54 thoughts on “Time to Payoff”

1. awgee October 7, 2009 at 4:05 pm

   Nice find. Positive cash flow. Cool.
   1. Redken is better! October 8, 2009 at 10:28 am

      IHB is not as nice as Redken. Can this be changed back to Redken?
2. cara October 7, 2009 at 4:28 pm

   Years to retire debt at maximum payment. That is a great metric. Love it. Love the graphs too.

   24.1 years. yikes. Only worth it if you’re starting building your rental empire very early in life.

   I do think most landlords will be more optimisitic in terms of rent increases over the years. Taxes* and maintanence costs will also increase with inflation, so it’s a question of whether the rent increases fast enough to exceed that, or if it will fall behind eventually.

   So this makes the 24 years more of a benchmark. Still only 6 years faster than the straight 30 year amoritization isn’t a lot of cushion.

   *especially important to consider outside of CA where prop 13 mitigates the increases.
3. granite October 7, 2009 at 4:50 pm

   Last time I owned a house I paid almost 8% interest. That puts this place under 100K. Not a good feeling even if it is cash flow positive.

   Let the frenzied buyers of today have it.
   1. IrvineRenter October 7, 2009 at 5:13 pm

      That is my attitude as well. I hope to buy near to top of the next interest rate cycle.
      1. awgee October 7, 2009 at 5:48 pm

         Good Plan. Your plan is pretty much the opposite of the general consensus. And you know what I think of the general consensus.
         1. Geotpf October 7, 2009 at 6:27 pm

            Wouldn’t it depend on whether or not you were paying cash or not? If you were paying cash, it makes sense, IMHO, to buy when interest rates are high (assuming prices are therefore low). But if you are taking out a loan, buying when interest rates are low makes sense. You can always refinance later when rates drop again, but you pay the higher interest in the mean time, plus there are transaction costs in a refi which eat up some of your initial savings.

            Of course, the best time to buy is when prices and interest rates are both low (like right now).
            1. IrvineRenter October 7, 2009 at 6:54 pm

               It isn’t clear to me that you fully understand the relationship between interest rates and property pricing.

               People are going to put a certain number of dollars toward housing costs. If interest rates are high, most of this money goes toward interest, so the amount financed is small. If the loan is small, prices are low. Prices are only as high as bids permit them to get.

               If interest rates are low, few of the housing dollars go toward interest, so the amount financed is very large. If the loan is large, prices are high because people can raise their bids.

               What awgee and I are looking for is the period of time when the amounts financed are small because relative to incomes this is when prices are the most depressed. When interest rates are very low like they are now, prices become way too high relative to incomes. I am of the belief that mortgage interest rates will move higher because of medium term inflation, fears of long-term inflation, proper pricing of default loss risk, and other factors in the market that would dictate higher interest rates than we face today.

               The way to purchase and finance a home is to buy at the peak of the credit cycle when interest rates are very high — prices will be at their lowest relative to incomes. Refinance when interest rates are at their low in the cycle and accelerate your amortization. If you time this properly, you can pay off a mortgage in 15 years relatively easy — much faster if you are fiscally conservative and focus on paying off the debt.
            2. awgee October 7, 2009 at 6:58 pm

               Prices are not low right now. And just repeating a falsehood does not make it so.

               It is best to buy when interest rates are high if you are paying cash. And it is best to buy when interest rates are high if you are financing because you can refinance to a lower interest rate. You can not refinance your principal. this is exactly the opposite of what most people will do, but then that is why most people will slug along their whole lives just getting by. The folks who get ahead are those will do the opposite of the masses. In this case, IrvineRenter will buy when interest rates are high and prices are low, much lower than they are now. He will have the same payments as someone who bought now when prices are high and interest rates are low. But, as time goes by, his interest rate will decrease, because he is smart and will get a ARM, the opposite of what everyone else will be doing which is a fixed. He will buy at the lows. His property will appreciate much greater than all those who bought now. He will refinace at a lower rate in five or ten years after he buys and he will have a much lower payment than those who buy now when prices are high and interest rates are low.

               No, re prices are not low right now. They are lower than they were, but they are still going lower and will continue to go lower for a long time. Yes, there will alway be knifecatchers and they are the majority. The minority are those like IR who will truly buy at the bottom when no one else is buying. People will no longer be saying, “Now is a good time to buy.” People will be saying, “Now is a terrible time to buy because interest rates are high.” The best times to buy and sell are exactly the opposite of what most people think are the good times to buy and sell.
            3. IrvineRenter October 7, 2009 at 7:53 pm

               BTW, those of you who have not checked out Coto Housing Blog, the writing is excellent. Clearheaded thinking and analysis with property profiles for Coto de Caza.
            4. Geotpf October 7, 2009 at 8:11 pm

               I guess again a lot of this is a difference of opinion as to what the future holds. I believe prices are unlikely to drop significantly and might increase; awgee and IR think prices will fall further. Now, I know interest rates can’t go much lower-I think we can agree on that. They probably won’t be this low ever again (within the time period of a 30 year loan).

