"SHOW ME THE MONEY" VIEWS on HOW to make MONEY GR

[retailguy]

That's great advice if I could A) find something is SoCal under half a mil and B) have 20% of a half a mil in cash handy...

Guess I'll either have to suck it up and by a property somewhere else and move back here for 'the second house'. Bummer...

Anyway I can put down just 5 or 10%? Should I tap my 401k savings (one-time w/o penalty) to do this OR just continue renting/investing?

Fosco, So-cal is an "almost" unique anomaly. I owned a home in Camarillo in the Heights. I bought in 1990 for 217,000, I'd suppose that's about an $800,000 home right now.

End of the line, it's all relative. You can buy with less than 20% down, however, it'll delay the formula. Of course, 15 - 18 years is still much better than 35 - 40 years which has to be the median in the LA market right now (it wouldn't surprise me if it's higher). I'd think that most families in Southern California won't ever have a paid for house and just accept that. It is very sad to have to "rely" on appreciation to make it work. Appreciation will end one day, it has to, the only alternative is for income to rise, and that is not likely to happen.

Watch out for PMI no matter what you do.

If you can leave So-Cal, I'd do that. While I recognize it is a wonderful place to live, at least related to weather and activities, there are many other great places out there where you can make a better overall purchasing decision.

[Partial]

To my mind, it depends on the location. If it is in a neighborhood that emphasises schools and kids/etc. then it might be a problem. If it is in an urban area, there will be a market based on young, single professionals. At any rate, if you can get it paid off in 5-6 years and manage to live in it that whole time, that would be pretty amazing. Don't forget though, with condos come association fees so you also have to measure what amenities are available and what all you get for that money.

Pretty amazing? Why?? Pretty smart. Every American could have a PAID FOR house in 10 years, no matter their income. The process is actually quite simple.

1. You need 20% down. (There are ZERO exeptions to this).
2. You need to purchase two homes.
3. The first needs to be approximately half the value of the home you ultimately want to own. A small house/condo/duplex is PERFECT. Location is important. You need to look to re-sale value.
4. You need a 15 year mortgage to take advantage of the lower interest.
5. You need to run an amortization schedule to pay the home off in 5 years.
6. You sell 1st home at 5 - 6 year point, hopefully adding a bit of appreciation.
7. You purchase Home number 2 - your dream home identified in the beginning- at a slightly higher price than you would have 5 years ago, and dump EVERY DIME of equity/cash you received from home #1.
8. You again take the 15 year loan, or lower term if available focused on MINIMIZING the interest rate.
9. You again run an amortization schedule for 5 year repayment.
10. You invite all your friends over for a "mortgage burning" party, and begin to live debt free for the rest of your life.

Yes, I realize that this is ambitious and not something everyone would consider. It, however, CAN BE DONE for EVERYONE. Whether it is a 2 bedroom trailer or a small condo, or a 30 room mansion, it WORKS. It takes discipline, it takes persistence and it FORCES you to live below your means. You cannot make two $500 a month car payments and pay a mortgage payment approaching $2200 a month (for most of us, anyhow), but you CAN MAKE THAT payment if you don't have two car payments.

In the end, it isn't a "stretch" or "overly ambitious", it is about choices. We all make them, we just don't focus on the impact of some of those choices.

Off my soapbox now...

That sounds like exactly what I want to do, but only build the second house myself. Maybe even buy two and work the system to make money and build my third house as the keeper by the time I am 40 or so.

What is an amortization schedule? Just by looking at the logic behind this it seems like a really good idea because it keeps cutting down the amount you're going to pay in interest on the bigger house that you want. That's not a bad idea at all as a matter of fact.

[Partial]

To my mind, it depends on the location. If it is in a neighborhood that emphasises schools and kids/etc. then it might be a problem. If it is in an urban area, there will be a market based on young, single professionals. At any rate, if you can get it paid off in 5-6 years and manage to live in it that whole time, that would be pretty amazing. Don't forget though, with condos come association fees so you also have to measure what amenities are available and what all you get for that money.

