Rental parity on a 4/3 SFR?

irvine_home_owner_IHB

irvine_home_owner_IHB

New member
So one of the big things that hit me when I first started posting on IHB was the concept of rental parity.



The cliffnote version is that it didn't make sense to buy if you could rent for less and when those two figures came close, that could signify a time to consider purchasing.



I did some quick pricing and it seems like a decent 1900 sf 4/3 in Irvine is running at the low end of about $650k. Plugging those numbers into the RentVsOwnulator came up with an approximate monthly cost of $3000 per month if you purchase. I looked at leases for a similar home and rents ranged from $2600 to $3500.



On the calculator, I used 6% interest and a 35% interest/tax savings because I don't think 25% is high enough. Most dual-income families will probably be in that 35% range (but I'm not a tax accountant so don't quote me). I also lowered the cash savings to 2% but that should probably be less.



With home prices still dropping and if interest rates do stay at around 6-7% (which I think will be for a while), has Irvine hit parity for this specific product or did I do something wrong?
 
Can you copy and paste your whole calculation here? That may make it easier to see all the variables you used in it.





I'm always confused by the estimated ownership costs....how do you estimate that as a % and how did they come to the default of 18%?
 
[quote author="irvine_home_owner" date=1247095943]So one of the big things that hit me when I first started posting on IHB was the concept of rental parity.



The cliffnote version is that it didn't make sense to buy if you could rent for less and when those two figures came close, that could signify a time to consider purchasing.



I did some quick pricing and it seems like a decent 1900 sf 4/3 in Irvine is running at the low end of about $650k. Plugging those numbers into the RentVsOwnulator came up with an approximate monthly cost of $3000 per month if you purchase. I looked at leases for a similar home and rents ranged from $2600 to $3500.



On the calculator, I used 6% interest and a 35% interest/tax savings because I don't think 25% is high enough. Most dual-income families will probably be in that 35% range (but I'm not a tax accountant so don't quote me). I also lowered the cash savings to 2% but that should probably be less.



With home prices still dropping and if interest rates do stay at around 6-7% (which I think will be for a while), has Irvine hit parity for this specific product or did I do something wrong?</blockquote>
Did you include property taxes, insurance, HOA, Mello Roos, and maintenance in your calculation?
 
Interest rates are closer to 5 or 5.5% than 6% right now, which should make that calculation even better. But using IR's calculator, and assuming your estimate on prices of renting and owning are correct, you are correct-buying is at rental parity, or at least very close to it.
 
[quote author="25inIrvine" date=1247096406]Can you copy and paste your whole calculation here? That may make it easier to see all the variables you used in it.

</blockquote>
Here joo go:

<img src="http://www.edgeworld.com/ihb/rentalparity.gif" alt="" />

<blockquote>

I'm always confused by the estimated ownership costs....how do you estimate that as a % and how did they come to the default of 18%?</blockquote>
That was the default that IR came up with at the time the calculator was written. It's much harder to do the reverse calculation because of the regression involved so we decided to shortcut it and just put in a percentage calculation. The default should probably be lower nowadays.



One thing that I think many overlook is the tax writeoff is HUGE. For most people, 1/3 of your total mortage expense is a big discount on your housing costs. Even with 30-year traditional non-interest only loans, the majority of the interest is frontloaded so you are basically writing off your entire mortgage payment. Or maybe I'm just bad at doing taxes (who is our IHB accountant?).
 
[quote author="irvine_home_owner" date=1247098935][quote author="25inIrvine" date=1247096406]Can you copy and paste your whole calculation here? That may make it easier to see all the variables you used in it.

</blockquote>
Here joo go:

<img src="http://www.edgeworld.com/ihb/rentalparity.gif" alt="" />

<blockquote>

I'm always confused by the estimated ownership costs....how do you estimate that as a % and how did they come to the default of 18%?</blockquote>
That was the default that IR came up with at the time the calculator was written. It's much harder to do the reverse calculation because of the regression involved so we decided to shortcut it and just put in a percentage calculation. The default should probably be lower nowadays.



One thing that I think many overlook is the tax writeoff is HUGE. For most people, 1/3 of your total mortage expense is a big discount on your housing costs. Even with 30-year traditional non-interest only loans, the majority of the interest is frontloaded so you are basically writing off your entire mortgage payment. Or maybe I'm just bad at doing taxes <strong>(who is our IHB accountant?)</strong>.</blockquote>


I think that would be Ipop. Shoot him a PM and I'm sure he'll straighten all of this out for you.
 
[quote author="irvine_home_owner" date=1247098935][quote author="25inIrvine" date=1247096406]Can you copy and paste your whole calculation here? That may make it easier to see all the variables you used in it.

</blockquote>
Here joo go:

<img src="http://www.edgeworld.com/ihb/rentalparity.gif" alt="" />

<blockquote>

I'm always confused by the estimated ownership costs....how do you estimate that as a % and how did they come to the default of 18%?</blockquote>
That was the default that IR came up with at the time the calculator was written. It's much harder to do the reverse calculation because of the regression involved so we decided to shortcut it and just put in a percentage calculation. The default should probably be lower nowadays.



