New American Dream is renting to get rich

if you owe 1 million and inflation is 5%, you make 50k/year TAX FREE (post inflation post tax). you can't capture it on ANY tax filing because the tax system is INFLATION BLIND. but as warren buffet says in the linked article, inflation is a TAX, 3 times more devastating than income tax.
having inflation work for you is the ESSENCE of real estate investing (not location, high end finishes, supply/demand or whatever garbage).

Stand aside. Let me deflower this thing.

FG: among other things. Less on RE, less on education, less on healthcare (arguably). The list goes on. This is a RE website, so let's stick to RE. I agree that RE costs too much in NYC - though one can argue that the spread between most $$$ and least $$$ nabes in NYC has grown. So the diff. between living in Manhattan s. of 96th v. East NY has grown. Or the diff between Manhattan and SI. It is instructive to take a look at RE sales columns in the NYT from the 80s and early 90s. I believe that the cost of a detached house in SI was once more than a 1 bedroom apt in the Village. Is it possible to still be creative and risk-taking while living in the pits of the outer boroughs?
I don't know.

http://www.flickr.com/photos/arnade/page2/

> And yet again, another pro-renter falls back into the not-seeing-the-forest-for-the-trees phenomenon; you need to pay for a place to live, whether it's through a rental check to a landlord or a mortgage check ultimately to yourself. But in the end, after 15 or 30 years, the owner now OWNS the property outright. The renter is still paying top-scale market rent -- FOREVER.

Matt, renters are truly too short sighted and stupid to understand this basic point.
Renter = Low IQ.
Renter = Low to zero net worth.

Renters are stupid enough to point out that buying in 2009 was a losing deal.
While ignoring the other 100 years of data where you retired with a god damned lottery JACKPOT.
While the idiot renter pays top market $3000/mo rent in retirement...

"Yet another bitter buyer misses out on that thing called... MATH."

Here's some MATH for you:

$2,100 - owner's mortgage/maintenance on one-bedroom in Uptown Manhattan/Bronx, after $36K down payment.

$2,500 - renter's rent on similar apartment in Brooklyn Heights

$985 - Owner's effective monthly payment after mortgage tax deduction is factored in.

$2,500 - Renter's effective monthly payment.

--- 29 Years Later ---

$1385 - Owner's effective monthly payment after mortgage tax deduction is factored in, and allowing for regular maintenance increases

$12,000 - Renter's effective monthly payment, allowing for annual rent increases

--- 12 Months Later --

$900 - Owner's total monthly payment, now paying only maintenance

$12,360 - Renter's effective monthly payment, expected to only go higher forever and ever, amen.

================================

How did the owners monthly cost DROP from $1200 to $1385 while still having the mortgage? Are you factoring in the amortization in the last year where 90% of the payment goes towards paying principal (ie: himself)

I love how the idiot renters monthly cost went to to $12,000 while the owners stayed the same, and then disappeared entirely.

How do stupid renters not understand such basic math and logic?

when your apartment is 30% less than it is now, you'll be kicking yourself for not renting.

Ummmmm. I'm not poor. I rent. I bet I'm gonna be way richer than w67 the condo buyer in 2006/2007.... Just saying dealboy is a fking fktard.... Just wipe that santorum out of your mouth.

There'z a time to own and a time to rent. Does anyone have a working credit watch. My IWC broke. What credit time is this?

That's disgusting dealboy. Don't slurp that santorum back up. U fking financial retard. Ohhhhhhhh. Pardon me, you landed prepaid rent gentry. Fking idjiot.

Idiots talking about renting or buying a $10k Hyundai. And saying its cheaper to own!!!!!!

We are talking about $1mm mclaren f1. You twits.

w67thstreet
17 minutes ago
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Ummmmm. I'm not poor. I rent. I bet I'm gonna be way richer than w67 the condo buyer in 2006/2007....

Right, w67thstreet who was a buyer in 2006/2007 but for being outbid. w67thstreet the buyer.

