"The Wealthy Renter" by Alex Avery.

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willthrill81
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Re: "The Wealthy Renter" by Alex Avery.

Post by willthrill81 » Wed Dec 04, 2019 12:03 am

CurlyDave wrote:
Tue Dec 03, 2019 11:54 pm
CFM300 wrote:
Tue Dec 03, 2019 11:24 pm
CurlyDave wrote:
Tue Dec 03, 2019 10:52 pm
if I buy a house with 20% down, both my 20% and the bank's 80% appreciate at the rate of inflation. So, my share of the house appreciates at 5x the inflation rate.
Can you explain that, please?
How about a simple example. I buy a $100k house with 20% down. So I only put $20k of my own money into it, I borrow the other $80k.

Say inflation is 3%, so next year the house is worth $103k, a gain of $3k. So my equity is now $23K, and I still owe $80k on the house.

I have made a gain of 3/20 = 15% on my money.

This is the principle of leverage.

Of course, there are second order effects, such as the principal reduction on the loan, but for a simplistic example these are usually ignored.
Right. And, naturally, it can go the other way as well, as millions discovered the hard way a decade ago. In your example, had the home lost 20% of its value, the ROI would be -100%.
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Re: "The Wealthy Renter" by Alex Avery.

Post by randomguy » Wed Dec 04, 2019 12:12 am

dboeger1 wrote:
Tue Dec 03, 2019 10:37 pm
randomguy wrote:
Tue Dec 03, 2019 9:59 pm
dboeger1 wrote:
Tue Dec 03, 2019 12:59 pm


To add to that, I think rent vs. buy is rarely an apples-to-apples comparison in terms of the "amount" of home. My wife and I rent in the SF Bay Area, and I've run all kinds of calculations simply to find what everybody else knows is obvious, which is that there's virtually no way that buying comes out ahead at current prices.
People said the same thing 5 years ago. Looking back, they were wrong. Buying clearly beat renting and it wasn't even close. Maybe this time will be different. Or maybe it will be more of the same.
I'm not disagreeing with you, but I think you missed the point of what I was trying to say. Buying vs. renting the exact same home is one thing, but the home you rent vs. the one you buy is rarely the same, because the reasons people rent vs. buy also tend to be different. And for what it's worth, I think your choice to defend buying with a 5-year-window is a bit odd, considering Bay Area home prices have shot through the roof far more than is historically typical for here or any area in recent times. Also, certain cities have rent control, so that's another huge variable. And the equation depends on when you buy; you don't get to claim the gains from before you bought, hence why I specified at current prices. So if you're saying that someone who has been in a rent-controlled apartment in San Francisco or San Jose for many years and has a well-below-market monthly rent is at least as likely to come out ahead as moving out of that apartment and buying a house at current prices based on the last 5 years, well, I think that's a bit like being overly optimistic about the S&P500 over the next 20 years because of the recent bull market. I'm not saying it can't happen, just that your choice of a short and unusual time window is fairly arbitrary compared to reasonable estimates based on current figures.
You are missing the point. The point is simply you have no way of knowing if renting or buying will be cheaper. You can't make statements like "here's virtually no way that buying comes out ahead at current prices." because there is no way to predict the outcomes. Modest 1-2% changes in appreciation are more than enough to change which one wins. You can go read the boglehead posts from 2012-2015 about people asking about buying in the bay area and you will have a constant stream of posts saying how renting is cheaper and the prices are unsustainable. Those people were all wrong. Where will house prices be in 5 (or whatever time frame you want to use) years? I have no clue. I have no faith in my (or anyones) ability to figure out if you would have been better off buying or renting over the next x years.

What you can do is look at a range of outcomes and decide which ones you can live with. With buying there are some really bad downside cases (i.e. imagine say 10% housing correction and you have to sell after 1 year for a new job) which is a risk you might not feel comfortable taking on, Or maybe you plan on being there forever and you don't want to take on the risk of houses going up 30% and you having to pay that addition rent for the next 50 years.

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Re: "The Wealthy Renter" by Alex Avery.

Post by kramer » Wed Dec 04, 2019 12:26 am

I do think a lot of this comes down to personality and lifestyle. I have never owned any real estate, age mid-50's and retired over 12 years ago, classic boglehead in that all my extra income went straight to savings. The idea of working on and improving a house or working with contractors or shopping for specific furnishings literally gives me nausea (but I think that puts me in a minority). I have been away from home traveling for over 5 months this year, and I spent good money on some nice AirBnb's (I am typing this reply from one). But if I were a nester type personality, I would think more about owning and investing a lot in my own home. Ultimately, I think one day, when I settle down, I will probably buy a home or condo. But I will consider the money spent as a sunk cost, not for investment purposes.

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Re: "The Wealthy Renter" by Alex Avery.

Post by CFM300 » Wed Dec 04, 2019 12:32 am

CurlyDave wrote:
Tue Dec 03, 2019 11:54 pm
CFM300 wrote:
Tue Dec 03, 2019 11:24 pm
CurlyDave wrote:
Tue Dec 03, 2019 10:52 pm
if I buy a house with 20% down, both my 20% and the bank's 80% appreciate at the rate of inflation. So, my share of the house appreciates at 5x the inflation rate.
Can you explain that, please?
How about a simple example. I buy a $100k house with 20% down. So I only put $20k of my own money into it, I borrow the other $80k.

Say inflation is 3%, so next year the house is worth $103k, a gain of $3k. So my equity is now $23K, and I still owe $80k on the house.

I have made a gain of 3/20 = 15% on my money.

This is the principle of leverage.

Of course, there are second order effects, such as the principal reduction on the loan, but for a simplistic example these are usually ignored.
Thank you for the example. Is it also customary to ignore the interest you're paying on the 80% you borrowed? If the mortgage rate is the same as the inflation rate, then that's going to wash the gain on your investment back down to the rate of inflation, correct?

$80,000 * 0.03 = $2,400 in interest
$3,000 gain on home value - $2,400 = $600 net gain on investment
$600/$20,000 = 0.03

Not trying to be snarky. Just thinking about your claim in its original context -- i.e., as a response to this:
Seasonal wrote:
Tue Dec 03, 2019 12:52 pm
Houses have tended to appreciate in value at about the inflation rate. Investment portfolios have tended to appreciate at well above the inflation rate. Obviously, both have had long periods of better or worse performance...

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Re: "The Wealthy Renter" by Alex Avery.

