Take a look at the following breakdown:

Given the scenario of a home purchase of $650,000 with 10% down (which, by the way, is the minimum almost everywhere at the moment), leaving a loan of $585,000, this shows that this person, who currently pays $2,300/mo in rent, would have a monthly mortgage of $3663.

Here, the monthly outflow increases substantially, and you have to be able to afford that monthly to reap the benefits.

And here is where you’ll see the benefit…

In this scenario, this person would be able to reduce his taxable income from $120,000, where s/he would pay $33,600 in income tax, to $76,044 thereby reducing his income tax to $21,292, for a savings of $12,308. Divide that over the year, and s/he saves $1,026/month on average. With a $2,300/mo rent, adding this savings, theoretically, this person could afford $3,326/mo and own his/her home, benefiting also from the appreciation which has averaged 8% over the last 20+ years.

Request a copy of this form where you can plug in your own numbers by calling 650.515.5950.

Please consult your tax advisor on an accurate assessment of your specific situation, or contact Paul W. Bartke, Enrolled Agent and CPA at 650.773.1669, or via email at BartkePaul@comcast.net.

For mortgage questions, or to verify mortgage rates and payments, please consult your lender or mortgage broker, or contact Mike Romero of RMC Real Estate Loans at 650.401.3230, or via email at michael@rmcreloans.com.

A prospective buyer client of mine emailed me yesterday to say they were going to “…wait until after the first of the year as they are expecting home prices to drop here in San Mateo and Burlingame.”

I have a funny story… well, not funny, but common.

I have a friend, we’ll call him George (because I love that name). About nine years ago George was a single guy, no kids, grad student and marketing director. He was making good money and it was progressively getting better and better. I (among many others, I’m sure) advised that he invest in real estate. Mind you, I wasn’t a Realtor then, I just believe in the investment of real estate – particularly in the Bay Area.

So George starts looking around, tries out a couple of different agents, condo after condo, looks and looks and never takes the plunge – because he’s waiting for home prices to drop. He eventually buys SEVEN YEARS later! Guess whether prices went up or down? I’ll give you the answer in a minute.

So George gets married, buys a single family home in Belmont for about $1M. I love him for waiting for me to get my license but here’s the truth of the matter: 

George was looking primarily at condos in Menlo Park, San Carlos and Belmont. Let’s look at San Carlos which is, on average, right in between Menlo Park and Belmont price-wise.

Here are the average sales prices for condos in San Carlos per year, provided by MLSListings:

1998   $352,638 (this is when George could have made his first purchase)

1999   $397,038

2000   $500,406

2001   $519,235

2002   $489,747 (oops, a small dip – that means you might not want to sell then, but you’re still ahead)

2003   $502,993

2004   $565,272

2005   $671,880 (this is when George would have sold to buy his single family home with his new wife)

George could have had an additional $320,000 to put down on that $1M home he purchased in ‘05. And there’s your answer. If George waited for prices to drop, in 2002, he still would have missed out on all the equity between 1998 and 2002, and we haven’t even touched on the tax benefits! We’ll talk about that next time.

Have a great day!