Home ownership vs investing -- condos vs renting, etc

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 3:06 pm

Hello,

I want to think of home ownership from an investment point of view. Consider three "investment" options:

- Buy a stand-alone home.
- Buy a condo -- put any excess money in equities.
- Rent -- put any excess money in equities.

Owning a home can be seen as an investment with a return equal to the money you save in rent, minus the costs of home ownership (mortgage interest, repairs, etc). I can compute the return rate, and compare that to the return I get from equities. I can factor-in liquidity, transaction costs, agasint the price volatility of equities.

My question is: Do you think I can think of a condo, from an investment POV, as something in-between renting and buying a stand-alone home? I'm thinking that the purchase price of a condo might be lower than a stand-alone home, but the regular outgoing cashflow, which now includes condo fees, might be greater. You can see it as "renting" part of your home and "owning" part of your home.

To continue that analogy, you can think of your home as part of overall asset allocation. The choice between owning a stand-alone home vs owning a condo vs renting can be seen as three different allocations for the "housing" asset class and the "equities" asset class.

Do you agree with that view?

Do you know of any guidance for deciding on an asset allocation split between home equity vs stocks?

Thegame14
Posts: 352
Joined: Mon May 07, 2018 11:53 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by Thegame14 » Tue Jul 10, 2018 3:44 pm

A home is not an investment unless you are renting it out. You have to live somewhere. Stay at home with your parents as long as you can and save money, max out your 401K while your living costs are low. Live at home until you intend to get married, consider an apartment if you need to live with someone before marriage, then when you get married buy a home to live in and start a family that you plan on staying in for a long time.... Use the savings along the way to invest based on your risk tolerance and use it for a down payment on said house.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 3:54 pm

Thegame14 wrote:
Tue Jul 10, 2018 3:44 pm
A home is not an investment unless you are renting it out. You have to live somewhere.
That's an arbitrary separation. A home is an investment in so far as it produces a ROE in the form of reduced living costs.
Thegame14 wrote:
Tue Jul 10, 2018 3:44 pm
Stay at home with your parents as long as you can and save money, max out your 401K while your living costs are low. Live at home until you intend to get married,
You seem to have made several unwarranted assumptions about my age, marital status, and living arrangements.

Thegame14
Posts: 352
Joined: Mon May 07, 2018 11:53 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by Thegame14 » Tue Jul 10, 2018 4:05 pm

A home as an investment that you live in? are you factoring in cost of furniture, heat, AC, paint, electric, maintenance, PROPERTY TAXES, realtor 6% commission when you sell, you will not end up gaining much (if anything) when you factor all the costs of living a home vs any potential appreciation in value, it just isn't an investment you can look at vs a stock vs a bond.

You just cant look at a house as ROE, it will never work out, unless you get lucky and buy somewhere before a big boom which again, then you have to sell your appreciated house to buy guess what another house that has appreciated as well.....

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 4:32 pm

Thegame14 wrote:
Tue Jul 10, 2018 4:05 pm
A home as an investment that you live in?
My exact phrase was "A home is an investment in so far as it produces a ROE in the form of reduced living costs". A home on its own is a consumable. Any ROE is exclusively in the form of defrayed living costs, if any.
Thegame14 wrote:
Tue Jul 10, 2018 4:05 pm
are you factoring in cost of furniture, heat, AC, paint, electric, maintenance, PROPERTY TAXES, realtor 6% commission when you sell,
Yes.
Thegame14 wrote:
Tue Jul 10, 2018 4:05 pm
you will not end up gaining much (if anything)
The net cost or return depends on the particulars. It is a mathematical necessity that in a large fraction of cases the ROE is positive. Otherwise, people who invest in properties to rent would lose money. It is a fairly trivial mathematical observation to note that if it is possible to make a profit by buying a property to rent, it must also be possible to make a profit to buy a property to avoid paying rent yourself.

