ownership

Good Money After Bad

November 2, 2011 By Jon Griffith Leave a Comment

Come on! Seriously. You work WAY too hard every day for your money to be throwing it away.

If you are upside down in your house, you owe it to yourself to calculate the long term ramifications. The point of home ownership is a) to have a place to live that’s paid for, b) to build wealth and security for your family, c) to invest and generate cash flow.

As it is, with a 30 year mortgage, your total cost of ownership is much higher than the purchase price of the home. Many people consider a mortgage a forced savings account because part of the monthly payment reduces the total amount owed on the house and becomes equity. If you look at it this way, you also have to realize that during the first 15 years, MORE of your payment, in fact MOST of your payment is paid to the bank in the form of interest and is not “saved.” Your money hardly starts working for you until the latter 15 years.

Let’s look at a simple example.

Bob and Judy purchase a home for $250,000 at 6% over 30 years. Their monthly payment is about $1500.00 per month, and after 30 years, the total amount of interest paid reaches $289,500, making the total cost of ownership, not including deferred maintenance, $539,500. IF the house increases in value over those 30 years by 4% annually, at the end of 30 years, it should be worth approximately $810,000, yielding a gain of $270,500. If you divide the gain by the total cost, you get the investment gain, which is 50.1%. If my math serves me correctly, 50.1% over 30 years is 1.67% annually.

A 1.67% annual gain is not enough to outpace inflation. All things considered, Bob and Judy have a paid for home now, and they don’t have to worry about foreclosure, but the opportunity cost is just too great. Bob and Judy paid more in interest to the bank than the purchase price of the house. How much hard work does that represent? Ugh…it makes me sick to see so much potential thrown out the window.

The example I just outlined is a good standalone argument against 30 year fixed mortgages as it is. But what happens when you purchase a home and the value drops by 50%, which is exactly what happened in Phoenix in recent years.

Well, Bob and Judy’s original 30 year note would still yield the same numbers and at the end of the loan they would have paid a total of $539,500 as I outlined above, but in this case, they would have lost 50% of the original purchase price only 4 years into their 30 year term (2008-2012). What they had originally paid $250,000 for is now worth $125,000.

If over the next 25 years remaining on their mortgage, their home increases in value by 4% annually, at the end of the 30 year mortgage, their home might be worth $333,000 and they will have paid out $539,000 for a total LOSS of $206,000.

Is this all starting to become clear?

There’s a point during the loan term at which your house value and the amount remaining on your note will break even, but it’s at a little more than 10 years in. So for those 10 years you can count your payment as rent to yourself. It disappears. What you really have to pay attention to is the total cost by the end of the 30 year term.

So what’s the point? The point is that it’s time for you to take a look at your current situation and weigh them against your long term plans and the possibility of the unexpected rainy days changing your path. If you know for certain that you’ll be living in your house or owning the home for the entire 30 year term, then the worst that could happen is you’d lose a truck load of money, but you’d have a paid for home. If, however, there’s ANY remote possibility that you would need to move for any reason whatsoever before your house is worth more than you owe, then you need to recognize that every penny you spend on your house now is good money after bad.

In other words, if you don’t choose to short sell your house now, you may be forced to later. Really consider whether or not this is a possibility and then don’t delay on course correcting now.

Regardless of whether or not you choose to remedy your financial situation by paying off your note or short sell your home, you need to take inventory of your financial situation so you can plan your next steps.

Filed Under: Short Sales Tagged With: cost, home, house, ownership

A Higher Sense of Purpose

August 27, 2010 By Jon Griffith 2 Comments

Real Scottsdale Living isn’t just a site about real estate in Scottsdale. It’s not only a place where you can search for properties, learn about the Short Sale process, or research what the community has to offer. It’s also a site about getting REAL in Scottsdale. The name Real Scottsdale Living was born after seeing Steve Belt’s success with Real Phoenix Living. Steve Belt, formerly a real estate agent and property manager with Realty Executives, now owns and operates a successful coffee shop at 78th Street and Thomas called Echo Coffee.

