i've been talking to a few of my friends about the advantages in partnering up in real estate endeavors. the main advantage of this is that once you get to a certain size, the cash that you can generate can start funding expansion. consider this, let's say that i was 1 out of 10 individual investors, each of us operating separately. if i wanted to add another holding, i could take the income my one property is generating, let's say $5,000 a year, plus another $45,000 out of my pocket to get 20% down plus closing costs on a new property worth 200k. now, i'd be cash flowing $10,000 a year, which is great, but i had to have that $45,000 just sitting around.
consider that the 10 of us individual investors formed a partnership, then with each of us contributing nothing but the $5,000 from our investments, we could each participate in 1/10th of a $200,000 purchase that would cash flow $500. the ROI is the same (10%), but this was done without any additional infusion of capital.
of course, there are some downsides to doing this. your partnership agreement must be well drafted and you need to deal with people you know and trust. even then, there are times when folks will want to get out of the deal and take their pieces with them. you have to have all of those details sorted out. it can be messy. especially when you are talking about lots of people.
Showing posts with label housing. Show all posts
Showing posts with label housing. Show all posts
Friday, April 1, 2011
Wednesday, March 30, 2011
investment property search
i was talking to a friend of mine the other day about investment properties. he asked for some advice and the best thing that i could tell him was that if he was really serious, he'd have to stop looking for reasons not to take the plunge. he had concerns about finding a place that would rent, or about maintenance, or bad tenants, or any number of other things.
the fact of the matter is that he's right. there are a number of things that can make purchasing a property for investment purposes go terribly wrong. it's a risk that you have to weigh against the possible returns. of course, this is the case with any investment, but with real estate, it seems like so much more could go badly. but, there are a lot of things in your control, too. you can drop your rent if your property isn't moving. you can sell your property if it's too big a hassle. you can actually live in it, if you have to.
i'm about to begin a new search for some properties to invest in, and i thought i'd chronicle my search through this site to give a view into what i look for. the most important thing, as i said, was to just make the decision that you are going to become a landlord. the next thing to do is to develop a model that outlines the costs associated with a property against the revenue that you can expect. this is pretty easy to do:
your expenses include:
principal
interest
taxes
insurance
maintenance
management
hoa
your revenues include:
rent
there will be some ancillary costs associated with leasing like utilities and rehab, or with purchasing like closing costs, appraisals, and inspections, so you want to have a sense for those, as well.
i look to put between 20% and 25% down, depending on what kind of terms i can get on a loan.
after you have a model in place, you can fairly easily troll the listings for properties that fit with your investment strategy. i look for places that cash flow. so, generally speaking, i look for properties that i can rent out monthly at or near 1% of the purchase price. so, if i find something at $150k, i'd like to see it rent at $1500. this is just a rule of thumb -- i always go back to my model to validate cash flow. in general, with this formula, i can return between 6-10% in cash on my initial investment.
i have a few geographical places that are my go to places as far as location goes. the only reason for this is that i'm knowledgeable on the market rents and sales prices. when i made my first purchase, i had to make some assumptions. but, you can get a good feel on this, again just based on trolling the listings.
the next thing (or the first thing) that i'm going to do is contact my realtor. she's able to keep an eye out for properties for me so i don't have to spend all my time looking. i'll report back on that next time.
the fact of the matter is that he's right. there are a number of things that can make purchasing a property for investment purposes go terribly wrong. it's a risk that you have to weigh against the possible returns. of course, this is the case with any investment, but with real estate, it seems like so much more could go badly. but, there are a lot of things in your control, too. you can drop your rent if your property isn't moving. you can sell your property if it's too big a hassle. you can actually live in it, if you have to.
i'm about to begin a new search for some properties to invest in, and i thought i'd chronicle my search through this site to give a view into what i look for. the most important thing, as i said, was to just make the decision that you are going to become a landlord. the next thing to do is to develop a model that outlines the costs associated with a property against the revenue that you can expect. this is pretty easy to do:
your expenses include:
principal
interest
taxes
insurance
maintenance
management
hoa
your revenues include:
rent
there will be some ancillary costs associated with leasing like utilities and rehab, or with purchasing like closing costs, appraisals, and inspections, so you want to have a sense for those, as well.
i look to put between 20% and 25% down, depending on what kind of terms i can get on a loan.
