Upsizing your home in order to increase profits

Riversider: about 13 months ago

Basically what the question is can one make more money in real estate by increasing one's exposure and/or leverage.
Question could have been can I make more money in the stock market if I increase my investment and/or borrow to do that.

NYCMatt: about 13 months ago

Wait, there are "tiers" ranking suburbs?

When did this happen?

Where can one find the guide?

dealboy: about 13 months ago

Is it safe to say that once you get into the $1mm home market, the odds of actually taking a loss increase? (Yes, next to impossible in real estate, over a longer time period)

Higher carrying cost.
And a much narrower segment of buyers.
(LOTS of people can afford $700-900k homes, but a lot less can do $1.2m)

Power curve...?

inonada: about 13 months ago

Email sent from _se@yahoo.com, dealboy.

w67thstreet: about 13 months ago

Sometimes you just gotta scream 'shark'.

Some boats sinks because they have a thru hole that's improperly installed.

Some babies drown in a foot of water.

Most recently, underwater prepaid renter killed 8 afghanies cause his credit score went to shit.

huntersburg: about 13 months ago

>And even more if you count the negative carry if renting was really $3400/mo for something equivalent.

Which suburb has this $3400 rental? It's one thing to be talking about rentals of quality in NYC, but in the suburbs?

dealboy: about 13 months ago

If you look at the numbers, they made out like bandits on #2. Making $150k on a $350k property is intoxicating. The natural thinking is to scale up to twice the house, for more profits. However, #3 backfired.

"When the tide goes out, we see who's naked".
"All boats rise with the tide."

dealboy: about 13 months ago

And even more if you count the negative carry if renting was really $3400/mo for something equivalent. If that's really the case, buying was a very bad move.

What's interesting is that they are undeterred and scaling up regardless. Buying their way to the next step, vs. trading their way into it. It is easy to dismiss #3 as "bad luck.". There are a host of things you could blame it on, etc.

Also, we are assuming they get asking of $800k. Not sure how strong that market's been.

Friend says everything they're looking at in the $1.2mm range has been listed for over a year. If that's not a bad sign, what is? Personally, I'd be low balling the $1.7mm homes for $1.2mm.

Ino, thanks for taking an interest in this analysis.
Can you email me offline at gmail? "dealboydealboy"

inonada: about 13 months ago

So it sounds like nominally, they're down $20K overall ($40K + $140K - $200K), but actually $120K once you include the $100K in broker fees ($15K + $35K + $50K), and more like $180K once you include the other 3-4% of transaction costs on the $1.6M they have in aggregate sold.

Not very good given that they were handed a freebie in terms of the bubble, but it sounds like they never figured out that it has been a bubble.

dealboy: about 13 months ago

Ino,

I do not know if they are just nominal price differences, or net profits (counting cost of upgrades, realtor, closing costs, etc) The fact that they cited $200k as the loss for house #2 without netting for $50k realtor (putting it to $250k), leads to to believe it's the former.

I assume 20% down each time. They do well, and are savvy enough to avoid ghetto PMI.

inonada: about 13 months ago

Thanks. Are those profits net of transaction costs, or just the difference between nominal sales prices? Also, were they done at 20% down the whole way (except upgrades on the last one)?

dealboy: about 13 months ago

Condo #1 late 90s - 2002. (Profit = $40k)
Guessing $200s

House #1 2002 - 2005 (Profit $140k)
$400s

House #2 2005 - 2012 (Loss of $50k, not including capital upgrade costs/realtor)
$800s

inonada: about 13 months ago

"So, they are 2 for 3, or almost 70%, despite being at a net negative."

Classic. You know, if they just don't sell and hang on to the place they will remain 2 for 2.

Kidding aside, in what year were each of their purchases & for roughly how much? (I guess we know the 3rd one was for $1M after renovations.)

huntersburg: about 13 months ago

>Are their many REITs that invest strictly in residential houses?
Otherwise, they have zero interest in being shareholders of some strip mall in NJ.

You seem to know "their" preferences very specifically.

dealboy: about 13 months ago

They can easily afford the cashflow of the bigger house, or they wouldn't do it.
Are their many REITs that invest strictly in residential houses?
Otherwise, they have zero interest in being shareholders of some strip mall in NJ.