Thegame14 wrote:
Tue Jul 10, 2018 4:05 pm
when you factor all the costs of living a home vs any potential appreciation in value, it just isn't an investment you can look at vs a stock vs a bond.
Of course it is. You pay money, you alter future cashflows, you have liquidity costs, you have transaction fees, and you have a variety of costs and risks, including opportunity cost, and lack of diversification. These can be compared with alternatives.
Thegame14 wrote:
Tue Jul 10, 2018 4:05 pm
You just cant look at a house as ROE, it will never work out,
That is not correct. Not only can you do it, but you SHOULD do it. Otherwise, you'll have an incorrect picture of your overall asset allocation. For example, owning a home means that a large fraction of your equity is undiversified, and a mortage acts like a negative bond.
Thegame14 wrote:
Tue Jul 10, 2018 4:05 pm
unless you get lucky and buy somewhere before a big boom which again,
Note that I never said anything about house appreciation.

User avatar
Phineas J. Whoopee
Posts: 7559
Joined: Sun Dec 18, 2011 6:18 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by Phineas J. Whoopee » Tue Jul 10, 2018 4:44 pm

I wholeheartedly agree with danielc's position, and furthermore object to the idea that an investment isn't an investment unless one sells it for a price higher than one paid, that is, you find out whether it was an investment in the first place after its disposition. It's an example of the No True Scotsman fallacy.
PJW

megabad
Posts: 659
Joined: Fri Jun 01, 2018 4:00 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by megabad » Tue Jul 10, 2018 5:32 pm

danielc wrote:
Tue Jul 10, 2018 3:06 pm
Hello,

I want to think of home ownership from an investment point of view. Consider three "investment" options:

- Buy a stand-alone home.
- Buy a condo -- put any excess money in equities.
- Rent -- put any excess money in equities.

Owning a home can be seen as an investment with a return equal to the money you save in rent, minus the costs of home ownership (mortgage interest, repairs, etc). I can compute the return rate, and compare that to the return I get from equities. I can factor-in liquidity, transaction costs, agasint the price volatility of equities.

My question is: Do you think I can think of a condo, from an investment POV, as something in-between renting and buying a stand-alone home? I'm thinking that the purchase price of a condo might be lower than a stand-alone home, but the regular outgoing cashflow, which now includes condo fees, might be greater. You can see it as "renting" part of your home and "owning" part of your home.
I think you should think however you see fit. I see condos as likely the worst risk adjusted financial decision of your three options in all regions that I am familiar with. However, if you want condo style living and value the perks, than go for it.

To continue that analogy, you can think of your home as part of overall asset allocation. The choice between owning a stand-alone home vs owning a condo vs renting can be seen as three different allocations for the "housing" asset class and the "equities" asset class.

Do you agree with that view?
Your wording is somewhat confusing to me, but yes I think so. This seems to be how most good rent vs. buy calculators work.

Do you know of any guidance for deciding on an asset allocation split between home equity vs stocks?
Logically the decision is simple: put your money where you will gain the most financial benefit. When we had 3% 30 yr mortgages, my personal decision would almost certainly have been put all that you can in equities (small down payment, big mortgage). As interest rates rise, the decision is less obvious for me and certainly requires a little of predicting the future if you want to come out ahead.

Thegame14
Posts: 352
Joined: Mon May 07, 2018 11:53 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by Thegame14 » Tue Jul 10, 2018 5:34 pm

https://www.moneyunder30.com/why-your-h ... investment

https://www.usatoday.com/story/money/pe ... t/8900911/

According to research by Yale economist Robert Shiller, one of the foremost experts on housing in the U.S., noted that from 1890 until 1990, the real inflation-corrected prices of homes showed almost no change. This is a surprise to many people, as most people expect to be able to sell their home for a gain in the future.

https://www.usatoday.com/story/money/co ... 340516002/
It’s all a fool’s argument. Yes, you might make money if you spot some trend, then buy right, at the right time and the right location, then put lipstick on a pig (which few do well), and flip it. It’s a comforting mythology, like reality TV. Folks routinely fool themselves by calculating returns dead wrong. 

No matter how wonderful your home is, it’s a worse investment than virtually everyone thinks. Yes, home ownership has many benefits. If you didn’t own, you’d pay rent (which is tiny compared with the above almost everywhere).  

