Home Buying in 93021>Question Details

Jessica Reyes, Home Buyer in 93021

My husband and I are trying to decide between two scenarios, buy our mortgage down so it is a conforming loan

Asked by Jessica Reyes, 93021 Fri Jan 23, 2009

rather than a jumbo loan to get a lower mortgage payment, or use that money to put a down payment on a condo, rent it out and then sell it 3-5 years from now and gain that equity?

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Barry Shapiro’s answer
BEST ANSWER
Hi Jessica,

That is an excellent, yet complex question to be asking as mortgage rates become very attractive. The answer(s) lie within yourselves, after you acquire and analyse the gamet of information necessary for making a prudent decision. Some thoughts to consider:
1) How much risk are you willing to take at this juncture in your lives?
2) Do you have experience and the financial reserves necessary to become a landlord?
3) Low Risk: If you refi- with the extra cash, at say, 4.75% for 15/30 years, you could cruise into retirement with your home paid off. You pretty much won't be affected by the ups and downs in real estate, but you will end up with all your equity in your home. Do you have a retirement plan(s) that will enable you to live the lifestyle you plan for during your working years?
4) High Risk: Keep the Jumbo Loan and buy an investment property. The problem with doing this, in my opinion, is that you may end up losing your down payment should the market continue to decline.
5) I would ask: Where are you planning to buy this "cash flowing" real estate? It's still difficult to identify a suitable investment property in Ventura County. Remember, too, that if your current home does not have at least 90% loan-to-value, the new lender may not provice financing.
6) In the event the local market does rebound in 3-5 years (and my opinion is that it won't hit bottom until 2012), will you plan to sell your investment property? Uncle Sam (IRS) will tax you on your capital gains, unless you do a 1031 Exchange and defer the taxes. My wife and I have owned up to 5 rentals and plan to "swap 'til we drop" to avoid the 35%+ capital gains hit.
7) Worse case scenario: You lose your job after buying the rental. Your tenant flakes out on you and you can't pay two mortgages. This is an all too frequent scenario in an uncertain world. Pretty scary, huh?
8) My advice: Pay down your your loan to create extra cash-flow every month. Save that extra cash and be ready to invest it after 2012. Put yourself in the most favorable and least risky position as an investor.

Leveraged Real estate investing is an exciting way to create income streams when done properly. Your next stop should be to your local library or book store. Education won't cost you your life savings. Investing blindly will. Good luck with your decisions!!!
2 votes Thank Flag Link Fri Jan 23, 2009
Jessica,

Really to "cut to the chase"....I am not sure if there will be enough gain in the market in the next 3-5 years to give you the gain you are expecting.

We are looking at a large influx of option arm resets in 2010 and 2011. While the banks and the government are taking steps to mitigate the anticipated fall out, we will not really know the impact of the event till it happens. If we have another wave of short sales and foreclosure as the result of that reset, you will be sitting on that condo for a long time.

Also since the single family detached homes are as low as they are, many buyers are by-passing the Townhome/condo market for the home instead. HOA dues are high in many complexes which is having a big impact on buyers.

I wrote about the resets here: http://homebuysblog.com/2008/10/15/adjustible-rate-mortgage-…

after you read that article look at the categories section on the right margin and go through the market updates section and I have the monthly closing numbers for condos in Moorpark and Simi Valley posted there. That will give you an idea of the activity.

http://homebuysblog.com/category/market-updates/
Web Reference: http://www.homebuysblog.com
1 vote Thank Flag Link Sat Jan 24, 2009
Hello again Jessica,
Due to the recent turn-around in the real estate market, entry level condos in Newbury Park are selling in the $225K plus range to a flurry of homebuyers coming off the fence. So, you predicted the outcome of owning real estate long-term and reaping the rewards of appreciation. Congratulations!
0 votes Thank Flag Link Mon Oct 22, 2012
Jessica,

I just posted up on my blog an article about our Phantom Foreclosure Inventory. It is an interesting phenomenon. All of this and the discussion that has been going on below will have a huge impact on any decision you will make regarding rental property and the amount of time you need to hold it.

http://homebuysblog.com/2009/01/25/phantom-inventories-can-b…

The landlord business is not for everyone. I have a residential rental, plus I manage my family's retail shopping center. I am stressing this as much as I can, do not work with any Realtor who does not have rental property. There is no such thing as experience by "theory".

If you are the kind of person that gets upset over bounced checks and cannot fathom how a person could write a bad check, then Landlording is definitely not for you. I am not saying that every tenant is bad or that you will see lots of bad checks, but the longer you are at the business, not matter how well you screen individuals and businesses...Stuff happens.

If you get a vacancy for a few months; will you have the reserves to cover expenses and possible repairs?

I love rental property, but then again I grew up around it. I had a family that did real estate and did not do stocks.
Web Reference: http://www.homebuysblog.com
0 votes Thank Flag Link Mon Jan 26, 2009
Jessica, I agree with Barry's suggestion to pull together a "team." - completely.