Eric_14: about 13 months ago

But neither dealboy nor his friends see any downside. After all, they're two-for-three! Okay, they've lost everything, but I guess the two-for-three sort of kind of makes up for it.

w67thstreet: about 13 months ago

Ok. The bigger the risk the higher the return. Next retarded question.

huntersburg: about 13 months ago

Dealboy, if they are so bullish, why don't they buy the house that they need to live in, and then put the extra money into a REIT - this way they get the appreciation potential on the house, the appreciation potential on the REIT, but their carrying costs are in line with what they can afford, and the REIT will provide current income that would otherwise be eaten up by living in a too-big place. Also that too big place has a higher risk on sale because of the limited market, and has higher transaction costs than the trading and liquidity costs of a public REIT.

dealboy: about 13 months ago

On the other hand, you can make an easy $500,000 a lot easier in the 7-figure luxury market than you ever could in the $500k entry level market where a house would have to double in price. In contrast, adding a $200k pool and a $100k kitchen could add $800k to your house price. At those levels, it's all funny money anyway.

dealboy: about 13 months ago

Any other general reactions to this plan? Another note is that the $1.2mm+ suburban home bracket is a different animal than what they've previously dealt with. Once you get past $800k, you're now dealing with a smaller segment of the population on a power curve. I wonder if this gets exponentially smaller. Many working class dual incomes can afford $800k and $25k taxes. But, I bet a lot fewer can afford $1.2mm and $35k. It's a jump that's harder to fake.

dealboy: about 13 months ago

Well said, Eric. It actually worked for the first 2 properties (I omitted the fact they used condo #1 profits to finance house #1). So, they are 2 for 3, or almost 70%, despite being at a net negative.

Eric_14: about 13 months ago

All this analysis is well and good, but irrelevant. They're buying on bubble mentality. It worked the first time (so they say), which made them "smart." It definitely didn't work the second time, but they were just "unlucky." Third time?

inonada: about 13 months ago

The $125K transaction costs on $1.3M are 5-6% for broker, 0.4% for state, ~0.4% for title insurance, 1.3% mortgage recording tax (say for Westchester), 1% mansion tax, 1% local transfer tax (depending on where exactly), points, etc. So close to 10% of purchase price.

BTW, we forgot insurance & maintenance. Those'll kick up the carry by a few thousand a year too.

dealboy: about 13 months ago

They're not. I think they really think it's a money winning proposition. They don't need to justify anything to me. If they just wanted more house, they'd simply say it.

AvUWS: about 13 months ago

(Jumping into this late.)

Why is someone who buys a house for appreciation (IOW, looking to make money on it) also making upfront money losing renovations?

Seems to me they are using the appreciation/profit story as a justification to buy a bigger house because, well, they want a bigger house. And in that house, as in their last house, they want $50k bathrooms, or perhaps $75k bathrooms this time.

By why the need to rationalize their consumption?

huntersburg: about 13 months ago

Try this to translate:

http://translate.google.com/#ape|en|

dealboy: about 13 months ago

> They spent $150k in 'known' money losers

What does this mean?

w67thstreet: about 13 months ago

Step aside buy the leveraged asset, or as it were - become prepaid renting perma bull.

w67thstreet: about 13 months ago

They spent $150k in 'known' money losers on a leveraged asset they want to make more re bubble profits on after it's already popped and we are the 'irrational perma bears'. Flmaozz.

Omfg. Gap up azzhole.

dealboy: about 13 months ago

And the $125k trans. costs being realtor 6% of $800k and 6% of 1.3mm = $50k + $75k = $125k.
Funny how a $850k to $1.3mm profit only leaves $175k when you plow money into excessive renovations.
These renovations were known money losers, up front. ($50k bathrooms, etc)

w67thstreet: about 13 months ago

Dealboy. Bend over and gap up azzhole. Nothin in the universe says friends have to be financially savvy. In fact most of my 'friends' are financially illiterate. Like the couple that moved to shanghai. They are doing the slow negative carry on their trump unit as we txt. 2006 purchase. They looked into my eyes and begged the deflating was over.