               Therefore, under my thinking, if prices will probably be stable, and interest rates will probably increase, if you are taking a loan out now is the time to buy, but a cash buyer can wait if they choose to.

               But if you think prices will drop further, it makes sense to wait, period, no matter what happens to interest rates.
            5. SeattleRenter October 7, 2009 at 8:30 pm

               I know you are right, and yet I struggle with this quite a bit, because, who knows when the interest rate cycle will be at its peak? Certainly, rates will rise eventually – they have to – but that could be 3, 5, or 8 years from now. Does it really make sense to put life on hold and continue renting during that time?

               My wife and I started looking at insanely priced houses in Seattle a few months ago, but the thought of being trapped in a house for a decade when rates rise is scaring me to death.
            6. bigmoneysalsa October 7, 2009 at 9:14 pm

               You consider your life “on hold” because you are renting. Sorry, but I think that’s kinda sad.
            7. Alan October 7, 2009 at 9:16 pm

               I’ve never understood the “put your life on hold and continue renting” mindset. I’m renting, and getting along with my life just fine. In fact, I have the freedom to go where life and my interests take me. Being in debt for, and trapped in, a house is to me putting your life on hold.
            8. Perspective October 7, 2009 at 9:32 pm

               It’s similar to the mentality that many have about life being “on hold” until someone is married. It’s as if your life is complete once you’re married and “own” a home. Only happiness follows!

               Life is never “on hold.” You will never get today back. You will be one day older tomorrow and one day closer to death.

               Good times…
            9. SeattleRenter October 7, 2009 at 9:56 pm

               There’s nothing sad about renting. What’s sad is that I’ve delegently saved a lot of money over my life and I earn a good salary, and yet, I can’t afford a modest house in any area of the country that I want to live without getting into massive amounts of debt.

               What I’d like is a nice yard, a garage, some space to myself, more room, and the freedom to do whatever I want with the place I live. What’s sad is that insane prices are forcing me to put off a decision that my parents were able to make when they were much younger than me and prices made sense.
            10. Geotpf October 8, 2009 at 12:16 am

                Well, part of the issue is that they aren’t making any more land. After an area is built out (supply is stable), but more people continue to want to move there (demand is increasing), prices have to rise. Houses are cheap as dirt in the sticks, because this isn’t a factor.

                Irvine have artifically created this “built out” phenomenon because one corporation basically controls all the vacant land, so they can trickle it out in slow motion to keep prices high.
            11. muzie October 8, 2009 at 12:57 am

                Did you read what he said?

                People bid the max they can based on payment.
                Interest rates go higher, means they can’t finance as much, means they can’t bid as high as the same house.

                It’s not a question of opinions about whether houses will drop further in price.

                You can’t argue that interest rates will rise and bids based on payments wont’ be affected. That doesn’t make sense.

                You COULD argue that people actually don’t bid based on the max payment they can afford, which would invalidate IR’s theory; that could be an interesting point. But if you do accept the relationship that the price of houses correlates with maximum payment people can afford, it’s a given interest rates = lower house prices.

                This isn’t opinion, it’s just basic cartesian logic. You can debate the relationship between these values, but you can’t debate the result if you do accept the relationship.
            12. awgee October 8, 2009 at 1:05 am

                Again you are wrong, even with stable prices. did you read what IR wrote?
            13. SacBoomer October 8, 2009 at 2:55 am

                I.R.
                I’ll try to demonstrate. In 1980, with interest at about 17% I got a discounted 14% loan for my first house. I could only buy a home priced at 2X my income, even with 20% down. That worked out to $50,000 purchase with a $10,000 DP. Had I re-financed at a later date, instead of selling, I would have owned it outright in relatively little time. Again you can finance at a more advantageous rate at a later date, but you can’t ask for a lower price after the fact.
            14. MalibuRenter October 8, 2009 at 7:48 am

                ” After an area is built out (supply is stable), but more people continue to want to move there (demand is increasing), prices have to rise. Houses are cheap as dirt in the sticks, because this isn’t a factor.

