Los Angeles Real Estate: Prudent Investment or Insanity?

My landlord is selling the house I'm presently renting, and so I have been thinking it's about time I actually look into buying a house.

I talked to a lender, and they are willing to loan me about $500k with nothing down, which is good because I don't have savings other than $10k or so to deal with closing costs.

I was very surprised at the terms: Interest only at 5.65% for two years for 80% of the balance, with the other 20% at 9.9% for 15 years with a 30 year amortization. Since I'm used to the idea of the 30 year mortgage, this looks like fiscal insanity, since I'm not paying off anything, and in two years I have to go through the whole horrid financing mess again.

The upshot is that, even with these generous payment schedules, I would have to pay $3,314 a month for a $500,000 house, which - if you didn't know - is pretty much low-end, bottom of the barrell housing if you want to live in a pleasant area of LA. (This amount includes first mortgage, second mortgage, taxes and insurance).

Now, I would get about a $800 a month tax deduction, and if I got a house with a guest unit I could lease it for $750-1,300 a month depending on how nice it is.

If home prices continue to go up as they have, this is a very smart thing to do. The tax deduction plus the rental income would wind up getting me about half the money I needed. The other half would be a few hundred dollars more than I pay in rent now.

If interest rates increase substantially during the two years I'd own the loan, and my income did not increase, I could be in big trouble because I wouldn't be able to refinance and still keep my payment down to a reasonable level. I would then have to sell the house into what I'm sure would be a declining market.

If home prices go down, this is a very stupid move indeed since I would be gaining hardly any equity. I was thinking of paying the 30 year second mortgage over 15 years, which would only be about $200 a month more. Then I'd have SOME equity, but still, the whole deal seems amazingly risky from the bank's point of view.

I want to buy in a unique area of the city, such as Topanga Canyon, where unusual conditions make the area very desirable. Although this is very expensive, in my view it does shield me somewhat from real estate declines because my house would be something unique that would still be valued by the market. As I told the loan broker, people like me who want hillside homes with views are maybe 1% of the market, chasing .1% of the homes.

If Los Angeles is indeed fated to increase in population, and if the population continues to be fairly wealthy and home-hungry, then this seems like the right thing to do despite the huge debt burden. But if the population winds up being people with no money, I could still see things go sour if the economy went bad, or more people with no money flooded in.

I would appreciate any thoughts. Feel free to ping any other knowledgable people.

I've lived in So Cal my whole life and own 1 commerical property and 2 residentials in SD county - I'll give you my 2 cents.

My husband and I got into our first home 17 yrs ago with 5% down . It was a killer for us to buy a $150K home then, but now it's worth $500K. I bought a brand new home just 13 months ago (basically 0 down again) and it has gone up $125K. Quick jump to the latest with my properties, the commercial property (landlord selling so we quickly borrowed small down payment) that I purchased 5 years ago is paid off thanks to some refi's. The plan we have for our retirement is to sell the new house around '08 (just before the possible Hillary factor), pay off the smaller home, and retire there. We will use the commerical property as monthly income.

I'm sure some can name bad times in real estate (the early 90's had a few years of decreasing values), but they went back up and have gone up on the average 10-15% every year since.

I don't know if my experience will help, good luck!

David-

Just wanted to drop you a line.
I am a Real Estate agent in Philadelphia, and I'm happy to offer some good advice.

THE HOUSE
First, nobody can tell you what is a good deal or a bad deal. Real estate is local, and unless you have someone who knows your specific area, their home advice is useless.

THE MORTGAGE
Second, DO NOT get an amortized loan. They are a waste of money. Paying principle is foolish. Instead, get an interest-only loan. You pay interest, but no principle.
Why?
1-Because paying principle doesn't change the value of the home.
2-You must weigh paying off the home vs. investing the money.
If you have a 401k, you'll get matching funds, with the same tax break.
If you have a self-employed IRA, you can stash a boatload of money into it.
You can't pick a better time to invest. The market is poised to make a screaming recovery.

AND...it's also a great time to invest into real estate as well. With extra money, yoiu can.

ALSO- If you have ANY OTHER DEBT- You can use that extra money to pay it off.
Car loans, credit cards, school ooans, etc.
And remember, they are NOT deductible. Home loans are.
Paying off debt is WAY smarter than paying off principle.

NOTE- ALWAYS put your money where it gets the highest return.
If your mortgage is at, say, 5.5% and you are in the 28% bracket, your NET interest is 3.96%. If you invest into the market, you should easily beat that over time.
PLUS- It's almost always a better rate than the cost of your debt. Better to pay off debt than to pay off principle.

SUMMARY
Paying your home off early must always be balanced with how much you could earn by investing the difference or paying off debt.
Take that money that WOULD have been principle, and invest it instead. Long before 30 years gets here, you'll have enough to pay off the mortgage and have a ton of money left over.

BEST INTEREST-ONLY LOANS OUT THERE?
HOMESTAR Check out their 6 MO ARM, tied to the LIBOR.

INTERESTING POINT- Normally, points are foolish.
But this loan allows you to pay points that buy down rate AND margin.
2 pts drops the margin from 2.25 to 1.5% over the LIBOR
That is sweet. You get the points back in 2 yrs and always have a great rate.

TOM ADKINS

I would have to disagree with you most strongly. The first four books outline the mental changes a person has to undertake in order to acheived wealth. That is why I limited my recommendation to the first four.

If you study these books there are several nuggets of wisdom in the books that a person can use. Understanding good debt vs bad debt, gaining control of your personal finances, educating yourself in investments, putting education to use to gain experience and creating excess cash, identifying goals, making a plan, learning how to read financial statements etc.

I am NEVER an advocate of simply taking one person's advice to the exclusion of all others. All information needs to be checked against other souces. Like "critical thinking" I call this "critical research". The ideas that Kiyosaki tucks into a considerable amount of story telling are age old axioms of investing and gaining wealth. It is however, the only place that I have seen all of these elements brought into one location. Further, to Kiyosaki's credit, he recommends other reading and encourages folks to learn from other sources.

Conversely, I know nothing of the indiviudal who wrote the web page you listed. I do not know if the individual has ever read the books or has gone out and implemented any of the items recommended in the book. I do not know if the person owns their own business or even has any form of wealth.

In fact, it sounds very much like someone who just likes to be critical. I assure you that I do not need critics, there are plenty around.

What Kiyosaki has done for me is to allow me the strength to look at why my own business failed. He has shown me how to regain control of my finances to the point that I am getting started in my second venture and I'm currently laying the ground work for a third. By the way, none of these are or have been MLMs.

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