Finance guy

You never disappoint. You always make a good point, and your style always makes me chuckle a little bit. Love it.

financeguy
about 4 hours ago
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Re interest deduction:
The reason corporations, and indeed all businesses, are allowed to deduct interest is that the interest is considered an expense of creating the income. An income tax aims to tax net income, not gross receipts. This justification also explains why a landlord gets to deduct interest against the rental income.
But a personal mortgage does not generate any taxable income: Owner-occupants do not declare the (in-kind) income they receive as landlords by paying rent to themselves. So a mortgage on an owner-occupied unit is not an expense of producing income. It is double-dipping to allow owner-occupants to deduct the expenses of producing non-taxable income. (We enforce this principle elsewhere: if you borrow to buy tax-exempt bonds, you are not allowed to deduct the interest on your loans.)
Therefore, in a fair income tax system, there would be no deduction for mortgage interest for an owner-occupied home.

-What is the source of the money for the equity (downpayment and non-deductible equity amortization) in the purchased home? Personal income after income taxes?

Even this would be a subsidy to owner-occupants, just a smaller one than today: In an imaginary ideal income tax system, owner-occupants ought to be paying tax on the net income from their rental investment property just like commercial landlords (and therefore tenants) do. But this is way too complicated to work in the real world -- no one would know how to calculate the imputed rent or understand why they should pay taxes on purely imaginary payments, enforcement would be impossible, and too many homeowners wouldn't have the cash to pay the tax.
If we were interested in a fairer system, we might instead allow tenants to deduct their rent (on the assumption that nearly all the time, markets allow landlords to recover the tax they pay from their tenants as part of rent).
- of course, this is impractical, because the taxing bureauclass don't want more deductions and lower overall taxes, but rather they want more taxes on more people and more money for the government.

That has its own complications, but it would come closer to equalizing tenants and owner-occupants and in any event would eliminate the current upward redistribution from tenants to owner-occupants.
-Redistribution of what? Taxes are progressive. Mortgage deductions phase out.

Also, it would eliminate the current current subsidy for leverage that encourages the upper middle class to take out excessive mortgages.
-Sounds nefarious. Is this any different from the topic at hand, or did you just find another way to say the same thing? Leverage=borrowing=paying interest expense

(It would still be a subsidy to the real estate business, detracting from more productive enterprises and keeping real estate prices higher than they should be, but I don't see any way to avoid that without having a government agency calculate the fair market rent on every owner-occupied unit in the country, which seems absurd.)
- Ok, which more productive enterprises would become more productive under your plan?

Unfortunately, making the wealthy -- or even just the less poor half of the country -- pay their fair share of the costs of running the country is not on the political table at the moment.
- Since we both know that the wealthy pay more than anyone else in percentage and actual dollar amounts, what additional amount of taxes brings it to your level of "fair share"?

Nor is reducing the subsidies to the finance and real estate industries.
-But you said that people in finance make a greater share of mistakes than not:
"financeguy
about 7 hours ago
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jhocle -- You may well be right. It's hard to overestimate the skewed incentives and simple blindness in the real estate or finance industries. The professionals are likely to try every possible way of losing money before finding the profitable one. "

Better punctuated / parsed:
financeguy
about 4 hours ago
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"Re interest deduction:
The reason corporations, and indeed all businesses, are allowed to deduct interest is that the interest is considered an expense of creating the income. An income tax aims to tax net income, not gross receipts. This justification also explains why a landlord gets to deduct interest against the rental income.
But a personal mortgage does not generate any taxable income: Owner-occupants do not declare the (in-kind) income they receive as landlords by paying rent to themselves. So a mortgage on an owner-occupied unit is not an expense of producing income. It is double-dipping to allow owner-occupants to deduct the expenses of producing non-taxable income. (We enforce this principle elsewhere: if you borrow to buy tax-exempt bonds, you are not allowed to deduct the interest on your loans.)
Therefore, in a fair income tax system, there would be no deduction for mortgage interest for an owner-occupied home."

-What is the source of the money for the equity (downpayment and non-deductible equity amortization) in the purchased home? Personal income after income taxes?

"Even this would be a subsidy to owner-occupants, just a smaller one than today: In an imaginary ideal income tax system, owner-occupants ought to be paying tax on the net income from their rental investment property just like commercial landlords (and therefore tenants) do. But this is way too complicated to work in the real world -- no one would know how to calculate the imputed rent or understand why they should pay taxes on purely imaginary payments, enforcement would be impossible, and too many homeowners wouldn't have the cash to pay the tax.
If we were interested in a fairer system, we might instead allow tenants to deduct their rent (on the assumption that nearly all the time, markets allow landlords to recover the tax they pay from their tenants as part of rent)."

- Of course, this is impractical, because the taxing bureauclass don't want more deductions and lower overall taxes, but rather they want more taxes on more people and more money for the government.