Pretty amazing? Why?? Pretty smart. Every American could have a PAID FOR house in 10 years, no matter their income. The process is actually quite simple.

1. You need 20% down. (There are ZERO exeptions to this).
2. You need to purchase two homes.
3. The first needs to be approximately half the value of the home you ultimately want to own. A small house/condo/duplex is PERFECT. Location is important. You need to look to re-sale value.
4. You need a 15 year mortgage to take advantage of the lower interest.
5. You need to run an amortization schedule to pay the home off in 5 years.
6. You sell 1st home at 5 - 6 year point, hopefully adding a bit of appreciation.
7. You purchase Home number 2 - your dream home identified in the beginning- at a slightly higher price than you would have 5 years ago, and dump EVERY DIME of equity/cash you received from home #1.
8. You again take the 15 year loan, or lower term if available focused on MINIMIZING the interest rate.
9. You again run an amortization schedule for 5 year repayment.
10. You invite all your friends over for a "mortgage burning" party, and begin to live debt free for the rest of your life.

Yes, I realize that this is ambitious and not something everyone would consider. It, however, CAN BE DONE for EVERYONE. Whether it is a 2 bedroom trailer or a small condo, or a 30 room mansion, it WORKS. It takes discipline, it takes persistence and it FORCES you to live below your means. You cannot make two $500 a month car payments and pay a mortgage payment approaching $2200 a month (for most of us, anyhow), but you CAN MAKE THAT payment if you don't have two car payments.

In the end, it isn't a "stretch" or "overly ambitious", it is about choices. We all make them, we just don't focus on the impact of some of those choices.

Off my soapbox now...

That's great advice if I could A) find something is SoCal under half a mil and B) have 20% of a half a mil in cash handy...

Guess I'll either have to suck it up and by a property somewhere else and move back here for 'the second house'. Bummer...

Anyway I can put down just 5 or 10%? Should I tap my 401k savings (one-time w/o penalty) to do this OR just continue renting/investing?

Do California salaries correspond with the ridiculous cost of living? I mean it wouldn't be so bad paying that much if everybody with an office job is getting 100k

[Fosco33]

To my mind, it depends on the location. If it is in a neighborhood that emphasises schools and kids/etc. then it might be a problem. If it is in an urban area, there will be a market based on young, single professionals. At any rate, if you can get it paid off in 5-6 years and manage to live in it that whole time, that would be pretty amazing. Don't forget though, with condos come association fees so you also have to measure what amenities are available and what all you get for that money.

Pretty amazing? Why?? Pretty smart. Every American could have a PAID FOR house in 10 years, no matter their income. The process is actually quite simple.

1. You need 20% down. (There are ZERO exeptions to this).
2. You need to purchase two homes.
3. The first needs to be approximately half the value of the home you ultimately want to own. A small house/condo/duplex is PERFECT. Location is important. You need to look to re-sale value.
4. You need a 15 year mortgage to take advantage of the lower interest.
5. You need to run an amortization schedule to pay the home off in 5 years.
6. You sell 1st home at 5 - 6 year point, hopefully adding a bit of appreciation.
7. You purchase Home number 2 - your dream home identified in the beginning- at a slightly higher price than you would have 5 years ago, and dump EVERY DIME of equity/cash you received from home #1.
8. You again take the 15 year loan, or lower term if available focused on MINIMIZING the interest rate.
9. You again run an amortization schedule for 5 year repayment.
10. You invite all your friends over for a "mortgage burning" party, and begin to live debt free for the rest of your life.

Yes, I realize that this is ambitious and not something everyone would consider. It, however, CAN BE DONE for EVERYONE. Whether it is a 2 bedroom trailer or a small condo, or a 30 room mansion, it WORKS. It takes discipline, it takes persistence and it FORCES you to live below your means. You cannot make two $500 a month car payments and pay a mortgage payment approaching $2200 a month (for most of us, anyhow), but you CAN MAKE THAT payment if you don't have two car payments.

In the end, it isn't a "stretch" or "overly ambitious", it is about choices. We all make them, we just don't focus on the impact of some of those choices.

