DL Financial Geniuses...please explain this to me

Actually, they are going to go for your bank assets first, then stocks, bonds, paper wealth, plus they can garnish your wages. If you have to plead bankruptcy, your residence is nearly always protected to a certain extent. However, there are other reasons not to own property. Maybe you don't want to be tied down, have responsibility for yard maintenance, or want to have more liquid investments that you can sell at the drop of a hat. However, for 90% of Americans, their homes represent the bulk of their net worth, because they are not good savers. A home gives you an asset in old age. You can sell it and use the money to supplement social security, or you can get a reverse mortgage if you don't have heirs, and live there until you die with some regular monthly income. But if you're a good reliable saver, have lots of different kinds of assets, good health insurance, a disability policy, and may whole life insurance too, you don't really need to own a property.

Getting sick is why you have insurance.

Getting old and being able to retire is why you build assets. When you pay rent, you don't get anything back. When you pay a mortgage you're building equity in a property that you can later sell or use as collaterol for a loan.

Where I live, property values have skyrocketed. If I didn't own, I could not afford to rent where I live. So there's also a security issue.

For me it’s simple math. To use round numbers, albeit unrealistic ones, let’s say your rent is $1,000 per month and remains that way forever.

You live in an apartment for 20 years, you’ve paid the landlord $240,000. You move out, you still continue to pay. You die, your family doesn’t have anything to show for that money.

Compare the same $1,000 for 20 years paying down your mortgage. It might even be paid off by then. Now you own that house. Your heirs have something to sell, and if you still live there, you’re done paying (the mortgage at least).

[quote] Where I live, property values have skyrocketed. If I didn't own, I could not afford to rent where I live. So there's also a security issue.

This is the most important issue as we approach retirement. The cost of renting is skyrocketing. Rents can increase every year. Mortgage payments (principal and interest) will remain the same year after year for the duration of the loan if you get a fixed rate. Although, property taxes will increase, and if you live in a condo or gated community, HOA dues will increase.

The result? I am in Los Angeles. I have owned for just 10 years. All in (Mortgage + Taxes + HOA) I pay less for a 1500sq.ft. 2bd, 2ba condo than I would pay to rent a studio apartment just 3blks away. If I'd continued to rent my 1bd apartment, even with rent stabilization that rent would have nearly doubled in that same 10 years to be just about what I am paying for the condo. Also, my condo has appreciated in value considerably in 10 years. If I did not own, I would have to move to another city, probably another State.

I own two houses (personal residence - paid for; inherited rental property - mostly paid for) but since I have no heirs, I wonder why I want to hang on to them. I could sell them both and rent for my remaining years (I'm 65) with no problem; alternatively, I could buy another, nicer house with a big mortgage (I have a good pension income) and that way I wouldn't have a bunch of assets when I die.

Hey R5. How you doin’?

R5 you should sell all real estate and then buy a really nice condo in a full amenity bldg. Why rent? Or why get a house that needs maintenance and tending?

No one mentioned, but if you rent, you are (usually) paying the owner to cover at least the entire expense of the apartment. The owner has costs and you pay him, covering all his expenses. He’s probably got a profit, too.

There is a whole nother matter about having your wealth protected. A 401k will do that. An IRA is also protected, but the extent of protection varies by state. I have a friend who moved his 401k money into an IRA, and is using it to buy rental apartments. He then has the real estate, but in the form of an IRA. I don’t think he did it correctly, actually, but whatever.

It is not automatically better to own than rent: that's why one might perform a rent vs. buy calculation/analysis. Here is the very comprehensive NY Times calculator. There are many available, or you could do your own. You'll also want to identify and consider qualitative factors when making the decision.

Here's all I know re: this topic:

In the upscale Chicago suburb where I live, a decent apartment was going for $1,000 a month. And this was in the mid-1980s.

I scraped together enough of a down payment to buy a good-to-great condo on the 30-year mortgage plan. That made my monthly payment about $600, plus a $75-a-month maintenance fee.

After a few years, I was able to switch to a 15-year mortgage plan. That made the monthly payment $450.

I ended up owning the place free and clear in less than 20 years. While monthly apartment rental fees kept climbing to $1,200, $1,500, $1,800.

Moral of story: do whatever you have to do, short of murder, to make that down payment.

