# An Apples To Apples Sale In The Marina (1751 Beach): The Investment

Dec 3, 2007

A little over two years ago (on 9/30/2005 to be exact) 1751 Beach Street was purchased for \$1,400,000. The purchase appears to have been financed with a down payment of \$170,000, a first (variable rate) mortgage in the amount of \$980,000, and a second (variable rate) mortgage of \$250,000. And HOA dues for the condo are a reasonable (especially considering they include earthquake insurance) \$275 per month.
Assuming a blended mortgage rate of 6% in 2005 (which is likely understated based on the combination of a super Jumbo first and a second), interest payments over the past two years would have been running at least \$6,100 per month. And property taxes (based on the sale price in 2005) around \$16,000 a year.
Based on these numbers, our back of the envelope calculations put the after-tax cost of holding this property at around \$4,400 per month (at a minimum); the opportunity cost on the down payment at around \$700 per month (assuming a 5% annual return); and the total effective cost at \$5,100 per month over the past two years. At the same time, this property did appreciate in value by about \$800 per month (based on its recent sale for \$1,420,000).
In other (overly simplified) words, if the person who purchased 1751 Beach Street last month for \$1,420,000 had passed on the purchase in 2005 (for \$1,400,000) and instead rented a similar condo for anything under \$4,300 per month (in 2005), they would have likely come out ahead (at least financially).
Looking forward? Well, that’s a topic for tomorrow.
An Apples To Apples Sale In The Marina (1751 Beach): The Market [SocketSite]

##### 64 thoughts on “An Apples To Apples Sale In The Marina (1751 Beach): The Investment”
1. Jimmy (Bitter Renter) says:

Doesn’t it cost something like 6% to sell the place?
Maybe you should factor that \$85,200 cost into their huge loss on this albatross…. which was costing them something like \$8400/mo in the end.
Ah, to be rich…

2. Agreeing w/ Jimmy. And don’t forget the loans’ closing costs (~15k?).

3. Satchel says:

Of course, Jimmy is right here. In addition to the 6% commission, don’t forget that interest is generally only tax deductible on the first \$1MM of debt (which doesn’t buy you a whole lot here!). In addition, most people who have the income to support these large mortgages are subject to AMT issues, or at the very least phaseouts that limit their ability to fully deduct the interest even on that first \$1MM. Albatross indeed!
And kudos to Socketsite for thinking about real estate in the right way (ie, comparing it to the rental cost/value). Looked at this way, at least in the nice areas in Western SF that I am very familiar with (e.g., St. Francis Wood, Monterey Heights, Forest Hills, etc.), I think you will find that real estate in this area has been basically a wash since 2002, and most definitely a loser since 2004 or so.

4. If memory serves me correct, the 2 bedroom on the top floor of this building sold in 2002 for 800k and again in 2005 for 1.2 million. 15% year-over-year increase is closer during that time period.
Maybe the purchase price of 1.1 million in July ’02 was unreasonably high.

5. fluj says:

It’s usually 5% commission, not 6.

6. FSBO says:

HOA dues are \$275 per month for a 2-unit HOA. Total dues are only \$6,600 per year (assuming each unit pays the same each month). I’m not sure what common area expenses these dues cover (utilities, lawn care, etc), but how much would earthquake coverage cost on brick building in the Marina? I’m surprised it is even available.

7. Uh, I may be way out of line here, and if I am please forgive me, but given that Socketsite has not generally done this kind of analysis in the past (at least since I started reading daily about a year ago), and given that I just posted a spreadsheet tool on my blog (http://www.submedian.blogspot.com) which does exactly this kind of analysis and which just so happened to be featured on the front page of thefrontsteps.com just this past Friday, I’m wondering if maybe, just maybe, my spreadsheet helped Socketsite make these calculations?
If so, it would be nice to get at least a shoutout and a link, like:
hey thanks Submedian for making a spreadsheet which we found useful.
I spent a lot of time on it, and I’m not charging for it, so the pleasure of being acknowledged is pretty much the only thing I get out of it. And again, if I’m completely off base, then I apologize, it just seems a more then a little coincedental is all.

9. missionite,
No offense taken and I’d probably ask the same thing (if not react in the same way). We do like your spreadsheet. We liked it when you first unveiled it a week ago as a comment on our post about 1307 Bay Street (When Good Comps Go Bad (Down In The Marina)). And we like it even more now that you’ve incorporated others’ feedback.
But quite honestly, we didn’t use it (and haven’t yet recommended it) for the simple reason that we haven’t been able to download it from Google Docs. And as such, we haven’t had a chance to put it through its paces (something we’re prone to do prior to recommending it to others). But we will.
That being said, as we wrote nine months ago, “Here’s the reality. As with any analysis, it’s all about the assumptions. And in the end, it’s an individual decision.” Regardless, we like the way you think, we’re looking forward to a web based version of your spreadsheet, and as always…thank you for plugging in.

