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Saturday, January 31, 2009
Northern Virginia Weekend Bits Bucket 1/31-2/1 2009
Posted by Harriet at 9:17 AM
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23 comments:
Anyone want to rent a house? Actually, you won't really be renting the whole house, as the owner, who bought in 2006, will be living in the basement:
FX6962000
http://tinyurl.com/desqa9
I grew up in that neighborhood. Wonder what the actual rental price is. Probably more than $0.
$2500
There are some well-located houses and townhouses in Arlington that were built in the 1940's, 50's, 60's, etc.
How old is too old? For example, how much risk is with this $420k 1941 duplex http://franklymls.com/AR6883748 ?
Is there a sweat spot where houses are not too old and were well-built?
I wanted to respond to Tom's post yesterday about the advantages of owning a rental property.
He talked about the favorable tax treatment you receive from a rental property. I just thought I would let everyone know that you cannot deduct a loss from a rental property on your tax return. It is known as a passive activity loss. The losses are deductible the year that the property is sold, and that usually offsets any gains form the sale of the property.
Sorry to go off topic. It has been bothering me after seeing the post yesterday. He was right about deducting the repairs and travel costs and anything else associated with the property.
I would suggest doing a little more research on your schedule E filing before you get in to the rental property business.
Guys and girls, I need your help, this is stressing me out -
I am buying a property as my primary residence. I am putting 20% down and getting a conventional mortgage. Because I already own another property in Virginia, the mortgage company told me that, in order to get my loan approved, I need to write them a letter stating that the new place will be my primary residence AND I will dispose my current property.
I have no problem stating that I plan to live in the new place. However, I do not plan to sell my current residence due to variety of personal reasons. I know I can qualify for both mortgages based on my current income.
Is that mortgage company correct that I can only own one home in Virginia if I want to get a low rate conventional mortgage?
CPA1 said: "I just thought I would let everyone know that you cannot deduct a loss from a rental property on your tax return. It is known as a passive activity loss. The losses are deductible the year that the property is sold, and that usually offsets any gains form the sale of the property."
As a general rule, you're right, CPA. However, IRS Pub. 925 says in part:
"If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception."
There's a phaseout rule for this exception depending on your modified adjusted gross income. Suffice it to say that my rental RE losses have never begun to approach the maximum allowed in this exception.
Hi Everyone. There is alot of talk here about Arlington prices staying high, but what do you think about east McLean? From the RE charts website, it looks like overall fairfax county has corrected somewhat, but homes in east Mclean are still expensive.
"Hi Everyone. There is alot of talk here about Arlington prices staying high, but what do you think about east McLean? From the RE charts website, it looks like overall fairfax county has corrected somewhat, but homes in east Mclean are still expensive."
This is true, one of the things we are seeing in general is that the most expensive portions of the city have been slower to fall than the less expensive ones.
This has a lot to do with the much smaller percentage of foreclosures and speculative activity in these areas as well as their status as "move-up" communities for most buyers.
(A lot of people cashed out of other areas and took their bubble equity into places like McLean. Now with the rest of the region cratering... that supply of easy money is gone.)
Eventually these areas will return to something similar to their previous premium over the rest of the region, but it is going to be a much slower process.
Does anyone have a chart showing dollar volume numbers broken down by area for the bubble years?
I have made a partial graph myself comparing PWAR and Arlington based on MRIS stats, it is a very interesting comparison.
The dollar volume surged by a simply amazing amount in PWAR, far more than Arlington during the bubble years. I am not sure of the implications of this yet, but the most obvious explanation is that that is the subprime and speculative money pouring in.
On the flip side, while dollar volume has recovered some in PWAR more recently despite far lower prices, it continues to decline in Arlington.
Here you go Leroy. Click an area on the left hand side of the page, and then the first graph is the dollar volume.
http://www.recharts.com/AroundDC.htm
What I find particularly interesting is the scope of the drop off after 2005. In PWC especially, you can really see there was no support for pricing - even in 2006 & 1st half of 2007 when junk loans still were available. Its as if all the flipers simulteaneously knew the party was over and headed for the door.
Tom at 10:12 PM:
"There's a phaseout rule for this exception depending on your modified adjusted gross income. Suffice it to say that my rental RE losses have never begun to approach the maximum allowed in this exception."
This area of tax law is a thicket, so it may be helpful to lay out further what you're discussing. In general, a RE investor can't deduct rental losses to the extent that they exceed income. Those losses wait in what's comparable to a hopper, and can be deducted when the investor sells the property. A RE investor, however, can deduct losses of up to $25K per year if he/she "actively participated" in the activity AND had "modified adjusted gross income" of less than $100,000. Deductible losses start phasing out as modified adjusted gross income exceeds $100,000, phasing out completely as it exceeds $150,000. For this purpose, modified adjusted gross income includes amounts contributed to a retirement plan.
For example, assume X has gross wage income of $130K, contributions to a 401(k) of $16,500, and RE losses of $25K. X's modified adjusted gross income is deemed to be $130K and is not reduced for the 401(k) contribution. Therefore, 60% of X's real estate losses (that's (130k- 100k)/150K) are phased out and X may only deduct real estate losses of $10K.