                Irvine have artifically created this “built out” phenomenon”

                This is a widely held incorrect belief. There are a large number of places in the US where prices have either dropped long term or have dropped once adjusted for inflation. Interestingly, many of the places with stable to slowly dropping prices are growing. Dallas, Atlanta, Houston, Charlotte, etc. did not become bubble unaffordable areas. It’s not a matter of whether people are moving there. It’s a matter of whether building restrictions and lending policies allow a bubble.
            15. Geotpf October 8, 2009 at 6:25 pm

                Restrictive zoning laws also artifically create a “built out” situation, encouraging bubbles and higher prices in general.
            16. freerent October 12, 2009 at 10:32 am

                I agree, the way the government is manipulating the system and giving everyone free rent for 2 years to default on their mortgage, and the same people just to to the fha to do it all over again makes me sick.
4. winstongator October 7, 2009 at 5:20 pm

   Why are non-owner-occupied homes given the same mortgage treatment as owner-occupied? Can Fannie/Freddie buy non owner-occ mortgages? Do banks care? Have they back checked foreclosures to see how many that didn’t have 2nd home riders actually were not primary residences?
5. movingaround October 7, 2009 at 6:18 pm

   This is a bit off topic but I still cannot get the calculator to work – when I click edit it says I do not have ‘permission to access this page’. Anybody else having this problem?
   1. zovall October 7, 2009 at 8:57 pm

      Hmm.. What browser are you using? Shoot me an email (zovall at gmail dot com) and I can look into it.
6. Geotpf October 7, 2009 at 6:20 pm

   Would this really rent for $1,250 a month? It’s only 471 sq ft, and your rental comparables are 662, 700, 717, and 819 sq ft. Now, all but one are more than your $1,250 a month, but the 717 sq ft one is $1,200. Now, for a rental, the number of beds and baths is probably more important than square footage, but, still, wouldn’t it have to be less than that, say $1,050 or $1,100?

   In any case, this makes an interesting comparable to over here in Riverside. Prior to me buying my house, I lived in an apartment almost exactly this size, but paid $675 a month (more than half the $1,250). I also was at the bottom end of prices for 1 bedroom apartments-typical would be about $800. That difference is much smaller than the difference in sale prices between similar properties in the two cities.
   1. pianist October 7, 2009 at 6:44 pm

      I’m also wondering about the rent. Asking amount doesn’t necessarily equal contract amount. Anyone have stories about how much they or their friends and acquaintances were able to negotiate asking prices for Irvine rents?
      1. Geotpf October 7, 2009 at 6:56 pm

         I think the prices IR are using for rental comps are off the MLS for closed leases and therefore should represent actual rents, not just asking prices. I don’t doubt the prices are real, just the fact that the square footage for them is significantly higher than this place.
         1. pianist October 7, 2009 at 9:51 pm

            IR, would you consider a post dedicated to Irvine rental rates and rent price negotiation for investor owned homes, townhomes, & condos? I don’t think apartment rents should be included as the contract rate doesn’t necessarily reflect concessions that may be earned after x month of residence. I’d love to hear lots of anecdotal stories from the posters here.
7. biscuitninja October 7, 2009 at 6:21 pm

   While the information is great and the report fairly comprenshensive. Some of the numbers are not exactly normal or conservative. 1% property tax? 5% vacancy and collections loss? Speaking from experience these are great for a large number of apartments. For anything less than 10 units, its agressive, VERY agressive. I would probably push the down closer to 30%+ to make it cashflow positive. That way you could probably withstand 1-2 months of no rent if it came down to it (hopefully it doesn’t). Anyways good report.
   1. alan October 7, 2009 at 8:05 pm

      As a former landlord, I agree. There are other costs you haven’t factored in. Advertising for tenants. A property manager if you don’t plan on doing it yourself. Vacancy rates are higher than 5%, it can take several months to find a new tenant and my tenants averaged about 1 1/2 to 2 years. Long term tenants are rare.
   2. Geotpf October 7, 2009 at 8:24 pm

      Prop 13 fixes property tax at 1% in the state of California. Now, there could be Mello Roos on top of that, although not on a place this old.
8. surfing in Newport October 7, 2009 at 6:50 pm

   I don’t think your calculation is correct with respect to tax treatment.

   You need to calculate all the expenses before any tax adjustment and then look at the profit/loss. That profit/loss will be taxed. How much of the loss you can apply towards reducing your tax bill is something that you need to check with a tax professional.

   Expenses also include depreciation which is not shown and do not include payment towards the principle of the loan.
   1. IrvineRenter October 7, 2009 at 8:00 pm

      Yes, both of those criticisms of the tax adjustment are valid. As I contemplated what to do about the taxes, I wanted to keep it simple and get as close to accurate as I could. The big wildcards are things like passive loss limitations of accelerated depreciation of personal property (a specialty of an architect I once worked with). The tax code gets so complex that to be accurate would require more personal data from the buyer, which I don’t want to ask for.