10. Jimmy (Bitter Renter) says:

No doubt the spreadsheet is excellent, and comprehensive, but in the case of the particular real estate transaction being examined in this thread, its all about the numbers and has very little to do with the assumptions (except perhaps the estimated mortgage rate the buyers were paying).
Whoever bought this place most recently lost a LOT of money after factoring in transaction costs, interest costs, taxes and insurance. And if they did any maintenance or renovations, they lost all that “investment,” too. (But, their selling price *did* rise 1.4% right? So, prices haven’t actually dropped …)
Now, a real coup would be to get the sellers to post on this website how they really felt about their RE ownership experience.

11. missionite says:

For what it’s worth, I have included directions on the sheet itself for how you (or anyone) can generate your own editable copy. That seems to be working for most people, but I will export an .xls copy and send it to you. It is still a work in progress so I continue to welcome feedback. I will also be incorporating some of the comments I see here (i.e. Satchel points out that only the first million in interest is deductible – which I didn’t know, and does anybody know what “loan closing costs” JDMC is referring to?).
You are absolutely correct that is all about the assumptions.
My goal with this calculator is to try and give a reasonably accurate frame to those assumptions (i.e. worst case scenario/best case scenario) and show the financial costs and benefits of a given decision relatively free of more subjective influences.

12. Satchel says:

You’re right, Jimmy, the last buyer did lose a lot of money. But nothing compared to what the CURRENT owner is going to lose, IMO….

13. missionite says:

FWIW,
I have updated the numbers posted above onto the aforementioned calculator, and published it.
The break even point between buying and renting (assuming the renter is investing 100% of the difference – which, granted, is a big assumption) is if the renter is actually paying about \$10,362.75 a month in rent.
The owner lost about \$117k or \$4,500/month in cold hard cash. Which doesn’t sound that bad until you consider that \$170k down payment could have been generating 5% interest, and the cash flow difference between owning and renting, which in theory, the renter could have invested at 5% as well. Once that’s factored in, then the loss by the owner is around \$320k, or \$12k a month.

14. Trip says:

Missionite’s numbers are pretty ugly, and even the more conservative numbers show this owner very clearly would have been far better off renting rather than buying this place in 2005. That said, I think this seller is extremely smart and savvy in getting out now at the selling price and cutting his/her losses. Holding on to this place another year or two would have resulted in much, much bigger losses. It might seem sensible in one’s gut to “hold on until things rebound,” but that is not a smart financial move with the trends we’re seeing.

15. spencer says:

missionite,
i like your spreadsheet as well. i am glad that socketsite is doing this type of analysis and posting it for the masses to see. This is the same calculation that I have been doing for the last 3 years every time I get the hankering to look at properties for sales.
in order for me to buy, the cost of buying has to be at least close to the price of renting. right now, it is near double with my current apt. I would venture to say that 75% of the buyers in SF over the past 3 years DID NOT do this calculation.

16. RT says:

Several points:
1) Prices went up around 15-20% in 2005. Buying in 1Q05 is very different from buying 9/30/05. If you bought this place in 1Q05, you could have probably bought it for \$1.25-\$1.3 mil. Prices went crazy in 2005.
2) Prices continued to go up in 2006, and 2007. Just look at the Socketsite charts. 2005 was not the peak in prices. End-2005 was the peak in price appreciation, but prices continued to go up in this segment.
3) We can cherry pick minor appreciation condos in The Marina, but there are 20+ example I can think of that shows new record prices in District 7. I dare not post here, b/c I don’t want to incur the wrath and get my post deleted.
RT

17. tipster says:

I hate to be the one to bring this up, but the rental price for a 2000 square foot 3/2 in the Marina that done up would have been around \$4100, which was very close to their monthly costs, excluding maintenance.
Now it’s true that they lost the commission, and they probably paid closing costs at both ends, and they probably paid \$20K to fix stuff up over that period, so they lost only about \$120K. And if prices stay flat for the next five years, they still would have lost at least 120K, so there isn’t any need to discuss the problems of owning real estate in the short term. Long term it would have been just as bad or worse.
But I can promise you that if you met the seller, he’d tell you he made money, focusing only on the increase in price.
As for RT’s comments about new record prices, so what? If I buy a place for 1.2M, put \$0.3M in improvements and sell it for 1.4 that’s a record price for that property. But I still lost money. So record prices are clearly meaningless.

18. RT says:

I saw this place in 9/05, and last month. NOTHING was done to it.
A 3/2 in The Marina is renting for \$4,500-\$5,000/month. Anybody who pays rent is -\$110,000 to -\$120,000 in after tax income.
Im im the buyer, I am pumped. Bottom line, nobody should be buying with the expectation to hold for less than 5 years.
Furthermore, why is everything about making money? Show me something in the rental housing supply where you can rent something as nice. It’s rare.

