UnThreaded | Threaded | Whole Thread (13) | Ignore Thread Prev Thread | Next Thread
Author: DanOB Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 13935  
Subject: Affordable or Market-Priced Home a better deal? Date: 11/26/2012 5:45 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I'm semi-retired and have recently moved to Austin TX. There's an interesting "new urbanism" development here with 25% of properties (small homes, townhomes, rowhouses, and condos) designated as "affordable." These are available to people (like me) whose income is less than 80% of the city average. The affordable homes are intermixed with the market-priced ones, but they're a little smaller and the interior finish is more modest (laminate vs granite counters; carpet vs. hardwood flooring, etc.) but fine for my purposes.

The "catch" in the affordable homes is that the buyer agrees to an equity gain cap of 2% per year, and when you want to sell, the developer essentially buys back the house and puts it back in the affordable pool. So the buyer gives up any capital appreciation and perhaps even takes a slight loss, if you believe that inflation will be higher than 2% over the coming decade (as I do).

On the other hand, the affordable models are about $100,000 less than the market-priced homes ($180K vs. $280K). Because of a sale of a previous residence, I actually have the assets to buy the full-priced home even though my monthly cash flow qualifies me for the discount. Obviously, I would tying up more capital that wouldn't be at work elsewhere, so there's an opportunity cost.

So my question is how to think about the tradeoff of lower acquisition cost vs. limited or no appreciation.

Any suggestions? Is one approach clearly better than the other?
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: qazulight Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13644 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/26/2012 6:49 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Dan,

I am not a professional, but 2% on cash is not a great deal of money, however, 2% leveraged is 20%. Now the down side to the leverage is you will pay more the 2% in interest. However, if you were going to borrow the money anyway, then the interest is wash.

Here is the way I might figure it, others probably will differ.

280,000 house.

100,000 dollars down, finance 180000 at 3.5 percent.

Leaves you with a Principle and Interest Payment of 808. Your taxes will be roughly 2 percent or 5600 a year. So you can add about 450 a month to that for taxes. So roughly 1250 a month. For this if the house goes up 10 percent a year for 5 years the value would be about 420,000 dollars or a gain of a 140 percent on your initial investment. However, you also need to include P & I and taxes. So you add 75000 dollars to your investment, meaning your gross return without figuring the time value of money made as payments is somewhat less. For rough calculations just toss the 75,000 in with the 100,000 down payment and you get a return of about 80 percent in 5 years.

Now let us look at the less expensive home. It is a 180,000 dollar home. But, you will need to put 20 percent down to avoid PMI. so you need to put in 36,000 dollars. This will leave you with a mortgage of 144,000 and Principle and Interest Payments of 646. Your taxes will still be about 2 percent so you are looking at taxes of about 3600 a year, divide that 12 and add the 300 a month to your payments and you get roughly 900 a month. (I expect the difference in insurance to be small.)

So, now you figure a max of 10 percent return, (2 percent per year times 5 years) and you get a home value of 198,000 dollars for a gross profit of 50 percent on your 36,000 dollar investment. When you add in the payment, you get 54000 in payment and a 20 percent return on all the money you invested.

Of course if you change the assumptions you will get different results. If it were me, I would put the two scenarios into a spreadsheet and massage the numbers for a while.

Cheers
Qazulight

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: BadPokerPlayer Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13645 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/26/2012 10:44 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
If you bought the 180k house, if it really is worth ~280k, would you have to still put 20% down to avoid PMI?
And how soon after purchase could you sell it back?
What would the transaction costs on the sale back be? No Real Estate agent etc would be required etc...

Print the post Back To Top
Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13646 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/27/2012 3:48 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
they're a little smaller and the interior finish is more modest (laminate vs granite counters; carpet vs. hardwood flooring, etc.)

...
The "catch" in the affordable homes is that the buyer agrees to an equity gain cap of 2% per year,


Is there any chance you'll want to improve the house significantly (ex. put in granite, better appliances, etc?)
If so, then what happens to the improvemnts you make -how do those factor in to that "gain cap"?
I'm just thinking - you buy place, put in $20K (or more) into fixing up some things, and instead of getting $10K or $20K better sales price, you get nothing for what you put in

Print the post Back To Top
Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13647 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/27/2012 10:50 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
For this if the house goes up 10 percent a year for 5 years the value would be about 420,000 dollars or a gain of a 140 percent on your initial investment.