Me Too, Me Too

At the time I discovered Steve’s real estate blog, being part of a blogging community was more important to me than working on real estate, which essentially is working on relationships. True, blogs provide a way to develop relationships, but when I first began this venture, it was all about being noticed as a blogger.

We Can’t Focus on That

Boy was I on the wrong track, and thankfully, I believe the purpose of this website is evolving into something that means more than I ever thought it would. What that is, I can’t exactly place yet, but I know that I have a higher sense of purpose in mind, and I think it may have something to do with the hidden meaning in the name of this site.

What It Boils Down To

True, the name is good for search engines, and it’s good for indexing based on common real estate phrases, but I think I got lucky with the name, because the higher purpose of this site is to help people realize (REALize) their financial dreams through the process of personal refinement. I’m on a mission to help people who are ready to get REAL about life in Scottsdale, their life in Scottsdale.

I’m a pretty straight forward guy. I say what I think when I think it as long as I can debunk the myths that I tell myself, and I’m okay if you don’t like it. There are plenty of people who do, and I work with them to help them achieve their real estate results.

What Prompted This Post

I came across the following statement that is a clear myth we all buy into from time to time. “I can’t do it.” I nothing more to say to someone who says that “I can’t do it.” I find myself believing more and more that I can do it as I pick myself up over and over again to continue through something even after I fail at it. “Until you try, you can’t possibly know what you can or can’t do.” – Gary Keller, Keller Williams Real Estate.

Coming from a mastermind of the real estate world, a statement like this sinks in and does its work in my heart and in my mind. But what about in others’ hearts and minds?

The Daily Risk

I have found that it is so much easier to be pulled down by people who live inside of “I can’t do it” than it is to pull myself up and out. If you surround yourself with people who believe they will never succeed, or that they have reached their limit, it’s likely that you’ll follow along with them because you’ll be afraid of going against the grain, because going against the grain means discovering something new, which means change will happen. When change happens, old relationships pass, and new ones begin. So the daily risk of surrounding yourself with people who don’t believe they can do it, is a very high risk activity, and the risk is never creating new relationships that can help you achieve your goals.

Filed Under: Other Stuff Too Tagged With: achievement, approval, ownership, purpose, results, succeed, success, value

The Debate Continues: One User’s Opinion on Renting vs. Buying

September 23, 2009 By Jon Griffith Leave a Comment

As with anything, there are pros and cons that change with every complicated variable involved. The concept of buying being better than renting is relative to the context of each side of the equation at any given time. No two situations are the same, but generally speaking, assuming certain conditions are already met, owning a home is MUCH BETTER for long term wealth building than renting.

In an article that I wrote back in 2008 on the SonoranHouse.com blog, I illustrated the financial benefits of renting vs. buying. Here’s what one user had to say, along with my thoughts on the response:

WRONG… Renting is FAR better and Cheaper than buying a house.

Not so fast. There are too many variables involved, and each situation is different, but the principle cannot be disputed. Owning is a long term prospect. Not short term. In order to conclude that owning is better, one must assume that the property will be held for as long as possible.

1. The down payment is $20,000 OUT OF YOUR POCKET on day one. SO by purchasing a house you are immediately $20,000 POORER the day you buy your house. In contrast, you can RENT and only pay a SMALL deposit equal to 1 months rent and keep the rest of your $19,000 to use as a safety net to pay the rent with and live an easy STRESS FREE life knowing you have the rent covered for 19 months if it’s a $1K a month rental.

When you pay a deposit to a landlord, it is a fee that can never be recovered. When you put money down on a house, you are instantly investing your hard-earned cash in an appreciating asset. You are not spending the money. Again, if your investment mindset is short term and you sell your home too quickly, you will certainly cut into your initial down-payment unless your property experiences unheard of appreciation in a short time period. Not likely to happen again. Buying real estate is a long term wealth building investment.

A rule of thumb for an emergency fund is 3 to 6 months worth of living expenses. If your rent is $1000.00/month, you have 19 months of rent paid for, but that doesn’t take into account the rest of your expenses. If a down payment on a house depletes your living expenses, they you are not ready to buy. Your down payment should be above and beyond your 3 to 6 months. So, if your expenses are $2000/month, you should sock away about $12,000. The rest can be used towards your future down payment. This all assumes that you are completely out of debt. If you aren’t, then you shouldn’t be buying a house in the first place. Most renters do not have this much money saved up and they live paycheck to paycheck, so they feel they NEED to have some sort of financial buffer to buy them time.