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 5:40 pm

megabad wrote:
Tue Jul 10, 2018 5:32 pm
I think you should think however you see fit. I see condos as likely the worst risk adjusted financial decision of your three options in all regions that I am familiar with. However, if you want condo style living and value the perks, than go for it.
Thanks for the help. I am actually mostly not interested in the perks, with the exception that I like the idea of paying someone else to mow the lawn and do general exterior maintenance. Conversely, I've read horror stories about Home Owner Associations. Can you clarify for me why a condo might be the worst risk-adjusted financial decision?
megabad wrote:
Tue Jul 10, 2018 5:32 pm
Logically the decision is simple: put your money where you will gain the most financial benefit. When we had 3% 30 yr mortgages, my personal decision would almost certainly have been put all that you can in equities (small down payment, big mortgage). As interest rates rise, the decision is less obvious for me and certainly requires a little of predicting the future if you want to come out ahead.
Thanks.
Last edited by danielc on Tue Jul 10, 2018 5:46 pm, edited 1 time in total.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 5:46 pm

Thegame14 wrote:
Tue Jul 10, 2018 5:34 pm
According to research by Yale economist Robert Shiller, one of the foremost experts on housing in the U.S., noted that from 1890 until 1990, the real inflation-corrected prices of homes showed almost no change.
I know. I've known this for a long time. This is even covered in the wiki page I linked to earlier.
Thegame14 wrote:
Tue Jul 10, 2018 5:34 pm
This is a surprise to many people, as most people expect to be able to sell their home for a gain in the future.

https://www.usatoday.com/story/money/co ... 340516002/
It’s all a fool’s argument. Yes, you might make money if you spot some trend, then buy right, at the right time and the right location, then put lipstick on a pig (which few do well), and flip it. It’s a comforting mythology, like reality TV. Folks routinely fool themselves by calculating returns dead wrong.
Literally nobody in this thread has argued for house appreciation. Who are you talking to?

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 6:08 pm

Thegame14 wrote:
Tue Jul 10, 2018 5:53 pm
Then you are talking about the "cost" of not renting, so let's say your rent would have been $1,500 if you rented instead of buying,
As an aside, are you familiar with the idea of using discounted cashflows to estimate the present value of an investment? What you will find is that this calculation is the basis for most assets that affect cashflows, including bonds, stocks, and homes. For example, the value of a stock is the present value of expected future dividens, the value of a bond is the present value of future coupons and return of principal, and the value of a house is the present value of future rents minus costs. In all cases, the discount rate contains information about the cost of capital, and in some cases a risk premium as well.

KlangFool
Posts: 10385
Joined: Sat Oct 11, 2008 12:35 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by KlangFool » Tue Jul 10, 2018 6:13 pm

OP,

1) Are you willing to rent the same house as what you choose to buy?

2) Are you buying a house with PITI that is 20% to 30% cheaper than renting with 20% down payment and 30 years fixed rate mortgage?

3) If you say yes to (1) and (2), you are making/saving money from imputed rent. Then, you do not need to know or care about the house's appreciation. You "make money when you buy".

KlangFool

megabad
Posts: 659
Joined: Fri Jun 01, 2018 4:00 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by megabad » Tue Jul 10, 2018 6:25 pm

danielc wrote:
Tue Jul 10, 2018 5:40 pm
Thanks for the help. I am actually mostly not interested in the perks, with the exception that I like the idea of paying someone else to mow the lawn and do general exterior maintenance. Conversely, I've read horror stories about Home Owner Associations. Can you clarify for me why a condo might be the worst risk-adjusted financial decision?
Well it helps to have owned in a condo community before. My list of bad for finances risks starts something like:
1) Special Assessments
2) Condo fee changes (I have seen them double in one year)
3) Rental restrictions
4) Neighbors in close proximity

I do not find, in my experience, that condos are priced attractively enough to overcome these risks in most cases.

