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Apr 10, 2006 8:18 pm

O.k. I have been struggling with this for months. I need help. Here's the case.


My 72 year old widowed mom has purchased an ocean front condo in FL. She doesn't want to live in it, only wants to rent it. It's an investment. She has plenty of money and doesn't need the rental income. She has two other homes, and land. The new condo will be held in my deceased father's trust. She is in the 15% tax bracket and makes about 75k/yr. net worth is about 3 mill.


She can pay cash or finance using a a cash flow program that will allow her to pay a minimum payment, an interest free payment or a 30 yr payment. If she pays the minimum payment the difference between the minimum payment and the interest free payment is added to her principle. It is basically a monthly variable rate based on the Libor Index. This program is a popular investment property finance program.


What should she do?? Serious advise only, unless it's funny, I like that.


Thanks.

Apr 10, 2006 8:22 pm

I forgot, by keeping the cash on hand I can make 5% using commercial paper and between minimum rental revenue and the interest on the cash, I can just about cash flow. by keeping the cash she remains liquid, and keeps the waterfront appreciation. By paying cash she is out the liquidity and makes a little income.

Apr 10, 2006 9:43 pm

I say pay cash and keep it simple...I don't see any increase in her current or future QOL to make it worthwhile to finance.

Apr 10, 2006 10:11 pm

Go get your CFP, then you can help your mom.

Apr 10, 2006 10:20 pm

She'll be gone before someone w/the handle ezmoney gets his CFP, even that might be the rightway.  Not a good sign when you can't spell princpal or advice when asking for advice.  I could be reading into it a little too much, but "...I can make 5%....I can just about cash flow" seems odd when it's not his money.  Plus, aren't you supposed to make financing decisions BEFORE you buy...?


I'm awaiting the results on my CFP exam...which is a bit annoying but at least I'm not studying.

Apr 10, 2006 10:26 pm

Cowboy-



You will log on 24,000,000 times between now and when it gets
posted.  They will email you letting you know its out there, then
it the sight will be blocked up for about 6 hours.  THAT is
annoying!

Apr 10, 2006 10:42 pm
rightway:

Go get your CFP, then you can help your mom.



That is neither useful advice nor funny.

C'mon guys....the guy asked for some serious input.

I say pay cash and keep it simple.  The tax deduction is of minimal use to her.

Apr 10, 2006 11:08 pm
rightway:

Go get your CFP, then you can help your mom.




That's f**kin' funny.





I'll get back to you tomorow with some input. Is it pre-construction? Don't

freak out. Okay?





Apr 10, 2006 11:16 pm

After reading your post a second time, it sounds like she has a negative

amortization mortgage. The difference between the loan rate and current

mortage rates is added to her outstanding balance. That's not Kosher.



I don't think the unit can rent for enough money to cover a conventional

mortgage. P/E ratio is too high. But there are too many other factors to

consider. Maybe she can flip it quickly, less than 2 years, etc.



Good Luck,



SKEE

Apr 10, 2006 11:45 pm
skeedaddy:

After reading your post a second time, it sounds like she has a negative

amortization mortgage. The difference between the loan rate and current

mortage rates is added to her outstanding balance. That's not Kosher.



I don't think the unit can rent for enough money to cover a conventional

mortgage. P/E ratio is too high. But there are too many other factors to

consider. Maybe she can flip it quickly, less than 2 years, etc.



Good Luck,



SKEE



Dude are you seriously implying he should consider trying to flip property in this market?

Have you heard of hurricanes?

Apr 11, 2006 1:50 am

good post, EZ. shame you got such terrible responses. Good luck to you, I have no advice unfortunately.

Apr 11, 2006 5:54 am
joedabrkr:
rightway:

Go get your CFP, then you can help your mom.



That is neither useful advice nor funny.

C'mon guys....the guy asked for some serious input.

I say pay cash and keep it simple.  The tax deduction is of minimal use to her.





I think in the big picture it is useful.  CFP certificants must be
able to address all areas of finances, not just simple investment
products.  The CFP classes will have case studies working through
just such situations, analyzing various options.  EZ has been
quick to toss daggers at those that have the designation, well here is
an example in his or her own life where it comes into play. 

Apr 11, 2006 6:47 am

...or at an absolute minimum know who to call on for HELP w/such analysis, another than anoynomous message board people.


Just for the record, I thought rightway's comment was both useful advice and funny.


rightway--so, I guess you're not surprised that I logged on yesterday just in case the 10th could be construed as the "end of April"?  Oh well, it's outta my hands now.

Apr 11, 2006 7:48 am
joedabrkr:

Dude are you seriously implying he should consider trying to flip

property in this market?Have you heard of hurricanes?[/quote]





So what gives? Are you now a Florida Real Estate guru? Who knows what the

next 2 years will bring? Besides, Boca Raton is not Hicksville, L.I.

Apr 11, 2006 8:24 am

I had my financing straight when she bought the property. I told her to pay cash . But now I'm thinking why not leverage the property when I can get a loan with a rate that is less than the current interest only rate even after the principle add on. She keeps liquidity of 350k making 5%. The rental income will generate another 1-2% covering a 6% loan.