The problem with this is that they never get OUT of the rat race by behaving this way, and they never put their money to work for them. They will live the rest of their lives working for their money. What would be the difference between having 19 months of STRESS FREE living in a home that is appreciating in value versus apartment living with the same amount of a safety net? The difference is that part of your monthly payment is being added to the home’s equity. Some of that payment will be recovered. NONE of the rent will.

2. The Tax Deduction is nonsense… You spend $1.00 in Mortgage Interest to deduct .10 cents off your tax bill. HARDLY a “savings” at all. Your still LOOSING .90 CENTS in interest!! WAKE UP PEOPLE!!

Tax Deductions are a poor excuse for people who are poor to continue to be poor. The argument here is that it makes sense to pay the bank $1.00 in interest to avoid paying the government ten cents. Obviously that is flawed thinking. Spending 90 cents to save 10 is absolutely ridiculous. That is why the largest mortgage anyone should be financing is a 15-Year fixed. Obviously paying cash is the best way to buy a house.

3. When you own a house you pay PROPERTY TAXES each and every year. These taxes are about 1.5% of the value of your home or around $3000 a year. That’s $3K a year your LOOSING if you own a house.

Hmmm…let’s see. Property taxes at $3000/annually, deductible at your tax bracket rate, or $12,000 wasted on rent. Personally, I’d rather put the remaining $9,000 in growth stock mutual funds to offset the perceived loss, because by the time my $9,000 per year is invested over 30 years, it will pay the property taxes a few thousand times over.

4. When you own a house you pay Property INSURANCE on your house each year. This will be about 1% of the value of the home so figure $2000 a year on a $200K house.

I own a $200K home. Taxes and insurance annually do not exceed $3000.00. In fact, they don’t exceed $2000.00. This has everything to do with location and tax rates. Again, I’d rather cough up $2000/year for insurance than blow $12,000/year on rent. So based on points 3 and 4, which add up to $5000.00, I’m still ahead with $7,000 invested annually in growth stock mutual funds. Come to think of it, my down payment of $19,000 as used in this example will be reimbursed fairly quickly.

5. When you own a house you pay for ALL MAINTENANCE/REPAIRS/REMODELS. This means spending about 1.5% of the value of your home EACH YEAR to keep it in livable condition so figure another $3000 a year on maintenance/upkeep.

Nobody forces remodeling, so we’re going to remove that from the equation. Deferred maintenance is a price that everyone has to pay for, whether you own, or you rent. As the king of your castle, you determine what’s used on your property to improve and maintain it and you have a choice over the cost/savings realized from it. By renting, you have no control over these things, and the cost of rent is at the discretion of the landlord, who can easily raise it high enough to force you out to make room for someone else as a result of increased management costs. Owning your own home offers greater long-term housing security.

6. In order to “get your money back” out of your house you will need to SELL your house. This means FINDING SOMEONE ELSE TO BUY IT. You’ll have to pay Closing Cost, Real Estate fees, etc. and it can take a LONG TIME to find a buyer. THEN even if you sell, you will have to live somewhere so you would have to turn around and buy ANOTHER house or do what most smart people do in the first place… RENT.

False. As a long term investment, the asset appreciates and the value of the loan decreases over time. If you paid cash, you have an instant money making machine creating passive income. If you didn’t, you’ll eventually reach a point at which renting your home to someone else will generate positive income above what you owe on the mortgage payment. The tone of point number six seems to emphasize the dependence upon cash in the bank to provide a safety net. Obviously if you’ve been able to save $19,000, you’re making more than you’re spending, so the time that it takes to sell should be irrelevant unless you’re forced to move via relocation or other circumstance beyond your control. It’s true that if you sell too early, you’ll erase your gains because you didn’t have a long term mentality. There is so much more risk to buying a home when you borrow, but if you are able to pay cash for a home, then I’d say you’re living well financially. One’s intelligence is not a factor determined by the decision to rent or buy. One’s wealth, however, is. If you want to get rich and live free like nobody else, then you’ll invest wisely. Renting is not investing.