after you have a model in place, you can fairly easily troll the listings for properties that fit with your investment strategy. i look for places that cash flow. so, generally speaking, i look for properties that i can rent out monthly at or near 1% of the purchase price. so, if i find something at $150k, i'd like to see it rent at $1500. this is just a rule of thumb -- i always go back to my model to validate cash flow. in general, with this formula, i can return between 6-10% in cash on my initial investment.
i have a few geographical places that are my go to places as far as location goes. the only reason for this is that i'm knowledgeable on the market rents and sales prices. when i made my first purchase, i had to make some assumptions. but, you can get a good feel on this, again just based on trolling the listings.
the next thing (or the first thing) that i'm going to do is contact my realtor. she's able to keep an eye out for properties for me so i don't have to spend all my time looking. i'll report back on that next time.
change of plans
well, after much deliberation, i decided against paying off rental property #1. the reason for this seems kind of at odds to my approach on finding good cash flow and yield on my investment. you see, the property has about 7 years left on the note, and the rent that we collect is just enough to offset all the expenses related with owning the property. if we were to pay off the property, we would easily see a positive cash flow out of the property. i took that cash flow and projected it over 7 years. it came to be roughly equivalent to the lump sum amount that we'd have to pay in order to payoff the property.
this means that by doing nothing, and leaving our money essentially just in cash or some vehicle that at least keeps up with inflation, we'd be in the exact same position in 7 years whether we pay off the property now or not (assuming no appreciation). in one situation, we'd be out that cash, but it would slowly be building back up, and in the other, we'd have that cash on hand and the property would pay itself off.
instead, if we found some other vehicle for that capital that i was going to use to pay off the property, we'd actually come out ahead (assuming that the capital retains its original value). for example, if we purchased another property, that cash would be converted to equity, and any return on that cash would actually improve our position.
this seems to be a 180 degree reversal from what i was advocating before, which was to seek out investments with good cash flow. though the cash flow would not be as good, it actually makes more sense in the longer term. after 7 years, our cash position would be less, but we'd actually be cash flowing 1.5 times what we would cash flow by paying off the property.
this means that by doing nothing, and leaving our money essentially just in cash or some vehicle that at least keeps up with inflation, we'd be in the exact same position in 7 years whether we pay off the property now or not (assuming no appreciation). in one situation, we'd be out that cash, but it would slowly be building back up, and in the other, we'd have that cash on hand and the property would pay itself off.
instead, if we found some other vehicle for that capital that i was going to use to pay off the property, we'd actually come out ahead (assuming that the capital retains its original value). for example, if we purchased another property, that cash would be converted to equity, and any return on that cash would actually improve our position.
this seems to be a 180 degree reversal from what i was advocating before, which was to seek out investments with good cash flow. though the cash flow would not be as good, it actually makes more sense in the longer term. after 7 years, our cash position would be less, but we'd actually be cash flowing 1.5 times what we would cash flow by paying off the property.
Saturday, January 29, 2011
big decisions
i've been looking at our finances and looking at ways to improve our cash flow. on thing that has been jumping out at me is a rental property that we purchased about 8 years ago on a fifteen year note. the cash return on this property is pretty close to 0%, though, we obviously are increasing our equity position with tenants paying down the note each month.
in 7 years, we will own the property free and clear, and it will start returning us around $1,000 a month (after property management, hoa fees, insurance, and taxes) in cash.
we could pay this down early and start getting the benefit of this return today, though this would be a pretty big drain on capital, it's hard not to consider. the annual return would be around 12-13%, the only real concern that i have is the opportunity cost of putting all that money into play. over the long term, it's hard to refute this as the best play -- we have the money earmarked for investment, anyway. the other option would be to put that toward another property, but the cash return on that would probably be half.
it seems like a no brainer, but i'm still on the fence about it. when my wife and i got married, we joked that she is responsible for all the small decisions and i'm responsible for all the big decisions, and up to this point there haven't been any big decisions.
stay tuned . . .
in 7 years, we will own the property free and clear, and it will start returning us around $1,000 a month (after property management, hoa fees, insurance, and taxes) in cash.
we could pay this down early and start getting the benefit of this return today, though this would be a pretty big drain on capital, it's hard not to consider. the annual return would be around 12-13%, the only real concern that i have is the opportunity cost of putting all that money into play. over the long term, it's hard to refute this as the best play -- we have the money earmarked for investment, anyway. the other option would be to put that toward another property, but the cash return on that would probably be half.
it seems like a no brainer, but i'm still on the fence about it. when my wife and i got married, we joked that she is responsible for all the small decisions and i'm responsible for all the big decisions, and up to this point there haven't been any big decisions.
stay tuned . . .