Post by CurlyDave » Wed Dec 04, 2019 12:47 am

CFM300 wrote:
Wed Dec 04, 2019 12:32 am
CurlyDave wrote:
Tue Dec 03, 2019 11:54 pm
CFM300 wrote:
Tue Dec 03, 2019 11:24 pm
CurlyDave wrote:
Tue Dec 03, 2019 10:52 pm
if I buy a house with 20% down, both my 20% and the bank's 80% appreciate at the rate of inflation. So, my share of the house appreciates at 5x the inflation rate.
Can you explain that, please?
How about a simple example. I buy a $100k house with 20% down. So I only put $20k of my own money into it, I borrow the other $80k.

Say inflation is 3%, so next year the house is worth $103k, a gain of $3k. So my equity is now $23K, and I still owe $80k on the house.

I have made a gain of 3/20 = 15% on my money.

This is the principle of leverage.

Of course, there are second order effects, such as the principal reduction on the loan, but for a simplistic example these are usually ignored.
Thank you for the example. Is it also customary to ignore the interest you're paying on the 80% you borrowed? If the mortgage rate is the same as the inflation rate, then that's going to wash the gain on your investment back down to the rate of inflation, correct?

$80,000 * 0.03 = $2,400 in interest
$3,000 gain on home value - $2,400 = $600 net gain on investment
$600/$20,000 = 0.03
Well, you need to live someplace. Usually the mortgage interest is considered to be similar to the rent you would pay on a rented house or apartment. This isn't ignoring it, but frequently it is close to the rent. If you rent, the money is lost forever, and so this amount is not considered in looking at the return.

The whole process of looking at a house as an investment is full of controversy.

I know for sure that as a landlord, the rent my tenants pay covers the mortgage and a profit for me.

In the calculation you did, you would be living in the house for free, which is a nice trick if you can pull it off.

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Re: "The Wealthy Renter" by Alex Avery.

Post by joelly » Wed Dec 04, 2019 12:57 am

I’m not convinced. Being a renter doesn’t make one wealthy, like being a homeowner doesn’t make one poor. But when you retire, do you want to retire and be homeless? Retirement = fixed income while rent will continue to raise every year, no? How would one keep up with rent in retirement?

Please explain to me I want to learn.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Nathan Drake » Wed Dec 04, 2019 1:06 am

joelly wrote:
Wed Dec 04, 2019 12:57 am
I’m not convinced. Being a renter doesn’t make one wealthy, like being a homeowner doesn’t make one poor. But when you retire, do you want to retire and be homeless? Retirement = fixed income while rent will continue to raise every year, no? How would one keep up with rent in retirement?

Please explain to me I want to learn.
It’s just an expense, it should be baked into your SWR calculation

How does a home owner keep up with property taxes, insurance, and maintenance that rise with inflation?

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Re: "The Wealthy Renter" by Alex Avery.

Post by JoMoney » Wed Dec 04, 2019 1:07 am

I'm a renter and prefer renting, I generally agree with what the author said... but, I do think the value of "imputed rent" is often ignored (or under-rated). You're likely to be a great tenant (to yourself), and if you were instead drawing on investment to pay rent rather than owning you would owe income tax on the investments earnings... No income tax is due on the value of the 'imputed rent' you're not paying yourself.
Owning is also a good inflation hedge that is linked to your real world housing liability/costs. If you were renting and relying on an investment in bonds you can be certain of a specific payout that might cover a lease for a brief time period, but you're left with the risk of rents rising over time and being able to cover it. If you invested in equities you have no guarantees on a 'safe withdrawal rate' at all. While there are still some additional liabilities that come with owning, one of the largest expenses people have (rent) is essentially covered regardless of inflation and market risks.
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Re: "The Wealthy Renter" by Alex Avery.

Post by BionicBillWalsh » Wed Dec 04, 2019 1:15 am

I’ve owned four homes in my life. I’ve made money off every one that I sold. Given the low interest rates in my lifetime, I’ve basically lived for free for the duration. Now...I’ve been fortunate enough to buy desirable properties and maybe that plays into my viewpoint, but renting seems to be a great way to flush money down the toilet.

I can understand the personal freedom that renting gives...but not the wealth aspect.

If I had rented properties for the duration of time that I’ve owned homes, I would have been in the hole nearly $800,000. As it stands, I’ve made nearly half that amount in property appreciation. And I’m not even accounting for the tax benefits of owning a home.

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Re: "The Wealthy Renter" by Alex Avery.

Post by willthrill81 » Wed Dec 04, 2019 1:30 am

JoMoney wrote:
Wed Dec 04, 2019 1:07 am
I'm a renter and prefer renting, I generally agree with what the author said... but, I do think the value of "imputed rent" is often ignored (or under-rated). You're likely to be a great tenant (to yourself), and if you were instead drawing on investment to pay rent rather than owning you would owe income tax on the investments earnings... No income tax is due on the value of the 'imputed rent' you're not paying yourself.
Owning is also a good inflation hedge that is linked to your real world housing liability/costs. If you were renting and relying on an investment in bonds you can be certain of a specific payout that might cover a lease for a brief time period, but you're left with the risk of rents rising over time and being able to cover it. If you invested in equities you have no guarantees on a 'safe withdrawal rate' at all. While there are still some additional liabilities that come with owning, one of the largest expenses people have (rent) is essentially covered regardless of inflation and market risks.
Right. Living in a home owned free and clear allows retirees to be more flexible in their portfolio withdrawals, reducing sequence of returns risk. Note that retaining a mortgage in retirement, like renting, increases sequence of returns risk because it forces the retiree to make the monthly payment even if their portfolio is suffering. This isn't to say that it's a poor choice, but the risk is there and should not be ignored. If one has non-portfolio sources of income that can cover one's fixed expenses like rent or a mortgage, then it's a non-issue.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "The Wealthy Renter" by Alex Avery.

Post by HEDGEFUNDIE » Wed Dec 04, 2019 2:21 am

gch wrote:
Tue Dec 03, 2019 7:34 pm
I’m constantly amazed at the number of people on here who find nice enough landlords to take losses on their homes and rent them for less than mortgage+insurance+taxes.

Sure maybe in a few select areas with high expected appreciation, but then those people foregoing owning are also giving up that appreciation.
I don’t consider it a loss for the landlord unless the rent is below mortgage interest + insurance + taxes.

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Re: "The Wealthy Renter" by Alex Avery.

Post by stocknoob4111 » Wed Dec 04, 2019 5:35 am

In my area (OC, CA) a 1000 sqft hone costs $1.1M and i'm renting my 700sqft 1bd with garage for $1425. Buying makes no sense here.

I save all the extra cash and hope to retire early in a LCOL.

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Re: "The Wealthy Renter" by Alex Avery.