That's a lot of appreciation. Historically, housing prices have appreciated at close to the rate of inflation.

I don't have time to do more than a back of the envelope right now, but.for argument's sake let's say puts down 20% on either house,

If the expensive house only appreciates at 2%, he gets $49K in appreciation over the ten year term vs. $31K for the cheaper house. But he saves he saves roughly $46K in payments on the cheaper house.

I'm neglecting the difference opportunity cost in the downpayment, but that's probably pretty small.

Print the post Back To Top
Author: qazulight Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13648 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/28/2012 1:34 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
That's a lot of appreciation. Historically, housing prices have appreciated at close to the rate of inflation.

I don't have time to do more than a back of the envelope right now, but.for argument's sake let's say puts down 20% on either house,

If the expensive house only appreciates at 2%, he gets $49K in appreciation over the ten year term vs. $31K for the cheaper house. But he saves he saves roughly $46K in payments on the cheaper house.

I'm neglecting the difference opportunity cost in the downpayment, but that's probably pretty small.


The OP is considering a house as an inflation hedge. The lessor price house gives up the inflation hedge while allowing for more leverage at the same house note.

Personally, I think I would avoid the whole concept, high or low priced. To me there seems to be a lot of unknown risks.

Cheers
Qazulight

Print the post Back To Top
Author: DanOB Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13649 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/28/2012 3:41 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Good questions. Yes, I'd have to put down 20% of the imputed value of $280K to avoid PMI. So the down payment would be $56K.

No minimum time to sell it back, but I wouldn't anticipate doing that. If I had to move, I'd probably rent the house.

On the sale back, no agent and therefore no commission would be involved.

Print the post Back To Top
Author: DanOB Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13650 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/28/2012 3:43 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Yes, there's no "improved value" gain possible from improvements, which is a distinct negative.

Print the post Back To Top
Author: DanOB Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13651 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/28/2012 3:45 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
To qualify for no PMI, I'd have to put down 20% on the true (non-subsidized) value of the house, so $280K*.2=$56K, or the same I'd put down on the market-priced house.

Print the post Back To Top
Author: DanOB Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13652 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/28/2012 3:50 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
>>Personally, I think I would avoid the whole concept, high or low priced. To me there seems to be a lot of unknown risks.
>>

I think I'm coming around to this point of view, Qazulight. Market-priced homes have a known risk profile, while the subsidized units add a layer of uncertainty that a retired guy should probably stay away from.

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13653 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/28/2012 4:46 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
DanOB: "To qualify for no PMI, I'd have to put down 20% on the true (non-subsidized) value of the house, so $280K*.2=$56K, or the same I'd put down on the market-priced house."

This makes no sense to me, because in your original post you wrote:

"The affordable homes are intermixed with the market-priced ones, but they're a little smaller and the interior finish is more modest (laminate vs granite counters; carpet vs. hardwood flooring, etc.)"

20% of a larger home with a better finish is not the appropriate comparison, IMNSHO.

Regards, JAFO

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13654 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/28/2012 4:49 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
DanOB: "If I had to move, I'd probably rent the house."

Are you sure that is permissible under the applicable rules. "Affordable" housing is usually to encourage owner-occupied homes.

I would not be surprised to learn that your move-out triggers a sale back to/buy back by the developer, so that the developer can sell to another owner-occupant instead of allowing to to retain the house and obtain market rents.

Just my $0.02. Regards, JAFO

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13655 of 13935
Subject: Re: Affordable or Market-Priced Home a better de Date: 11/28/2012 4:52 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
DanOB: "Yes, there's no "improved value" gain possible from improvements, which is a distinct negative."

If true, then IMO that tends to discourage bioth maintenance and capital improvements. I understand that allowing the owner to improve the home to market condition may move it of the "affordable" category, but I am surpirsed that there is no compromise position.

Regards, JAFO

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (13) | Ignore Thread Prev Thread | Next Thread
Advertisement