Owning a house ONLY makes sense IF you could pay CASH for it. Even then, your still going to “Throw money away” on Taxes, Insurance, Maintenance, and the excess bills that come from owning a house when if you RENTED many of those bills are included in the rent.

Paying cash for a home ISN’T THE ONLY time it makes sense to buy a home. It is the BEST practice for sure, but you’re not throwing money away on taxes because your home is appreciating in value, and in theory, you’re renting that home out, collecting $1000.00/month rather than spending it. Can you imagine how nice it would be to be able to put $12,000.00 less a few expenses every year without having to work for it?

The fact that there are additional bills when you own versus renting is also a false assumption. Do the math over a long period of time. Take the appreciation of real estate and the potential passive income from owning a rental and see where it would be in 30 years if invested wisely, long term. Compare it to the real costs of owning. Remember, we’re talking about ownership versus renting. We’re not talking about owning a high cost property that has no potential to generate future income. That would not be a wise investment. Of course, you could just keep on throwing your hard-earned money away. In fact…

…I’ll look forward to renting one of my properties to you because you sound like the perfect tenant.

Filed Under: Personal Finances, Real Estate Basics Tagged With: appreciation, Buying A Home, equity, investment, ownership, Renting, Rich, wealth

The Benefits of Ownership

February 9, 2009 By Jon Griffith Leave a Comment

Buying a home doesn’t mean all of your problems will go away. There are plenty of responsibilities that come with home ownership, but the benefits far outweigh those responsibilities.

Owning a home involves a down payment, property taxes, potential home owner’s association fees, and other various expenses that can seem at first to be a burden, but when put into perspective, are all positive aspects of home ownership.

Down Payment – the downpayment becomes part of your home’s equity, or the amount of money your home is worth above and beyond what you’ll owe on it. Equity is what you would walk away with if you sold the home. Traditionally, since homes increase in value on average by 3% – 4% annually, your downpayment is now part of that investment.
Property Taxes – Did you go to school? Are you children in school? Will they be? Education is just part of what your property taxes pay for, and as I mentioned, contrary to popular belief, purchasing a home is not the most important investment you’ll ever make.
HOA Fees – The homeowner’s association is responsible for keeping your neighborhood looking good for the purpose of retaining property values. Nobody likes a run down neighborhood. There are other benefits that you’ll learn about in their documentation (Covenants, Conditions, and Restrictions.) Remember, not every neighborhood has one.

The fact that purchasing a home involves large dollar amounts is what typically drives the would-be buyer away. But let’s face it. Most of us don’t have $100,000 sitting around in our bank account, and so we remain stuck in a pattern of believing we cannot afford to buy a home.

So what makes buying a home such a financial benefit?

Tax Deductions – When you finance a home, part of the payment you pay to the bank is interest and part of the payment is equity. During the first 20 years of a 30 year fixed mortgage, the interest portion is actually disproportionately larger than the principle payment. Under current tax regulations, you are permitted to deduct the interest payments from your income to lower your tax liability. Renting does not allow this.
Appreciation – Real estate, over time, will increase in value by an average of 3-4% annually. In some cases more, in some cases less. As your home’s value increases, your equity grows, which equates to you and your family walking down a road towards financial independence and complete freedom from the rat race.
Equity – Part of your monthly payment goes towards chipping away at the balance of your loan and becomes equity in your home. Equity is something you can recover when you sell the house, provided the value has increased. When you rent, you don’t build any equity.
Buying Power – As the equity in your home grows, so does your ability to borrow that equity to improve your home or invest in additional properties down the line. While the reason we’re in this economic crisis is because of cash mongering greed, home equity loans are a potential solution to emergencies should they arise.
Economic Stability – A 30-year fixed loan is just that, fixed. The payment never changes. Rent continually shifts from lease term to lease term and over time can increase. Buying a home ensures your payments will always be the same.
Freedom to Choose – Owning a home gives you the right to do just about whatever you want to it, from the landscaping to interior decorating, you’ll no longer be bound by the landlord’s rental agreement and you’ll have the freedom to express yourself exactly how you want. Not only that, but you’ll also have the freedom to rent your home out to someone else. Renting out your home is a great way to continue to reap all of the benefits above without having to pay for it. In fact, your renter pays for it and helps move you toward financial freedom.

