Below rental parity where I am renting

[ipoplaya_IHB]

The key difference is tax savings. At our income level, we are already itemizing due to state tax liabilities, so our tax savings on morg/tax deduction is at marginal rates, 28% and 9.3%, for a total of 37.3%. Also, I used an after-tax rate on our foregone/lost income. Since we are earning around 4% on our down payment fund, and lose 37.3% of that to taxes, a net rate of 2.5% is more appropriate.

MRs and association are very low relative to much of Irvine on this property.

I think 2.5% net is pretty low for lost investment. You're basically saying that since you've allocated it to a safe investment to protect it's downpayment ability that you've flushed it as an investment. Are you really a CFO that doesn't think he'll beat a 7.5% gross return on his investments? That's the rate that breaks even with the tax advantage on the interest right off.

If you figure a net 6% after from a gross 10% investment return, I get $4161.

If you figure 7% net if targeting a 10% return with a long term cap gains rate, I get $4440.

If you adjust your maintenance and replacement reserves, it get's worse. $417/month or $5000 a year sounds like a lot, but over ten years it's only $50,000, over 30 years, it's only $150,000.

Ironically, if you use a 6% lost return and a 25% down, I get a ownership cost close to a flat $4100 with a 1% maintenance reserve. I really think this is a better comparison. Not to mention the $125K that you can investment or use as a cushion.

I'm looking at the S&P and I believe its only yielded around 4-5% annually since I graduated college. A check of the top 25 performing mutual funds over the past 15 years puts the median return at around 8%. I'm not going to assume for calculation purposes that I am going to make the same returns as the top 1-2% of funds out there over a long horizon.

That being said, using 6-7% gross return with a long term gain vs. short tax effect would be more realistic and in that case, this purchase would not be at rental parity.

 

[lendingmaestro_IHB]

Ipop,

Weren't you just talking about possible decreases in income/possible employment uncertainty in an another thread?

 

[ipoplaya_IHB]

Ipop,

Weren't you just talking about possible decreases in income/possible employment uncertainty in an another thread?

Yup. Buying this place would mean my after-tax spend on housing was less than my rent. In a sick and twisted way, the purchase would have been a short-term cost-cutting measure. The maintenance reserve portion would likely not need to be spent while I was not working, so the purchase would have meant spend of $2750 or so vs. $3200 per month.

 

[No_Such_Reality_IHB]

That being said, using 6-7% gross return with a long term gain vs. short tax effect would be more realistic and in that case, this purchase would not be at rental parity.

I've been struggling with the right values. Leverage is so high on both sides, low mortgage rates and very large downs, that minor shifts in valuations really swing calculations.

I'd hope that the speculative bubbles have beaten the growth investing out of people, but I doubt it. It doesn't matter if it's real estate, tech stocks or gold. I suspect that the volatility and speculation is just going to get worse making realistic return calculations in investing in anything other the antacids problematic.

 

[WINEX_IHB]

Ummm, if you have to spend $350k to get that $450 a month reduction in rent, it can hardly be considered an austerity measure.

 

[biscuitninja_IHB]

Ironically, if you use a 6% lost return and a 25% down, I get a ownership cost close to a flat $4100 with a 1% maintenance reserve. I really think this is a better comparison. Not to mention the $125K that you can investment or use as a cushion.

I was doing exactly this. My calculations for financing in todays market look alot like this. I'd probably use the extra cash into a 529 fund(s). It just depends.

I'd also look at payoff in 15 years... just when you children will start into college....

-bix