Monday, September 4, 2017

Five Ways You Can Afford a Million Dollar Home in Los Angeles

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an old house and condo from downtown

West LA Homes - Million Dollars and Up - What You'll Need to Live There

If you live in DTLA or anywhere west of downtown, and you are currently paying rent or own a home in a neighborhood you want to get out of. Or if you need more room. You need to get used to the fact that a quality home or condo in a good neighborhood is going to cost you a million bucks. We have shown here and here why these prices are unlikely to decrease anytime soon, and we’ve shown here why buying is much better than renting (assuming the same quality home and neighborhood.

What will it take to get that $1m dollar home, and how can you start planning now to make that purchase?

What income do you need to qualify for an $800,000 mortgage?

The standard down payment for any home purchase is 20%. Therefore, if you are buying a $1M home, you’ll need $200,000 down. That means you will need to qualify for an $800,000 mortgage. Clearly, you can pay more down, and your payments will be less, therefore making it easier to qualify. You can also put less than 20% down, but then your monthly payments will go up and you will need to pay an additional amount for PMI (premium mortgage insurance) through the FHA or through private insurance providers.

For this illustration, we’ll assume the standard situation. At 4% interest, the total cost including taxes and insurance will be approximately $5700 per month. The recommended income for this type of loan is $240,000. With outstanding credit, you might be able to slide by at $207,000.

If you were to eliminate all other debt, including car debt, you might be able to qualify with an income of $170,000. The range of the ratio acceptable today is an income equal to 28% to 41% of payments on debts + property taxes + home owner’s insurance + PMI.

Step one would include getting enough income and low enough debt to qualify. How can you get the requisite income? Your personal earnings plus your spouse’s earning, and/or the earnings of any individual who will live on the premises and is willing to sign on the mortgage. Keep in mind that their credit score must also qualify.

How do you get rid of debt? You will need to do these things well in advance of making the purchase:

·      Sell the expensive car and get by with a less expensive car or other transportation method.
·      Cut back on expenses to make large payments on credit card or other debt. The lower transportation cost will already help. You can get rid of cable TV, eating out, coffee out, and alcohol, not to mention cigarettes. Then review internet and miscellaneous expenses. Generally, you’ll find at least $500 per month that can be eliminated for a while or forever.
·      Who might “give” you the money to eliminate your debt or part of it. If you are already counting on these donations to help with the down payment, you may not be able to double dip here. On the other hand, the elimination of debt will lower the down payment needed, so would often be the better strategy.
·      Liquidate assets such as pension plans, savings, investments, or collections. Keep in mind that taking funds out of pensions will result in penalties if you are under 65.

What If I can do all the above, but I can’t generate $170,000 in income? For many individuals that are looking to buy a $1M home, they are selling a home in the process. The sale of the home may create more down payment, thus reducing the needed income. Each additional $100,000 in down payment reduces the monthly payment by $550, and therefore reduces the income needed by about $20,000 per year. In the case where you have high credit scores and no debt, the income needed on a $700,000 loan would drop to $150,000.

Alternatively, you might be able to rent out the property you now own. Any profit you can show on that rental would increase your income. However, you will need to show that you are a competent property manager and/or hire one, and you’ll need a lease in place.

I have the income, but not the down payment

You can buy a home with as little as 3% down, but most mortgage companies would like to see at least 5% down. This also allows you to use private mortgage insurance, which generally has many benefits compared to FHA.

Obviously as the mortgage amount goes up, the monthly payment goes up. You will pay about $550 per month more for a $900,000 mortgage compared to an $800,000 mortgage. In addition, you will pay PMI of around $300-$500 per month. If we use $1000 per month additional payment total, then the income necessary to afford the loan becomes closer to $275,000 per year, but could be as low as $200,000 with outstanding credit and no debt.









Monday, April 10, 2017

Should You Buy a Home in Los Angeles or Rent?