I bought their daughters ice cream at the shanghai sculpture garden for $20 as 10 Chinese kids looked on in amazement (I guess 120 yuans for 2cones are expensive) and said 'it's a nice place to come back to nyc to!'. And proceeded to catch tadpoles in the water with my kids.

Funny, when the shanghai re bubble pops, they will be out of a job and sitting on $800k in losses over the 07 to 15' period in nyc. But maybe the yuan will strengthen and they'll time it right... Nah. They look like they will get divorced, the kids will end up in limbo and maybe they will learn to do a proper rate of return on their 'shanghaied' trip.

inonada: about 13 months ago

"Wait, in the fantasy, where did you get the $275k from again?"

Sorry, I was being confusing. I was starting from an $800K sales price with a $275K loss as baseline.

Alternatively, it was $1300K sales price, minus $125K transaction costs, minus $850K purchase price, minus $150K renovations, leaving a $175K profit on the $330K of capital put up.

huntersburg: about 13 months ago

This negative 40k to renting, where are these theoretical rentals in this suburb?

But this idea sounds nuts dealboy .

dealboy: about 13 months ago

Wait, in the fantasy, where did you get the $275k from again?
$500k cap gain, I see.
-$50k realtor, I see.

inonada: about 13 months ago

So was this a 2005 purchase then, dealboy?

inonada: about 13 months ago

dealboy: "inonada, I will get the numbers, but you're about right.
Bought for $850k. Invested $150k. Selling for $800k.
As far as negative carry and transaction costs, hindsight is 20/20.
If the house was now worth $1.3m, they'd be brilliant, and those costs are moot."

Putting aside negative carry, they're out somewhere in the neighborhood of $275K between lost equity and transaction costs.

On the $670K loan, I'm guessing they were carrying it with an interest rate that averaged 5-6% over the duration of ownership (assuming they refi'ed post-2008, which they may or may not have had the equity to do). That's $37K a year in interest before tax benefit, with around $12K in tax benefit for someone making $500K, so $25K a year in interest. On the $25K in property taxes, their income is squarely within AMT, so no benefits on that.

So their cost was $50K a year, with $330K of equity sunk into it. Was this place worth $4K a month in rent? If price/rent was anything like NYC during that period, $4K a month is just about right. So assuming the cost of capital on that $330K was 0, you could argue that they didn't have any negative carry.

But they did end up losing 83% of the $330K investment.

It's interesting to note what would have happened if the fantasy of a $1.3M sales price (62.5% above current prices) did happen. In that case, they'd have had another $50K in transaction costs, so their profit would have been ($1300K - $800K) - ($275K + $50K) = $175K. That's a 53% gain on a $330K investment. Assuming it were held for 5 years, since 2007, that'd work out to 8% annual gains.

Think about it. A fantasy sales price 62.5% above current market, representing 5.25% annual capital appreciation (16% above inflation over 5 years) from a point when everybody was saying "bubble". An illiquid levered investment. But only 8% annual returns to show for it? I'm sorry, but 8% annual returns isn't "brilliant".

dealboy: about 13 months ago

> probably another $40K to negative carry compared to renting.

Cost = $850k. $25k taxes.
Equivalent rental = $3400.

Back of napkin, how bad was the negative carry vs. renting? (For 7 years)

Renting = $3400 /mo
Owning = $5700/mo (Just mortgage + tax)
$2300/mo * 12 * 7 years = $193.

Almost another $200k net carry loss based on rental equiv.

(Renting was half ?!! Holy shit that is a textbook blunder.
Buy vs. rent calculator, people!! Real estate 101)

inonada: about 13 months ago

"You could also factor in the extra $70k equity tied up in the house."

I'd also consider that part of the "50% more" as it'd be 50% more equity tied up in the house.

inonada: about 13 months ago

dealboy, on "almost double", I was comparing $1.2M against $700K (what I thought you had said in your original post). But if it's $1.2M against $800K, then you're right -- "50% more" is appropriate.

300_mercer: about 13 months ago

dealboy, if this family needs more house and has additional income/assets to justify it, will make sense as all they are doing is the equivalent of putting in more money into an asset when they think it is attractive. If their income has remained similar, why would they increase the monthly expense? Also, upgrading has significant transaction cost.