In my state, $150,000 of a primary residence's value is protected from creditors. Equity is king, OP, and you get to keep it.

R9 is correct. You need to determine if it's cost effective and financially sound in the long run to buy a home.

What others have said, plus the interest you pay on the mortgage is tax deductible. You can also deduct up to $10k per year on property taxes. The latter is a result of Trump's tax reform bill. It used to be that 100% of your property taxes were tax deductible but he imposed the $10k cap. Which sucks for me since I pay nearly $20k/year in property taxes. I will have to sell if Gov. Cuomo doesn't do something to intervene.

The other thing is - mortgage interest is tax deductible. It lowers your income so you pay less taxes.

A relative got rich that way. As he and his wife raised their family over 20 years or so, they moved about 5 times. Each time, they they decided not to sell their house. They'd rent it out instead. After all three kids grew up and moved out, the couple sold all five houses within a few years.

Another consideration: if your home is paid off when you retire, your retirement is cheaper.

Is mortgage interest tax deductible even if you take the standard deduction or do you have to itemize?

I live in NYC, so I’m renting for now but considering buying. The cost of most HOAs here rivals my rent though so it would be very costly and my savings are invested in stocks so I may be earning more keeping them there than using them for a down payment. Elsewhere in the country though I’d be buying

Bought a house in a comeback neighborhood for $25,000, lived in it for 20 years claiming mortgage interest deductions while restoring it, and sold it for $625,000 and retired. You do the math...

R17, you have to itemize but that's not a big deal.

Yeah - not a guarantee of wealth creation depending on circumstances. I have a house in suburbs where my property taxes are greater than my rent in the city. So the only way it makes sense is if the home value goes up by over 10% (=the commission/fees if I sell). And if I bought in the city, my maintenance/HOA fees would be only slightly less than rent so again - depends on increasing value.

The big myth of the mortgage interest/property tax deduction is a fraud as most people can take a standard deduction that is greater than the mortgage interest/property tax deduction.

Don’t take it as gospel that buying is better than renting. Perhaps for certain places and certain times - but that can not be predicted in advance. Take your pick - Gambling on the stock market or gambling on real estate. But know there is risk.

No one can force you to move when you own. You can knock a hole in the wall to suit you and no one cares. If you’re worried about bankrupcy or being sued in the future buy your asset with a family trust or llc. That way you don’t technically own it cause it’s not in your name.

[quote] I will have to sell if Gov. Cuomo doesn't do something to intervene.

What can Cuomo do? This is NOT a snarky or rhetorical question. I’m serious.

NYS can’t change the federal tax codes. He can change NYS tax codes to allow for a full exemption, but that’s about it.

I hope there is something he can do, but I’m afraid there isn’t, which is why I asked.

[quote] The big myth of the mortgage interest/property tax deduction is a fraud as most people can take a standard deduction that is greater than the mortgage interest/property tax deduction.

It depends on where you live. This is only true in Southeast or some parts of Midwest.

R22 when the new federal tax code was signed into law Cuomo talked about coming up with state or local tax credits to help New Yorkers with the property tax burden. If he doesn't, I can move 15 miles east to CT and buy a comparable home with taxes half of what I pay in NY. I would rather not though.

Thanks R24.

Another benefit of owning is that, when you die, the value of a home is “stepped-up”, as stock is. That means that your heirs pay no tax on the profit on your home. If you bought at $160,000; when you die, if it’s worth $1,160,000, the million dollar profit is not taxed by anybody. That’s actually my situation though I’m not dead yet. On death, you get the house appraised and magically, that becomes the value of the house.

Another benefit from owning is that you are investing with mostly borrowed money. If this were the stock market, it would be like investing using 90% margin (buying stock with borrowed money). Your profit is oversized because your gain is on your money, plus the bank’s money. If the value falls, then that sucks, sorry, mate.

My Dad’s business property value was stepped up upon his death. It then fell due to the crash. I sold at a lower price. I got a tax write off on the lowerd sales price. It felt very weird, because the gain was simply a paper gain, at the whim of the appraiser. But, the law is as it is. I paid no income tax that year. Thanks, Dad!

My plan as an eldergay is to eventually sell the home I’m in, with a big profit, an then rent for the remainder of my life. Does that sound reasonable?