Post by winterfan » Wed Dec 04, 2019 6:05 am

I think people overstate maintenance and upkeep issues. I'm trying to figure out what keeps breaking in all of these homes that consumes all your weekends! We have owned an old home (100+ years) for almost 20 years and haven't had that many issues. Sure, you have to mow the lawn and shovel the sidewalk, but that doesn't take more than 30 minutes max and it's not every week even. What am I missing?

That said, there's nothing wrong with renting. I don't think I would with children in school though. I live in a tight rental market and I've known several cases of people who have been evicted because the landlord was selling the home they were living in. They were scrambling to find another place to keep their kids in the same schools. It was tough. They were paying a lot to rent too. I also like the idea of owning my home. We haven't had a mortgage in years and I'm shocked at how much homes rent for today.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Sam1 » Wed Dec 04, 2019 6:15 am

Nathan Drake wrote:
Wed Dec 04, 2019 1:06 am
joelly wrote:
Wed Dec 04, 2019 12:57 am
I’m not convinced. Being a renter doesn’t make one wealthy, like being a homeowner doesn’t make one poor. But when you retire, do you want to retire and be homeless? Retirement = fixed income while rent will continue to raise every year, no? How would one keep up with rent in retirement?

Please explain to me I want to learn.
It’s just an expense, it should be baked into your SWR calculation

How does a home owner keep up with property taxes, insurance, and maintenance that rise with inflation?
Property taxes, inflation and maintenance aren’t typically that much and should be way more manageable in retirement than an actual rent payment. Many jurisdictions have property tax relief for seniors.

Renting my current home would be approximately $5k per month. My property tax and insurance are around $700 per month. I have lived in my home for 6 years and have spent approximately $20k on maintenance. This averages to less than $300 a month. So $1k on tax, maintenance and insurance vs $5k in rent.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Sam1 » Wed Dec 04, 2019 6:20 am

winterfan wrote:
Wed Dec 04, 2019 6:05 am
I think people overstate maintenance and upkeep issues. I'm trying to figure out what keeps breaking in all of these homes that consumes all your weekends! We have owned an old home (100+ years) for almost 20 years and haven't had that many issues. Sure, you have to mow the lawn and shovel the sidewalk, but that doesn't take more than 30 minutes max and it's not every week even. What am I missing?

That said, there's nothing wrong with renting. I don't think I would with children in school though. I live in a tight rental market and I've known several cases of people who have been evicted because the landlord was selling the home they were living in. They were scrambling to find another place to keep their kids in the same schools. It was tough. They were paying a lot to rent too. I also like the idea of owning my home. We haven't had a mortgage in years and I'm shocked at how much homes rent for today.
I agree many renters seem to overestimate maintenance. I also own an old home and am not sure what people think needs to be done that is on a frequent basis and so expensive. Most appliances and systems last 15+ years. A standard roof is every 25 years? It’s true you could spend a lot of money updating your home, but most of that should be optional.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Sam1 » Wed Dec 04, 2019 6:22 am

stocknoob4111 wrote:
Wed Dec 04, 2019 5:35 am
In my area (OC, CA) a 1000 sqft hone costs $1.1M and i'm renting my 700sqft 1bd with garage for $1425. Buying makes no sense here.

I save all the extra cash and hope to retire early in a LCOL.
But does 700 sq feet/1 bed = 1000 sq foot home?

Relocating to a LCOL area is a decent strategy if you don’t mind moving to a LCOL area. I personally would have a hard time living in Southern California and then relocating to say, Texas or Alabama to save on housing costs. If you want to live in a LCOL then arguably you could do that NOW and probably invest even more money.

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Re: "The Wealthy Renter" by Alex Avery.

Post by z3r0c00l » Wed Dec 04, 2019 7:25 am

Living in NYC has forced me to rent longer than I would have elsewhere. Since striking out on my own I have spent only $198,000 on rent in 12 years. That won't even cover the down payment for the kind of apt I would want to live in, and it has allowed me to save and invest. So far it worked out but buying might be nice eventually.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Seasonal » Wed Dec 04, 2019 8:49 am

z3r0c00l wrote:
Wed Dec 04, 2019 7:25 am
Living in NYC has forced me to rent longer than I would have elsewhere. Since striking out on my own I have spent only $198,000 on rent in 12 years. That won't even cover the down payment for the kind of apt I would want to live in, and it has allowed me to save and invest. So far it worked out but buying might be nice eventually.
The relative costs of buying and renting in NYC are on the extreme end of the spectrum.

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Re: "The Wealthy Renter" by Alex Avery.

Post by longinvest » Wed Dec 04, 2019 8:53 am

As a renter, I don't own big appliances and I don't accumulate junk. Moving is easy and cheap.

When my housing needs change, I move. If I ever need to lower my housing expenses in retirement, I'll just move and rent a cheaper home. If a disaster hits the geographical location where I live and destroys its quality of life (as well real estate values), I'll move to a different location.

Renting is like having a broadly diversified portfolio of potential homes with a broad variety of monthly costs. I can easily move from one to another. I'm not tied to the economic fate of a single undiversified home.

For me, renting represents freedom and flexibility.

Is renting cheaper or more expensive than owning? Is a diversified portfolio cheaper or more expensive than a concentrated portfolio? :wink:

I rent a nice home. I live below my means. This allows me to save and invest significant amounts of money into a broadly-diversified global balanced index portfolio. I'll retire with dignity while enjoying freedom and flexibility.
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Re: "The Wealthy Renter" by Alex Avery.

Post by lostdog » Wed Dec 04, 2019 9:11 am

My wife took a job in another city so we sold our house and moved.

We're currently renting and love the freedom of knowing that we don't have to be concerned about the responsibilities that come with home ownership.

We love the simplicity of just paying rent and that's it. We also love being more liquid. Just the dividends from the brokerage account would pay for rent in our luxury apartment.

Like others have said, it's about the lifestyle. We were home owners for 16 years. We now love the simplicity of renting, being more liquid and having the flexibility and freedom.
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Re: "The Wealthy Renter" by Alex Avery.

Post by luminous » Wed Dec 04, 2019 9:20 am

Seasonal wrote:
Wed Dec 04, 2019 8:49 am
z3r0c00l wrote:
Wed Dec 04, 2019 7:25 am
Living in NYC has forced me to rent longer than I would have elsewhere. Since striking out on my own I have spent only $198,000 on rent in 12 years. That won't even cover the down payment for the kind of apt I would want to live in, and it has allowed me to save and invest. So far it worked out but buying might be nice eventually.
The relative costs of buying and renting in NYC are on the extreme end of the spectrum.
Sure, but this whole thread is full of personal anecdotes, this is just one more.