Tuesday, January 18, 2011
property taxes
because we don't have a state income tax here in texas, our property taxes are relatively high -- on the order of about 2% or more of the assessed value of the home. so, for a while, i had been escrowing that, so it was included in our monthly mortgage payment. a few years back, i thought that there was clear benefit to holding that myself. our annual property taxes are around $12,000, so i figured that i could earn some interest on that money before i had to pay it out.
mathematically, it all works out, i even set aside an estimated amount at the beginning of the year so that i won't be caught off guard. but with interest rates these days, that amounted to little more than $10 this year! i'm going to shop around a bit for a better rate, but even if i find something that pays 1%, which at a glance seems like it would be doable, that would only amount to $100.
emotionally, there are a couple of factors at play. one, it's a bit painful to write that check every year, even though the money has been set aside. two, around about june, long after the pain of writing that big check has worn off, i get a exaggerated sense of wealth, because that money is sitting around. i know it doesn't make sense, but that's the truth of the matter.
from a purely mathematical standpoint, i still don't like escrowing, but there are clearly some advantages to it. and, every once in a while, you can benefit from it, as banks will do an escrow analysis only every once in a while, you can actually have less in your escrow account than what is needed to pay your taxes. this essentially amonuts to a 0% loan from the bank. of course, the opposite is also true, so it probably balances out.
for now, i'm still going to stick with my non-escrow plan, i feel that it gives me a bit for flexibility, but definitely something to think about.
mathematically, it all works out, i even set aside an estimated amount at the beginning of the year so that i won't be caught off guard. but with interest rates these days, that amounted to little more than $10 this year! i'm going to shop around a bit for a better rate, but even if i find something that pays 1%, which at a glance seems like it would be doable, that would only amount to $100.
emotionally, there are a couple of factors at play. one, it's a bit painful to write that check every year, even though the money has been set aside. two, around about june, long after the pain of writing that big check has worn off, i get a exaggerated sense of wealth, because that money is sitting around. i know it doesn't make sense, but that's the truth of the matter.
from a purely mathematical standpoint, i still don't like escrowing, but there are clearly some advantages to it. and, every once in a while, you can benefit from it, as banks will do an escrow analysis only every once in a while, you can actually have less in your escrow account than what is needed to pay your taxes. this essentially amonuts to a 0% loan from the bank. of course, the opposite is also true, so it probably balances out.
for now, i'm still going to stick with my non-escrow plan, i feel that it gives me a bit for flexibility, but definitely something to think about.
Sunday, January 2, 2011
the escalating cost of higher education
a common conversation topic when i'm talking with my friends who have kids is the price of a college education these days, and whether we as parents are intending to cover any or all of that expense for our children (and, if we are planning on doing so, when to clue the kids in).
back when i graduated from the university of houston, about 15 years ago, tuition and fees for a full course load was less than $1,000 per semester for an in state student. i remember that figure, because i had a scholarship that paid that exact amount, and i would routinely get some spending or book money when my check came in. i just checked around, and the price is now closer to $3,000 per semester -- that's a decent chunk of change to have around, when you've got two kids that are going to overlap their college careers. and, that doesn't count room and board or other living expenses, which could easily double that figure. it wouldn't make much sense for my kids to go to the university of houston, though, unless they got some scholarship money there. with our rental properties in austin, it would be almost a no brainer that heading to the university of texas would be a better bet, as their housing would be set. but, what if they want to attend a school out of state? or an ivy league school?
i was able to live at home for part of my college life, which helped with expenses, and allowed me to be in the enviable position of not having to borrow any money in pursuit of my degree. after my freshman year, i decided to get a job and live on or nearer to campus with friends and have a more complete college experience. i juggled a pretty full load of school and work pretty much throughout my years at school, which i think helped prepare me for the "real world" in a way that many of my friends did not get to experience, while trading off some of the activities that my friends were able to participate in.
as parents, i think we all want to provide as much support and assistance as we can to our kids, and many times that comes with great sacrifice on our part. as i mentioned, i feel that my college experience allowed me to be better positioned for life after school, but i don't feel that is a lesson that i'd want to force on my kids.
we've already socked away enough for our three year old to handle a little more than year of tuition at the university of texas, and our one year old might just have enough to get through a semester at this point. i'd imagine, barring a drastic decline in their rates of return, that they'd have enough to get through an in-state public school, even with the trend of tuition increases that we've seen over the past years continue. and that's what we are prepared to do for them -- put them through a public university. of course, if they choose to go out of state or attend a private university, we'll let them make up the difference.