R28, you need to talk to a financial planner- not DL.

Yes, R29, but I don’t know how to find an advisor.

[quote]No one can force you to move when you own

Since when?

Eminent domain is so rare, it's barely even mentioning.

R30 ask at your bank.

OP, there are “start up” costs for both. Renting costs are almost nothing. Owning costs are more. They’d generally keep you from buying and selling every year.

When I bought, a million years ago, the banks periodically had “first time home buyers classes”. Only a few classes, but they instilled confidence. I recommend asking about that.

If they still exist when I am in my late 60s or 70s I may consider taking out a reverse mortgage to help fund a nice lifestyle in my golden years. I have no heirs so might as well live off the value my house accrued.

R36, I heard a reverse mortgage was not financially wise.

I'm surprised the new tax law hasn't taken a huge hit on the property values in California. I know there are a lot of people like me who don't want to move because our property taxes are capped under Prop. 13, but if we bought another house, even of the exact same value, they'd skyrocket.

[quote] I'm surprised the new tax law hasn't taken a huge hit on the property values in California.

It will. Tax season of 2019 will be mass hysteria. The average person has no idea of the impacts of the new tax law. Many people are under-withholding because they never changed their payroll exemptions and some have bought all the repug bullshit about lowering taxes. The typical taxpayer will only see a small reduction in their Federal income tax if any. When middle-class taxpayers who are accustomed to deducting their full property tax bill and state income taxes realize that deduction has been capped at $10k there will be blood in the streets.

Then will come the big hit to residential real estate values in high-cost states.

By buying, you can parlay your initial purchase into a more expensive house with little money.

For example, I bought my first apartment for $250k. After 10 years, I sold it for $650k. I was able to buy a $1 Million house. Each time I put down at least 20%.

After 20 years, I’ll be able to sell the house and buy a much smaller apartment to live out my retirement years. The rest of the money will fund retirement expenses.

The only reason I own a home is because it's cheaper than rent in this town. But in 12 years I've amassed $43K in equity and it'll be paid off by the time we retire, giving us easily $120K to help retire on. We'll need it, especially if Trump fucks up the economy like I suspect he will.

R37 the only people who say a reverse mortgage is "unwise" are those who want to inherit a debt free property. I can mortgage the equity and then when I die or have to go into a nursing home the bank can have it.

R36, I don’t know enough about the topic, but I’ll just say this: any financial product that’s hawked on late night TV ads, by C-list celebrities, is not something I’m interested in.

Do you see IRAs or Stock Brokers with late night ads encouraging you to invest in an IRA?

It's only cheaper to rent if it works out OK. Your bank owns your home till the last payment, miss it or have a downturn and you lose out just like with rent.

Plus you have to figure in the cost of missed opportunities by owning versus renting.

Renting may or may not be cheaper over the long haul than owning.

The problem with threads like this is you have dumbasses that declare it's always better to own than rent. It's simply not the case. You have to assess each person and each of that person's property individually and blanket statements are useless.

^^^^ Conventional wisdom is that owning is better than renting. It applies for the majority if not every single person. It is important to understand the relative merits of both. This thread has a great deal of valuable information and very few "dumbasses."

[quote] R42: R37] the only people who say a reverse mortgage is "unwise" are those who want to inherit a debt free property. I can mortgage the equity and then when I die or have to go into a nursing home the bank can have it.

I agree with the concept of keeping a mortgage forever. I’m retired with a mortgage. I have the cash to pay it off, but the cash earns more in the stock market than I pay in the mortgage interest rate, so that’s fine. That said, I [italic] still [/italic] understand that a reverse mortgage is a bad idea.

I can’t cite exactly why. However, my impression is that there are other ways to get cash out of a residence that are more equitable, like an equity line of credit. One matter is that you have to pay mortgage insurance with a reverse mortgage . I don’t know how burdensome that is. I suspect that the set-up costs with a RM are more than they should be. I wonder if they “build-in” an “annoyance tax” for dealing with “cranky old elders”, lol.