I live in a large rent controlled apartment in SF. Our annual rental increase is capped by the city, and it is very hard to evict tenants. I used to yearn to buy our own place, but when that finally became financially feasible we realized that our rent was low enough compared to the cost of buying that we’d rather stay renters. Sure, SF-style rent control and renter protections are rare in the US. But they greatly influenced our decision to remain renters.
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Re: "The Wealthy Renter" by Alex Avery.

Post by BionicBillWalsh » Wed Dec 04, 2019 9:22 am

lostdog wrote:
Wed Dec 04, 2019 9:11 am
My wife took a job in another city so we sold our house and moved.

We're currently renting and love the freedom of knowing that we don't have to be concerned about the responsibilities that come with home ownership.

We love the simplicity of just paying rent and that's it. We also love being more liquid. Just the dividends from the brokerage account would pay for rent in our luxury apartment.

Like others have said, it's about the lifestyle. We were home owners for 16 years. We now love the simplicity of renting, being more liquid and having the flexibility and freedom.
There is insecurity in renting as well, especially with luxury apartments. I know many people that live in great place, their kids going to desirable schools, and now the apartment owner decides to put the property on the market. They’re out, scrambling for a new place not nearly as good as the old.
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Re: "The Wealthy Renter" by Alex Avery.

Post by meowcat » Wed Dec 04, 2019 9:35 am

There is no doubt, a certain pride in owning a home. With that, I will tell you that we've owned our own home in two different locations for a total of 31 years and all it ever did was drain our bank account. Since we started renting, our net worth has skyrocketed.
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Re: "The Wealthy Renter" by Alex Avery.

Post by Sam1 » Wed Dec 04, 2019 9:45 am

It’s easier to prefer renting during a bull market. It’s kind of like how many people promote FIRE.

I could maybe save an extra $500 a month by renting. BUT then I’d need to continue renting in retirement. Not to mention that I plan to pass on my home to heirs.

One think that stands out to me about owning a home is that you can end up with a lot of equity not really knowing how it happened. It truly is a forced method of savings. For me, it’s diversification since I already save a significant amount in the market.

I can’t help but remember moving out of apartments and getting a security deposit back. The rent wasn’t that much less than a mortgage on a similar property. But when I sell my current home I’ll be handed a huge check of close to half a million.

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Re: "The Wealthy Renter" by Alex Avery.

Post by stoptothink » Wed Dec 04, 2019 9:55 am

stocknoob4111 wrote:
Wed Dec 04, 2019 5:35 am
In my area (OC, CA) a 1000 sqft hone costs $1.1M and i'm renting my 700sqft 1bd with garage for $1425. Buying makes no sense here.

I save all the extra cash and hope to retire early in a LCOL.
That can't possibly be a normal situation. My sister pays more than $1425/month for a similar sized apartment with no garage in a part of SoCal with much lower property values (Riverside).

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Re: "The Wealthy Renter" by Alex Avery.

Post by Admiral » Wed Dec 04, 2019 10:41 am

It would be interesting to know how many people with children still at home choose to rent. Stability for children is important and moving constantly is not exactly ideal. (Granted, some people are able to stay in the same rental unit/home for years, but one can assume their rent goes up.)

I have teens. I know many, many parents of teens and young kids. I can say unequivocally that the only parents I know who rent are those who are divorced. Caveat is these are middle or upper middle class folks. Lower down the economic ladder, owning may not be possible due to lack of savings for a down payment. But, the down payment is part of the point: it forces one to save.

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Re: "The Wealthy Renter" by Alex Avery.

Post by ohai » Wed Dec 04, 2019 10:50 am

CurlyDave wrote:
Tue Dec 03, 2019 10:52 pm
Seasonal wrote:
Tue Dec 03, 2019 12:52 pm
Houses have tended to appreciate in value at about the inflation rate. Investment portfolios have tended to appreciate at well above the inflation rate. Obviously, both have had long periods of better or worse performance...
As true as this might be, if I buy a house with 20% down, both my 20% and the bank's 80% appreciate at the rate of inflation. So, my share of the house appreciates at 5x the inflation rate.
Yes, but if your mortgage rate is above inflation, does this still make sense?

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Re: "The Wealthy Renter" by Alex Avery.

Post by Seasonal » Wed Dec 04, 2019 11:04 am

luminous wrote:
Wed Dec 04, 2019 9:20 am
Seasonal wrote:
Wed Dec 04, 2019 8:49 am
z3r0c00l wrote:
Wed Dec 04, 2019 7:25 am
Living in NYC has forced me to rent longer than I would have elsewhere. Since striking out on my own I have spent only $198,000 on rent in 12 years. That won't even cover the down payment for the kind of apt I would want to live in, and it has allowed me to save and invest. So far it worked out but buying might be nice eventually.
The relative costs of buying and renting in NYC are on the extreme end of the spectrum.
Sure, but this whole thread is full of personal anecdotes, this is just one more.

I live in a large rent controlled apartment in SF. Our annual rental increase is capped by the city, and it is very hard to evict tenants. I used to yearn to buy our own place, but when that finally became financially feasible we realized that our rent was low enough compared to the cost of buying that we’d rather stay renters. Sure, SF-style rent control and renter protections are rare in the US. But they greatly influenced our decision to remain renters.
Sure, but there is statistical data out there. NY and SF are among the two most extreme real estate markets in the US, both in terms of pricing and buy/rent.

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Re: "The Wealthy Renter" by Alex Avery.

Post by willthrill81 » Wed Dec 04, 2019 11:15 am

winterfan wrote:
Wed Dec 04, 2019 6:05 am
I think people overstate maintenance and upkeep issues. I'm trying to figure out what keeps breaking in all of these homes that consumes all your weekends! We have owned an old home (100+ years) for almost 20 years and haven't had that many issues. Sure, you have to mow the lawn and shovel the sidewalk, but that doesn't take more than 30 minutes max and it's not every week even. What am I missing?
In terms of the expense of home maintenance, our experience after owning three homes, ranging from brand new to over 40 years old, is that 'standard view' that, over the long-term, 1% to 1.5% of the home's market value will be spent annually on home maintenance is pretty accurate. Note that lawn care and home upgrades are not included in this estimate. Also, home maintenance expenses seem to typically be very lumpy. Years may go by with little spent on home maintenance, and then a big expense suddenly crops up. Knowing this, what we've done for years is to save every month for home maintenance expenses into a savings account and to pay for said expenses from that account when they occur, and it's worked beautifully so far.

In terms of the time involved in home maintenance, that varies too, but we have spent very little time on home maintenance. Lawn care is a completely different story, and we elected a few years ago to hire that out and never regretted it for an instant. Most winters, we don't get much snow, so periodic shoveling isn't an issue.
Last edited by willthrill81 on Wed Dec 04, 2019 11:17 am, edited 1 time in total.
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Re: "The Wealthy Renter" by Alex Avery.