19. Dan says:

“Long term it would have been just as bad or worse.”
With all of the costs involved in selling a place, it is not hard to find examples of people who lose money selling after such a short period. If you don’t plan to stay in the area for very long, it is clear that renting makes more sense.
Long term, one is less likely to lose money buying. Even those who bought at the peak prices of early ’90’s eventually made money if they held on to their properties. And long term, if one is renting a home not subject to rent control, rental costs catch up and surpass ownership costs.

20. SFSal says:

RT/Prime:
1) Buying for \$1.25M in 1Q05 would mean appreciation from 3Q02 to 1Q05 was 5%/yr and less than 5%/yr from 1Q05 to 4Q07. Typing “Prices went up around 15-20% in 2005” doesn’t make it so.
2) Too bad the sellers didn’t get your memo that prices in this segment are up since 2005. Think of all that money they must have left on the table.
3) There are 99+ example I can think of that shows new record low prices in District 7 but I dare not post here…

21. ex SF-er says:

“A 3/2 in The Marina is renting for \$4,500-\$5,000/month. Anybody who pays rent is -\$110,000 to -\$120,000 in after tax income.”
First, you’re incorrect… that would be \$110 to \$120 PRETAX income. (think about it for a minute).
Even then, i’m sorry you’re using a VERY generous 50% tax rate??? most people renting in the marina are nowhere near those tax rates due to the fact that tax rates are MARGINAL tax rates…
I also want to be sure we realize many people are “double dipping”.
They take the rent and “backwards math” it to a pre-tax income.
And then they take the mortgage and work through the taxes and deductions to compare that to a after-tax income.
you’ve got to choose one way… can’t double dip.

My computation shows that the original buyer lost \$253,800 (detailed below)
Purchase price 1,400,000
Sales commission, 5% 71,000
Loan closing cost 15,000
Interest 6100*24 146,400
HOA 6,600
Property taxes @ 1.1% 30,800
Insurance 4,000
——————————-
Total cash out 1,673,800
Original cost, 9/30/05 1,420,000
——————————-
Net loss 253,800

23. james says:

your numbers are all wrong and based on huge assumptions. only the agent, the buyer and his accountant know what commissions were paid if any. property taxes are closer to 1 percent, not 1.1. 15k in closing costs? when was the last time you got a loan?

24. Trip says:

James, the property tax rate in SF is 1.141%.

25. Satchel says:

Assuming the buyer lived there, you can’t really say that he “lost” \$253K because he did receive a benefit – namely the imputed rental value of the property.
Now, RT says that this is around \$4.5-5K permonth, and not being very familiar with the Marina I can’t say I disagree. I will say that in my neck of the woods (St. Francis/Monterey Heights), rental rates have been around \$3-4K per month for a typical SFH, often less. (They are ticking up a bit lately.) For this, the typical renter could rent a 2.5-3.0K square foot home, typically 3 or 4 bedrooms and 2 or 3 bathrooms. This typical house would have sold for around \$1.3-\$1.8MM during the period 2004 through 2007 (prices in general have not really gone up since then, although of course there are exceptions). On these numbers, you can see that anyone having purchased around here since 2004 has not made a wise financial decision (in perfect hindsight of course!), although RT’s point that not everything is about money is very well taken!
RT, since you are the purchaser of this place, I’d really be interested in any details that you would care to share about what your cost of financing is, and what type of appreciation you are expecting. I’m really trying to get my hands around the SF market and what people are thinking, because to me it all looks like a giant bubble… But I’m yearning to learn!

Use what ever numbers you want. My point is that the losses “appears” large.
Loan cost– The \$15,000 is not my number. I am using the number of another reader — see above jdmc at December 3, 2007 1:16 PM.
Property taxes — I don’t know for sure. The following site shows a rate of 1.11% for FY03-04. If you are right just reduce the total by \$2,800 — do what you wish with my number. Not a big deal.
http://www.sfgov.org/wcm_controller/community_indicators/government/propertytaxrate/propertytaxrate.htm
My number is meant to be gross total. Of course they are not absolute. They’re guestimates. Additionally one gets tax benefits from investment losses — yes only his accountant and the IRS know for sure.
OK

27. Dan says:

“I will say that in my neck of the woods (St. Francis/Monterey Heights), rental rates have been around \$3-4K per month for a typical SFH, often less. (They are ticking up a bit lately.) For this, the typical renter could rent a 2.5-3.0K square foot home, typically 3 or 4 bedrooms and 2 or 3 bathrooms. This typical house would have sold for around \$1.3-\$1.8MM…”
I think it would be unlikely one could rent a house that large in St. Francis Wood or Monterey Heights for \$3-4k now. Here’s a 3000 SF house near Forest Hill and Golden Gate Heights that is selling for \$1.575 million and renting for \$6750/month.
http://sfbay.craigslist.org/sfc/apa/498050009.html

28. missionite says:

Um, guys, I spent a good amount of time making the aforementioned spreadsheet (see above). It’s been somewhat vetted at this point by several hundred people and no major mathemetical errors have turned up yet, so instead of reinventing the wheel, and using flawed analysis, and arguing in circles, why don’t you just head over there, where this particular property is currently the featured property? Then grab a copy of the spreadsheet, and you can run any property you want to look at in the future. You’ll save a lot of time spinning your wheels. Also if you find an error on my spreadsheet you can let me know, I can correct it, and the entire community benefits.
James: the property tax is currently 1.141% (http://www.sfgov.org/site/treasurer_page.asp?id=8099), a 5% realtor commission is a conservative (and quite reasonable) estimate, and yes a commission was almost certainly paid because the house was listed on the MLS.
I know some loans carry pre-payment penalties, but I have not heard back from JDMC as to where he arrived at this number, and at the moment I don’t think this number is something you can safely factor into your assumptions.
Satchel,
Ex Sf-er is correct, you are double dipping. This is a common error you see people making around here (unless you are the “anon” who was making this error previously). I hope you aren’t making serious financial decisions based on this logic.

29. Satchel says:

Hi Dan,
I’ve seen that one. With all due respect, you are a little off base if you think that is typical. I personally have rented a 2800 square foot home here, unobstructed ocean view (4 bedrooms, 4 bathrooms, renovated kitchen with granite and Subzero, 2 car garage space) for almost 5 years at \$3100 per month (no increases until this year). 1 Rosewood Drive (very large 3500 sq ft 4/2 with indoor 2 car garage, but slightly dated kitchen) was for rent for more than 1 year(!) (empty) at asking price of \$4000, before finally getting a corporate rental a month or so ago (as I said, things are tightening up). There are others on Monterey Blvd and St. Elmo currently renting for less than \$3K, etc. If you really care, I could find out the addresses and post them (I’d have to ride my bike by and write them down).
What I am noticing now, though, is that long term tenants are being asked to leave, and the houses are being held empty (there are a LOT of empty houses around here – maybe 5-8% of all the houses in this neighbohood). As I’ve written before, prices are not appreciably going up here, and haven’t been for a few years (for some examples, look at 135 San Benito – sold in 2004 for \$1.75M and in escrow now for around \$1.8MM after two price reductions, and 1495 Monterey – https://socketsite.com/archives/2007/08/its_on_monterey_but_its_feeling_more_carmel.html – purchased for \$1.5MM in 2002 (!), and now pulled off the market because as I understand no interest at anything more than \$1.7MM). Many houses are being prepared to come on the market – without the appreciation game, I’m guessing that many “accidental” landlords are getting ready to cash in.
Never confuse wishing prices with what is actually going on!

30. Dan says:

“for almost 5 years at \$3100 per month…”
Rents were lower 5 years ago, after the dot com bust, the recession, and 9/11.

31. james says:

that was 2 years of property taxes, sorry. i thought you were saying it was 1. again, without knowing all the fee’s, you really can’t say whether this guy broke even, made money, or lost it, nor if he cares.

32. Jimmy (Bitter Renter) says:

No matter how you quibble with the numbers– in the final accounting, owning this place for two years cost the buyer about \$10k/month (only a small fraction of which could have been written off of taxes) — safe to say that renting for the short term would have been a MUCH better deal.

33. james says:

ah, jimmy, almost all of that 10k would have been written off by anyone with a good accountant. those first few years of your mortgage are all interest, the property taxes, the costs to borrow if you pay any, all deductable.
if you don’t make enough money to have a tax problem that is’ the only time you shouldn’t buy, imo.

34. rillion says:

missionite, since this was mentioned earlier and it still wasn’t 100% accurate I’ll clarify it for you so you can set it up in your sheet correctly. There are two mortgage interest deductions that are allowable, up to \$1 million for Acquisition Indebtedness. There is a seperate deduction allowable for the additional interest on \$100,000 of Home Equity Indebtedness (which can be for purchasing the property or just for anything as long as the loan is secured by the property). You can combine them to deduct the interest on up to \$1.1 million in mortgages.
If someone is subject to AMT, they can still benefit from the \$1 million but they lose the \$100,000 Home Equity Indebtedness deduction.
I haven’t seen your spreadsheet yet but depending on how you set it up and how complete you want it to be, you might want to have it due different calculations depending on if someone is subject to AMT or not, since being in AMT doesn’t just change the rate, it also changes how big your mortgage can be and still be deductable(\$1 million vs \$1.1 million).
Now granted particularly in California, if someone has enough earned income to afford a \$1.1 million mortgage, they are almost certainly going to be running into the AMT.

35. Trip says:

James, even if the owner were in the highest tax bracket, it is certainly untrue that “almost all of that 10k would have been written off by anyone with a good accountant.” Even assuming that every penny of that 10k were interest, the owner would only be able to deduct his marginal tax rate X the interest. And AMT and other limitations also kick in at these high loans. At best, the deduction was about 40% of the portion of the 10k that represented interest, not “almost all.”