Related, but different subject: Just FYI, when you die, the gains on your property are not subject to income or capital gains tax. They are tax free. A rare gift from Uncle Sam. Conversely, if you sell your home before you die, you must pay capital gains tax. Typically 15% Federal and 5% State. (Taxes vary considerably, by state esp.) So, if you’re on your last leg, and you like your heirs, and have a home worth money, it’s best not to sell in the last days. It’s one of those things most people learn after it would have had some use to them, *sigh*.

Even better is owning a vacation home. I have a place in Florida I rent out. It is booked 40 out of 52 weeks a year and 2000 a week. I paid it off in 5 years and now have a second income stream of about 50K (80K minus the maint cost, taxes, insurance and paying a management company to handle my bookings). In addition to that I can write off any trip to it as an expense so my vacations are tax write-offs. Any improvements I make to it are tax write-offs as well. I literally get paid to go on vacation.

[quote] Even better is owning a vacation home. I have a place in Florida I rent out. It is booked 40 out of 52 weeks a year and 2000 a week. I paid it off in 5 years and now have a second income stream of about 50K (80K minus the maint cost, taxes, insurance and paying a management company to handle my bookings). In addition to that I can write off any trip to it as an expense so my vacations are tax write-offs. Any improvements I make to it are tax write-offs as well. I literally get paid to go on vacation.

For tax purposes, a single property can be a vacation home or rental property but not both. You can deduct expenses associated with maintenance of investment/rental property but then it is not a "vacation" or second home, and you are NOT being paid to go on vacation. If it were discovered in a tax audit that you were vacationing at your investment/rental property rather than tending to it you would be in trouble. Vacation/second homes and Investment/rental properties have different tax treatments. Since this thread is about providing information it is important to make that distinction.

r48 Rental Property / Personal Use If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You're considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of:

14 days, or 10% of the total days you rent it to others at a fair rental price.

I rent it for 40 weeks out of the year or 280 days. That means I can use it for 28 days before it is considered a dwelling,. I actually use it two weeks out of the year.

I’m a Millennial at a minimum wage job with about $6000 in the bank ($1000 in savings).

Any advice, hints, warnings or good starter resources I can look to? I badly need and want to start getting passive income and making investments so that I don’t have to work until I drop dead broke.

r50: Start putting your savings into a Roth IRA. $5,500 is the annual maximum. Don't wait. Save early and save often. I recommend choosing from one of the Vanguard targeted retirement date funds.

Yes you make a profit when you sell a house, but think of all the money you’ve paid in upkeep. From mowing lawns to maintain sprinkler systems. If you’ve got a pool, there’s that. I periodically have to have shingles replaced and have all of them stained. Then there’s outdoor mold, mildew and algae (probably not a problem in dry areas). Tree trimming, paying to have someone cut a tree up after a hurricane or nor’easter blew it down. Flooding during torrential rains (again, not a problem in dry areas) that ruin your basement, especially if it’s finished. Driveway upkeep every few years, critter removal, leaks/holes in roof.

We had to replace 3 water pumps. No plumbers or electricians could tell us what the problem was. When I had a sprinkler system put 8n 5he sprinkler guy showed me that my pipes were being eaten by mineral deposits. That’s what was causing the water pump to malfunction. I put in a water filtration system. Bastard plumbers knew damn well what 5he problem was but wouldn’t tell us so they could make more $$.

Contractors lie, cheat, don’t ever finish a project. You can get puffbacks from your oil burner if you’ve got one. Rotting wood on porches sheds, decks. We had a pipe burst and insurance refused to pay for it. Regular maintenance of chimneys, boilers, burners, filtration system.

If you’re handy, buying a house makes sense. If you’re not, get a condo (not a coop) or rent. unfortunately for me my house is in what has become one of the hottest second home markets in the world, but the traffic into and out of the area is horrendous. Contractors can’t afford to live here so they spend hours in traffic and tack that onto their bills. I spend 3x what would be spent in another area but the husband refuses to move or rent the place out. He’s Mr Big Shot with a house in an exclusive area.

r50 Sugar Daddy.

Yeah - I’ve tried the flipping game thinking it was path to savings / profit as an investment. Between the maintenance, taxes, flip fees (can be close to 10% with RE commissions, state and local flip taxes and other fees), rarely made any real profit. Only place it worked was Brooklyn which was only due to the market in Brooklyn exploding (largely unpredicted) - not the basics of flipping or real estate as “investment”. Probably worked in LA and SF during certain periods. But as with stocks, nothing is a sure bet and be ready to lose money. Risk = reward but just as easily risk = losses.