Post by bligh » Wed Dec 04, 2019 11:16 am

On average home ownership comes with a significantly better financial outcome to renting. For the vast majority of home owners the equity built up in their houses acts as a savings vehicle for their retirement. Had they been renting instead, the money would likely have been spent. Throw in the enormous tax advantages of owning a home using leverage (ie. a mortgage) and I think home ownership comes out a clear winner in most cases. Of course, this isn't necessarily the case and the crowd here on this forum is certainly not representative of the average person.

I say this as a renter who can afford to buy a home in my area. I do it for many reasons, one of which is intentional control over my lifestyle expenses. As with most people, I am willing to rent a smaller, less swanky house than I am willing to buy. If I were to buy a house it would not be equivalent to the house I am currently renting. Yet, I am comfortable in this house and like it very much while renting it.

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Re: "The Wealthy Renter" by Alex Avery.

Post by CFM300 » Wed Dec 04, 2019 11:20 am

CurlyDave wrote:
Wed Dec 04, 2019 12:47 am
Well, you need to live someplace. Usually the mortgage interest is considered to be similar to the rent you would pay on a rented house or apartment. This isn't ignoring it, but frequently it is close to the rent. If you rent, the money is lost forever, and so this amount is not considered in looking at the return.
...
In the calculation you did, you would be living in the house for free, which is a nice trick if you can pull it off.
Got it. Thanks again for clarifying.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Walkure » Wed Dec 04, 2019 11:29 am

Several recent posts suggest two important distortions of the rental market that rarely get mentioned in the buy/sell discussion. They only become really obvious in the extreme cases of VHCOL areas, but the underlying principles apply elsewhere.
stoptothink wrote:
Wed Dec 04, 2019 9:55 am
stocknoob4111 wrote:
Wed Dec 04, 2019 5:35 am
In my area (OC, CA) a 1000 sqft hone costs $1.1M and i'm renting my 700sqft 1bd with garage for $1425. Buying makes no sense here.

I save all the extra cash and hope to retire early in a LCOL.
That can't possibly be a normal situation. My sister pays more than $1425/month for a similar sized apartment with no garage in a part of SoCal with much lower property values (Riverside).
The ability to rent at such a discount to present sales suggests a large amount of the housing stock has not sold in a while, and therefore the average landlord's cost basis is far lower than what a prospective buyer would pay for the same property today. Over time, turnover will cause catch up, but when an area has experienced rapid price growth, renters essentially benefit from a "time machine" that is difficult to arbitrage away due to the transaction costs of selling. In other words, you should expect the market equilibrium of rental prices to be a function of supply and demand where the rental supply at time t is a function of purchase prices at time t-n where n is the average time since last arms-length sales transaction for a given rental market. If it gets too out of whack from current buyable homes, rental demand will outstrip purchase demand and rents will rise, but there's a delay to these sort of things.
luminous wrote:
Wed Dec 04, 2019 9:20 am
Seasonal wrote:
Wed Dec 04, 2019 8:49 am
z3r0c00l wrote:
Wed Dec 04, 2019 7:25 am
Living in NYC has forced me to rent longer than I would have elsewhere. Since striking out on my own I have spent only $198,000 on rent in 12 years. That won't even cover the down payment for the kind of apt I would want to live in, and it has allowed me to save and invest. So far it worked out but buying might be nice eventually.
The relative costs of buying and renting in NYC are on the extreme end of the spectrum.
Sure, but this whole thread is full of personal anecdotes, this is just one more.

I live in a large rent controlled apartment in SF. Our annual rental increase is capped by the city, and it is very hard to evict tenants. I used to yearn to buy our own place, but when that finally became financially feasible we realized that our rent was low enough compared to the cost of buying that we’d rather stay renters. Sure, SF-style rent control and renter protections are rare in the US. But they greatly influenced our decision to remain renters.
This rent control post reinforces the previous one on the time distortion, but it also suggests another issue even where formal rent controls are not legislated. A good tenant is worth keeping, and in the case of a long-term rental such as the "wealthy renter" is wont to be, this can result in a rent that is significantly below rental market. This creates a "lock-in" effect similar to owning a home in terms of the way it limits mobility, in that you couldn't easily find a comparable rent elsewhere. It also makes the calculus of rent vs. buy increasingly less favorable toward buying the wider this discrepancy becomes.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Kenkat » Wed Dec 04, 2019 11:33 am

Admiral wrote:
Wed Dec 04, 2019 10:41 am
It would be interesting to know how many people with children still at home choose to rent. Stability for children is important and moving constantly is not exactly ideal. (Granted, some people are able to stay in the same rental unit/home for years, but one can assume their rent goes up.)

I have teens. I know many, many parents of teens and young kids. I can say unequivocally that the only parents I know who rent are those who are divorced. Caveat is these are middle or upper middle class folks. Lower down the economic ladder, owning may not be possible due to lack of savings for a down payment. But, the down payment is part of the point: it forces one to save.
Right, I think in a lot of cases other considerations trump any financial ones. In my area, there are very very few houses available to rent in the better school districts. What is available is the lower end housing stock that tends towards first time home buyers rather than upwardly mobile young families with children. The families with children all buy, not rent. Renting something suitable is just not possible as a general rule.

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Re: "The Wealthy Renter" by Alex Avery.

Post by bligh » Wed Dec 04, 2019 12:01 pm

Walkure wrote:
Wed Dec 04, 2019 11:29 am
Several recent posts suggest two important distortions of the rental market that rarely get mentioned in the buy/sell discussion. They only become really obvious in the extreme cases of VHCOL areas, but the underlying principles apply elsewhere.
stoptothink wrote:
Wed Dec 04, 2019 9:55 am
stocknoob4111 wrote:
Wed Dec 04, 2019 5:35 am
In my area (OC, CA) a 1000 sqft hone costs $1.1M and i'm renting my 700sqft 1bd with garage for $1425. Buying makes no sense here.