"That has its own complications, but it would come closer to equalizing tenants and owner-occupants and in any event would eliminate the current upward redistribution from tenants to owner-occupants."

-Redistribution of what? Taxes are progressive. Mortgage deductions phase out.

"Also, it would eliminate the current current subsidy for leverage that encourages the upper middle class to take out excessive mortgages."

-Sounds nefarious. Is this any different from the topic at hand, or did you just find another way to say the same thing? Leverage=borrowing=paying interest expense

"(It would still be a subsidy to the real estate business, detracting from more productive enterprises and keeping real estate prices higher than they should be, but I don't see any way to avoid that without having a government agency calculate the fair market rent on every owner-occupied unit in the country, which seems absurd.)"

- Ok, which more productive enterprises would become more productive under your plan?

"Unfortunately, making the wealthy -- or even just the less poor half of the country -- pay their fair share of the costs of running the country is not on the political table at the moment."

- Since we both know that the wealthy pay more than anyone else in percentage and actual dollar amounts, what additional amount of taxes brings it to your level of "fair share"?

"Nor is reducing the subsidies to the finance and real estate industries."

-But you said that people in finance make a greater share of mistakes than not:
"financeguy
about 7 hours ago
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jhocle -- You may well be right. It's hard to overestimate the skewed incentives and simple blindness in the real estate or finance industries. The professionals are likely to try every possible way of losing money before finding the profitable one. "

"ino, these are idiots, not landlords. they're not investors. they're high paid employees who want to play the game. but they are for a living.their knowledge is superficial. they're gonna lose their shirt as they should. that's how you learn. "

That's very funny. Guess who bought the property? The head of a RE investment firm. This guy:

http://www.glenmontcapital.com/bios.php

Let's talk cashflow on the purchase. You've got a $3.8M purchase with 70% financing using a 10-year IO ARM at 4%. That's $9K a month. Common charges are another $4K. Put in $4K to amortize transaction costs over a 7-10 year hold, $1K for insurance & minimal upkeep, $1K for management company.

That's $19K a month for an apt that didn't rent at $15K last year. Let's say it could move at $13K including a vacancy allocation, a pretty rosy assumption.

So for the benefit of losing $72K a year, $1.14M was put up. Suppose the hope is for 7% return on equity, or $80K a year. The place has to appreciate at $152K a year to achieve that -- 4% a year -- without any renovation.

>That's $19K a month for an apt that didn't rent at $15K last year. Let's say it could move at $13K

precise numbers, how did you get to that precision:

>Put in $4K to amortize transaction costs over a 7-10 year hold, $1K for insurance & minimal upkeep, $1K for management company.

So within the "let's say" differences of between $4K and $6K ($19K - $15K or $13K) , you have $4K of non-cash amortization, $1K of insurance for the owner - ridiculous considering it isn't owner occupied, and an extra $1K to a management company over and above already paying $4K of common charges presumably for a full service building. It's hard to dispute that at the high end of the market that there are great relative rental deals, but the level of fudge factor to prove your points is excessive.

How about - $13K after a "vacancy allocation" means that someone has to move every two years, so there's $500 / month in amortized moving costs, a rental brokerage fee of 12% coming out to $900 / month, application and condo fees of another $100 per month. Additionally, moving every two years to a high end place means some inevitable friction when you'll need to be paying an extra month for a place while you move into another, so at $13K / month rent that comes out to an extra $550 / month amortized cost. Plus there's fees for a personal assistant in addition to the physical moving to deal with all of the moving hassles that come with changing apartments and buildings every couple of years, call that $250 per month. Plus your landlord is some odd owner who is angry that he's only getting $13K per month on the $19K per month apartment, so you aren't getting your security deposit back or will have to hire a lawyer because Small Claim's Court isn't available in this price range. That's another $550 / month spent by the renter.

Add in, bigger personal costs include the hassle for your family including your spouse being upset, that's $1K / month in jewelry. $500 / month per child for extra allowance as a bribe because the commute to school got longer.

In addition, because your money isn't tied up in housing, you'll need to put it to work at a cost of 1% to your money management advisor, so on this $3.8MM purchase that comes to $38K/year.