Regarding cashflow, savings and ROI we may have a departure of thoughts. There is a "mythconception" regarding the security of paid-in equity to a home. First, as many people are now painfully aware, paid in equity is not safe as the market can easily erase it (orcourse, it's only lost if you sell while down). Nonetheless, the fundamental truth is that every dollar you pay in principal returns you 0%, is not earning a secure return. To get a "by the numbers" look at this topic see:
http://docs.Steven-Anthony.com/HowToSafelyManageHomeEquity.pdf

See an example of how this makes a difference in this post:
http://www.trulia.com/voices/Home_Buying/how_much_does_down_…

Best, Steve
0 votes Thank Flag Link Sun Jan 25, 2009
Hello Reyes Family,

I really appreciate how much time and effort you are putting into trying to make this work. The idea of owning an investment property is a great step towards realizing a comfortable retirement.

After reading others comments and your response, I suggest you sit down with the various players (tax, realtor, financial planner) to discuss your individual needs, timeframes and goals. I would personally try to talk you out of buying the rental condo today. Instead, I would suggest you pay down and refi- your mortgage into a conforming (non-Jumbo loan) with the $30K in cash (more or less). Figure out how much you'll be saving every month. THAT is your guaranteed RETURN ON INVESTMENT. What I mean to say is that the extra cash-flow you create by ceasing a low interest rate (while rates are so low) will equate to more money in your pocket at the end of the month. Set that money aside and wait for the opportunity to re-invest it into a condo in the future. Remember, too, that an investor makes their money when they BUY (below market), not when they sell (at market value). It's a good idea to "learn" where the positive cash-flowing deals are in Ventura County, so when the time is ripe you'll be best prepared to move forward. Plan for at least a 5-yr to 7-yr. holding period.

Here's the currently active (14) Attached RENTALS in Newbury Park:
http://vcrdsmls.rapmls.com/scripts/mgrqispi.dll?APPNAME=vcrd…

And, here's the (13) recently RENTED attached homes in Newbury Park (from the MLS):
http://vcrdsmls.rapmls.com/scripts/mgrqispi.dll?APPNAME=vcrd…

I'd like you and your family to have a complimentary copy of "The Millionnaire Real Estate Investor" book, written by experts in this field and the founder of Keller Williams. Let me know when we might be able to meet up at the Keller Williams Realty office in Westlake Village to share ideas and allow me to talk you out of an immediate purchase :-)
0 votes Thank Flag Link Sun Jan 25, 2009
Hi Jessica,
As Steve said this is uncharted territory. The ARM reset is going to impact every town in every part of the country differently. I attended the California Housing Market Forecast luncheon last October. While the prices are declining, sales are strong. I have attached a link to the website for your review. In this forecast you can see the difference in the housing decline throughout California. Sorry but, the ambitious goal of doubling you investment in 3-5 years isn't going to happen. The days of property doubling it value short term are over, that is the exact reason why there are so many foreclosures now.
-Larry
http://www.car.org/media/pdf/econpdf/10-15-08EXPOForecast-Fi…
0 votes Thank Flag Link Sat Jan 24, 2009
Hi Jessica, not familiar with that area, I'm up in the SF Bay Area; however, you can look at local rents using these two websites:

http://www.zilpy.com/
http://www.rentometer.com/landlord

To say that we are in uncharted waters would be an understatement concerning the housing market and its recovery. I think if you have a 10-year timeline you will be OK.

Again, I would highly advise that you get professional guidance on this before doing anything. Start with a CMPS to do a financial "sanity check." Then have a Realtor get involved that is referred from a trusted source.

I’m not sure of your background, but think long and hard about becoming a landlord . Going from homeowner to Landlord may present a steep learning curve in the maintenance of property, legal issues, and commitment of time.

Best, -Steve
0 votes Thank Flag Link Sat Jan 24, 2009
This is Jessica.........the investment property would be in Newbury Park. I was thinking of buying a condo for less then $130k and putting down about a 20% down payment, then hoping within 3-5 years the condo would be above $225k or more. Is Newbury Park a good rental market?
0 votes Thank Flag Link Sat Jan 24, 2009
Jessica, sorry, here's the "closer look" at the chart from Credit Suisse shown in Ted's blog link:
http://docs.Steven-Anthony.com/Resets.pdf

Best, Steve
0 votes Thank Flag Link Sat Jan 24, 2009
Jessica,

To add to what Steve just posted, we are in completely new territory, so even though we have some historical data to look back at, what has transpired this time is new. We just went through a period were Loans were securitized, this was major break from the traditional method of lending. Loans were made then packaged up in bulk 30-60 days after they were funded and sold as securities.

Also the fundamental attitude in what a house was to buyer this time around had radically changed. People were buying houses this time as high yielding commodities. Others were using the equity in their homes to supplement their incomes. In the 1970s the attitudes and beliefs of people were not even in the same galaxy.