Terminator-X, you're right. This not being a tax discussion board, I didn't lay out the whole chapter and verse, but I would refer anyone interested to IRS Pub. 925 (which, as with all the IRS pubs I've ever read, is quite clear). My RE losses have always been quite small, at most a thousand dollars or so in a year, which was always a price I was willing to pay provided the property was on track to appreciate as I calculated it would. In most years, I've run a small profit. As I noted before, I've always been very satisfied being a small landlord and the profits overall have been substantial. I'm no Cassandra and I do recognize we're still in the midst of a housing reset, but as I noted previously I'm very comfortable with the prospects for RE in N. Arlington within walking distance of the Orange Line.
lw,
as far as I know,
This depends on the terms of the mortgage of your existing house. Basically, that mortgage can have stipulations that you'll be living in it to get those rates. Sometimes such clauses have end-dates. But if you don't plan on disposing of the other home, then you need to mortgage the two properties accordingly. It's possible that your current mortgage already allows it to become a secondary residence or rental, look through your documents and see. If it does, copy those portions and send it off to the new lender.
What's the ratio NOVAwatcher?
annual rent x 14 = home price ?
In Van Dorn Village, I noticed one home was vacated back in early December 2008. Its address is
6012 Hydrangea Dr. It was bought in late October 2006 for $385,000. If it appreciated 7% or 3.5% over inflation since 1998, then it should be worth around $305,000.
back when interest rates were closer to 6%, I was using 150x monthly rent. I think the actual number was closer to 138x, but 150x is easier to do in my head when I don't have a calculator.
In the Sunday Washington Post Loudoun Extra section there is an article about tax assessments down 15 percent.
How's this for a theory: Rents on single family homes in North Arlington (Ballston, McLean, etc.) have actually been *depressed* over the past five years because if you could afford to pay 4K a month rent, there was some moron waiting to give you a mortgage -- no money down of course -- that cost you (initially) $3.5K a month. Rents could not, therefore, keep pace with the sale price, because if they approach parity, it became cheaper to buy, and without the requirement of a down payment, foolish (or so they thought) not to.
In those areas today however the cost of housing rental, when it's available, is much higher than we've seen in the past, despite the ample supply of traditional rental housing (apartments, condos, townhouses) driving down rents.
I would submit that part of the reason that the 22207 zip hasn't taken the bath that others have taken (or at least not so deeply or quickly) is that rents have been artificially suppressed, and, therefore, the housing in this particular area has not technically been as overpriced as housing further out.
That is, the true ratio of sales cost to rent cost in these areas is not so far out of whack as it got further out. This would explain the remarkable resistance of prices in this area to falling, and it would also explain the fact that housing rental prices appear to be going up (spurred no doubt by people who can't sell; the difference these days is that there's nobody saying, for that kind of rent i could just buy). Further out, you've got SFH selling for less than 100K which suggests a valid rent in the neighborhood of less than $700.00 per month; unlikely, I should think.
gruntled said: "How's this for a theory: Rents on single family homes in North Arlington (Ballston, McLean, etc.) have actually been *depressed* over the past five years because if you could afford to pay 4K a month rent, there was some moron waiting to give you a mortgage -- no money down of course -- that cost you (initially) $3.5K a month."
Where do you get your $3.5k a month figure. What is the price of the home, the down payment, and the interest rate and borrowing terms?
I assume you are suggesting that the widespread use of interest-only or pay-option loans in Arlington allowed for such low "initial" payments. Do you have any evidence to support this?
Gruntled,
Fact on the ground (at least in my observation) do not support your theory. I rent a SFH in McLean.
"that rents have been artificially suppressed"- When we moved in in 2006 there were plenty of rental properties on the market, all were comparably priced. One, across the street sat empty for ~10 mo. The only thing driving the rent levels was supply and demand. Nothing "artificial". I assume that you might mean that some of the expected demand for rental properties at that time might have been shifted to demand for purchase properties. This was almost certainly the case, and is probably swinging back some, though I have not seen local statistics.
"housing rental prices appear to be going up"- Not the case. My rent has not increased in 3 yrs. Houses for rent in my neighborhood have had rents decline this year. There has been a tremendous amount of rental inventory brought onto the local market. Much of the inventory has been quite unusual, and I can only speculate that it indicates sellers either attempting to mitigate losses or a belief that if they can hold on until some time in the future, prices will return to their higher level. For example, around the corner we saw a knockdown, mcmansion rebuild, ~5000 sqft, never lived in, put up for rent. This is very unusual, but speaks to the tremendous supply of rentals brought onto the market recently.
In the end, I don't think that there were any particularly unusual circumstances in the rental market in that area in the recent past, and there has certainly not been an increase in rents recently.
Anon,
Why are you using 7% (3.5% faster than inflation)? Was this in order to get a number approaching their current going price? Because incomes most certainly haven't been going up at that rate since 1998.
and gruntled, entertaining idea. Similar thought-paths are basically what lead me to believe that move-up money is required to have created such housing prices. Because incomes could only support the actual rent levels (mortgage PITI levels too), therefore the prices must have been supported by something else, and given the scaricity of option-ARMs and I/O loans in these counties, it's not that (and in many cases that's not sufficient to explain the discrepancy). So, to get PITI down to rental equivalents you needed huge chunks of liquidated cash from bubble profits elsewhere.
Oo, and another idea,
Maybe sellers in N. Arlington were discriminating against those who appeared to be speculators by virtue of the type of financing proposed in the offer. Maybe they favored those buyers with higher percentage down-payments thus insulating the neighborhood from future losses. Hmm, this info must be available somewhere....
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