gmaynardkrebs
Posts: 922
Joined: Sun Feb 10, 2008 11:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by gmaynardkrebs » Tue Jul 10, 2018 6:30 pm

danielc wrote:
Tue Jul 10, 2018 5:46 pm
Literally nobody in this thread has argued for house appreciation. Who are you talking to?
I am amazed by that too. Home/condo ownership has been richly favored by the tax laws. Before the Trump tax law, I would have said that buying was a virtual no-brainer, provided you itemized deductions and planned to stay in the place for at least a few years. After taxes, the cost could actually be lower than renting, even with no appreciation. Now, you need to look at the tax aspect under the new laws. The NYT used to have a great rent vs buy online calculator, but I don't know if it has been updated for the new tax law. It even included opportunity costs for the "rent and invest the difference in stocks." (Personally, I think that is a bogus criteria, because outside of Bogkeheads (maybe), few people have the discipline to do that.)

Where I live (Washington, DC), condos have done well, but not as well as SFHs as far as appreciation. At luxury buildings, the monthly fees are very high, and would be a deal killer for me. However, my experience was that maintaining a home costs at least as much as a non-luxury condo fee on a per sq ft basis. I think a major advantage of urban condos is that they tend to be located on major avenues, with more convenient access to public transit, than most homes in the same city.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 6:42 pm

KlangFool wrote:
Tue Jul 10, 2018 6:13 pm
1) Are you willing to rent the same house as what you choose to buy?
I would be willing to rent something comparable. I would like a small upgrade, and I understand that I might need to adjust the "rent" value accordingly.

KlangFool wrote:
Tue Jul 10, 2018 6:13 pm
2) Are you buying a house with PITI that is 20% to 30% cheaper than renting with 20% down payment and 30 years fixed rate mortgage?
I'm looking at an example right now. Should I include HOA fees in PITI?

--> PITI without HOA fees are less than rent but not 20% less.
--> PITI with HOA fees are ~8% more than rent.
--> Interest + Tax + Insurance + HOA fees are less than rent but not 20% less.

So in principle I would be "saving" money but all the savings would go into house equity. I actually did not think that a positive cashflow would be a viable possibility. I've always thought that you have to have any savings get locked up in the house.

KlangFool wrote:
Tue Jul 10, 2018 6:13 pm
3) If you say yes to (1) and (2), you are making/saving money from imputed rent. Then, you do not need to know or care about the house's appreciation. You "make money when you buy".

KlangFool
Thanks! Going forward I will keep your guidelines in mind.

JustinR
Posts: 743
Joined: Tue Apr 27, 2010 11:43 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by JustinR » Tue Jul 10, 2018 6:44 pm

You actually lose money by buying a house instead of renting an apartment. So your assertion that buying reduces living costs is incorrect right off the bat.

Buying a house is a lifestyle choice, not a financial one.

Many people understand this and buy a house anyway. In this case it's not seen as an investment.

danielc wrote:
Tue Jul 10, 2018 4:32 pm
The net cost or return depends on the particulars. It is a mathematical necessity that in a large fraction of cases the ROE is positive. Otherwise, people who invest in properties to rent would lose money. It is a fairly trivial mathematical observation to note that if it is possible to make a profit by buying a property to rent, it must also be possible to make a profit to buy a property to avoid paying rent yourself.
That's not true at all. You can rent a smaller place than one you'd buy. Such as an apartment.
Last edited by JustinR on Tue Jul 10, 2018 6:54 pm, edited 1 time in total.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 6:49 pm

JustinR wrote:
Tue Jul 10, 2018 6:44 pm
You actually lose money by buying a house instead of renting an apartment.
Why do you think so? I would like to hear more about that. In terms of personal lifestile, I am fine renting at this point. I'm really mostly interested in the financial aspect.

KlangFool
Posts: 10385
Joined: Sat Oct 11, 2008 12:35 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by KlangFool » Tue Jul 10, 2018 6:58 pm

danielc wrote:
Tue Jul 10, 2018 6:42 pm
KlangFool wrote:
Tue Jul 10, 2018 6:13 pm
1) Are you willing to rent the same house as what you choose to buy?
I would be willing to rent something comparable. I would like a small upgrade, and I understand that I might need to adjust the "rent" value accordingly.

