Home Buying in 90045>Question Details

Miguel_trulia, Other/Just Looking in 91030

buy a home or a pair to rent out?

Asked by Miguel_trulia, 91030 Sat Dec 27, 2008

my wife and i are trying to figure out the best way to take advantage of this falling market. we can afford to buy 2 houses in the la puente/west covina area to rent out or a single home in the west la area to live in. if we buy 2 to rent, we'll continue living in an apartment ourselves. what are you thoughts?

things we've considered:
1. deductions from interest payments
2. chance of increase/decrease in property value over the next 5 years
3. not sure, we might be missing some things

our thoughts on each will be in the next post

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Answers

5
Miguel .. Bill is right that the best approach is to prepare a list of positive responses about buying a home ... and then compare that with a negatives list. Please consider income tax consequences of each choice and consult with an income tax professional.

We recommend that you plan carefully for the purchase of a home, especially if this will be your first home purchase. This planning will include consulting with a lender or mortgage professional.

Keep in mind that the purchase of a home would not primarily be an investment, but rather for a place for you and your family to live for the next at least three years. The investment characteristics about this purchase will be considered over a longer period of time and at least three years.

Best wishes to you.

Harrison K. Long, Realtor agent and broker, Coldwell Banker Previews, Irvine, CA.

For the best Southern California home and property search check out
0 votes Thank Flag Link Sat Dec 27, 2008
Wait another year to buy, save another 20% on the price. Good Luck
0 votes Thank Flag Link Sat Dec 27, 2008
Miguel,

Each opportunity comes with its unique set of circumstances that are associated with your personal preferences and needs.

Our recommendation is for you to take some time developing two lists....one that accounts for advantages and the other for disadvantages for each option.

This is very basis but it's suprising the difference a simple activity like this can make.

Good luck
0 votes Thank Flag Link Sat Dec 27, 2008
You pretty much nailed it Miguel. Nice calculations and forethought. I would purchase units if you have the resources to do so. Rents are at an all time high and in demand from all the foreclosures occurring. Why not consider a triplex or fourplex where you can live in one of the units and be an onsite manager? Stop renting and be able to claim the structure as your primary residence as well as investment property/rental units. Please check with your accountant or tax advisor on the pros and cons in that regard to verify that it is in your best interest. The two out of five year rule applies but I'm not sure how it applies with 1-4 units. You may be able to offset the gain in five years if you were to sell the entire structure if you have lived there for the two year period. But please check that. I'm not for certain.

You get to write off the depreciation each year too. I believe the benefits will outweigh any negatives. Good luck and good thinking!!

Diane Wheatley, Broker
diane@moveuproperties.com
0 votes Thank Flag Link Sat Dec 27, 2008
i'll assume for now that in 5 years, house prices will be the same as they were when the market was its highest...

1. i assume we can't deduct interest payments on the rental property, and i'm assuming interest for the first 5 years on a 500K mortage will be about $36K a year, so we'd pay about a third of that less in taxes. so we'd save $12K by paying $36K, but its $12K we won't save with a rental.

2. since houses in la puente/west covina are about half what they were a year ago, they can potentially be that amount again. whereas houses in west la have maybe dropped about 10%, so they can potentially go up that amount. i'm thinking, for a home, we'll pay about $3K each month for 5 years, and reduce the principle by about 20K, then if it goes up about 10%, i'd be able to sell for about 70K more than i payed (assuming 700K house with 100K down) then i'd actually end up losing money - i'm paying 24K interest each year that isn't saved in taxes, for 5 years thats 120, so i'd lose $50K.

for the case of a rentals, i'd put in 100K down, maybe 50K for maintaining both houses for 5 years and maybe 10K for covering mortage when i'm not getting rental income. the rest of the mortage would be covered by rent. since these houses were twice their current value, there is a higher chance(?) that they can double again. so 2 houses at 250K, doubling would be 500K in profit, but then subtract the 160K, thay leaves about 340K in actual profit.

am i missing something? or is this a no brainer?

the only thing i think i'm missing is the extra time/effort that the rentals will cost me. i suppose i can't really put a price on that. then there's the price of owning the house i live in.

but quite frankly, it seems like in west la, you get a fairly crappy house for 600K or you get a really nice house in the ghetto.
0 votes Thank Flag Link Sat Dec 27, 2008
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