I save all the extra cash and hope to retire early in a LCOL.
That can't possibly be a normal situation. My sister pays more than $1425/month for a similar sized apartment with no garage in a part of SoCal with much lower property values (Riverside).
The ability to rent at such a discount to present sales suggests a large amount of the housing stock has not sold in a while, and therefore the average landlord's cost basis is far lower than what a prospective buyer would pay for the same property today. Over time, turnover will cause catch up, but when an area has experienced rapid price growth, renters essentially benefit from a "time machine" that is difficult to arbitrage away due to the transaction costs of selling. In other words, you should expect the market equilibrium of rental prices to be a function of supply and demand where the rental supply at time t is a function of purchase prices at time t-n where n is the average time since last arms-length sales transaction for a given rental market. If it gets too out of whack from current buyable homes, rental demand will outstrip purchase demand and rents will rise, but there's a delay to these sort of things.
luminous wrote:
Wed Dec 04, 2019 9:20 am
Seasonal wrote:
Wed Dec 04, 2019 8:49 am
z3r0c00l wrote:
Wed Dec 04, 2019 7:25 am
Living in NYC has forced me to rent longer than I would have elsewhere. Since striking out on my own I have spent only $198,000 on rent in 12 years. That won't even cover the down payment for the kind of apt I would want to live in, and it has allowed me to save and invest. So far it worked out but buying might be nice eventually.
The relative costs of buying and renting in NYC are on the extreme end of the spectrum.
Sure, but this whole thread is full of personal anecdotes, this is just one more.

I live in a large rent controlled apartment in SF. Our annual rental increase is capped by the city, and it is very hard to evict tenants. I used to yearn to buy our own place, but when that finally became financially feasible we realized that our rent was low enough compared to the cost of buying that we’d rather stay renters. Sure, SF-style rent control and renter protections are rare in the US. But they greatly influenced our decision to remain renters.
This rent control post reinforces the previous one on the time distortion, but it also suggests another issue even where formal rent controls are not legislated. A good tenant is worth keeping, and in the case of a long-term rental such as the "wealthy renter" is wont to be, this can result in a rent that is significantly below rental market. This creates a "lock-in" effect similar to owning a home in terms of the way it limits mobility, in that you couldn't easily find a comparable rent elsewhere. It also makes the calculus of rent vs. buy increasingly less favorable toward buying the wider this discrepancy becomes.
+1

As someone who lives in a high cost of living area that has seen prices go up rapidly in the last 7 or so years your post matches my observations perfectly. Also as a "wealthy renter" my rent has gone up less than 4% over that entire period. My landlord openly discusses the value of a good tenant and so hopes to keep me from moving by not increasing my rent.

Of course, in hindsight in my particular neck of the woods, I would have come out far ahead financially if I had purchased a house instead of renting.

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Re: "The Wealthy Renter" by Alex Avery.

Post by pepys » Wed Dec 04, 2019 12:14 pm

gch wrote:
Tue Dec 03, 2019 7:34 pm
I’m constantly amazed at the number of people on here who find nice enough landlords to take losses on their homes and rent them for less than mortgage+insurance+taxes.

Sure maybe in a few select areas with high expected appreciation, but then those people foregoing owning are also giving up that appreciation.
In my case, I have a 750 sq foot apartment with someone in the floor above me and two other apartments attached to mine on the sides. The efficiency also matters for pricing. The smallest house I could find very close nearby would be about 1000 sq feet. I've been considering buying, but it's definitely a very complicated situation. I might make a post here when my lease gets closer to being up.
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Re: "The Wealthy Renter" by Alex Avery.

Post by surfstar » Wed Dec 04, 2019 12:21 pm

*ahem*

So, in summary, the answer is...


it depends.



But, like many a boglehead discussion, we'll spend pages on it anyways.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Admiral » Wed Dec 04, 2019 12:26 pm

surfstar wrote:
Wed Dec 04, 2019 12:21 pm
*ahem*

So, in summary, the answer is...


it depends.



But, like many a boglehead discussion, we'll spend pages on it anyways.
What, you've got something better to do? Like work? :P

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Re: "The Wealthy Renter" by Alex Avery.

Post by stoptothink » Wed Dec 04, 2019 12:35 pm

Admiral wrote:
Wed Dec 04, 2019 12:26 pm
surfstar wrote:
Wed Dec 04, 2019 12:21 pm
*ahem*

So, in summary, the answer is...


it depends.



But, like many a boglehead discussion, we'll spend pages on it anyways.
What, you've got something better to do? Like work? :P
Sad personal anecdote. I had almost 200hrs of PTO that I was going to lose so had to take the entire month of December off. I've got the entire month mapped out; because of the logistics of our childcare and some meetings/projects which I can't ignore, I'm actually going to be in my office almost every day. Furthermore, wife and I share a car (I have a walking commute), so I'm kind of limited to what I can do with my free time as all my friends/family are working. Essentially, the only thing that has changed is I don't feel guilty about heading home at 11am or surfing the internet if everything has been taken care of. I've got to start rethinking my in-year PTO usage and also consider what I'll do in retirement (still decades away).

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Re: "The Wealthy Renter" by Alex Avery.____true "apples to apples"

Post by Nestegg_User » Wed Dec 04, 2019 1:19 pm

If in fact you could come up with a true "apples to apples" comparable location, there are factors would cause a disconnect in pricing:
1) a rental unit, if correctly priced, needs to account for potential unrented periods and latency before re-renting the unit. This could easily be 8%-10%, depending upon expected turnover. The unit rent must also account for those potential unfortunate situations where a tenant leaves but causes damage above any security deposit (where even going to court wouldn't be viable, either due to cost or viability of any recovery). again, depending upon area, tenant selection, and turnover this number is definitely non-zero.

2) those renting must make a return on their investment, which should, at least be above a risk-free bond.

3) AFA renting, renters have an ability to take advantage of utility (eg, few homeowners have houses without a separate dining area but renters might not find utility in spending for such areas; if one was renting a 4bd 3 bath the extra utility of the third bath isn't as high... an owner might find however that the third bathroom might be needed comparable to neighborhood houses for future salability)

4) OTOH, an owner doesn't have to maintain unit to comply with ADA or other concerns whereas that becomes a not insignificant cost for rental units, that needs to be able to be forwarded to the rental population.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Sam1 » Wed Dec 04, 2019 1:32 pm

willthrill81 wrote:
Wed Dec 04, 2019 11:15 am
winterfan wrote:
Wed Dec 04, 2019 6:05 am
I think people overstate maintenance and upkeep issues. I'm trying to figure out what keeps breaking in all of these homes that consumes all your weekends! We have owned an old home (100+ years) for almost 20 years and haven't had that many issues. Sure, you have to mow the lawn and shovel the sidewalk, but that doesn't take more than 30 minutes max and it's not every week even. What am I missing?
In terms of the expense of home maintenance, our experience after owning three homes, ranging from brand new to over 40 years old, is that 'standard view' that, over the long-term, 1% to 1.5% of the home's market value will be spent annually on home maintenance is pretty accurate. Note that lawn care and home upgrades are not included in this estimate. Also, home maintenance expenses seem to typically be very lumpy. Years may go by with little spent on home maintenance, and then a big expense suddenly crops up. Knowing this, what we've done for years is to save every month for home maintenance expenses into a savings account and to pay for said expenses from that account when they occur, and it's worked beautifully so far.

