ipoplaya_IHB
New member
[quote author="No_Such_Reality" date=1230036628][quote author="ipoplaya" date=1230013148]
The key difference is tax savings. At our income level, we are already itemizing due to state tax liabilities, so our tax savings on morg/tax deduction is at marginal rates, 28% and 9.3%, for a total of 37.3%. Also, I used an after-tax rate on our foregone/lost income. Since we are earning around 4% on our down payment fund, and lose 37.3% of that to taxes, a net rate of 2.5% is more appropriate.
MRs and association are very low relative to much of Irvine on this property.</blockquote>
I think 2.5% net is pretty low for lost investment. You're basically saying that since you've allocated it to a safe investment to protect it's downpayment ability that you've flushed it as an investment. Are you really a CFO that doesn't think he'll beat a 7.5% gross return on his investments? That's the rate that breaks even with the tax advantage on the interest right off.
If you figure a net 6% after from a gross 10% investment return, I get $4161.
If you figure 7% net if targeting a 10% return with a long term cap gains rate, I get $4440.
If you adjust your maintenance and replacement reserves, it get's worse. $417/month or $5000 a year sounds like a lot, but over ten years it's only $50,000, over 30 years, it's only $150,000.
Ironically, if you use a 6% lost return and a 25% down, I get a ownership cost close to a flat $4100 with a 1% maintenance reserve. I really think this is a better comparison. Not to mention the $125K that you can investment or use as a cushion.</blockquote>
I'm looking at the S&P and I believe its only yielded around 4-5% annually since I graduated college. A check of the top 25 performing mutual funds over the past 15 years puts the median return at around 8%. I'm not going to assume for calculation purposes that I am going to make the same returns as the top 1-2% of funds out there over a long horizon.
That being said, using 6-7% gross return with a long term gain vs. short tax effect would be more realistic and in that case, this purchase would not be at rental parity.
The key difference is tax savings. At our income level, we are already itemizing due to state tax liabilities, so our tax savings on morg/tax deduction is at marginal rates, 28% and 9.3%, for a total of 37.3%. Also, I used an after-tax rate on our foregone/lost income. Since we are earning around 4% on our down payment fund, and lose 37.3% of that to taxes, a net rate of 2.5% is more appropriate.
MRs and association are very low relative to much of Irvine on this property.</blockquote>
I think 2.5% net is pretty low for lost investment. You're basically saying that since you've allocated it to a safe investment to protect it's downpayment ability that you've flushed it as an investment. Are you really a CFO that doesn't think he'll beat a 7.5% gross return on his investments? That's the rate that breaks even with the tax advantage on the interest right off.
If you figure a net 6% after from a gross 10% investment return, I get $4161.
If you figure 7% net if targeting a 10% return with a long term cap gains rate, I get $4440.
If you adjust your maintenance and replacement reserves, it get's worse. $417/month or $5000 a year sounds like a lot, but over ten years it's only $50,000, over 30 years, it's only $150,000.
Ironically, if you use a 6% lost return and a 25% down, I get a ownership cost close to a flat $4100 with a 1% maintenance reserve. I really think this is a better comparison. Not to mention the $125K that you can investment or use as a cushion.</blockquote>
I'm looking at the S&P and I believe its only yielded around 4-5% annually since I graduated college. A check of the top 25 performing mutual funds over the past 15 years puts the median return at around 8%. I'm not going to assume for calculation purposes that I am going to make the same returns as the top 1-2% of funds out there over a long horizon.
That being said, using 6-7% gross return with a long term gain vs. short tax effect would be more realistic and in that case, this purchase would not be at rental parity.