[quote] R50: I’m a Millennial at a minimum wage job with about $6000 in the bank ($1000 in savings).

R50, I wish you well. I’m sorry, but I feel like you need to find a way to earn more money, and I can’t help with that.

I have been reasonably successful investing in the stock market but own no rental property. I have just put the following thoughts together, but haven’t got the realty experience to feel confident in my conclusions yet. I’m dropping it here to hear if the DataLounge experts can pick it apart or endorse it:

Two ways I know of to generate extra income are either to buy rental property, or to invest in the stock market. Most people I know of usually focus on one or the other. If you have a natural interest in one or the other, make an effort to read further on your choice to learn more about it.

One of the benefits of real estate is that your investment is usually highly leveraged, i.e., you personally put down a relatively small percentage of the total real eastate value. Suppose you put 20% down on a rental property. Conversely, one could technically borrow money on margin to invest in the stock market, but I don't know anyone who would invest in the market with only 20% in cash, and 80% borrowed on margin. Therefore, I conclude that it might be easier to get started by focusing on real estate, and not by investing in stocks.

What do people think about that?

[quote] [R50]: I’m a Millennial at a minimum wage job with about $6000 in the bank ($1000 in savings).

R50, aside from suggesting you cultivate an interest in whatever investment means is most of interest to you, I also suggest you practice being a “good consumer”. That’s a general phrase I use for being frugal, and making good financial choices. It’s a little hard to explain what this all encompasses, but Suze Orman writes books where she discusses various financial subjects that teach the average person some good, basic, common sense financial rules for living. I’d suggest you buy one of her books - or better yet, borrow one from the library! (Perfect example of being a good consumer.)

Lastly, it may not seem true, but I can say from personal experience that it is easier to sacrifice when you are young, than when you are older. Your older self will thank you if your earlier sacrifices mean you are able to invest for the future.

if you are 21, put 5500 into a roth IRA and never put in another penny with say a fund that follows the SnP 500 index - you would have 1 million dollars at 65.

R57, but what will 1 million buy in 2062?

R58, that was just an example of how a mere $5,500 will grow over time. He didn’t say don’t ever put another dime in again.

Ok, R59, but I am guinuinly wondering what a million will buy in 2062?

Now that’s a whole other thread. And it could be fun, too.

Damn good question.

[quote]I am guinuinly wondering what a million will buy in 2062

Half a semester of post-secondary education.

I don’t question that the stock market generally returns more than the rate of inflation; but without a reasonable estimate of inflation, a balance of $1 million is not informative. It might as well be “1 million Rupees”, without even specifying which of the 6 national currencies called “Rupee” we mean. Sounds great, but it doesn’t tell me much about what it can buy.

I don't care, as I'll be long gone by 2062.

R50, Basically, you want to make sure you have about six months of expenses that are liquid--so if the worst happens, you're covered. Then you want to divide the rest--do the long-term retirement stuff. If you're in an area where property makes sense, start saving (but know your area--that location, location, location thing is everything. When it comes to property that means buying where the schools are good, even if you hate kids and never, ever want one. Alternatively, buying in the upcoming trendy/artsy area, but before people know it's that.)

The most mindless investment are indexed mutual funds (like Vanguard), but be prepared to ride the market. Sometimes it collapses and you need to hold on. Add to it when the market is down. This is not money to which you'll need quick access, but you're young so you can sock it away--and, over the decades, the stock market has a good return. But there are times when your net worth is suddenly half of what it was.

Since you're young, you don't have to put away a lot at once. A little at time, but steadily, will put you in good shape.

One of the big mistakes I see over and over is that people think they have more money than they do, but it only takes a couple of financial disasters to destroy a lifetime's worth of assets. Do not, unless you have a home a comfortable retirement nest egg, blow a ton of money on a luxury car. (Lease, if you must).

My car is an 18-year-old compact. The people next to me have a Tesla. Guess who owns their home and who's renting?

[quote] I’m a Millennial at a minimum wage job with about $6000 in the bank ($1000 in savings).

I'm both impressed and confused that someone who works at a minimum wage job has 6k in the bank.

