> Where can I put my money and earn 7% interest? The only safest investment
> is putting your money in the bank earning 3% interest and then minus taxes.
> Did you see the stock market today?

The stock market goes up and down, however it has averaged 10% per year. Safety comes with diversity and keeping yourself as well informed about your investments as possible. Just because stocks have not been fairing well in the past month does not always make them a horrible investment. And the nice thing about the stock market is that you can invest in many different kinds of things. Gold and oil have done very well in the past month.

As for the 7%. I was offered a very safe 7% annuity only a few years ago before rates got raised to their recent highest level. High quality bonds and t-bills were hovering around 6% only a year ago. The treasuries have obviously come down lately thanks to the free money the government is putting out, but the credit squeeze is still there so corporate bonds are still fairing quite well.

2% property tax

You are obviously in CA were your own property taxes are being artificially kept low by that proposition from many years ago. Unfortunately that has actually caused a distortion of the market as what should be your fair share of the property tax burden has instead been shifted onto more recent buyers of properties. Right now you happen to be the beneficiary. However if you ever need to move you will find yourself on the other side of the distortion, just like those people whom happen to have large down payments available that you suggest will go out and buy a house. Obviously if you never decide to move then you will win with this particular cost over the long run, assuming CA’s budget problems doesn’t force the state to remove the cap. As for the insurance I am happy for you that you have been able to keep the same rate, I lucked out on one of my investment properties this year with keeping the same rate as well. I would wonder if your coverage has actually gone down over time though. One of my properties’ insurances added a bunch of exemptions to their terrorist incident coverage in this past year. Also your coverage levels may no longer be adequate after all this time for your property. After all, after the bubble and the current bust I would expect that your property should still be worth about 500k and construction costs have also risen in that time. The 10% increases have been noted by various sources. These numbers are suppose to be nationwide so it would not surprise me if local variances exist. These numbers aren’t pulled from thin air, landlord have been complaining about them for years as various rent controls throughout the country aren’t allowing the landlords to keep their costs covered.

Rents have consistently risen in West LA average 5-7% a year since 1995.

> I am paying $1200 a month fixed for a condo I bought for $300,000 in 2001
> putting $60,000 down. Guess what, the interest in tax deductible so my true
> out of pocket cost is $900 a month. Comparable rents for my condo are now
> going for $2350 a month. Just in 7 years I am way ahead than renting and
> imagine in 10-20 years when rents are up to $3500 to $4000 a month for a
> condo while I am paying say $900 out of pocket.

Do you do realize you happen to buy just at the beginning of the bubble? The price you paid for your condo is probably pretty reasonable compared to even what someone could get today with the current 15% decline. Even then something seams very off about your numbers.

300,000 price
- 60,000 down payment
————————————
240,000 loan

That means that you should have started out paying about $1,200 in interest every month assuming a 6% loan. That amount of interest goes down over time but it should not have changed a huge amount in only 7 years assuming a 30 year mortgage, and the difference paid in principle pretty much does cancel itself out once you factor in the lost opportunity costs.

I suppose its possible that you are in a 50+% total tax bracket so you are getting a huge deduction. Although since you are bring up deductions, I should mention that as a landlord I get to deduct many more housing related expenses as they all qualify as business operating expenses, plus I get a free loan from the government through the depreciation deduction. Despite this I would love to see an expense rate as low as yours. I am going to assume your tax bracket is 30% as this is the average. Doesn’t change it much as either way it sound like you are forgetting to factor in a huge number of your housing related expenses. So lets see where you started.