One thing that I think many overlook is the tax writeoff is HUGE. For most people, 1/3 of your total mortage expense is a big discount on your housing costs. Even with 30-year traditional non-interest only loans, the majority of the interest is frontloaded so you are basically writing off your entire mortgage payment. Or maybe I'm just bad at doing taxes (who is our IHB accountant?).</blockquote>


You will not get a 35% tax savings. You must give up the personal exemption when you itemize to claim the HMID. This nets about 10% off your highest marginal tax rate. Many people have run this scenario both ways in their tax software, and the 10% net loss is pretty consistent.



Also, you will need to check the HOA and Mello Roos for the individual property in question. This is a killer in Irvine. I have found several properties in Tustin and Costa Mesa that are below rental parity mostly because they do not have HOA or Mello Roos.



Can you show me a nice 4/3 that could rent for $3000 that only costs $650,000 in Irvine? I have not seen many of those yet.



If you factor in the lower payments of our near 5% interest rates, you can probably get near rental parity.
 
[quote author="IrvineRenter" date=1247100658]You will not get a 35% tax savings. You must give up the personal exemption when you itemize to claim the HMID. This nets about 10% off your highest marginal tax rate. Many people have run this scenario both ways in their tax software, and the 10% net loss is pretty consistent.

</blockquote>
IPOP said in some thread that you can save .37 cents on the dollar which seems to jive with what my 2008 taxes compute on.

<blockquote>

Also, you will need to check the HOA and Mello Roos for the individual property in question. This is a killer in Irvine. I have found several properties in Tustin and Costa Mesa that are below rental parity mostly because they do not have HOA or Mello Roos.

</blockquote>
Most of the HOA and MRs for homes built prior to 2000 fall in that $100/.25% range I put on the calculator.

<blockquote>

Can you show me a nice 4/3 that could rent for $3000 that only costs $650,000 in Irvine? I have not seen many of those yet.

</blockquote>
Here's a 1999 built 4/2.5 listed for $580k:



<a href="http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=41356453">http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=41356453</a>



And then a rental for $2600 in the same neighborhood:



<a href="http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=41023974">http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=41023974</a>



When I have time, I'll find the 4/3s I was looking at but the above was a better example because of their proximity to each other.
 
When you find one, send me the address, and I will do a more advanced analysis pulling actual rental and sales comps and post the report.



BTW, it was IPOP who first confirmed that you do not get the benefit of the full 37% marginal tax rate. It might feel like it to you if you already own a home, but you must compare it to renting to have an legitimate baseline.
 
<blockquote>Here?s a 1999 built 4/2.5 listed for $580k:



http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=41356453



And then a rental for $2600 in the same neighborhood:



http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=41023974</blockquote>


This is a great example of Rental Parity. Not so surprise that the listing home for sale receive multiple offer over the asking price.



What do you all think the sold price will finally sell for?
 
I ran the numbers throught a detailed financial planning projection program I have and came up with the following:





Assumptions: Married filing Jointly with two dependants, Gross salary $150,000, Home purchase 1/1/2009 for $650,000 with $130,000 down, 5.5% P&I 30yr loan, property tax $542/mo, insurance-repairs-special assessments-HOA (IRSAH) $831/mo. The rent scenario assumes $2600/mo rent and 2% interest on downpayment savings.



2009 Annual Summary

Rent Buy



Salary $150,000 $150,000



Interest From Savings $2624 $0



Total Income Tax ($43,526) ($32,885)







IRSAH or Rent ($31,200) ($9,973)



Interest ($0) ($28,425)



Principal ($0) ($7,005)



Property Tax ($0) ($6,500)



Money Left over $77,898 $65,212



You save $12,686 for 2009 for Renting vs. Buying
 
[quote author="irvine_home_owner" date=1247115972]McDonna:



I used $650000 with a $3000 rent on the calculator.



For $2600 rent, you need to go to $580k like my above example.</blockquote>


If you change the rent to $3,000 then the rental savings drops by $4,800 ($400x12). My main goal was to show you the tax difference. My program calculates deductions, exclusions, FICA, etc so it is pretty accurate.
 
[quote author="irvine_home_owner" date=1247115972]McDonna:



I used $650000 with a $3000 rent on the calculator.



For $2600 rent, you need to go to $580k like my above example.</blockquote>


Your numbers look good to me. Your insurance is almost double what i'm paying on a much larger home. Not sure why it's so high, but it's minor.



I also think your maintenance reserves are way too high. My parents spent about 20k on a 30 year old home in OC from 1990 to 2004 with AC and roof the major items. Perhaps they were lucky, but assuming most on here will buy a relatively new home I just don't see how you will spend anywhere near 50k during a 10 year window.
 
[quote author="Mcdonna1980" date=1247116432][quote author="irvine_home_owner" date=1247115972]McDonna:



I used $650000 with a $3000 rent on the calculator.