Off my soapbox now...

That's great advice if I could A) find something is SoCal under half a mil and B) have 20% of a half a mil in cash handy...

Guess I'll either have to suck it up and by a property somewhere else and move back here for 'the second house'. Bummer...

Anyway I can put down just 5 or 10%? Should I tap my 401k savings (one-time w/o penalty) to do this OR just continue renting/investing?

Do California salaries correspond with the ridiculous cost of living? I mean it wouldn't be so bad paying that much if everybody with an office job is getting 100k

Well, I know there are more millionaires in SoCal than anywhere else in the USA - mainly due to their real estate as part of there overall wealth.

Regarding salaries, even someone making 6 figs could barely afford a half-million dollar condo (trust me). I heard the formula was something like (max property value = 4 X's annual gross salary) - meaning someone making 100K could only afford a $400K home.

I'm in a tough spot right now though - the ladyfriend is a CA native and while she wouldn't mind moving, she's very happy here. In addition, I'll be travelling from LA to NY every week for the forseeable future - so time to research out of state properties is nill.

But this is a great forumula - I'm sending to my bro-in-law who just bought a summer house in WI. Thanks again, RG.

[mngolf19]

If you are not investing for your retirement, you are investing in failure. Social Security will not pay your bills, that is only additional help to what you should already have saved. A simple plan for where your money should go is: Figure your debts and investments by their interest or % gain/loss. Always deal with the highest ones first. If you have high interest rate debts, pay them off first with any extra money. Example-Visa 18% or 401k at 10% ? Pay off your 18% Visa(regardless of matching funds). Then continue the % rate comparisons. Also, you have to have a place to live when you retire. So you better pay that off as well before then. Once you have your mortgage on track to pay off by retirement, and your interest rates comparisons are lined up, then invest in whatever you are most secure with. Stocks are my bet, and I have done very well. I avg. 45% a year. I started out small and have grown. I didn't know alot about stocks until I read a book called "A beginners guide to short term trading". Very easy to understand, I recommend it to all.

[Partial]

bump

[Fosco33]

bump

Nice. I'd second the bump and encourage any new readers to PR and the Romper Room to actually read this whole thread - lots of good stuff here.

[Partial]

bump

Nice. I'd second the bump and encourage any new readers to PR and the Romper Room to actually read this whole thread - lots of good stuff here.

Heh, I was thinking the samething myself, thats why I bumped it. I've got a few questions still but those will all come in due time

This is by far and away the most useful thread on the forum!!

[Scott Campbell]

What is an amortization schedule?

An amortization shedule is a list showing each loan payment made broken out into the amount going each month towards interest, and the amount going towards paying down the principal of the loan. At the beginning of the loan nearly all of your payment goes towards interest. At the end it's nearly all principal. If you make additional payments on a loan, you want to make sure the extra amount goes towards paying down principal. I've heard of some lenders using the excess to prepay interest.

Here's a little amortization calculator I found that lets you play around with what if scenarios.

http://www.hsh.com/calc-amort.html

[Scott Campbell]

Do California salaries correspond with the ridiculous cost of living? I mean it wouldn't be so bad paying that much if everybody with an office job is getting 100k

The short answer is absolutley not. There are those people there who have incredible amounts of money tied up in there homes if they've been in them long enough. Those people hit the lottery but have to move out of the area to cash out. And then there are those people with stock option plans from the late 90's that made ridiculous amounts of money during the dotcom bubble. Some secretaries made millions. Many of these people lived in California - Bay Area specifically. All that money chasing limited housing options really inflated values. Typical earners can't compete with that.

[Scott Campbell]

That sounds like exactly what I want to do, but only build the second house myself.

This is a great way to build wealth. Any sweat equity you're able to build into the house drops completely to the bottom line of your personal balance sheet. As long as you live in the house 2 years, up to $500K of appreciation (profit) is tax exempt.

The more money you make at your job, the bigger the impact. Lets say your making alot of money and your marginal tax rate is nearly 50%. If you made $100K on your house in 2 years, you'd have to make $200K at your job to clear the same amount of money.