back when i graduated from the university of houston, about 15 years ago, tuition and fees for a full course load was less than $1,000 per semester for an in state student. i remember that figure, because i had a scholarship that paid that exact amount, and i would routinely get some spending or book money when my check came in. i just checked around, and the price is now closer to $3,000 per semester -- that's a decent chunk of change to have around, when you've got two kids that are going to overlap their college careers. and, that doesn't count room and board or other living expenses, which could easily double that figure. it wouldn't make much sense for my kids to go to the university of houston, though, unless they got some scholarship money there. with our rental properties in austin, it would be almost a no brainer that heading to the university of texas would be a better bet, as their housing would be set. but, what if they want to attend a school out of state? or an ivy league school?
i was able to live at home for part of my college life, which helped with expenses, and allowed me to be in the enviable position of not having to borrow any money in pursuit of my degree. after my freshman year, i decided to get a job and live on or nearer to campus with friends and have a more complete college experience. i juggled a pretty full load of school and work pretty much throughout my years at school, which i think helped prepare me for the "real world" in a way that many of my friends did not get to experience, while trading off some of the activities that my friends were able to participate in.
as parents, i think we all want to provide as much support and assistance as we can to our kids, and many times that comes with great sacrifice on our part. as i mentioned, i feel that my college experience allowed me to be better positioned for life after school, but i don't feel that is a lesson that i'd want to force on my kids.
we've already socked away enough for our three year old to handle a little more than year of tuition at the university of texas, and our one year old might just have enough to get through a semester at this point. i'd imagine, barring a drastic decline in their rates of return, that they'd have enough to get through an in-state public school, even with the trend of tuition increases that we've seen over the past years continue. and that's what we are prepared to do for them -- put them through a public university. of course, if they choose to go out of state or attend a private university, we'll let them make up the difference.
Thursday, December 30, 2010
reboot
i've been purposely anonymous (not just by name, but also in not divulging my age, profession, income, etc.) in my writing on this blog from the beginning because i felt that would allow a broader audience to read my posts.
an interesting thing happened the other day that made me rethink this approach, and made me think that i should narrow my focus and write with a very specific and personal audience in mind. you see, i was having lunch with a co-worker and the topic of goals, retirement, and the like came up. now, here's a guy i respect very much, who is about the same age as i am, about the same income level, and for all practical considerations, we could be practically twins on paper.
when the talk moved to retirement, i shared with him that my goal is to retire or semi-retire by the time i am 45 years old. i am currently 36. he was a bit shocked, and floated a big question my way: "what's your secret?"
i was perfectly honest with him. i don't have any secrets. for the most part, i am a pretty normal guy. i have not had any big windfalls occur in my life. i have not made a ton of money in stocks or real estate. i did not come into any family money by birth or inheritance. i am not an entrepreneur. i do not own my own company. i am a hard worker and make a decent wage.
there might be some small things that may separate me from my co-worker. i have never carried any credit card debt. i did not take out any student loans. the only debt that i have ever carried is mortgage and car loans. i have been an aggressive saver most of my working life.
i am married and my wife and i were dual income / no kids for about 7 years. my wife is now part time and we have 2 kids -- a one year old and a three year old. we live in the suburbs some 20 miles north of dallas, texas, in what is for most respects our "dream house".
i used to think that i'd need 2 million dollars to retire, but these days i feel like retirement or semi-retirement can be accomplished with far less. i could be dead wrong. but, this is what i am going to write about.
an interesting thing happened the other day that made me rethink this approach, and made me think that i should narrow my focus and write with a very specific and personal audience in mind. you see, i was having lunch with a co-worker and the topic of goals, retirement, and the like came up. now, here's a guy i respect very much, who is about the same age as i am, about the same income level, and for all practical considerations, we could be practically twins on paper.
when the talk moved to retirement, i shared with him that my goal is to retire or semi-retire by the time i am 45 years old. i am currently 36. he was a bit shocked, and floated a big question my way: "what's your secret?"
i was perfectly honest with him. i don't have any secrets. for the most part, i am a pretty normal guy. i have not had any big windfalls occur in my life. i have not made a ton of money in stocks or real estate. i did not come into any family money by birth or inheritance. i am not an entrepreneur. i do not own my own company. i am a hard worker and make a decent wage.
there might be some small things that may separate me from my co-worker. i have never carried any credit card debt. i did not take out any student loans. the only debt that i have ever carried is mortgage and car loans. i have been an aggressive saver most of my working life.
i am married and my wife and i were dual income / no kids for about 7 years. my wife is now part time and we have 2 kids -- a one year old and a three year old. we live in the suburbs some 20 miles north of dallas, texas, in what is for most respects our "dream house".
i used to think that i'd need 2 million dollars to retire, but these days i feel like retirement or semi-retirement can be accomplished with far less. i could be dead wrong. but, this is what i am going to write about.