36. ex SF-er says:

rillion:
AMT makes the calculation so difficult though, ESPECIALLY if you ‘just’ hit the AMT.
One year I hit the AMT, just barely. I would NOT have hit the AMT had I not owned my home.
I was still able to deduct the interest I paid for my mortgage (which is far under \$1M)
however, due to now being in AMT land I LOST many of the deductions that I otherwise would have had…
so after all was said and done the mortgage interest deduction didn’t help me much.
In fact, if memory serves I redid my taxes that year NOT including the mortgage interest deduction (which would have kept me out of AMT) and I would have only paid a few thousand more in tax that way
now if you’re way into AMT territory then it doesn’t matter as much…

37. ex SF-er says:

for those of you who are interested:
One trick I learned a few years ago was to do “fake” taxes on the computer tax software to help get a guestimate of tax consequences of your actions. (I use Turbotax as example)
In Turbotax set up and do your real taxes. you will then have a printout of exactly how much tax you pay for the year, etc.
then you can change different parameters to see how it actually would affect YOUR PARTICULAR tax situation if you make life changes (like buy a house, get married, have a kid, etc)
so example… doing so I found out exactly how much mortgage interest I could deduct before I hit the AMT! and then how much it would affect me if it did!
it can also help if you have multiple variables changing.
Let’s say this year you make X amount and are getting married, and you plan on making X plus her salary next year and you’ll have a kid and buy a house…
you can run the scenario in turbotax to get a pretty close guestimate as to what your tax basis will be!!!! (now of course tax laws change each year so it isn’t perfect… but you’d be suprised how much this can help you)
many people are shocked to find that they don’t come out as well off as they think they will! others are pleasantly surprised.

38. travelling circus says:

Would someone enlighten me as to how to factor in the 1/3 decline over the last 5 years in the value of the dollar (vs. foreign currencies) to owning vs. renting. I don’t mean the tax effect of loss or gain, since owning and renting are both domestic transactions.
Isn’t there something to be said for holding (if you can) a real asset in a period of currency decline?

39. missionite says:

Rillion,
Currently, based on the earlier information I received, the spreadsheet is setup so that the interest on the first million of the purchase is deductible. Everything after that is not.
I did not know about the \$100k extra, and I will need to do some research to understand this better. I will of course incorporate this into the calculations once I have a grasp on how it works.
With regards to the AMT, I have wanted to avoid building a tax calculator, as that is beyond the scope of my goals, and I don’t want to make the spreadsheet too difficult or time consuming to use.
I had hoped to leave the tax bracket as a field that people could put their own numbers in, and I have pre-populated it with the bracket for AMT.
However, in certain cases, an owners tax status can have a large effect on the results (for example filing married or jointly has a huge effect on the capital gains exclusion), and I know the rules change a bit once AMT is triggered, so I may have to introduce an AMT check box that will then adjust all the affected formulas accordingly.
The tax implications are, for me at least, the hardest and most complex part to calculate. Just figuring out the capital gains exclusion made my head hurt with all the nested IF statements (which in and of themselves are difficult to work with in Excel due to the less then clear structure Excel forces you to use). How I long for a flat tax! 😉
Unfortunately there are no shortcuts, so I will need to just plod my way through one step at a time.

Travelling circus:

It’s hard to model the effect of the dollar’s decline. If you own assets that can be traded internationally (actually to Europeans or Canadians, since the dollar hasn’t declined against the Yen or Yuan or Middle Eastern currencies as much) then you benefit.

Since SF prices have been steady this year, at best, it implies foreigners with appreciated currency aren’t buying our real estate in great numbers.
And if you rented, you could have invested your downpayment money in gold (or other commodities) or European stocks or bonds.

It really varies on a case-by-case basis for renters, and homeowners are now stuck owning assets with steady or declining prices in US\$.

41. Trip says:

Travelling Circus — currency decline in and of itself won’t have much impact on the equation unless you have some international financial interest (e.g. some portion of your income is in Euros). Currency decline is often accompanied by inflation, however, which certainly will make holding a real asset more valuable. But there are lots of “real assets” that renters can hold as a hedge against inflation or currency decline — e.g. gold. This alone is not going to change the buy vs. rent analysis much.

42. fluj says:

If SF holds steady why is that a big problem? If it slowly grows over time, why is that some sort of failure? Why was double digit appreciation for unimproved property ever built in to any equation? I think most buyers over the last five years greeted double digit apprecition with surprise. They bought because they wanted to own in SF.