In terms of the time involved in home maintenance, that varies too, but we have spent very little time on home maintenance. Lawn care is a completely different story, and we elected a few years ago to hire that out and never regretted it for an instant. Most winters, we don't get much snow, so periodic shoveling isn't an issue.
The 1% rule is probably more accurate in a MCOL or LCOL area. I live in a HCOL city and my home has increased in value 3x In the last decade. But the cost of a dishwasher or roof has NOT.

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Re: "The Wealthy Renter" by Alex Avery.

Post by willthrill81 » Wed Dec 04, 2019 1:43 pm

Sam1 wrote:
Wed Dec 04, 2019 1:32 pm
willthrill81 wrote:
Wed Dec 04, 2019 11:15 am
winterfan wrote:
Wed Dec 04, 2019 6:05 am
I think people overstate maintenance and upkeep issues. I'm trying to figure out what keeps breaking in all of these homes that consumes all your weekends! We have owned an old home (100+ years) for almost 20 years and haven't had that many issues. Sure, you have to mow the lawn and shovel the sidewalk, but that doesn't take more than 30 minutes max and it's not every week even. What am I missing?
In terms of the expense of home maintenance, our experience after owning three homes, ranging from brand new to over 40 years old, is that 'standard view' that, over the long-term, 1% to 1.5% of the home's market value will be spent annually on home maintenance is pretty accurate. Note that lawn care and home upgrades are not included in this estimate. Also, home maintenance expenses seem to typically be very lumpy. Years may go by with little spent on home maintenance, and then a big expense suddenly crops up. Knowing this, what we've done for years is to save every month for home maintenance expenses into a savings account and to pay for said expenses from that account when they occur, and it's worked beautifully so far.

In terms of the time involved in home maintenance, that varies too, but we have spent very little time on home maintenance. Lawn care is a completely different story, and we elected a few years ago to hire that out and never regretted it for an instant. Most winters, we don't get much snow, so periodic shoveling isn't an issue.
The 1% rule is probably more accurate in a MCOL or LCOL area. I live in a HCOL city and my home has increased in value 3x In the last decade. But the cost of a dishwasher or roof has NOT.
True. The '1% rule' is probably more applicable to the cost of rebuilding the structure, not the market value of the entire property. In many HCOL areas, the land is more valuable than the home sitting on it.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "The Wealthy Renter" by Alex Avery.

Post by spae » Wed Dec 04, 2019 2:10 pm

Sam1 wrote:
Tue Dec 03, 2019 10:32 pm
Okay. The point is that most people who rent are NOT saving and investing a lot. It’s great you are and your friends are as well. It was pointed out above that we are talking about the average person.
You're trying to talk about the average person and the one concrete example you bring in is someone renting for $8k a month?

That's 50% more than the median pre-tax household income in the U.S and 8 times the median U.S. gross rent.

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Re: "The Wealthy Renter" by Alex Avery.

Post by spae » Wed Dec 04, 2019 2:17 pm

randomguy wrote:
Wed Dec 04, 2019 12:12 am
You are missing the point. The point is simply you have no way of knowing if renting or buying will be cheaper. You can't make statements like "here's virtually no way that buying comes out ahead at current prices." because there is no way to predict the outcomes. Modest 1-2% changes in appreciation are more than enough to change which one wins. You can go read the boglehead posts from 2012-2015 about people asking about buying in the bay area and you will have a constant stream of posts saying how renting is cheaper and the prices are unsustainable. Those people were all wrong.
Were they wrong? I've compared my portfolio to the house-price appreciation from co-workers who bought in that timeframe and my portfolio did significantly better. If you compare someone who heavily leverages their assets with their mortgage, as some of my co-workers did, that beat renting and running 0% leverage because the both the housing and the stock market are up, but when you compare to a similarly leveraged portfolio, renting appears better at the same level of risk even though you don't get the tax deduction if you leverage without buying a house.
Last edited by spae on Wed Dec 04, 2019 3:24 pm, edited 1 time in total.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Admiral » Wed Dec 04, 2019 2:36 pm

spae wrote:
Wed Dec 04, 2019 2:17 pm
randomguy wrote:
Wed Dec 04, 2019 12:12 am
You are missing the point. The point is simply you have no way of knowing if renting or buying will be cheaper. You can't make statements like "here's virtually no way that buying comes out ahead at current prices." because there is no way to predict the outcomes. Modest 1-2% changes in appreciation are more than enough to change which one wins. You can go read the boglehead posts from 2012-2015 about people asking about buying in the bay area and you will have a constant stream of posts saying how renting is cheaper and the prices are unsustainable. Those people were all wrong.
Were they wrong? I've compared my portfolio to the house-price appreciation from co-workers who bought in that timeframe and my portfolio did significantly better. If you compare someone who heavily leverages their assets with their mortgage, as some of my co-workers did, that beat renting and running 0% leverage, but when you compare to a similarly leveraged portfolio, renting appears better even though you don't get the tax deduction if you leverage without buying a house.
Price appreciation on a house is irrelevant unless you are selling. So, I'm not sure how you can compare your portfolio and their phantom housing prices. What's relevant is the carrying costs of the house vs rent. Also, let's be clear, the market has tripled in that time.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Sam1 » Wed Dec 04, 2019 2:40 pm

spae wrote:
Wed Dec 04, 2019 2:10 pm
Sam1 wrote:
Tue Dec 03, 2019 10:32 pm
Okay. The point is that most people who rent are NOT saving and investing a lot. It’s great you are and your friends are as well. It was pointed out above that we are talking about the average person.
You're trying to talk about the average person and the one concrete example you bring in is someone renting for $8k a month?

That's 50% more than the median pre-tax household income in the U.S and 8 times the median U.S. gross rent.
I am very out of touch.

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Re: "The Wealthy Renter" by Alex Avery.

Post by ohai » Wed Dec 04, 2019 2:47 pm

Saying "my house tripled in a decade" is akin to saying Amazon price went 10x over the same time. That performance does not reflect the average house, nor should it be expected to continue for the future.

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Re: "The Wealthy Renter" by Alex Avery.

Post by stocknoob4111 » Wed Dec 04, 2019 2:48 pm

the "leverage" argument never made any sense to me... you pay money to borrow capital, at 4%+. Some people in VHCOL areas are even taking more expensive loans such as extremely low downpayment and very high cost FHA loans (with upfront PMI etc.). To successfully use leverage as a way to make money your rate of appreciation has to be above the cost of capital otherwise it makes no sense. If your home is appreciating at the historic rate, about 1% above inflation, or typically 2-3% nominal and you're paying 4% for the loan then leverage is not helping you. Bottom line - Capital is NOT FREE!