Saturday, December 12, 2009
investment properties 2 and 3
went out a few weeks ago with my realtor and found a great deal and a property that i thought we could get done. one was a foreclosure and we made an offer that day, but we were a bit slow. it had been on the market less than a week and it was snapped up. the other property happened to be the exact same floor plan as the other, and after several rounds of negotiations, i still couldn't get the sellers to move to the where the deal would make sense for me.
Sunday, October 18, 2009
investment property #1 follow up
well, we moved too slow. after seeing investment property #1, we slept on it one night, and the following day i contacted our realtor to start putting an offer together. as she was putting it together, we came to find out that the owner had received another offer and accepted it the previous day.
i'm not too broken up about this -- we're looking for a deal and want to make sure we're comfortable buying what we buy. in so doing, we will miss out on some and we will close others. the most important thing is that when we do, that we're comfortable that we're making a sound financial decision, and not buying for the sake of buying.
i'm not too broken up about this -- we're looking for a deal and want to make sure we're comfortable buying what we buy. in so doing, we will miss out on some and we will close others. the most important thing is that when we do, that we're comfortable that we're making a sound financial decision, and not buying for the sake of buying.
Monday, October 5, 2009
investment property #1
after weeks of looking and looking, i think we finally found a "deal". over the course of the past couple weeks and dozens and dozens of house that we looked at, we saw homes that were mainly overpriced. even some that were in a terrible state of disrepair were asking for a pretty penny.
then, this sunday, everything changed. we looked at two homes, and we liked both of them! one was a foreclosure and would need a good amount of work to get it into a habitable state, but it was at least priced right. the other had been sitting on the market for a while and had just dropped the price about 12%.
this second one was in pretty good condition and had been upgraded a fair bit. and, the listing agent was offering that the seller was "motivated". we'll see just how motivated he/she is as we'll be making an offer at a discount of another 7% of the list price.
my my figures, based strictly on cash flow and making some assumptions about the cost of maintenance, occupancy rates, etc. i'm guessing that we can make about 4.5% on money that we are putting in. that's based strictly on cash flowing from rent, over the long term, even assuming that the value of the property stays put, the return actually moves to 11-12% when you take the build up in equity over the course of the mortgage.
now, i'm a novice at this, so i may be way too optimistic with my models and assumptions, but i'm going to give it a try and i'll report back on the details.
then, this sunday, everything changed. we looked at two homes, and we liked both of them! one was a foreclosure and would need a good amount of work to get it into a habitable state, but it was at least priced right. the other had been sitting on the market for a while and had just dropped the price about 12%.
this second one was in pretty good condition and had been upgraded a fair bit. and, the listing agent was offering that the seller was "motivated". we'll see just how motivated he/she is as we'll be making an offer at a discount of another 7% of the list price.
my my figures, based strictly on cash flow and making some assumptions about the cost of maintenance, occupancy rates, etc. i'm guessing that we can make about 4.5% on money that we are putting in. that's based strictly on cash flowing from rent, over the long term, even assuming that the value of the property stays put, the return actually moves to 11-12% when you take the build up in equity over the course of the mortgage.
now, i'm a novice at this, so i may be way too optimistic with my models and assumptions, but i'm going to give it a try and i'll report back on the details.
Wednesday, May 30, 2007
15 or 30
i posted a while back about whether it was better to go with a 15 or 30 year mortgage on our house. in the end, for flexibility, we opted for the 30 year. this made me think about whether it would be better to go with a 15 or 30 year note on an investment property. now, generally speaking, i think rents on investment properties probably allow you to take in some passive income if you're on a 30 year note, but it's probably much more difficult to do on a 15. but, of course, you get the benefit of depreciation, so it's probably doable. my question is this -- is it better to build equity in an investment property (say a small house or condo that likely appreciates slower than your primary residence) quickly with a 15 year note and possibly take on some investment losses until the mortgage is paid off, or take some gains while paying off the mortgage and go with a 30 year note?