43. Satchel says:

Fluj, I can only speak for myself. I’m bearish, and so I do not think price will hold steady. But for me, I’ve crunched the numbers, and it literally costs me 1/3 to 1/4 as much to rent the place I want then it would cost to buy. To put that in real \$\$, if the price just stays “steady”, in my mind I am losing approximately \$50K per year in AFTER TAX DOLLARS, which is about 3% of the purchase price. Or, to put it even another way, the property would have to appreciate 3% per year just to break even. From an investment point of view of view, I am literally paying to take on the risk of what I think is an extremely irrational and overvalued market. That’s a bet I don’t want to take, and historically it is one that has not turned out well in any number of markets. When imputed earnings ratios (i.e., renting vs. buying in SF over the last 7 or 8 years, tech stocks in 1998-2000, farmland in Iowa in the 1920s, etc.) fall to levels where not only are you not being compensated for taking risk, but you are actually paying for the privilege, the episodes have typically ended in tears. But obviously everyone needs to make the decision for him- or herself. That’s why I applaud efforts such as the spreadsheet that we are talking about, because at least people can begin to make informed decisions.
If you think that prices are going to hold steady, understand that the owner of the Marina condo that we are talking about is effectively paying between approximately \$7K and \$11K per month in AFTER TAX DOLLARS to “rent” the condo (depending on financing rate, income, tax rate, etc.). And after all that, he or she is taking the risk that the property declines in value, a risk that is so idiosyncratic that it cannot be diversified away. Again, not a bet I’d take, but obviously a lot of people are taking it! I guess that’s what makes a market…..

44. chuck says:

Fluj, I’m going to go ahead and agree with Satchel about why it matters if the market just holds it’s value. When I run my very real world scenario through the NYT calcultor http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html it shows me I will NEVER be ahead by buying at these levels. (I want to try Missionites .xls soon too). I will loose 500k or more over a 30 year mortgage. And that is at a low 5% return on the money I am not investing in the house.
Here are the variables I changed from
default:
Monthly Rent: \$2400 (my real rent)
Home price: 800,000 (next door same size sold for
\$915k 6 months ago – benefit of the doubt is 800k)
Down Payment: 20%
Mortgage default: 6.25%
Annual property taxes: 1.25%
Annual Home appreciation: 2% (default)
Annual Rent Increase: 3% (rent control)
The main variables here that one needs to change to make it look better for buyers is the annual appreciation. Or adjust the Home price down, and the calculator looks better for buyers.
For me and this scenario, and Satchel, it seems just a bad deal to buy at these levels. Anybody else see this with their numbers who live in San Fran?
Personally I’m not bearish enough to forecast price declines. But I can’t forecast 5% a year appreciation either. Nothing about rent or wages or the economy indicates we can support 5% price increases annually for 5-10 years in San Fran. And even at 5% levels I will LOOSE money for 10 full years compared to renting according to these calculators.
It could be that if it matters to enough people that homes aren’t appreciating fast enough prices could go down…

45. Dan says:

If you are in a rent controlled apartment for \$2400/month, and are happy there, and you are not at risk of eviction by OMI or Ellis, it does not make sense to pay \$800,000 to own the same place. You should rent there as long as you are happy there, and invest your money.

46. james says:

let’s try this post again. maybe it’s the blog software and not the editor deleting my posts. if so, sorry for assuming as much editor.
if you can’t reduce your income by a 100k per year in deductable interest and property taxes, you don’t have a very nice place in the city or you really need a new accountant. anyone that pays serious taxes should always consider buying.
as for chuck, how big or small is this place for 2400 per month? are you single? why would you be reading this blog if you have no interest in buying.

47. ex SF-er says:

james:
I gotta get your accountant! 🙂
the age old problem though: I don’t want to spend \$1 to get 35 cents back on my taxes…
sure, the govt is subsidizing your housing expense… but you still have to pay 2/3rds of the cost(or near enough)
It’s one thing I never understand about people. They look at how much money they take in per month and then spend darn near that.
They spend a million bucks on a condo… a MILLION bucks. Man o man. Even if you make good coin, do you know how long it takes to pay that off with interest??? (yeah, I know… 30 years… chuckle chuckle)
but think about all the future expenses… retirement (no, a 401k is not enough), college for the kids, and all that…
I”m biased because I decided to live comfortably but frugally, so I could escape the rat race on MY terms.
I HIGHLY recommend this to people. Live BELOW your means. I’m not saying you have to rent… but leave yourself with some cushion!!!
My life improved 100x when I scaled back. No more running “The Red Queen’s Race” (wikipedia it)
when you buy a house, buy one you can afford EASILY. don’t need to make the Red Queen’s race any harder than it already is.

48. james says:

this is the problem with san francisco. not everyone can afford it. if you can’t move to tracy.
😉

49. diemos says:

Huh? I can easily afford to live in SF … as long as I rent. Much money for running around, funding the 401K, funding the house downpayment fund. If I bought a dwelling my standard of living would drop precipitously and I would lose all of my margin for dealing with life’s little surprises.
Going into debt up to my nostrils to purchase a dwelling would only be reasonable if I had a guarantee that the appreciation fairy would sprinkle some free money on my dwelling. Unfortunately, she’s been working overtime for the past 5 years and is about to go on an extended vacation.