This forum is not big enough to discuss in depth, but the spending that our economy so depends on cannot return to the levels of 2005-2006 for a long time. If people were living off their equity for all the "toys" and now the equity is gone; now they have to live off their income, which means the spending will be down. With unemployment up wages being threatened then the economy as a whoe will have a very slow climb out when the bottom is reached.
Web Reference: http://www.homebuysblog.com
0 votes Thank Flag Link Sat Jan 24, 2009
Ted, very good point on the return timeline! Jessica, you can get a closer look at the reset below.

While the predominate amount of foreclosures tied to “subprime” loan products has passed, we're not in the clear. This chart shows scheduled reset loan volumes for different loan categories.

As the chart shows, Subprime loans have pretty much run their course; however, Option/Alt-A/Unsecuritized ARMs are the next phase to provide a destabilizing affect. We have taken on some of the projected Option ARM pain earlier than is shown in the reset schedule. This is because Option ARMs have valuation based "triggers" that can cause resetting to occur sooner than originally planned (due to property devaluation and an owner's payment selection of a minimum or interest-only payment). The following chart shows how the resetting of these loans has shifted due to valuation based resetting and I have also provided an explanation.
http://docs.Steven-Anthony.com/OptionArmResets.pdf

Historically, since 1968 (this is how far the available data from CAR goes) there has only been one time where California housing had consecutive years of price decline. That would be 1992-1996 (see chart link below). Note that after this period the entire decline had been made up within the following two years (92-96 total decline of 12.2%, 97-98 total increase of 12.5%). While past performance is not a 100% predictor of future performance, I believe in the resiliency of California as an international destination location for work and living.
http://docs.Steven-Anthony.com/200XCAAnnualDataChart.pdf
0 votes Thank Flag Link Sat Jan 24, 2009
Jessica, You and your husband are faced with the same question as a lot of other potential investors. If your house payment is comfortable and you are in a decent fixed rate loan then buy an investment. Remember the interest you are paying is a tax deduction even on a jumbo. The price of an investment such as a condo is great, it is a buyers market out there. Nobody knows when the market will turn and start the up swing, but history tells us eventually it will. When it does you will have two properties with a lot of potential equity. My best advise to the both of you is
#1 sit down with a trusted Real Estate Professional and fully discuss and pencil out your options.
#2 sit down with your tax advisor and pencil out the numbers.
Please take the steps above, some people didn't over the last few years and now they are suffering and unable to make ends meet. Good Luck! I hope this helps :)

Have a great evening, Larry


Larry and Stephanie Watson
REALTORS, E-Pro, Eco-Broker
CrazyForRealEstate@yahoo.com
Stephanie 805-208-8219
Larry 805-660-8219
Both Of Us 818-606-0080
Fax 805-578-1519
http://www.SimiForRealEstate.com
R.R. Gable, Inc.
0 votes Thank Flag Link Fri Jan 23, 2009
Speak with CPA who can review all your financial records determine short / long term goals, tax benefits. Owning a 2nd home for investment income there are tax advantages.
Web Reference: http://www.lynn911.com
0 votes Thank Flag Link Fri Jan 23, 2009
Hi Jessica,

You are right. Equity in your home means lending money to the bank for free. Everything is on sale right now. Interest rates are low too. It is the time to buy.

I don't know how much down payment you are planning for the rental. For rental property, you must do a calculation. A good investment should have at least $200 positive cash flow per month
Duplex would be a better choice because one tenant moves out, you still have half rental income. It really depends where you want to invest.

Good luck with your investment. Please feel free to contact me.
Angela
0 votes Thank Flag Link Fri Jan 23, 2009
Hi Jessica, I would suggest that you locate a fellow Certified Mortgage Planning Specialist in your area to work with. This is exactly what we are trained to analyze.

Using nationally recognized experts as instructors, the CMPS Institute educates mortgage professionals on how to integrate sound financial planning advice into the mortgage process. CMPS graduates have developed five essential skill sets including: 1) Financial market and interest rate analysis, 2) Cash flow analysis, 3) Debt analysis, 4) Real estate equity management, and 5) Real estate investment analysis.

Do yourself a big favor and visit: http://www.cmpsinstitute.org/public/menu

Best, Steve
0 votes Thank Flag Link Fri Jan 23, 2009
I would look to refinance rather than pay down; a trusted mortgage person would be able to run the numbers for you. If you like your mortgage company start with them. In this market and with the low interest rates I would try to get a better loan.
You can then depending on your money situation still buy a condo, if you can afford to carry the costs of the condo in case the rental doesn't work out. Make sure you are buying in a vacation spot, also you may have to check the condo association rules about renting. Some associations won't allow anything but yearly rentals. Best to work with a realtor who can help you sort things out and get that kind of information for you.
0 votes Thank Flag Link Fri Jan 23, 2009
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