[woodbuck27]

That sounds like exactly what I want to do, but only build the second house myself.

This is a great way to build wealth. Any sweat equity you're able to build into the house drops completely to the bottom line of your personal balance sheet. As long as you live in the house 2 years, up to $500K of appreciation (profit) is tax exempt.

The more money you make at your job, the bigger the impact. Lets say your making alot of money and your marginal tax rate is nearly 50%. If you made $100K on your house in 2 years, you'd have to make $200K at your job to clear the same amount of money.

Yes. Yet... is it right to make that house work so hard?

[Partial]

How would a single-man making 40-50k pay off even a modest house in 5-6 years? I guess I am unaware of how much it costs to live. By modest, I mean like a 180,000 house so it's relatively easy to resell and likely to grow in value over that time.

What sort of tax benefits do you get when purchasing a house?

[Bretsky]

How would a single-man making 40-50k pay off even a modest house in 5-6 years? I guess I am unaware of how much it costs to live. By modest, I mean like a 180,000 house so it's relatively easy to resell and likely to grow in value over that time.

What sort of tax benefits do you get when purchasing a house?

I'm not sure if a single guy making 40G could pay off a house in 5 years; but RG would, I think say, that you should wait until you have a more substantial downpayment then or buy a smaller house.

In terms of tax benefits, every penny you pay on the interest for the year and the annual property taxes you pay are tax deductible....aka...taken off your annual income for tax purposes.

RG, let me know if I'm slightly wrong on this but I'll throw out this example.
You make 40G per year; your taxes are 3G per year and Annual Interest on that mortgage is 9000. That would bring your taxable income down to 28G instead of 40G and good chance you'll get money back at tax time because you overpaid based on the 40G figure.

[Partial]

How would a single-man making 40-50k pay off even a modest house in 5-6 years? I guess I am unaware of how much it costs to live. By modest, I mean like a 180,000 house so it's relatively easy to resell and likely to grow in value over that time.

What sort of tax benefits do you get when purchasing a house?

I'm not sure if a single guy making 40G could pay off a house in 5 years; but RG would, I think say, that you should wait until you have a more substantial downpayment then or buy a smaller house.

In terms of tax benefits, every penny you pay on the interest for the year and the annual property taxes you pay are tax deductible....aka...taken off your annual income for tax purposes.

RG, let me know if I'm slightly wrong on this but I'll throw out this example.
You make 40G per year; your taxes are 3G per year and Annual Interest on that mortgage is 9000. That would bring your taxable income down to 28G instead of 40G and good chance you'll get money back at tax time because you overpaid based on the 40G figure.

Do less valuable houses sell, though? It seems like everyone and there mother is selling there house in my area but no one is buying them.

Ideally, I would convince the GF (who I hope will be a long term GF, but eitehr way its good advice for her) to do the pay off house in 5 year thing, and if I did the same, we could put down like a monsterous payent on a house together someday if we're together then, or she would be able to afford a nice place of her own that way.

[retailguy]

How would a single-man making 40-50k pay off even a modest house in 5-6 years? I guess I am unaware of how much it costs to live. By modest, I mean like a 180,000 house so it's relatively easy to resell and likely to grow in value over that time.

What sort of tax benefits do you get when purchasing a house?

I'm not sure if a single guy making 40G could pay off a house in 5 years; but RG would, I think say, that you should wait until you have a more substantial downpayment then or buy a smaller house.

I don't think a single guy making 40K has any need to buy a 180,000 house, and I'm also not sure that you could qualify for that big of a house without a substantial downpayment.

3x your income is 120K, you could probably buy a small condo for that, and you could pay that off in 5 years, PROVIDED, you put 20% down and you didn't have any other payments (Auto, Furniture)

In terms of tax benefits, every penny you pay on the interest for the year and the annual property taxes you pay are tax deductible....aka...taken off your annual income for tax purposes.