KlangFool wrote:
Tue Jul 10, 2018 6:13 pm
2) Are you buying a house with PITI that is 20% to 30% cheaper than renting with 20% down payment and 30 years fixed rate mortgage?
I'm looking at an example right now. Should I include HOA fees in PITI?

--> PITI without HOA fees are less than rent but not 20% less.
--> PITI with HOA fees are ~8% more than rent.
--> Interest + Tax + Insurance + HOA fees are less than rent but not 20% less.

So in principle I would be "saving" money but all the savings would go into house equity. I actually did not think that a positive cashflow would be a viable possibility. I've always thought that you have to have any savings get locked up in the house.

KlangFool wrote:
Tue Jul 10, 2018 6:13 pm
3) If you say yes to (1) and (2), you are making/saving money from imputed rent. Then, you do not need to know or care about the house's appreciation. You "make money when you buy".

KlangFool
Thanks! Going forward I will keep your guidelines in mind.
danielc,

<< I'm looking at an example right now. Should I include HOA fees in PITI?

--> PITI without HOA fees are less than rent but not 20% less.
--> PITI with HOA fees are ~8% more than rent.
--> Interest + Tax + Insurance + HOA fees are less than rent but not 20% less.>>

In order for buying a house to be equivalent to renting in term of expenses, the PITI has to be 20% to 30% lower. There is the additional expense associated with house ownership. The PITI needs to be low enough to cover the difference.

<< So in principle I would be "saving" money but all the savings would go into house equity.>>

No, I do not consider home equity as savings.

<<I actually did not think that a positive cashflow would be a viable possibility. >>

Why not? If it is not worthwhile for you to buy the house, you can choose not to buy the house. Then, renting makes a lot more sense. You can choose to "make money when you buy" or not. You only buy when it makes financial sense to you.

By the way, I buy my house based on my rules. In my case, I lower my housing expense by buying. I do not need to consider home equity as savings to justify my purchase. In fact, I consider the whole PITI as pure expenses. In my case, the house value could go down to zero and it is still a great buy for me.

KlangFool

User avatar
Phineas J. Whoopee
Posts: 7559
Joined: Sun Dec 18, 2011 6:18 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by Phineas J. Whoopee » Tue Jul 10, 2018 7:13 pm

JustinR wrote:
Tue Jul 10, 2018 6:44 pm
You actually lose money by buying a house instead of renting an apartment. So your assertion that buying reduces living costs is incorrect right off the bat.

Buying a house is a lifestyle choice, not a financial one.

Many people understand this and buy a house anyway. In this case it's not seen as an investment.

danielc wrote:
Tue Jul 10, 2018 4:32 pm
The net cost or return depends on the particulars. It is a mathematical necessity that in a large fraction of cases the ROE is positive. Otherwise, people who invest in properties to rent would lose money. It is a fairly trivial mathematical observation to note that if it is possible to make a profit by buying a property to rent, it must also be possible to make a profit to buy a property to avoid paying rent yourself.
That's not true at all. You can rent a smaller place than one you'd buy. Such as an apartment.
One can rent a house.

One can buy an apartment.

Buying is a financial choice, not a lifestyle one.

PJW

User avatar
Phineas J. Whoopee
Posts: 7559
Joined: Sun Dec 18, 2011 6:18 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by Phineas J. Whoopee » Tue Jul 10, 2018 7:14 pm

KlangFool wrote:
Tue Jul 10, 2018 6:58 pm
danielc wrote:
Tue Jul 10, 2018 6:42 pm
KlangFool wrote:
Tue Jul 10, 2018 6:13 pm
1) Are you willing to rent the same house as what you choose to buy?
I would be willing to rent something comparable. I would like a small upgrade, and I understand that I might need to adjust the "rent" value accordingly.

KlangFool wrote:
Tue Jul 10, 2018 6:13 pm
2) Are you buying a house with PITI that is 20% to 30% cheaper than renting with 20% down payment and 30 years fixed rate mortgage?
I'm looking at an example right now. Should I include HOA fees in PITI?