Sunday, May 27, 2007
to pay extra on my mortgage
we moved into a new home (with a brand new mortgage, to boot) last month and i have been setting up the auto pay options with my lender. we secured a 30 year loan at 6% and i figured i could pay a bit extra each month and trim about 10-15 years off the note. well, when i initially set up the auto pay, i figured instead of paying extra principal i could take it and invest that money elsewhere. if i'm borrowing at 6% (really, somewhere around 4% because of the interest deduction), i reasoned, i could put that money into the market, which historically returns around 10%. so, that's how i set it up.
then, a few days later, i reasoned a bit differently and reset my auto pay options so i was paying extra. i would be saving the guaranteed 6% (or the effective rate after applying 25% or 33% or whatever depending on my tax bracket) and i wouldn't have to worry about putting that money at risk in the stock market.
but now, i'm back to thinking that i should just pay the monthly payment, invest the extra, and sit back and relax. right now, it makes the most sense to me. yeah, i'll end up paying about twice the price of my house over 30 years. but in 30 years, my extra investments should easily return a double. so, absolute worst case, it's a toss up. best case, my monies that would have otherwise reduced the price of my loan will end up beating out those gains.
then, a few days later, i reasoned a bit differently and reset my auto pay options so i was paying extra. i would be saving the guaranteed 6% (or the effective rate after applying 25% or 33% or whatever depending on my tax bracket) and i wouldn't have to worry about putting that money at risk in the stock market.
but now, i'm back to thinking that i should just pay the monthly payment, invest the extra, and sit back and relax. right now, it makes the most sense to me. yeah, i'll end up paying about twice the price of my house over 30 years. but in 30 years, my extra investments should easily return a double. so, absolute worst case, it's a toss up. best case, my monies that would have otherwise reduced the price of my loan will end up beating out those gains.
Tuesday, May 1, 2007
15 or 30
well, after quite some deliberation, we decided to opt for a 30 year mortgage rather than a 15. gasp! on our last house we secured a 30 year mortgage when we bought it and then refinanced a year later to a 15, and we felt that would be the prudent thing to do again.
since we're not experts at home buying, we figured that on a 30 year note, we would have the flexibility to pay extra towards principal and essentially turn the 30 into a 15, but if we started with a 15 year mortgage, we wouldn't have that same flexibility. this is especially important the first year or two in a new house at least in texas where we live, where property taxes are pretty high. mortgage bankers generally will take the previous years taxes and use that to calculate your payment. in our case, since we built a new house, our year ago appraisal would have been that of an unimproved lot and taxes would be a lot lower.
almost without question, i certainly think that a 15 year note is the way to go. when you look at the amount of interest you pay over 30 years, you basically are paying for your house twice! on a fifteen, that gets cut down to about a 1.5x multiple. it comes down, of course, to what kind of return you can get on your money as to which one (or even a longer term) to go with. since we're rather conservative, we'd rather take the guaranteed return by paying down our mortgage -- but not to the exclusion of other investments. other people might opt to take a longer term (and hence a smaller monthly payment) and find a better return on stocks or other investments.
since we're not experts at home buying, we figured that on a 30 year note, we would have the flexibility to pay extra towards principal and essentially turn the 30 into a 15, but if we started with a 15 year mortgage, we wouldn't have that same flexibility. this is especially important the first year or two in a new house at least in texas where we live, where property taxes are pretty high. mortgage bankers generally will take the previous years taxes and use that to calculate your payment. in our case, since we built a new house, our year ago appraisal would have been that of an unimproved lot and taxes would be a lot lower.
almost without question, i certainly think that a 15 year note is the way to go. when you look at the amount of interest you pay over 30 years, you basically are paying for your house twice! on a fifteen, that gets cut down to about a 1.5x multiple. it comes down, of course, to what kind of return you can get on your money as to which one (or even a longer term) to go with. since we're rather conservative, we'd rather take the guaranteed return by paying down our mortgage -- but not to the exclusion of other investments. other people might opt to take a longer term (and hence a smaller monthly payment) and find a better return on stocks or other investments.