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With Los Angeles Mortgage Rates Still at 4.15%, and Home Prices Still Increasing, Buying Is Still Better


2013
In 2013, we started following a typical Westside home worth $650,000. We now have data through 2017 and while every situation is not the same, the results are pretty clear in this analysis. Buying is better!
 According to Zillow.com the rental value of that home was $3150 a month in 2013.  The estimated mortgage was $2441 based on 20% down and 3.75% 30 year fixed mortgage.  Property taxes and insurance would add another $730.  Maintenance might be $500.  So total out of pocket was around $3700 in 2013.
The tax advantage in the 25% tax bracket would come in at around $800 month, so the net advantage to buying was around $250 a month that year. If the house was purchased in 2013, there would have been at least $6000 in closing costs. We’ll spread those over 3 years. That would result in another $166 per month.
Rent vs buy in 2013.  About even.
2014
Zillow says the house is now worth $795,000, for a gain of $145,000. Last year the interest was 3.75%.  Today interest would be 4.5%. Total monthly mortgage would be estimated at $3129 now vs $2441 a year ago. All of these estimates are from Zillow.com, and we can't totally rely on their numbers.  In fact, the rent number seems suspect, as it has dropped from $3150 to $3125.  Government statistics for cost of living specifically associated with rental of a primary residence showed a 2.7% increase in the LA area.  Even so, that would only boost the rent by $90.  My gut tells me that rents are up and that the 2.7% number might be more in line with reality.   If this was a new purchase, there would be a slight bias to the renter of around $300 a month. However, if the home was purchased in 2013, the owner just made $145,000. The renter could have put the 20% down payment in an investment and made 6% on the $130,000 or $7,800.
Rent vs buy in 2014. Cash flow benefit to the renter.  Wealth increase huge win for the buyer
2015
Zillow now says the house is worth $840,000. And increase of $190,000 over the last two years. The rent is up from $3150 to $4000 per month. Markets don’t always act like this, but the tenant would likely be subject to these increases and would now be paying $4000 for rent vs the $2700 they would still be paying for mortgage, property tax, insurance, and repairs if they had purchased in 2013. They would also have a $190,000 capital gain on their $130,000 down payment. The purchase in 2013 would have been a huge success. Of course this capital gain would be offset by costs of purchase and costs of sale if the increase was to be realized rather than just on paper. If we used 10% or $83,000 for that number, we are still $50,000 ahead by the end of year two. In other years this could have gone the other way.
The current mortgage based on a 20% down payment and 4% interest rate would be $3208 with another $900 for property taxes and insurance. Add in $500 for repairs and the total is approximately $4700. Tax savings would be $1000 using the same criteria as above. So the net cash cost per month is $3700 vs rent of $4000.
Of course, every house in every neighborhood will have different results, but Zillow has done an analysis by neighborhood that predicts how long it will take to break even on a purchase vs a rental. Their system is not very sophisticated and does not take into consideration appreciation.
2017
We skipped a year, but how is that same house doing in 2017. Zillow says that the house is now worth $970,000 and the rent is likely to be $4000.
For the owner who purchased in 2013, his out of pocket is now $2900. He has a capital gain of $320,000 which would be reduced by about $50,000 for real estate fees were he to sell. The gain would still be at least $270,000.
The renter who put his $130,000 into an investment returning 6% compounded would have made $34,122.
Owner out of pocket $2900 vs renter out of pocket $4000
Owner ROI $270,000 vs renter ROI $34,122
So, what about buying that home today? Is it still a good deal? With 20% of $194,000 down and a 4.15% mortgage, the monthly payment including taxes and insurance, would be $4700. Add in the $500 for maintenance and subtract the tax IRS advantage of $1200 per month and you have $4000 per month out of pocket, just about equal to the rental amount. The closing costs of $10,000 would result in a the buyer paying about $300 per month more than the renter in the first year. But by year three it is likely that the monthly rent would be up another few hundred dollars, and in year four the amortization of those closing costs would be over (based on our idea to amortize them over 3 years.)
After four years of running this experiment, and even with a supposedly overheated seller’s market in Los Angeles, it seems that buying just makes way more sense than renting. We can imagine scenarios where this would not be the case. The housing market is subject to downturns just like any market. It is possible to imagine this home dropping by $300,000 if there were a typical drop in market values like 1999 or 2008.
Even then, these markets correct, and over time the likelihood is that the home will continue its upward valuation curve. On the other hand the market may continue strong and deliver another $100,000 or so in appreciation over the next three years.
A major issue in the current market is whether you can even get a mortgage in Los Angeles.  We can help you with that.  A short complimentary conversation will allow us to give you plenty of direction on your eligibility and what you can afford.  Call Bill Rayman at 424-354-5325


New Contact Information for Bill Rayman
Bill Rayman Home Mortgage
12121 Wilshire Blvd
Suite 350
LA CA 90025

424-354-5325

bill@rate.com