--> PITI without HOA fees are less than rent but not 20% less.
--> PITI with HOA fees are ~8% more than rent.
--> Interest + Tax + Insurance + HOA fees are less than rent but not 20% less.

So in principle I would be "saving" money but all the savings would go into house equity. I actually did not think that a positive cashflow would be a viable possibility. I've always thought that you have to have any savings get locked up in the house.

KlangFool wrote:
Tue Jul 10, 2018 6:13 pm
3) If you say yes to (1) and (2), you are making/saving money from imputed rent. Then, you do not need to know or care about the house's appreciation. You "make money when you buy".

KlangFool
Thanks! Going forward I will keep your guidelines in mind.
danielc,

<< I'm looking at an example right now. Should I include HOA fees in PITI?

--> PITI without HOA fees are less than rent but not 20% less.
--> PITI with HOA fees are ~8% more than rent.
--> Interest + Tax + Insurance + HOA fees are less than rent but not 20% less.>>

In order for buying a house to be equivalent to renting in term of expenses, the PITI has to be 20% to 30% lower. There is the additional expense associated with house ownership. The PITI needs to be low enough to cover the difference.

<< So in principle I would be "saving" money but all the savings would go into house equity.>>

No, I do not consider home equity as savings.

<<I actually did not think that a positive cashflow would be a viable possibility. >>

Why not? If it is not worthwhile for you to buy the house, you can choose not to buy the house. Then, renting makes a lot more sense. You can choose to "make money when you buy" or not. You only buy when it makes financial sense to you.

By the way, I buy my house based on my rules. In my case, I lower my housing expense by buying. I do not need to consider home equity as savings to justify my purchase. In fact, I consider the whole PITI as pure expenses. In my case, the house value could go down to zero and it is still a great buy for me.

KlangFool
Are homeowners association assessments not housing costs?

Is an increase in one's net worth as one pays off principal of a mortgage not an increase in one's net worth?

PJW

KlangFool
Posts: 10385
Joined: Sat Oct 11, 2008 12:35 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by KlangFool » Tue Jul 10, 2018 7:24 pm

Phineas J. Whoopee wrote:
Tue Jul 10, 2018 7:14 pm

Are homeowners association assessments not housing costs?

Is an increase in one's net worth as one pays off principal of a mortgage not an increase in one's net worth?

PJW
PJW,

1) My PITI is less than $1,800 per month. The rent was $2,300 per month.

<<Are homeowners association assessments not housing costs?>>

2) The HOA's fee is less than $1,000 per year. My 20% to 30% safety margin account for this.

<<Is an increase in one's net worth as one pays off principal of a mortgage not an increase in one's net worth?>>

3) I do not care. My PITI is low enough that I treat the whole amount as expenses. I do not count home equity as part of my net worth.

KlangFool

User avatar
Phineas J. Whoopee
Posts: 7559
Joined: Sun Dec 18, 2011 6:18 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by Phineas J. Whoopee » Tue Jul 10, 2018 7:29 pm

Fortunately for me, I didn't ask about KlangFool's. I asked about one's.
PJW

JustinR
Posts: 743
Joined: Tue Apr 27, 2010 11:43 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by JustinR » Tue Jul 10, 2018 7:43 pm

danielc wrote:
Tue Jul 10, 2018 6:49 pm
JustinR wrote:
Tue Jul 10, 2018 6:44 pm
You actually lose money by buying a house instead of renting an apartment.
Why do you think so? I would like to hear more about that. In terms of personal lifestile, I am fine renting at this point. I'm really mostly interested in the financial aspect.
Renting is financially better than buying a house mainly due to the existence of apartments. For a renter, this means you're able to rent a place smaller than a house. You can rent the exact amount of space you need and no more.

As a renter you have only a few costs: rent, renters insurance (optional but extremely cheap), and utilities (cheaper than a house since the space is smaller and you don't have things like a lawn).

People will say that the costs are already built into your rent. When you rent a house, this is 100% true. But for apartments, the owner enjoys an economy of scale so their costs are lower per unit, and the savings gets passed onto you.

