Here are some notes after a conversation 11/13/2007.
Right now is a great time to be buying a home, not so hot for selling. Tucson has just finished a time of adjusting prices to nationwide levels, and is a bit over the top and prices are settling down to norms right now. There are lots of homes on the market, maybe 5 homes per buyer. You should aim to buy for 15 percent below appraised value in the current market.
And what about the house I am now living in? Do I want to sell it or hang on to it. SC gave me a strong argument for keeping it, as follows. First off, he says the goal when you retire is to maximize your equity, NOT to have everything paid off. The prediction (as of late 2007) is for home prices to continue to drop a bit, then perhaps in 2008 to come up 1 percent, then maybe 8 percent in 2009 and then to be back on track with the 12 percent "growth" nationwide. If you can get a loan for 6 percent (as you can right now), and make 12 percent, you are doing well.
I had argued as follows: why have a $200K house you live in, and a $100K house you rent out. You should lump things together, and just live in the $300K house. The mistake is that this ignores the rental income. My current house has a $350/mo mortgage payment, and I could rent it out for double that ($700/mo). The bank views the rental income as just that: income! The "profit" I can just dump back into paying off principle, along with setting some money aside for maintenance and repairs. (Tom says, think in terms of hiring people to do repairs and work at the house instead of doing it myself).
I asked SC how he got so smart (he now owns 3 houses). He says that he could sell the other houses and just pay off the one he lives in, but that isn't his goal. The goal is to let the bank hold the house and you get the appreciation. Also, as said above, the goal is to maximize your equity, not minimize your debt. His father was into finance (stocks and bonds), and his mother was into real estate; he grew up being educated in these issues.
Three other tips:
(1) When you do start renting, set up a limited liability corporation. Pay an accountant $400 to do this (it will take 15 minutes), versus 3 weekends to do it yourself and perhaps not get it right. Then a lot of things can be deducted, even one of your vehicles can be "owned" by the corporation. An accountant can look over your last 5 years of tax returns and ammend them, and apply the ammendments to the current return. A good acountant will ask for your previous 5 years of returns.
(2) You want to pay 20% down to avoid MPI. To do this, take out a line of credit on your existing home equity. This is not dishonest, you are just using equity in one house to avoid MPI on the other. If you are buying a 400K house, 20 percent would be 80K which is typically what you can get from 100K of equity in the first home. This line of credit on your existing home equity boils down to a second mortgage, though it may not be called that. You can usually get 90 percent of the appraised value, minus what is still owed, i.e. (appraisal * 0.9) - amount_owed. Also, a little known fact is that the interest rate on such a line drops as the line gets larger, with one lender the rate drops from 8.5 to 6.5 for a line greater than $150K. Note also that you don't need to borrow an amount this large, just get a LOC approved for this amount. There are probably other breakpoints below 150K, i.e. a schedule - ask the lender.
(3) Get prequalified as a first step in house hunting, then shoot to be paying 15 percent below market. Tell them, "the marked is going down and I will be taking a loss to pay appraised value".
More notes after a conversation 11-28-2007 Right now there are 11,000 homes on the market (the norm for Tucson is 2,500 homes). The prediction is for the market to drop 10 percent in 2008 and this has people scared. The recommendation is to pitch a lowball price at 20 percent below asking price and expect them to meet you halfway at 10 percent below. So, for a 300K home bid 240K and expect the price to be 270K. Here are two rules to remember that SC says his father taught him over and over: (1) You can make money in both a rising and a falling market. (2) There is no gain without risk. Don't sweat when prices drop 10 percent during 2008 (anytime in 2008 should be a great time to buy). The goal is to be able to sell in 5 years and make some amount, 12 percent is the normal yield on the real estate market. Get pre-qualified! Go to Wells Fargo and tell them you have a mortgage with them and ask what incentives there are for you to take out another. They will typically do a free appraisal, and closing costs for $900 total. Also go to Chase (and maybe Bank of America) and shop around. Right now loans are 6 percent for a 30 year fixed loan. When you get prequalified, you get an LSR (Loan Status Report). To get this, you want to show them a sheet with 3 columns: Assets, Debts, and Income. Assets: House Retirement Paid off Cars Debts: Mortgage Cars Credit cards Income: My and my wifes recent pay stubs My and my wifes SSN Rents and other incomes (include 250/mo from Alex) Being pre-qualified when you make a lowball offer gives you some clout. Shawn is using an agent named Kathy, who he really likes, but he would be happy to use Marilyn Joyce as well. 1400 sq. ft. --- $120,000 (our current home) 2000 sq. ft. --- $300 - $350K (but you get a garage and perhaps a pool) 2400 sq. ft. --- $400K A pool isn't that much work, and it gives better resale value. Consider keeping our house and taking a 10 year interest only loan. We can pay down principle on our current house, and let it appreciate (and let the second home appreciate), then sell our current house after it is paid off and drop that money on the principle on the second home, and in the meantime live in a nicer house (doing interest only lets you get into about a $100K more expensive home for the same monthly payment.) Your home is your best tax write-off. In the early stages of paying off a loan, the payments are essentially all interest, and you get back 20-25 percent, depending on your tax bracket. This may make it worth while to file another W-4 form, having a sizeable home loan is like having a new dependent if you look at it that way.