
Bathrooms: 2
Document Date: 1-10-2008
Electra Tracker Thread
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Eugene
Posts:256
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| 05/31/2008 9:59 AM |
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1) That property does not become more expensive to maintain just by the virtue of it being worth $1 million. It's a 900 sq ft condo, for Christ's sake. A brand new one, too. I wouldn't expect any serious maintenance issues for the first 10 years. Worst case scenario, you need to replace the carpet every 3 years. That can be done under $1000.
2) By default, rental activity is passive. Exceptions are 1. material participation, 2. being a real estate professional, 3. the property being an oil or gas well, 4. using the property as the second home, 5. the property being actively traded securities (stocks or bonds).
3) Taxable losses on rental activities are capped at 25k/year. This cap does not apply to opportunity cost losses.
4) Mortgage interest rates are always higher than CD interest rates. In the original example, mortgage rate is 6% but savings rate is only 3.15%.
5) When it appreciates, you'll move into the property, live there for 2 years, sell it, and pocket the profit tax-free.
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rkf619
Posts:37
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| 05/31/2008 10:25 AM |
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| You do not "pocket the profits tax free" after two years. If you have rented out the apartment and taken depreciation on the property, you must recapture the depreciation when you sell it even if it now your residence. |
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Brian
Posts:2210
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| 05/31/2008 10:50 AM |
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2) I don't think that CJ's friend in renting a 2/2 that is only 900sf.
If you think that $24,000 in reserves over 10 years to upkeep a $1 million property is too much then, that's fine by me. How much is a bath remodel? Or a kitchen remodel? Or to refinish wood floors? Or to polish marble floors? And don't you think that people who rent at Electra expect everything to be perfect?
2) Material participation and being a real estate professional are the same thing. Active participation is different. Read the rules again.
3) Loss deductions are capped at 25k unless you are a real estate professional.
4) What about investing in a Dow index or other financial instruments? Anyway, my point is that, for math purposes, it complicates matters to compute interest with a down-payment and then have to add back the opportunity cost of the down-payment. Just compute on, interest-only, 100% financing. Isn't a benefit of being a millionaire the ability to use other people's money?
5) How old do you think the average age of the purchasers at Electra is. My bet is that they are in their mid 50s. By the time, the condos appreciates again, they would have joined their equity in the after life. Over time, real estate only appreciates at the rate of inflation, otherwise, our standard of living would decline, not increase. As a matter of fact, people today get more for their money (as a proportion of income) than their elders did in the 1950s.
Anyway, I think that we are arguing semantics here. The truth is that landlord is bleeding money each month. Will he have have the wherewithal to absorb those loses long term or will he lose the condo in foreclosure?
I'll be watching the foreclosure list for Electra.
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