With renting you also have the flexibility of moving when your rent increase is too large or to take advantage of move in bonuses.

As a homeowner you have A LOT of hidden costs most people don't account for. Closing costs for both buying and selling (includes everything like title fees, inspection fees, agent commissions), home insurance, property tax, mortgage interest, maintenance and repairs, higher utility bills, and HOA fees. On top of this, the opportunity cost for not investing all of the above plus the down payment.

Rent an apartment and invest all the money you would have spent on a house. That's how you win financially.

Now, despite all of this, some people just really prefer their own place. That's fine, but that's why it's a lifestyle choice and not a financial one. If it were purely financial, you'd ideally rent forever and that money you saved would compound like crazy.
Last edited by JustinR on Tue Jul 10, 2018 7:49 pm, edited 2 times in total.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 8:03 pm

JustinR wrote:
Tue Jul 10, 2018 7:43 pm
Renting is financially better than buying a house mainly due to the existence of apartments. For a renter, this means you're able to rent a place smaller than a house. You can rent the exact amount of space you need and no more.
I certainly advocate not buying a bigger home than one needs. My understanding is that it is possible to buy a small apartment.

JustinR wrote:
Tue Jul 10, 2018 7:43 pm
As a homeowner you have A LOT of hidden costs most people don't account for. Closing costs for both buying and selling (includes everything like title fees, inspection fees, agent commissions), home insurance, property tax, mortgage interest, maintenance and repairs, higher utility bills, and HOA fees. On top of this, the opportunity cost for not investing all of the above plus the down payment.
Yeah. That's the main reason I haven't bought a house yet. I feel confident that so far I have made the right decision because I have moved a lot. Once I stop moving, the transaction costs at least can be amortized over time.

Thanks for the input.

User avatar
LadyGeek
Site Admin
Posts: 48533
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Home ownership vs investing -- condos vs renting, etc

Post by LadyGeek » Tue Jul 10, 2018 8:06 pm

I removed a number of off-topic posts, continuity is lost. As a reminder, see: General Etiquette
This is a moderated forum. We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

Discussions are about issues, not people. If you disagree with an idea, go ahead and marshal all your forces against it. But do not confuse ideas with the person posting them.

At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

JustinR
Posts: 743
Joined: Tue Apr 27, 2010 11:43 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by JustinR » Tue Jul 10, 2018 8:20 pm

danielc wrote:
Tue Jul 10, 2018 8:03 pm
JustinR wrote:
Tue Jul 10, 2018 7:43 pm
Renting is financially better than buying a house mainly due to the existence of apartments. For a renter, this means you're able to rent a place smaller than a house. You can rent the exact amount of space you need and no more.
I certainly advocate not buying a bigger home than one needs. My understanding is that it is possible to buy a small apartment.

JustinR wrote:
Tue Jul 10, 2018 7:43 pm
As a homeowner you have A LOT of hidden costs most people don't account for. Closing costs for both buying and selling (includes everything like title fees, inspection fees, agent commissions), home insurance, property tax, mortgage interest, maintenance and repairs, higher utility bills, and HOA fees. On top of this, the opportunity cost for not investing all of the above plus the down payment.
Yeah. That's the main reason I haven't bought a house yet. I feel confident that so far I have made the right decision because I have moved a lot. Once I stop moving, the transaction costs at least can be amortized over time.

Thanks for the input.
I think the reason people are down on buying something the size of an apartment (condo) is because you still have all the negatives of buying a house but none of the benefits of apartments (the lower costs from economy of scale I mentioned earlier, flexibility). You'd have to do the math but I think it's still worse than renting.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 8:23 pm

JustinR wrote:
Tue Jul 10, 2018 8:20 pm
I think the reason people are down on buying something the size of an apartment (condo) is because you still have all the negatives of buying a house but none of the benefits of apartments (the lower costs from economy of scale I mentioned earlier, flexibility). You'd have to do the math but I think it's still worse than renting.
I had really not thought of that. When you first mentioned economies of scale I thought you were merely referring to the cost of construction, taxes, and physical maintenance. I did not think that single ownership of an apartment would lose economies of scale.