For example I know water front property will appreciate at 15-20% average for the next 20 years. I have seen this with my mother's other waterfront property over the last 30 years. Let's assume the loan averages 6%. 15%-6%=9% worst case net appreciation. Using 20% appreciation she nets 14%.


Worse case if the interest rate got out of hand to where it was costing me more than the market interest only rate, she could pay off the loan. My point is she has the money to pay cash. BTW I have heard of huricanes. That's what insurance is for. That's why I'd rather finance to keep the hard cash invested in the property to a minimum in case the insurance co. decided not to pay up.


I don't need a CFP for that!

Apr 11, 2006 8:44 am

Since you know that waterfront property will increase 15-20%,why don't you borrow every cent that you can and buy every piece of waterfront possible? 


If one knows that they can get 15-20%, they should be able to borrow and invest their way to being a millionaire. 

Apr 11, 2006 8:46 am

Waterfront property is gold. not making anymore of it.

Apr 11, 2006 9:06 am
ezmoney:

Waterfront property is gold. not making anymore of it.


I wouldn't bet the ranch on that. It wouldn't be the first time that <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Florida condo pricing got ahead of itself. If I knew more about the location and the specifics of the market, I would consider flipping it. Otherwise I'd say hold the cash, but don't allow her to take the payment option that exposes her to negative amortization.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />


I live in an area where retirees are drawn like moths to a flame to buy condos, waterfront and otherwise, with full boat mortgages expecting to have rental proceeds that come close to covering the cost of carry. It just doesn’t happen. First, rents haven’t kept pace with property pricing. Second, buyers often forget the costs of taxes, rental management and vacancy rates (btw, are we talking long term or short term rental?).



Ordinarily the best to can ask for is an income stream that partially offsets the cost of carry, but not all. That leaves you to make your money on price appreciation, which has been sky rocketing the past few years. However, as is often said about the market, trees don’t grow to the sky. I don’t expect the housing “bubble” to burst, but some hyper-inflated parts of it (and that includes some Florida condo markets) will cool considerably.



The question becomes, if you can flip it now for a profit you can be happy with, would you rather do that or face negative cash flows while you wait for still higher condo prices?


Apr 11, 2006 9:23 am
Cowboy93:

...or at an absolute minimum know who to call on for HELP w/such analysis, another than anoynomous message board people.


Just for the record, I thought rightway's comment was both useful advice and funny.


rightway--so, I guess you're not surprised that I logged on yesterday just in case the 10th could be construed as the "end of April"?  Oh well, it's outta my hands now.



ok then.

Reasonable people can agree to disagree, right?  I suppose there was an element of humor now that I know the context of the situation.

Apr 11, 2006 9:35 am
skeedaddy:
joedabrkr:

Dude are you seriously implying he should consider trying to flip

property in this market?Have you heard of hurricanes?







So what gives? Are you now a Florida Real Estate guru? Who knows what the

next 2 years will bring? Besides, Boca Raton is not Hicksville, L.I. [/quote]

ROFL....no it certainly isn't Hicksville.  For one thing the train service in Boca SUCKS from what I understand!

I lived about 10 minutes from Hicksville until last summer.

No I am not a Florida real estate guru.  I am, however, an avid observer of markets and human nature.  Consider:

We've now seen constant rate increases for about a year and a half now.  Ultimately this is bad for real estate prices.

More folks have financed their purchases by using variable rate(ARM) products than ever before.  Too, investment purchasers as a percentage of real estate transactions are at historic levels over the last year, and climbing rapidly.  Both of these factors make real estate prices even more vulnerable to rising rates.

Florida coastal real estate has been one of the 'hottest' markets, which would suggest in any sort of correction it would have the farthest to fall.  For long-term investors this isn't such a big issue.  For 'flippers'.....well it could be a bit more challenging.

Prices for coastal real estate have continued to climb despite a VERY active hurricane season the last two years.  Totally irrational.

In my opinion-supported by the writings of others-interest in and allocation to real estate by investors-both institutional and individual-is much higher the last 5 years than in the past.  No doubt this is due to low interest rates and a 'punkish' equity market environment.  Real estate seems very attractive to stocks because it is tangible and prices are climbing.  Folks tend to invest by looking in their rear-view mirrors.  If those trends reverse-if stock prices start to climb a little more consistently-it could spark folks to reconsider their allocation decisions and hurt real estate valuations.

For whatever it's worth-I've noticed that the advertisements for the "How to Make Big $$ in Real Estate Seminars" are quite evocative of the "Make Big $$ Day Trading" seminars of the 99-00 season.  When 'everybody is making money doing it' it usual means that the 'stupid money' has gotten into the game to become the buyer of last resort.

Look at what is going on out there.  People are buying 'futures' on high-rise condos on the Las Vegas strip with the sole expectation of flipping them before construction is finished.  In Miami they're having HUGE parties at new condo openings.  It's a freak show out there people.

If she's interested in flipping the property but willing and able to hold it for the long term, then things should be fine.  I think it's dangerous, however, to get into this with the expectation of immediate profits.  That's why I think it makes sense to use a conservative financing strategy.