BuUmPP

To put a fine point in R65, don’t ever buy a new car. They depreciate in value by a large percent, immediately. What I have done is buy a certified preowned vehicle from a dealer. It comes with a warrantee of a couple years or so. Usually the cars are two years old with about 30,000 miles on them. They are much cheaper than buying new. Then, I keep the car until I total it or it gets stolen. I’ve had my current car for 13 years and think I will trade it in next Spring. It will actually be the only car I’ve traded in. All the others were totaled or stolen. Haha.

If I drove a lot or lived in a location where car culture was important, I might change my behavior. But I’m in Boston, and nobody cares what you drive here. It’s a bit of a luxury that I have a car at all. I suppose I could do without, but I like having it. I figured that it costs me an average about $4000 a year to keep the car, and that includes the purchase price, spread out over the 13 years. More and more of my neighbors are going carless.

[quote] To put a fine point in [R65], don’t ever buy a new car. They depreciate in value by a large percent, immediately. What I have done is buy a certified preowned vehicle from a dealer. It comes with a warrantee of a couple years or so. Usually the cars are two years old with about 30,000 miles on them. They are much cheaper than buying new. Then, I keep the car until I total it or it gets stolen. I’ve had my current car for 13 years and think I will trade it in next Spring. It will actually be the only car I’ve traded in. All the others were totaled or stolen. Haha.I

You are lucky. Most pre-owned vehicles are pieces of shit and as soon as the warranty expires they break down. Even before that you discover the "certified pre-owned" means nothing and if anything goes wrong with the car it is rarely covered under a "certified pre-owned" warranty.

R469, I’ve had many certified pre-owned Hondas and never had the problem you describe. What do you base your complaint on?

[quote] I'm both impressed and confused that someone who works at a minimum wage job has 6k in the bank.

R66 thanks, I guess. As for how I did it, it’s a combo of 1) no social life/expenses on leisure (I’ve been a depressed POS for years, few to no friends, travelling only for work), 2) frugal day-to-day living (eating leftovers all week from one-pot cooking, taking the bus or walking, same clothes for 5-10years etc.), 3) renting cheap rooms from family and later on friends instead of having my own place (no sex for me lmao), and 4) avoiding expensive tech (I get all my devices second-hand) and binding financial contracts (except that student loan, ugh). The savings I have made weren’t something I planned and turned out to be a happy side-effect of my anti-consumerist politics and generalised depression, after all.

It’s a mixed blessing, as you can see. I do feel good with that security cushion and it’s a luxury not to have to angst about having a negative balance. I like living minimally and not relying on money for my enjoyment, and it’s great to be able to amuse and delight oneself without currency (I write, sing, walk dogs, meditate, tend to trees and other such calm activities). I’m proud that I’m not materialistic and that I’m an independent type of personality. But I can’t pretend my quiet solitary life is always fun or that I have many cool memories to show for my sedate lowkey young adulthood. The other big reason I’m now looking into passive income/investments (and yeah, of course hunting for a better paid job) besides not wanting to die homeless/starving is that after long years I’ve finally gotten a little bored of my lifestyle. I’m still interested in keeping an egg for old age and maintaining, but I feel I want to actually live too. I live in the (relatively) “free” world and haven’t enjoyed it as much as I believe I could, so far. So there’s that.

[quote] [R469], I’ve had many certified pre-owned Hondas and never had the problem you describe. What do you base your complaint on?

I have a certified pre-owned Land Rover. Nothing but problems. Will only buy new henceforth.

I live in Miami which may be underwater in a couple decades.

Is it worth buying property if it could possibly become unusable or destroyed?

Also, the unpredicatbility of costs when you own scares me. Insurance rates doubling after a hurricane, tax rates zooming--I have heard it all and it makes me wonder if it is worth it to buy.

[quote]Is it worth buying property if it could possibly become unusable or destroyed?

Why did you buy a car? You could have an accident and it’ll be totaled.

[quote]Also, the unpredicatbility of costs when you own scares me. Insurance rates doubling after a hurricane, tax rates zooming--I have heard it all and it makes me wonder if it is worth it to buy.

That logic is flawed also. If those things occurred, and you were renting, your rent is going to go up, too, to cover the landlord’s taxes, insurance, etc.