50. RT says:

Ex-sfer and others, can we pay our rent with pre-tax income like how we pay/contribute to our 401k? If so, let me know where I can do this!
\$5,000/month in rent = \$8,000 in gross income based on a 35% tax rate. I’ve never been able to get on a program to pay rent in gross income.
As i look on CL now, this place would rent for closer to \$5,000-5,500/month and not \$4,500/month in after tax income. Feel free to look yourself.
After 24 months of renting at \$4,750/month let’s say, that’s \$114,000 in money never to return in after tax income. This equates to roughly \$160,000 in gross income one has to earn to pay \$114,000 in rent.
It is clear that anybody selling within 5 years will have a difficult time accumulating big wealth.
Again, if there is a system to pay rent with pre-tax income like flex spend or 401k, let me know! 🙂

51. missionite says:

RT,
Here’s a memo: You have to pay taxes if you own a home too. And when you pay your bills (mortgage-deductions, property tax-deduction, insurance, hoa, utilities, closing costs, selling costs, etc.) those are all in after tax dollars too. And if the home loses value, stagnates, or even if it only appreciates 2% a year, those dollars are never to return either. Worse, you can wind up losing a lot more money then if you had rented.
Owning a home will not, by itself, lead to big money. It’s a place to live, not an investment strategy. And if prices are inflated, and then come down as a result, owning a home can be an expensive decision.
James,
Your 2M home was worth what 7 years ago? \$500k? Do you think it’s going to be worth \$8M in 2014? By then the median income will be up to a whopping \$100k, right? So there should be a large pool of buyers who can afford a mortgage payment of \$45k+ a month don’t you think?
And if the tide starts to turn, how quickly can you get out of your house? It’s not a very liquid reserve of capital you have there, is it? Even if your home sells at \$2M it could be months before you complete a sale. You’re entitled to be excited about how well an investment your home turned out to be, but it’s an investment maxim that past performance is no guarantee of future results.

52. TR says:

Missionite:
You’re way too smart to be wasting your time on RT (Prime) or James (Prime again?). Save your breath for someone who can actually appreciate logic, rationality, and (gasp!) real economics.

53. Satchel says:

RT, no, unfortunately there is no way I know to pay rent with pre-tax dollars. Just one of the many distortions that the government has created.
But in thinking about after-tax costs, it should be kept in mind that many of us in SF do not have traditional W-2 employment, and so we often face lower marginal rates. For instance, investors and people living off, say, accumulated stock options wealth face a marginal federal rate around 15% maximum. Self-employed people can often reduce taxable income in numerous ways such that mortgage interest deduction is not as “valuable”. In fact, typical W-2 earnings for workers in SF are fairly low when compared to other cities with comparable housing costs (think NYC or Greenwich, CT), at least in my very limited experience (I’m not a W-2 guy, but we know a lot of them living in modest condos for which they’ve paid \$1MM++).
James, with all respect, your talk about deductions is a little silly. First, you don’t really specify any of the parameters (income, tax rate, morgage debt, etc.), but that’s ok. What I have an issue with is the idea that there are all these “magical” deductions that somehow only your tax guy can figure out. I’m not an expert, but I do know something about this. As an owner-occupier of a residence, you are entitled to deduct interest on up to \$1MM of debt (and on up to \$100K of home eq loan) and property tax, and that’s basically it. Condo owners may be able to deduct certain portions of their HOA, depending on what the HOA covers, but not the whole thing. There are also some small credits here and there that one can pick up for energy efficiency, restoration of historic property, etc., but these are small potatoes, and are generally not available in anay substantial size. That’s it.
Also, of course, any high earner W-2 “wage slave” 🙂 will be subject to the phaseouts that begin to reduce the amount of deductions (based on AGI), and in a normal underwriting situation (unlike what we’ve had in the last 7 years or so), anyone qualifying for the \$1MM+ required for even relatively modest SF properties will be WELL into the phaseout range, further reducing the “value” of the deductions. And then of course there are AMT considerations. Bottom line, all in tax benefits for most people are in the range of 25-40%, almost never higher than that.
Last, keep in mind that the interest deduction is limited to AT MOST \$1.1MM of debt. It seems pretty hard to get to “at least \$100K” off your taxable income. Effectively, that would mean that you are paying \$85K in interest on that \$1.1MM, in addition to prop tax of around \$15K. Obviously, there are a lot of variables, but you get the idea.
In all seriousness, it would be great if you could actually provide some real numbers to let us see how this \$100K deduction is achieved, and if there are any other benefits to homedebtorship that the Congress has slipped in without my noticing!