Sunday, April 29, 2007
for sale . . . sold!
so, after months and months, we have finally built, sold, and closed on our new, old, and our new and old homes, respectively. it was a very harrowing ordeal that came down to the last few minutes, but so far, we are really enjoying it.
the process started off easily enough: we decided to move to a house that was more suitable for us and our growing family. when we found the 'perfect' house, we decided to build it and sell our old house. since the build process takes a while (about 7 months for us), we thought we would have plenty of time to sell our old house. well, 6 months in, we still hadn't sold our house and decided to switch realtors . . . all the while, the progress on our new home was moving along. fortunately for us, our builder really worked with us and didn't even pressure us for more down or anything -- the contract called for a considerable deposit at the time it went to dry-wall. a day after we switched realtors, we got an offer and they wanted to move in quick -- in about 4 weeks. wow!
lo and behold, a call into our builder revealed that our new house would be done the exact same day that the buyers wanted to close on our old house! talk about coincidence!
we were getting very excited as we got close to our closing date (both the old and new on the same day) . . . the day before we were scheduled to close, with movers and an assortment of services scheduled, we got some uncomfortable news. our buyers had to move their close date out because they had changed lenders at the last minute and were scrambling around to get all their paperwork in place. well, we were supposed to use the proceeds of that sale towards the down payment on our new home. what were we going to do?
i called the title company and found out that it was perfectly acceptable for us to go ahead and close but the keys wouldn't be released to us until the loan was funded. not an issue with me. we had a day of buffer built into the whole process. but wait, there's more! at our final walk through with our builder, we found out that he had to push out the closing due to some small items that needed his attention. so, now, we were back to closing on the same day -- a friday. we'd close on the purchase in the am and as soon as the closing on the sale was done, the magic of wire transfers would make everything okay.
we found out that we were going to close on the sale at 3pm on friday. that gave us 2 hours for everything to get signed off on before the banks closed for the weekend. when we showed up, the buyers were still signing. at around 3:30pm, we got in, signed the HUD settlement statement, which got faxed over to the other title company while we continued to sign. about half an hour later, at 4, we finished and i called the other title company to make sure everything was okay. they just picked up the settlement statement and faxed it over to our lender, who was waiting on it. driving home, i got a phone call from the title company saying they were waiting for another document. what?! it was 4:30 and we were running out of time. i was calling the title company that we just left to find out what was going on when another call came in -- we were funded and everything was done!
whew!
i thought i'd pass on this story because i never had a real appreciation for how closings happen and what order things can happen in. basically, what it comes down to is this: you can more or less sign in any order you like, but nothing will be done until all the money moves around and all the docs are likewise passed around.
the process started off easily enough: we decided to move to a house that was more suitable for us and our growing family. when we found the 'perfect' house, we decided to build it and sell our old house. since the build process takes a while (about 7 months for us), we thought we would have plenty of time to sell our old house. well, 6 months in, we still hadn't sold our house and decided to switch realtors . . . all the while, the progress on our new home was moving along. fortunately for us, our builder really worked with us and didn't even pressure us for more down or anything -- the contract called for a considerable deposit at the time it went to dry-wall. a day after we switched realtors, we got an offer and they wanted to move in quick -- in about 4 weeks. wow!
lo and behold, a call into our builder revealed that our new house would be done the exact same day that the buyers wanted to close on our old house! talk about coincidence!
we were getting very excited as we got close to our closing date (both the old and new on the same day) . . . the day before we were scheduled to close, with movers and an assortment of services scheduled, we got some uncomfortable news. our buyers had to move their close date out because they had changed lenders at the last minute and were scrambling around to get all their paperwork in place. well, we were supposed to use the proceeds of that sale towards the down payment on our new home. what were we going to do?
i called the title company and found out that it was perfectly acceptable for us to go ahead and close but the keys wouldn't be released to us until the loan was funded. not an issue with me. we had a day of buffer built into the whole process. but wait, there's more! at our final walk through with our builder, we found out that he had to push out the closing due to some small items that needed his attention. so, now, we were back to closing on the same day -- a friday. we'd close on the purchase in the am and as soon as the closing on the sale was done, the magic of wire transfers would make everything okay.
we found out that we were going to close on the sale at 3pm on friday. that gave us 2 hours for everything to get signed off on before the banks closed for the weekend. when we showed up, the buyers were still signing. at around 3:30pm, we got in, signed the HUD settlement statement, which got faxed over to the other title company while we continued to sign. about half an hour later, at 4, we finished and i called the other title company to make sure everything was okay. they just picked up the settlement statement and faxed it over to our lender, who was waiting on it. driving home, i got a phone call from the title company saying they were waiting for another document. what?! it was 4:30 and we were running out of time. i was calling the title company that we just left to find out what was going on when another call came in -- we were funded and everything was done!
whew!
i thought i'd pass on this story because i never had a real appreciation for how closings happen and what order things can happen in. basically, what it comes down to is this: you can more or less sign in any order you like, but nothing will be done until all the money moves around and all the docs are likewise passed around.
