Author Topic: Leveraged Appreciation VS Stock  (Read 1330 times)

SuperMex

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Leveraged Appreciation VS Stock
« on: January 12, 2017, 06:58:52 AM »
I have been thinking about a possible strategy and wanted some second opinions on which is better.

I have an opportunity to move to San Antonio should I wish to following my current assignment.

I am a 100% disabled veteran and thus I wouldn't pay any property tax in Texas.

Let's assume a 5% appreciation rate in San Antonio. Let's also assume living in the area for 7 years.

1. Buy a no frills middle class home in cash 100-150K. (no interest or home payments plus appreciation of home)

2. Buy this middle class home with only 20% down and invest the difference in the market. (Write off of interest payments plus appreciation while leveraged and market gains of invested money)

3. Buy a McMansion for 450 -500K using 20% down. (I know this sounds crazy but if I am not paying property tax all I have to do is pay 1% for future maintenance and I could in theory see an increase of 5% on the value of the property annually while being leveraged in at only 20%)


« Last Edit: January 12, 2017, 11:51:29 AM by SuperMex »

J Boogie

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Re: Leveraged Appreciation VS Stock
« Reply #1 on: January 12, 2017, 09:43:55 AM »
I have been thinking about a possible strategy and wanted some second opinions on which is better.

I have an opportunity to move to San Antonio should I wish to following my current assignment.

I am a 100% disabled veteran and thus I wouldn't pay any property tax in Texas.

Let's assume a 5% appreciation rate in San Antonio. Let's also assume living in the area for 7 years.

1. Buy a no frills middle class home in cash 100-150K. (no interest or home payments plus appreciation of home)

2. Buy this middle class home with only 20% down and invest the difference in the market. (Write off of interest payments plus appreciation while leveraged and market gains of invested money)

3. Buy a McMansion for 450 -450K using 20% down. (I know this sounds crazy but if I am not paying property tax all I have to do is pay 1% for future maintenance and I could in theory see an increase of 5% on the value of the property annually while being leveraged in at only 20%)

Interesting! Does your property tax situation apply to rental properties as well?

If not, I would buy the most beat up home in the nicest, most established neighborhood you can find and live there.  Better yet a duplex.

If so, I would just go full bore RE investing, especially in nicer areas that typically have high tax rates.


Do not under any circumstances buy a McMansion.  If it's truly a McMansion, then future maintenance can be VERY costly (listen to the fine home building podcast about McMansions) and there's a good chance there might not be ANY appreciation.  Land appreciates, buildings depreciate.  Do you think the land that a McMansion is built on will appreciate much? I tend to think more established urban areas will appreciate more - and the housing supply tends to come from an era when homebuilders weren't cutting corners to maximize their profits.

SuperMex

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Re: Leveraged Appreciation VS Stock
« Reply #2 on: January 13, 2017, 04:18:06 AM »
The property tax only applies to your primary residents.

The law doesn't say what if you buy a duplex or quad and live in one of the units.



SeattleCPA

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Re: Leveraged Appreciation VS Stock
« Reply #3 on: January 13, 2017, 05:58:25 AM »
Apologies if I'm doing a "Cliff Clayvin" here and spouting off the obvious...

You may want to think about the impact of financial leverage this way. Your return on a particular property equals the income capitalization rate (or "cap rate") plus the appreciation rate.

Example: If you have a $100,000 rental that generates a bottomline profit (rent minus expenses) of $4,000, that's a 4% cap rate. And if that rental inflates in value by 2%, that's a 2% appreciation rate. And with numbers, your project or overall rate of return equals 6%.

If you can borrow money at any rate less than 6%, you make out like a bandit.

Financial leverage amplifies your risks, though. If the property depreciates by 3%, you're "earning" 4%-3%, or 1%... so it's not really magic.

And then the other thing to consider--and I am not saying this is a good idea--you can use financial leverage with any investment asset. And you get the same result. I.e., you could buy $100,000 of stocks and if the dividend rate equals 4% and the appreciation rate equals 2%, you get a 6% overall return... and if you can fund this with money you borrow for 4%, you're again making out like a bandit if things go well... and getting totally beat up if things do poorly.

The more I write, the more I feel like ol' Cliff Clayvin, so I'm going to stop... but I guess I'd close by saying this. I'd buy the $100K-$150K house with cash and then not take the risks associated with leveraging up.

talltexan

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Re: Leveraged Appreciation VS Stock
« Reply #4 on: January 13, 2017, 08:20:58 AM »
lived in San Antonio for four years, here, and many college friends still live there. Texas got hit by the oil price decline, and San Antonio--which is just North East of the Eagle Ford Shale play--hasn't been missed by this. Job growth (which affects price appreciation) has been weak there for the past year.

But you should be able to find good neighborhoods at all of these price points. The truly tony area is Alamo Heights-Olmos Basin, where you can probably find something at the high end that will hold up in value because of the quality of the schools there. Don't forget that you'll be paying a realtor $30,000 to sell the more expensive house, versus just $10,000 to sell the less expensive one.

talltexan

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Re: Leveraged Appreciation VS Stock
« Reply #5 on: January 13, 2017, 08:25:00 AM »
One other thing that will hurt San Antonio economy is the rapid depreciation of the Peso (currently near an all-time low versus the US $)...it will be much more expensive for Mexicans to come up on weekend trips there. I think your 5%/year appreciation is optimistic.