Cost of renting really adds up.

like I said: an idiot.
Investment firms are not at all immune of bad investments.Just look at the performance of mutual funds, post inflation, post tax, net of fees. really bad. index funds included.the prospectus are written (legally, with tons of disclosures) to obscure the facts.
The money is made in FEES.FEES AND MORE FEES.
like I said he's a highly paid employee. he doesn't invest his money (though probably has some skin in it).
And for the sake of disclosure I own 2 RE investment firms (manage one myself).Let me tell you, once you really understand the flow of fees it's a bad deal (though a better deal than index funds).but other people money is the best source of funds.and they never bother with post inflation returns, just nominal.do you ever see the stock market in post inflation return? no.
I have a meeting today for a new RE fund: the greediest? the lawyers.they always are (they get a cut, instead of a paycheck)
And who knows? maybe his firm made the deal with investor money and he parked his mistress, daughter, boyfriend or whatever in it.So a good deal for him. I've seen worse.

"maybe his firm made the deal with investor money and he parked his mistress, daughter, boyfriend or whatever in it."

Heh.

"Let me tell you, once you really understand the flow of fees it's a bad deal."

I have no familiarity with RE investment firm fees. How are the flow of fees structures, and why is it a bad deal?

"As far as I know, landlords ordinarily plan to and usually are able to charge rent that is enough to cover their taxes and still allow them to make a reasonable return"

That was the goal years back, and the rules of thumb used to be there.

Then all the idiot investors jumped in and were ok buying properties with no (or even negative) return because they were banking on price appreciation (which is basically the first thing old school RE investors tell you NOT to do).

The problem is, all the idiots run up the prices for the folks who are trying to do it right.

"How do stupid renters not understand such basic math and logic?"

They were too busy counting all their extra money to notice.

Any update from financeguy on why corporate landlords should be able to deduct interest expense on the buildings they own, but individual owners shouldn't be allowed to deduct interest expense on the mortgages for the homes they own?

Maybe Mitt Romney can help. Corporations are People, right? Or in financeguy's scenario, Corporations should get a benefit that People don't get.

midtowner, your "idiot" did a choppy-choppy from $17.5K down to $16K:

http://streeteasy.com/nyc/rental/838871-rental-257-west-17th-street-chelsea-new-york

Flmaozz. I have a feeling down there the 'owner' would take $15k that it listes d for 3 yrs ago wo too much convincing. And if you played coy by coming in asking to pay $14k, and while you were chatting him/her up, just dropped a bombshell of '$12k' prepaid one year in advance with 2 one year options- you've got 50/50 shot the owner would take it.

So you could earn $4.5k/month for a year with a 5 minute meeting. I've made more in 5 minutes. But $50k ain't bad.

example of fee.
acquisition fee 6%, management fee6%,capital fee 1.5%/year/capital invested, liquidity event/exit: a whole cascade of additional fees. and lawyers get a cobroke fee if they hold a RE license (150$, no exam if I understand clearly?).pretty harsh hurdles.

I had not looked at the place. cold. but not bad. bad deal though.

regarding the cash flow analysis: technically correct (management way too high) except for one major problem: the rent for a regular tenant is POST TAX. so to pay 16k you need to generate 32k/month, pay taxes (income/ss/medicare/state/city/inflation) and write a nice 16k check to the landlord. that's 384k per year.
my rule is housing less than 5% of income, meaning 7.6mil/year. hmmm.10% splurge? 3.8mil/year.hmmmmm.

for the landlord only the downpayment is posttax (unless financed by raising equity from investors in which case pretax for re syndicate/post tax for investors). pre tax 2.7mil loan (loan proceeds are free of taxes). HUGE difference.

that was for the cash basis analysis.
now on an accrual basis.assuming prices market adequate (may not be here).
rental income 192k,appreciation at inflation 5% (over 10 years,reasonable) 190k/year (increasing compound), and loss of purchasing power of 2.7mil at 5% inflation (decreasing compound) 135k/year total 517k/year 43k/month.
also the rental income is tax free (offset by interest for years), I didn't add depreciation which creates a fake loss,offsetting other current passive income resulting in "phantom cash flow" as it's called.

finally if the bottom is around now, the mean reversion to historical trend will be sweet for re holders/painful for tenants.I don't know the future but the odds are good.

so he might not be so idiotic after all (though a deal I would never take myself). for disclosure I am a sugar daddy. I park my very cute and young asian bb in a similar (though cheaper) kinda place. what an idiot.