Friday, April 6, 2007
point of interest
we are currently securing a loan for a new house purchase. mortgage rates are pretty low these days and some of our lenders are offering to let us buy points to lower them even more. these so called discount points cost 1% of the loan amount and bring down the interest rate 0.125%. so, i started thinking about the merits of buying discount points. it's not nearly as straightforward as i thought, but it feels like a sucker bet to me.
there are a lot of components:
0. your interest rate will change, causing your
1. your monthly payment to change slightly, resulting in
2. your overall cost of the loan changing, and
3. you lose any flexibility that you would have with that money
now, i haven't done any calculations, but the overall savings on 0.125% seems pretty slight to me. that is, i think you could do far better by taking the money and investing it elsewhere.
let's look at a tangible example. let's say you're looking at a $475,000 home, where you need to borrow about $380,000. if you are looking at a 30 year note @ 5.875% where principal and interest comes to $2,250, you'll end up paying $810,000 over the course of the note. if, however, you decide to buy that down, paying 3% of your home cost ($14,000), to 5.25%, you'll end up paying about $2,100 monthly, or $756,000 over 30 years. that comes out to a $54,000 savings. sounds like a lot, huh? well, depending on what you can make on that $14,000, i'd say you'd be better off not buying it down. if you could get about 10% on your money, you're likely to see about 3 triples, or a return around $100,000 on your money!
and anyway you look at it $100,000 > $54,000. so, stay away from the sucker bet, and stash your cash somewhere else.
there are a lot of components:
0. your interest rate will change, causing your
1. your monthly payment to change slightly, resulting in
2. your overall cost of the loan changing, and
3. you lose any flexibility that you would have with that money
now, i haven't done any calculations, but the overall savings on 0.125% seems pretty slight to me. that is, i think you could do far better by taking the money and investing it elsewhere.
let's look at a tangible example. let's say you're looking at a $475,000 home, where you need to borrow about $380,000. if you are looking at a 30 year note @ 5.875% where principal and interest comes to $2,250, you'll end up paying $810,000 over the course of the note. if, however, you decide to buy that down, paying 3% of your home cost ($14,000), to 5.25%, you'll end up paying about $2,100 monthly, or $756,000 over 30 years. that comes out to a $54,000 savings. sounds like a lot, huh? well, depending on what you can make on that $14,000, i'd say you'd be better off not buying it down. if you could get about 10% on your money, you're likely to see about 3 triples, or a return around $100,000 on your money!
and anyway you look at it $100,000 > $54,000. so, stay away from the sucker bet, and stash your cash somewhere else.
Wednesday, March 7, 2007
buying vs renting
i had a conversation with a buddy of mine yesterday about saving . . . he asked me what i thought my savings rate was and i said, it probably varies between 30% and 50%, but what i didn't take into account was home equity. every month a good portion of my take home goes toward paying on my mortgage, and while it is technically not the same as saving, it is going toward an asset that i could convert to cash at some point. not only that, it is probably earning 'interest' in the form of appreciation.
you can make a good argument on the benefits of renting versus buying. there are a lot of nice things about renting -- you get a good deal of flexibility, you don't have to put a lot down, and, if you rent a place cheap enough, you can really put your money where you can do better than in your home. on the other hand, if you are buying, at the end of it all, you can own your home and/or take some equity out along the way. you get some tax benefits from owning and if your mortgage is around what it would cost to rent, you're really using your home as a great vehicle for saving (it's an asset versus liability thing, if i remember from accounting).
look, i'm not saying one is better than the other, but for me, it's the way to go.
you can make a good argument on the benefits of renting versus buying. there are a lot of nice things about renting -- you get a good deal of flexibility, you don't have to put a lot down, and, if you rent a place cheap enough, you can really put your money where you can do better than in your home. on the other hand, if you are buying, at the end of it all, you can own your home and/or take some equity out along the way. you get some tax benefits from owning and if your mortgage is around what it would cost to rent, you're really using your home as a great vehicle for saving (it's an asset versus liability thing, if i remember from accounting).
look, i'm not saying one is better than the other, but for me, it's the way to go.
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