RG, let me know if I'm slightly wrong on this but I'll throw out this example.
You make 40G per year; your taxes are 3G per year and Annual Interest on that mortgage is 9000. That would bring your taxable income down to 28G instead of 40G and good chance you'll get money back at tax time because you overpaid based on the 40G figure.

Spoken like a true mortgage guy..... Not entirely true however. Now before you beat me, or call me a liar, hear me out. A single guy at 40K does NOT pay taxes on 40K if he doesn't own a house. Don't forget about the standard deduction, or the personal exemption! Those get factored out as well. In 2005, the standard Deduction was 5,000, personal exemption is 3200, so you pay taxes on 31800.... So, in this example, the mortgage interest gives you a $4k deduction over what you'd get as single. (9000-5000) 4k yield is about 800 net (see below) Whoopeee!!! Now before you bash me and "remind" me that you also get a deduction for taxes & charitible contributions, I KNOW THAT, however, you spent $9000 dollars to save $800 on your taxes. You'll spend more on those taxes & contributions to save as well.

Complete numbers - 40000 gross w2 income, yields 31800 taxable income after all deductions (std & pers exemption) - yields a tax bill of $4621.

For simplicity sake, here it is with just the mortgage - 40000 gross w2 income, 9000 itemized, 3200 exempt - yields 27,800 in taxable income and generates a $3809 tax bill.

4621 - 3809 = 812 savings IS IT WORTH IT? The home buyer has to make that call.

So, for a single guy, the mortgage interest doe give you a deduction. Now, do the same calculation for a married couple with 2 kids under the age of 17 making 40-60K. If you crank the numbers there is ZERO benefit of mortgage interest because that family is NOT paying taxes, but are more likely to be making a house payment than a single guy.

Why is this relevant? Simple - you have to look at your UNIQUE situation to see if you are benefiting from the mortgage deduction.

Personally, I don't really give a shit if the IRS has my money or Bank of America has it. If I can't keep it, it really doesn't matter. In the early years of buying a home, appreciation does not offset the amount of interest you pay, and typically the tax benefit is not very great.

As to the refund, Lord, where do I start. Yes, you will get a refund. BUT WHY? Uncle Sam offers the poorest interest rate in the history of the world ZERO PERCENT. You'd do better with a passbook. You should pay $499 each year, EVERY year. That is the way you MAXIMIZE your money related to the IRS.

In summary, I don't want to sound too negative related to the purchase of a home. I love owning a home. There are MANY MANY MANY reasons to do so that have NOTHING to do with money. It is a wonderful experience that I want EVERYONE to have the ability to do. BUT, and a big BUT, circumstances HAVE TO BE RIGHT.

Monetarily, appreciation cannot be ignored. It does work, and it does create wealth. But the home has to be in the right neighborhood, of the righs size, with the right amenities, and it takes TIME.

Please, please, please, NEVER buy a home to "save money" on the interest deduction. Buy it for all the other reasons, and then use the tax benefit as a "freebie"....

[retailguy]

after re-reading what I wrote above, I want to emphasize one more thing.

Home buying is not evil. Being undercapitalized and paying too much interest on a 30 year mortgage without the proper down payment makes the home purchase evil. It totally destroys the investment. Totally.

You have to properly capitalize your purchase. You owe that to yourself.

That's why I stress a MINIMUM of 20% down and a MAXIMUM of a 15 year loan.

If you do it any other way, I can stick money in a mutual fund and blow the doors off of any home you can purchase.... investment wise

[RashanGary]

after re-reading what I wrote above, I want to emphasize one more thing.

Home buying is not evil. Being undercapitalized and paying too much interest on a 30 year mortgage without the proper down payment makes the home purchase evil. It totally destroys the investment. Totally.

You have to properly capitalize your purchase. You owe that to yourself.

That's why I stress a MINIMUM of 20% down and a MAXIMUM of a 15 year loan.

If you do it any other way, I can stick money in a mutual fund and blow the doors off of any home you can purchase.... investment wise

Yeah, but your living in the home so it gains value as well as serves a purpose.

[Partial]

after re-reading what I wrote above, I want to emphasize one more thing.