$1439 monthly mortgage payment
$50 monthly insurance cost (unknown level)
$500 – property taxes, unknown??? I’ll assume you started at 2% of your value
$250 – condo common charges, unknown??? I’ll assume you started at 1% of your value
$30 – home insurance, to help keep big repair bills at bay. I’ve seen this run about $360/year for a condo.
$300 – lost opportunity costs on you $60,000$? – contribution for the deductible in the home insurance
$? – contribution for a maintenance fund, doesn’t matter if you actually budget for it, you will pay for it at some point.
$? – contribution to upgrades, new appliances, anything else.
$? – possible extra costs from being unable to move, extra gas, etc?
————————————————-
$2,569+ ———- total actual expenses, estimated
- $300 ———– tax credit at a 30% tax rate
—————————————–
$2,269+ ———— possible total actual expenses after tax deduction

Based upon your own numbers you said that the current rental value is $2,350 and it increased about 6% a year since 1995. So the rent a comparable condo in 2001 should have been about $1,562. Other related rental expenses? Maybe renter insurance, although that actually covers more than property and home insurance, but that is usually ridiculously cheap and optional. But I’ll be generous and set it at $38/month.

so your rental cost would have been $1,562 – $1,600.

Looks like a $669+ loss starting at the first month. At the end of the first year you would have had $8,028 that went to housing expenses instead of being invested somewhere else. Thats worth about $500/year in interest that you may have earned on that money. In the 7 years that passed that first year’s 8k loss has actually translated to a $12,071 loss in cash that you may have had today. Lets run the numbers. 2nd year $10/month increase in taxes and $15/month increase in common charges, we do not know what to figure in for the other unknown expenses. The comparable rent went up to 1,655. So its about a $69 increase in the numbers in your favor. 2nd year 600/month loss or $7,200/year or $10,213 in cash that you could have had today. 3rd year $1,754 rent, $520 taxes, $281 common charges; so $73 in your favor. $6324/year loss or $8,463 in cash you could have had today. You can continue running the numbers for your total count. Don’t forget that the cash you could have had today would be earning interest for you. To be fair I do not know what your common charges and taxes are, however keep in mind that I did not set any money aside for maintenance, upgrades, unexpected expenses that otherwise would have been covered in a rent. BTW, what happened to your closing costs? They are also part of your total purchase price; that should be about another $9,000 if not more.

After 7 years and having bought before the bubble you may very well be good. But the savings you are figuring in just may not be there. Even if I were to be generous and give you only a 25% real expense load (probably too low as deferred maintenance and the unexpected are real expenses), thats still an extra $600 on top of your $1,439 mortgage payment for a $300 current savings over renting. Your tax savings may add another $300, although that probably gets canceled out with the current lost opportunity costs on all the extra money you have paid so far. Also keep those fingers crossed that rising distressed properties in your area do not increase the number of places for rent, thus bringing down the comparable rents.

David,

Lease renewals usually don’t have the decreases, usually at best stay the same. For the same home its usually only the tenant going to the landlord to tell them that they could move for a better price that brings a rent reduction. This is more due to lack of information than anything else. Market rents are also set by comparable rents, just like owner occupied home prices. Landlords usually will not drop the price if the tenant is paying as they see the apartment worth that value, since the tenant is currently paying that amount. When renting anew, the landlord has to price correctly for the market. Also it is usually assumed that the rent will rise with inflation to cover the rises in costs. BTW, as for dropping rents, I read an article a week ago that here in Manhattan, NYC rents dropped 10% this year. Looks like we are to be hit as well.

You state:

You can easily get the same 7% or more in relatively safe investments elsewhere without the same level of risk nor headache.

Where can I put my money and earn 7% interest? The only safest investment is putting your money in the bank earning 3% interest and then minus taxes. Did you see the stock market today?

You state:

And to top that off I have heard many reports that insurance and property taxes have been rising 10% a year for several years now

Property tax increases are limited to 2% a year increase. So for example, if your property tax bill is $3800 like mine is, then the increase at 2% goes to $3876 My property insurance has been relatively flat at $500 a year through State Farm.

You state:

Also rents do and can go down.

Rents have consistently risen in West LA average 5-7% a year since 1995.

I am paying $1200 a month fixed for a condo I bought for $300,000 in 2001 putting $60,000 down. Guess what, the interest in tax deductible so my true out of pocket cost is $900 a month. Comparable rents for my condo are now going for $2350 a month. Just in 7 years I am way ahead than renting and imagine in 10-20 years when rents are up to $3500 to $4000 a month for a condo while I am paying say $900 out of pocket.