"acquisition fee 6%, management fee6%,capital fee 1.5%/year/capital invested, liquidity event/exit: a whole cascade of additional fees. and lawyers get a cobroke fee if they hold a RE license (150$, no exam if I understand clearly?).pretty harsh hurdles."

I see, those fees do suck. They'd be fine if the assets were well-priced, but I see why you say they're a bad deal. Do you consider your RE investment firms a bad deal too?

"rental income 192k,appreciation at inflation 5% (over 10 years,reasonable) 190k/year (increasing compound), and loss of purchasing power of 2.7mil at 5% inflation (decreasing compound) 135k/year total 517k/year 43k/month. "

Why are you adding the loss of purchasing power to the other things?

In any case, if you want to assume appreciation at 5%, that'd get you to a $118K return a year on $1.14M in equity. A modest 10% return assuming a rate of appreciation that is delusional for RE IMO.

Your post-tax / pre-tax statements are a red herring. At the end of the day, that 10% ROE under the delusional assumptions of 5% appreciation are going to be subject to capital gains just like stocks upon liquidation. What the renter earns and/or pays in taxes is irrelevant to the LL's taxes.

"my rule is housing less than 5% of income, meaning 7.6mil/year."

Maximum tax rate is 43% right now, so $7.6M will net $4.3M. Basically, the person could by one of these apts cash every single year, cover all other costs, but they could barely afford to rent one while socking away $3.5-4M in investments every year?

What does your rule say about owning? How much does a person need to earn before buying a $3.8M apt?

Like telling the guy 'you can't afford the lease payment on that Ferrari!' the same guy goes off any buys it cash.

I like how inonada eggs them on for details... And yet once again a 'financial savvy' investor hasn't a clue. What are we to do as a society except to stop letting my hard earned cash stop commingling with idiot prepaid renters.

But that dude's rules, you'd need $100mm in the bank and a $30mm/yr salary. Nice nice. I guess there are way more billionaires in manhattan and queens and billyburg that I could ever imagine.

I hope i do a good job for my investors. It's not only about the money. Most qualified investors are professionals. they don't have the time/interest to dedicate to investing. they buy a prepackaged deal.
still better than mutual funds.

loss of purchasing power of the mortgage is a completely different problem than appreciation. they both add up and both are inflation related.(if you buy cash you still have appreciation, not the mortgage "purchasing power" benefit. It's never calculated. it's a massive source of re profits)
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CCIQFjAA&url=http%3A%2F%2Fwww.safehaven.com%2Farticle%2F8253%2Ffinding-beauty-within-the-inflationary-beast&ei=zBZIT7b5IYGD0QGPndSwDg&usg=AFQjCNE8OkmzZuNnxMl9Ea8U5ITXp7ziTg

Appreciation is not on the down payment alone but on the property (leveraged down payment), and 5% is historically valid,in the US over the last 50 years. not delusional at all (I remember visiting a one bedroom 78 and madison: 40000$ in 1995.then I realized if was a coop (I didn't know what a coop was), I passed...

Pretax/post tax issues are FUNDAMENTAL to the buy/rent scenarios.Paying tax first then rent is the opposite of getting tax free money first (mortgage)to invest.You CAN bypass this massive hurdle, legally but it's not easy (if you own a sizeable business, a subsidiary buys a Manhattan place and rents it out to you, the executive (owner)as a corporate perk, the rent is paid with pretax money by you (the owner)for the benefit of you (the executive).legal.complicated. done everyday.

My 5% rule is for myself, and myself only.People can do what they want. it's their money.Can you afford a Ferrari if your net worth is 10mil? no obviously.Can you buy one?: sure.Some poor people buy boats. If they like it, perfectly fine.So the answer to a 3.8mil pad (overpriced)? 76mil net worth.what this means for me is that the money should have been used to become financially independant before splurging on what is consumer spending. Again, philosophy varies.

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=3&ved=0CDIQFjAC&url=http%3A%2F%2Fdanielamerman.com%2Farticles%2F2011%2FDoubleRc.html&ei=zBZIT7b5IYGD0QGPndSwDg&usg=AFQjCNFLdsOaDd9SbtcAvgGydYXZ1MzHfg

as for the 46% maximum tax rate....
"it's not what you don't know that gets you, it's what you know that just ain't true".

check out where columbiacounty calls inonada an idiot:
http://streeteasy.com/nyc/talk/discussion/30081-what-cost-more-feeding-the-car-or-the-family