      Part of the reason I didn’t include depreciation is because it is so small now with the extended schedules, and it is really just a deferred tax because it increases capital gains later. Of course, if it is an estate hold, the estate is taxed at original basis whereas the beneficiary gets a full-value basis. It is one way the rich have avoided the inheritance tax.

      All that is to say that I could not find a good way to increase the accuracy. Realistically, in working with an investor, he or she would tell us what marginal tax rate they want to use in the analysis, and we would use that in all of their work.
9. bltserv October 7, 2009 at 8:05 pm

   471 Sq/Ft. Thats not a condo. Its a prison cell.
   What next ? Postive cash flow on a Treehouse or a Cardboard Maytag box in the bushes off the 405 freeway ? No way this will rent for $ 1250.00
   Maybe $800.00 tops.
   1. Gemina13 October 7, 2009 at 11:41 pm

      That’s what I was thinking. $1250 a month to live in an apartment complex with a duck pond? No thanks.
   2. grabasnorkel October 8, 2009 at 12:32 am

      Zilpy.com (based on ads only, afaik) claims $2.48/sqft for studios in this zipcode (mean 573 sqft), $2.07/sqft for 1 br places (mean 703 sqft).

      Let’s assume the latter number is more accurate, that puts this at just under $1000/month rent. I’d give it a bigger discount, considering these are ads and actual rents will be slightly smaller. I’d say $900-$950 is reasonable.

      Intriguingly, the $2.48 figure for studios would roughly match IR’s numbers. Must be some really desperate renters in Irvine!
      1. bltserv October 8, 2009 at 1:32 am

         IR`s Numbers need to take into consideration this POS is 33 years old. For $ 1400.00 a month you could get 612 Sq/Ft in the “Park” at the Spectrum. Brand new everything and amenities.

         This place needs to be below the weekly flop hotel rate. That puts it down around $ 750.00 a month.
         1. BigDizzle October 8, 2009 at 5:11 am

            Agreed, don’t think this will get anything close to $1,250. Brand new apartment, $600 deposit, at the Park for a little more? I’d say $900 at the top.
10. Conan October 8, 2009 at 12:10 am

    Will you shut up and listen to me! Shut down all the garbage smashers on the detention level, will ya? Do you copy? Shut down all the garbage smashers on the detention level! Shut down all the garbage mashers on the detention level!

    =($D$51-(-PMT(H$145/12,$C$57*12,($C$54-$C$54*$F150))-1*($C$63)*((($C$54-$C$54*$F150)*H$145)/12+$D$42)-1*(-PMT(H$145/12,$C$57*12,($C$54-$C$54*$F150))-(($C$54-$C$54*$F150)*H$145)/12)))*12/($C$54*$F150+$D$71+$D$72+$D$73)

    No! Shut them *all* down, hurry!
    1. Geotpf October 8, 2009 at 12:20 am

       Methinks somebody shouldn’t do LSD and watch Star Wars at the same time.
       1. Gemina13 October 8, 2009 at 6:40 am

          Thank you for making me spew iced tea through my nose. I must remember that comment for future use.
    2. AVRenter October 8, 2009 at 8:51 pm

       That’s fantastic.
11. lowrydr310 October 8, 2009 at 12:57 am

    Being committed to a one year lease in an apartment makes me feel “trapped” – I couldn’t imagine being committed to a house with a mortgage.
12. biscuitninja October 8, 2009 at 1:14 am

    Completely agree with this. My apartments aren’t anywhere near this. Although I do have a few long term renters and I do as much as I can to keep them there…. Like little nuggets of gold they are…LOL!
13. Help is on the way! October 8, 2009 at 1:41 am

    Excerpts from Fannie Mae website.. about debt to income ratio being decreased. This could help decrease the pool of buyers (i.e. eligible demand).

    “DU Version 8.0
    During the weekend of December 12, 2009, Fannie Mae will implement Desktop Underwriter® (DU®) Version 8.0.
    …
    …
    Total Expense Ratio
    With this release, the maximum allowable total expense ratio in DU will be revised to 45 percent, with flexibilities offered up to 50 percent for certain loan casefiles with strong compensating factors. If current debts exceed the maximum allowable total expense ratio, the loan casefile will receive an Ineligible recommendation.”
14. no worries October 8, 2009 at 1:47 am

    From the NAHB:

    Extending the credit through Nov. 30, 2010 and making it available to all purchasers of a principal residence would result in an additional 383,000 home sales …

    The NAHB has also been arguing to expand the tax credit from $8,000 to $15,000. But using $8,000 per home buyer – and estimating 5 million home sales over the next year – the total cost of the tax credit would be $40 billion.