Infact, over leveraging, as many in VHCOL areas so often do, is extremely dangerous as in a recession you could lose everything. My stock portfolio is all paid for and I can sell part of it in an instant with zero transaction costs, you can't sell only part of your kitchen if things go bad.

I'm all for home ownership but I think with it you need a HUGE buffer and buy much more conservatively than most people are doing in HCOL areas these days.

One addition point - Ben Felix had a video recently where he estimated the unrecoverable cost of owning personal Real Estate to be 5%. The costs are much more than homeowners would lead you to believe. Property taxes, maintenance and even intangibles like lost opportunity costs etc. When you add it all up home ownership is very expensive. Add to the fact that most people overconsume when buying their home to "future proof", that consumption is a lifestyle expense that can be minimized by renting something more modest.

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Re: "The Wealthy Renter" by Alex Avery.

Post by spae » Wed Dec 04, 2019 3:13 pm

Admiral wrote:
Wed Dec 04, 2019 2:36 pm
Price appreciation on a house is irrelevant unless you are selling. So, I'm not sure how you can compare your portfolio and their phantom housing prices. What's relevant is the carrying costs of the house vs rent. Also, let's be clear, the market has tripled in that time.
You're arguing about carrying costs and also claiming that the market has tripled since 2015? That would've made a normal 1 bedroom in SoMa about $1k/mo in 2015, a nice unit in a skyscraper with A/C $1200 to $1500. Prices near tech companies haven't been that low since before the dot com era.

House prices aren't up by anywhere near 3x either unless you got very lucky. The Case-Shiller index for SF is up 22% since today in 2015. As ohai mentioned, saying that housing is up 3x is like saying the stock market is up 4x because I got lucky and bought a stock that went up 4x.

The reason appreciation is relevant is that I can easily cover the increase in rent over the years from the gains in my portfolio. Rent prices have not only not tripled since 2015, they've gone up so little relative to the stock market that I could cover the difference from a SWR calculation from the gains in my portfolio.

Even if that wasn' the case, the rent/buy ratio is extreme enough in SF that, by renting instead of buying unleveraged, I can easily cover my rent minus condo fees in a condo with money taken out from a SWR calculation with plenty left over, enough to cover the increase in rent even if my portfolio had been flat since 2015, which of course it hasn't been. The fact that the stock market has appreciated more than the rental market means the income I get from renting has increased over time despite rents increasing. There are no guarantees for the future, but if we're looking at the past, renting in my neighborhood in SF has left me much wealthier than I would've been if I bought.

Personally, I don't want to have a commute and it's literally impossible to buy a detached house that wouldn't increase my commute. I could've bought a unit in condo building, but when I look at condos that I could've bought that are comparable to our current apartment, prices are barely up on average and many units are down.
Last edited by spae on Wed Dec 04, 2019 7:19 pm, edited 6 times in total.

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Re: "The Wealthy Renter" by Alex Avery.

Post by Sam1 » Wed Dec 04, 2019 3:23 pm

stocknoob4111 wrote:
Wed Dec 04, 2019 2:48 pm
the "leverage" argument never made any sense to me... you pay money to borrow capital, at 4%+. Some people in VHCOL areas are even taking more expensive loans such as extremely low downpayment and very high cost FHA loans (with upfront PMI etc.). To successfully use leverage as a way to make money your rate of appreciation has to be above the cost of capital otherwise it makes no sense. If your home is appreciating at the historic rate, about 1% above inflation, or typically 2-3% nominal and you're paying 4% for the loan then leverage is not helping you. Bottom line - Capital is NOT FREE!

Infact, over leveraging, as many in VHCOL areas so often do, is extremely dangerous as in a recession you could lose everything. My stock portfolio is all paid for and I can sell part of it in an instant with zero transaction costs, you can't sell only part of your kitchen if things go bad.

I'm all for home ownership but I think with it you need a HUGE buffer and buy much more conservatively than most people are doing in HCOL areas these days.

One addition point - Ben Felix had a video recently where he estimated the unrecoverable cost of owning personal Real Estate to be 5%. The costs are much more than homeowners would lead you to believe. Property taxes, maintenance and even intangibles like lost opportunity costs etc. When you add it all up home ownership is very expensive. Add to the fact that most people overconsume when buying their home to "future proof", that consumption is a lifestyle expense that can be minimized by renting something more modest.
There are absolutely transaction costs to selling stock! Heard of capital gains taxes? One of the main benefits to owning a primary residence is the 500k exclusion.

The fallacy in your argument is that you have to have a place to live. Most people have to pay to live somewhere. Would I invest in a SFH in a HCOL city if I already had a free place to live? Of course not. But I have to spend money to live somewhere so I might as well have some of my monthly payment pay down equity and benefit from price appreciation. To to mention mostly fixed housing costs. My payment seems less every single year. Eventually I won’t have a mortgage payment.

You’re not going to believe this, but we really have only spent a little more owning and maintaining our house than when we rented. When we rented, it was a two bedroom apartment. We are in a HCOL area. When we rented and moved out we received our deposit back. Next time we sell we should be receiving a $500k check.

prioritarian
Posts: 85
Joined: Tue Jul 16, 2019 6:00 pm

Re: "The Wealthy Renter" by Alex Avery.

Post by prioritarian » Wed Dec 04, 2019 7:06 pm

Sam1 wrote:
Tue Dec 03, 2019 10:32 pm
Okay. The point is that most people who rent are NOT saving and investing a lot. It’s great you are and your friends are as well. It was pointed out above that we are talking about the average person.
The OP did not address the "average person" but rather someone who can afford to view a home as an investment or asset.

I could easily make the claim that the average person who buys a mortgage greatly underestimates the cost of renting from a bank. For example, loaning a home typically requires inspection costs, lender fees/points, title fees, attorney fees, escrow fees, notary fees, mortgage insurance, property taxes, increased utilities cost, cost of maintenance and repair, and loan interest. The opportunity cost (and increased risk) of a large down payment as well as the opportunity cost of all of the above spending during prime earning years is rarely considered when people purchase homes. I think it's great if someone views a home as a thing/experience they want to consume but I do challenge the idea that buying a home is necessarily a good financial decision for someone who is genuinely motivated to maximize their financial returns.

This table is a little outdated but provides a good snapshot of the increased costs of "loaning" as opposed to renting:
Image

PS: I have rented for 40 years and my current share of the rent is ~$500. Renting has definitely enabled me to max out my IRA, 403b, and 457b for several decades.

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