54. ex SF-er says:

RT:
what does renting have to do with your 401k? Yes, your money going into a 401k is pretax, and renting is post tax money… so what?
the argument isn’t “should you fund your 401k”, the argument is “should you buy or rent”
buying and renting both come from AFTER tax income. buying MAY return SOME (but probably less than a third) of your after tax income (due to deductions, etc), but unlikely any more than that.
Does your comment come from when I said: “but think about all the future expenses… retirement (no, a 401k is not enough), college for the kids, and all that… “??????
Because that comment only means that if you are ONLY saving in your 401k, you will NOT have enough to retire. One should max your 401k, and also any IRA if possible, and then ALSO set aside money for kids college, and then also money for a large emergency fund, and then ALSO for disability insurance and health/life insurance and all that. And then save some more.
And AFTER that’s all done then take what’s left and consider buying a house.
but too many americans do it the other way. They say “wow, I make \$200,000 a year. I’m rich. I’ll buy a \$1.5 Million house!!! I can make the payments (cough… interest only)”
and then they have no wiggle room.

55. spencer says:

Chcuck.
you are in the same boat as me. I pay \$2150 for rent and the apt next door sold for over \$900K.
For me to buy and hold for 10 yrs and be better of buying, the annual appreciation needs to be 7%. Otherwise I am losing money.
I think a 2% annual appreciation for the next 10 yrs in SF is stretching it. I think the 5 year aprpeciation will be negative

56. spencer says:

another note.
Someone alert the IRS to James. It seems that our man may be making some illegal deductions.

57. james says:

you know more about the tax code than i do. i don’t really care. i pay a guy every year to minimize my liability to fund our rediculous programs like wars and the homeless.
my place is worth just over 2mil and i owe about 1.3 on it. that’s where i get the 100k of deductions in both property tax and interest.
i agree with you about amt and minimized deductions but i have plenty of other things that help me get those back, all legal. that’s what good tax advice gets you. well, you get what you pay for i guess, and only a fool would hire himself as a client, so they say.
i don’t think you should do your own taxes when you bring home around 400k a year.
call me old fashioned.

58. chuck says:

James, I do want to buy, that is why I’m here researching. I like my place for \$2400 and it has 1400 square feet. Ok, I’d say, for the next 10 years but beyond that may need more space.
But I don’t want to buy at a rate that I loose \$40k a year, forever, vs renting according to the rent calculator (and a 2% appreication rate). Same boat as Spencer above. Last time I bought a house in 2003 it was cheaper than renting…. No brainer to buy. THEN it unexpectedly appreciated 50% in 2 years… based on ALL the money I put into it made closer to 100%. Sold tax free because I had to move, easy to sell too back in the end of ’05. That wasn’t San Francisco, but the return here would have been almost as good probably.
Buying now, hurts my brain. I can afford it easily… but the numbers don’t work out.
I’ve got a suggestion for you James: Sell your house for \$2,000,000. You should have about \$600k left after 5% selling costs and getting full price. Of course you have to pay taxes on your 600k minus deductions, (500k if your married), but I’m sure your accountant will work that out so lets pretend you net 600k out of it. Then go rent a place for \$5500 a month. You can probably get more than 5% on your 600k you just pocketed. Lets say 8% a year on your investments.
If you compare selling now and renting vs buying a 2 million dollar house, you see you may be able to earn \$8,000,000 toward retirement by renting vs buying a 2 million dollar place. If you compare selling now and renting vs a 1.3 Million dollar house, because you owe 1.3 million, you should sill save 2 million dollars or so MORE by selling now and renting.
Of course if you don’t sell, and your house actually goes down in value or doesn’t appreciate, you are loosing a ton of money vs renting. Earthquake wouldn’t help too much either.

59. anotheranon says:

One thing that seems to be missing from all the numbers being cruched is what happens once the mortgage for a home is paid off. Despite the property taxes, insurance and upkeep, the homeowner will be much better off than the renter at that stage. For a relatively young person, who would probably have at least a few decades after the house is paid off, that amount would be substantial. Can that be accounted for in the buy/rent scenario like missionite’s spreadsheet?

60. Satchel says:

Dan, I just saw your comment 12/4 9:37AM. Thanks for the tidbit about the Excelsior house. I think I’d prefer to stay in Monterey Heights/St.Francis for \$3K (4 bedroom/3 bath/2 car garage).
http://sfbay.craigslist.org/sfc/apa/499635549.html
Anyone who pays \$3.2K to rent in Excelsior is about as stupid as the person who paid \$800K+ to buy a place there (or in the Bayview, for that matter) – and there were a lot of those people!! In the upcoming deflating of this bubble, I suspect we’ll see some real wipeouts (like 50% off) in the marginal neighborhoods.

61. movingback says:

satchel, I am sure the owner of your lovely 4BR/3BA + 2 car garage home in St. Francis Woods appreciates the fact that you make his/her mortgage payment every month.

62. movingback says:

based on the location and brief description you gave, if I were the owner of the property, I would charge you closer to \$5,000 per month. With rents quickly on the increase, it could happen.