When you own, you have a voice, and you gain a sense of greater community, as though you matter more to the world. I have owned my own home since I was 30. I wish I had purchased sooner because I would be way ahead of the game. Get on it today! It’s time for you to buy a home.

Filed Under: Buying A Home, Real Estate Basics Tagged With: benefits, buyers, buying, equity, ownership

So Who Can Buy A Home?

September 24, 2008 By Jon Griffith Leave a Comment

The media is drilling you with the same information day after day. “Banks are failing. Unemployment Rates are climbing. It’s impossible to get a loan.”

The truth is, it’s not impossible to get a loan. Why would they say this? Because they continue to look in the rear view mirror at all of the high risk, no documentation, interest only loans they wrote over the past few years. Guess what…those people are not the right people to be buying a home.

So who is it that can actually buy a house right now.

Well, obviously cash buyers can buy a house, but they are few and far between. The next group of people are the only other group that really have a chance of buying a house right now. That’s you and me. The hard-working american who pays his bills on time, consistently, has a low debt to income ratio (and remember that lenders calculate debt to income ratios by including the potential loan that you’d be getting from them,) and has a good credit score.

If you fall into this category, and you’re renting, STOP THE MADNESS. Buy a house. Don’t worry so much about the fact that it may not be the perfect home. Find something suitable that you might be able to turn into a rental down the road, and buy it, and live in it, and make it a home.

If, however, you’re low on income, have nothing to put down, have a low credit score, and don’t may your payments on time, then you can forget about home ownership. Some people will always be renters. If this is you, I would recommend learning as much about managing personal finances as you can from someone who knows before you consider even attempting to buy a house.

Filed Under: Real Estate Finances Tagged With: home, house, ownership, rental, Unemployment, who can buy

To The Owner, It’s More About the Home

September 24, 2008 By Jon Griffith Leave a Comment

There’s nothing worse than media articles that continually pound the idea that your finances are in shambles. YOUR finances. I’m not certain what the analysts in the stock market are attempting to convey during these strangely unique economic times other than:

You’re going to lose your job soon.
Your interest rates are going to increase.
You should not by a house.
The world as we know it is gone forever.

ENOUGH ALREADY!

An article posted today at Marketwatch.com states that…

The purchase of a house is the ultimate confidence indicator, and if there’s anyone out there with any confidence these days after what the markets and the financial sector have been through, then you’re talking about the true eternal optimist.

Are you that optimist? Are you someone who wants to “indicate confidence?” We in the real estate business know the value of home ownership. We understand that when you buy a home, you put part of your payment into the value of the house, and part of it goes to the bank. When you rent, which is what many people who are sitting on the fence are doing, all of your payment goes to the owner of the home, and none of it is invested. Furthermore, none of your payment will help you reduce your tax liability at the end of the year. And historically over time, your home will increase in value.

Are you interested in giving yourself a raise? Then buy a house.

the housing market looks like a sunken soufflé

What a way to make a soufflé unappetizing. But we’re not talking about food are we. We’re talking about the concept of buying low and selling high, and the only thing that sunken represents to me is a low point, which is when I would buy. What about falling prices? When buyers hold out, sellers drop their price. That’s just basic supply and demand.

But why, ultimately, are you thinking about buying a home? Is it purely financial? I would hope not. This “sunken soufflé” could give you a perfect opportunity to finally secure a home. Not a house, not an investment for quick profit, but a home. Somewhere you can relax and entertain. Somewhere you can raise your children over the next 10 years. What you need is a place to call home.

If you look at the market in this light, it makes perfect sense to buy a home. Real estate is and always has been a long term wealth building investment vehicle, but more than that, it’s your little piece of America that you can rest upon every night when you come home from a long day at work.