Home buying is not evil. Being undercapitalized and paying too much interest on a 30 year mortgage without the proper down payment makes the home purchase evil. It totally destroys the investment. Totally.

You have to properly capitalize your purchase. You owe that to yourself.

That's why I stress a MINIMUM of 20% down and a MAXIMUM of a 15 year loan.

If you do it any other way, I can stick money in a mutual fund and blow the doors off of any home you can purchase.... investment wise

So what does one do if they don't have that 20% down payment? Rent? I was told that renting is just throwing money away.

I mean is it worth it to buy a 120,000 condo? Do people still buy those? I guess problem is I live in a fairly wealthy area where taxes are high and property values are even higher. A 150,000 is MODEST, as my 3 bedroom 2 bathroom ranch house with a crappy yard and landscaping is worth like 290,000 evidentally. That's unfortunate.

[retailguy]

Yeah, but your living in the home so it gains value as well as serves a purpose.

Greg, appreciation happens. But typically not very much in the first few years. Plus, you have to add on closing costs, and the various other expenses it takes to move into a home. Even at a 3% appreciation rate, you don't accumulate equity very quickly while making the minimum payment.

Second, you can lease the same home typically cheaper than you can buy, due to all the associated costs that go along with owning a home.

Partial, this example will answer your renting vs. owning statement as well. It is not throwing your money away to rent, provided, you don't "piss away" what you save in the process. You have to, as Greg stated, spend a certain amount of money to live. You can, pay a landlord, or pay a bank, in terms of interest, but you're going to pay someone to have a roof over your head.

Example. - You purchase a 180,000 home with no down at 6.75% and capitalize the 4500 closing costs. Your loan (or loans) are 184500. You take out a 30 year mortgage (or mortgages, one here for simplicity) which costs you 1196.66 or 1200 in round numbers. Unless you live on the west coast, property taxes will probably run you in the area of 4000 per year. Insurance 1000 and the dreaded PMI about 80. a month. These three things tack on another 496 or 500 in round numbers. This puts your house payment including taxes and insurance at 1700 a month.

You can probably lease the same house in most communities from 900 - 1200 a month, saving you a minimum of 5000 per year, not including the cost of upkeep/repairs/remodeling. Homeowners assessments can increase the prices even more, and are becoming very common as most people don't want to live next to Mike Tice's green/gold house....

Now look at the same home with 20% down plus you pay closing. Your loan is now 160000. payment is 1037, or 1040 in round numbers. Other costs are the same, but PMI is gone, so those costs are 416, or 420 in round numbers. Now your "payment" is 1460. Now your "loaded" cost of buying vs. renting is only 250 per month at the minimum. If you take the difference in the payment from 1700 vs. 1460 or $240 per month and apply that to the mortgage (I'd suggest much more) but just with that, you pay off the home in 24 years, saving you almost 6 years of payments or $50.729 in costs over the life of the loan.

So, when you look at how these numbers can change your life, and we're not even talking about moving the mortgage down to a 15 year term, or even less, you are talking about real dollars here. If you got 1400 a month back out of your budget 10 years sooner, that's 168,000 in principal alone over that 10 years.... So, even if you screwed up EVERYTHING ELSE in your life, you could still accumulate a $250000 pension before you retire.

Greg, I'd rather see that money in YOUR pocket, INSTEAD of Bank of America's.... You see it HOWEVER YOU'D LIKE TO....

Partial, what determines a good rental/purchase decision is what you do with the $500 differential in renting vs. buying the house. If you piss it away on wine and women, buy the house, if you can save it, do so, and make a smart purchasing decision.

The only true way to financial independence is to live on less than you make. No one has ever "borrowed their way to riches". Financing is the biggest reason that the "middle class" stays "middle class". You give the MAJORITY of your money to someone else. That 180000 home, purchased with no money down costs you, the homeowner $430798 over the life of the loan, JUST IN INTEREST AND PRINCIPAL. Doesn't include taxes and insurance. You are paying more in interest than you paid for the home... $250.798... That's a "lotta cash" to have the "privilege" of owning a home.