For $2600 rent, you need to go to $580k like my above example.</blockquote>


If you change the rent to $3,000 then the rental savings drops by $4,800 ($400x12). My main goal was to show you the tax difference. My program calculates deductions, exclusions, FICA, etc so it is pretty accurate.</blockquote>


Is this program something you can share?
 
[quote author="irvinebullhousing" date=1247104945]<blockquote>Here?s a 1999 built 4/2.5 listed for $580k:



http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=41356453



And then a rental for $2600 in the same neighborhood:



http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=41023974</blockquote>


This is a great example of Rental Parity. Not so surprise that the listing home for sale receive multiple offer over the asking price.



What do you all think the sold price will finally sell for?</blockquote>


Perhaps. That is still a GRM of 223. Rental parity, even with 5% interest rates, is closer to 185. The HOA and Mello Roos have a strongly negative impact on cashflow and would likely make this property much more expensive to own than to rent.



Also, these are both asking prices, and actual sales and leases are better comps.



That being said, with the kool aid in the market today, this will probably sell for over $600K.
 
[quote author="rtlguru" date=1247116656][quote author="Mcdonna1980" date=1247116432][quote author="irvine_home_owner" date=1247115972]McDonna:



I used $650000 with a $3000 rent on the calculator.



For $2600 rent, you need to go to $580k like my above example.</blockquote>


If you change the rent to $3,000 then the rental savings drops by $4,800 ($400x12). My main goal was to show you the tax difference. My program calculates deductions, exclusions, FICA, etc so it is pretty accurate.</blockquote>


Is this program something you can share?</blockquote>


The program is Naviplan. You can get a trial subscription online. I don't recommend it unless you want to spend alot of time learning the ins and outs of the program. If there is a scenario you want me to run let me know. P.S. I don't think the maintenance is overstated. I've looked at least 200 different home owner's budgets. They all spend a ton on their homes remodeling, decorating, gardening, maintenance workers, etc, etc. Homes are definitely black money holes. Sure you could get by on less but most don't. Yeah, insurance could be less if you have a small liability coverage and no earthquake.
 
[quote author="IrvineRenter" date=1247101640]When you find one, send me the address, and I will do a more advanced analysis pulling actual rental and sales comps and post the report.

</blockquote>
I used homeseekers.com to do my search and some 4/3s are actually 4/2.5s when you look at the details. The parameters I used were built after 1990, SFR, 4+br, 2.75+ba and in Irvine (obv). The reason I chose after 1990 was to minimize maintenance costs and because the newer floorplans are more desireable. The result was mostly West Irvine, Harvard Square and Westpark II (92602 and 92606 zip codes).



This one looked pretty good:



<a href="http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=39760648">http://www.socalmls.com/Listing/ListingDetail.aspx?Listing=39760648</a>



It's a decent sized corner lot, a 4/3, has upgrades and is range priced from $599k to $650k.



I used the same parameters for rentals and even scaled back to 2.5 ba but you still get the low of $2600 (the Copper Leaf property I posted earlier) and it looks to average around $3000 per month for comparables. This is also the data I pulled from IR2's closed leases spreadsheet:

<pre class="code">

Type A/D Zip Area Beds Full Half ThreeQuarter SqFt Total Sales Price

SFR A 92612 University Park (UP) 4 1 1 1 2200 $2,500

SFR A 92602 Northpark (NK) 4 2 1 0 2477 $3,150

SFR A 92612 University Park (UP) 4 3 0 1 2511 $3,200

SFR A 92604 El Camino Real (EC) 4 3 0 0 1900 $2,300

SFR A 92603 Turtle Rock (TR) 4 2 1 0 2555 $3,150

</pre>

(apologies for the formatting)
 
Anyone know what the HOA fees are for those West Irvine homes shown above? None of the ones on redfin seem to list them.



I'd pulled the property tax info. Loooks like about 1.04% + 1500 in special assessments. Should the mello roos/special assessments be a % in the rent vs. own calculator? Isn't it a set dollar amount regardless of sales prices and not a percentage?
 
[quote author="25inIrvine" date=1247118397]Anyone know what the HOA fees are for those West Irvine homes shown above? None of the ones on redfin seem to list them.



I'd pulled the property tax info. Loooks like about 1.04% + 1500 in special assessments. Should the mello roos/special assessments be a % in the rent vs. own calculator? Isn't it a set dollar amount regardless of sales prices and not a percentage?</blockquote>




West Irvine tracts that build on and before year 2000 has NO HOA. The newer developments between Robinson and Irvine blvd off Jamboree which has pools, tennis court and association amenities does have HOA. If the MLS does not have HOA listed for West Irvine homes, then this is not a mistake.



This is a huge saving for those home owner who bought in this neighborhood. I have friends who live in a gated communities that has pools and etc. but they do not even know what the pool look like. It is a complete waste of money if you don't use what you pay for. In addition living behind the guarded gate does provide some security. But it can be a false sense of security sometimes if you let your own personal guard down.
 
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