    According to the NAHB this would result in 383,000 additional home sales. Dividing $40 billion by 383 thousand gives $104,400 per additional home sold!

    http://www.calculatedriskblog.com/2009/10/housing-tax-credit-nahb-projections-and.html

    Holy crap, what a subsidy. Argh!

    Read the rest of the article as well. I especially see the point about pulling from renters, not creating new households…

    This is so frustrating. And realize it costs $104k, PRINCIPAL. But we’re borrowing that money, right? It’s like putting a car repair on a credit card you’re “hoping to pay off some day”. That $500 repair will end up costing you thousands before you actually pay it down.
15. newbie2008 October 8, 2009 at 2:11 am

    Observations:
    1. RE selling “homes” and not houses. I’ve owned many houses but no home. My family make a home that is neither bought nor sold.
    2. The new Fannie Mae expense ratio of 45% is better than the 60%, but should be at under 32% for a stable economy.
    3. The timing of a buy is dependent on the situation not an absolute rule. Say the price will drop 1%, but interest will double from 4.5% to 9% in one year. Even though the price will down, it would be better to buy with a 30 year fix loan now than to buy for 1% less and double the interest.
    4. IR’s capitalization rate and property value chart shows the dynamics of interest rates to prices. If the rate goes from 4.5% to 6.5% prices should drop by ~30%.
    5. The housing bubble was caused by more than just low interest rates. Reverse arguement of #4.
    6. Low to negative downpayments inflated the bubble, but what is the cure without killing the patient?
    7. When will prices go to affordable levels and will the USA be debt slaves?
    8. The Great Depression had many working people just earning enought to pay their housing and food. The hayday of the 1990-2005 had people spending 60% of their pay on house payments, but they felt rich because house price were going up and borrowed more money.
    1. tonye October 8, 2009 at 2:43 am

       How can someone pay 60% of their income on the mortgage and “feel rich”.

       I felt rich when my stocks were skyrocketing in the late 90s and richer when I sold in Y2K.

       I felt broke when I paid the IRS.

       I feel rich when I can put money into savings and pay off my credit cards on time.

       Maybe, at 50% debt ratio and low teaser rates I could buy in Coto de Caza.. those $3MIL Supersized McMansions are expensive… I wonder if I can borrow more money to pay for the upkeep.
       1. newbie2008 October 8, 2009 at 8:13 am

          Tonye,
          My family knew there as a housing bubble when the janitor of the office building “purchased” another $900k house. His salary was likely $40-50k. Interest alone would be $30K/year. Refinancing with cash out on the the other houses, he felt rich. Lots of money to spend — All borrowed but still money to spend.

          The bubble moved from internet stocks in the 1990s to housing bubble in the late 1990 to 2004. Look at all the people feeling rich with the internet stocks only to be licking their wounds today. Bubble money comes to those that get in early and cash out before the bubble pops. You did, so where you lucky or wise? Or both?
16. Sherry Wang October 8, 2009 at 5:19 am

    If you take a similar condo in Rancho Santa Margarita, maybe 10 miles south of this, but still in very good area, 441sqft that closed 9/28/09. (closed, was a bank owned) You will have true positive cash flow. That was a turn key property with washer/dryer that closed for $92,088. Why do people want to buy in Irvine? when they can get same condo (newer) for 1/2 the price only 10 miles away?
17. brea October 8, 2009 at 6:38 am

    Back in 1985, I bought a 100K house with a $100K loan at 13.25%. Payment was ~$1,100 per month. We started prepaying the loan after we put together a large emergency fund. It was paid off in 13 years. I refinanced, not paying any fees, just to get the lower rates. Each time I picked a 30 year loan just in case there was an emergency that resulted in the need of a $700 or later a $400 payment.

    My husband and I were saving $1,500 per month and later $1,000 after our daughter was born. After a good emergency fund, paying off the mortgage was a guarantied return of the mortgage rate or close enough.

    The real benefit is the added security during this downturn. He has health problems now and we are sure glad to have no debt just in case he can’t work anymore. Our strategy has always been to get and stay in a secure position.

    My husband and I did not know anything about real estate then other than we liked the prices and he was graduating from college. Riverside’s appeal was less risk. I also like the greenbelt with the orange groves.
18. wols0003 October 9, 2009 at 1:22 am

    IrvineRenter, am I missing something here? Why do you include short sales on your blog? Short sale listing prices are not a good representation of true market prices. I just don’t understand the point.

Comments are closed.