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by Pajamas » Tue Jul 10, 2018 8:28 pm

JustinR wrote:
Tue Jul 10, 2018 7:43 pm
People will say that the costs are already built into your rent. When you rent a house, this is 100% true. But for apartments, the owner enjoys an economy of scale so their costs are lower per unit, and the savings gets passed onto you.
The apartment owner should expect to make a profit which should be larger than any economies of scale. With a condo or co-op, those economies of scale are present but without the profit. That's really the ideal situation.

However, it is true that sometimes apartment owners don't really make a profit and may even have carrying costs larger than the rent received and thus actually supplement the tenant's living expenses, as we see here on Bogleheads on a regular basis.
megabad wrote:
Tue Jul 10, 2018 6:25 pm

Well it helps to have owned in a condo community before. My list of bad for finances risks starts something like:
1) Special Assessments
2) Condo fee changes (I have seen them double in one year)
3) Rental restrictions
4) Neighbors in close proximity

I do not find, in my experience, that condos are priced attractively enough to overcome these risks in most cases.
Fees and special assessments cover necessary costs. Similar costs are expected when owning.

Rental restrictions are beneficial to owners. People who prefer to live in a rental community should rent, not buy.

Neighbors in close proximity are also present with apartments but I don't see how that is a financial risk. It's more of a lifestyle choice. My apartment neighbors cause much less of a disturbance and intrusion that the neighbors of friends who live in houses.

As someone already pointed out, you can buy or rent a house, you can buy or rent an apartment. Comparing a condo apartment to a single family house is comparing apples to oranges.

Ben Mathew
Posts: 116
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle
Contact:

Re: Home ownership vs investing -- condos vs renting, etc

Post by Ben Mathew » Tue Jul 10, 2018 8:52 pm

danielc wrote:
Tue Jul 10, 2018 3:06 pm
Owning a home can be seen as an investment with a return equal to the money you save in rent, minus the costs of home ownership (mortgage interest, repairs, etc). I can compute the return rate, and compare that to the return I get from equities. I can factor-in liquidity, transaction costs, agasint the price volatility of equities.
Yes, you can think of the house as an asset whose payout equals rent savings (minus costs). You can calculate the rate of return on that. In my estimation, that return these days is less than stocks and more than bonds. You can look at a detailed example I did here on another thread.

Renting vs Owning Your Home

In that example, I got a 2.4% on a condo in Seattle assuming constant rents and costs (in real terms) and no real price appreciation.
danielc wrote:
Tue Jul 10, 2018 3:06 pm
My question is: Do you think I can think of a condo, from an investment POV, as something in-between renting and buying a stand-alone home? I'm thinking that the purchase price of a condo might be lower than a stand-alone home, but the regular outgoing cashflow, which now includes condo fees, might be greater. You can see it as "renting" part of your home and "owning" part of your home.
From a financial perspective, I think buying a condo is more like buying a stand alone house than renting. Stand alone houses have maintenance and property tax costs that are far from negligible.
danielc wrote:
Tue Jul 10, 2018 3:06 pm
To continue that analogy, you can think of your home as part of overall asset allocation. The choice between owning a stand-alone home vs owning a condo vs renting can be seen as three different allocations for the "housing" asset class and the "equities" asset class.

Do you agree with that view?

Do you know of any guidance for deciding on an asset allocation split between home equity vs stocks?
I do view my home as part of my overall asset allocation. The big categories for me are stocks/bonds/home. Each offers a different risk-return profile. What's the right mix of the three? For me, it was +stocks/+home/-bonds(mortgage and student loans)

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by danielc » Tue Jul 10, 2018 9:33 pm

Ben Mathew wrote:
Tue Jul 10, 2018 8:52 pm
danielc wrote:
Tue Jul 10, 2018 3:06 pm
Owning a home can be seen as an investment with a return equal to the money you save in rent, minus the costs of home ownership (mortgage interest, repairs, etc). I can compute the return rate, and compare that to the return I get from equities. I can factor-in liquidity, transaction costs, agasint the price volatility of equities.
Yes, you can think of the house as an asset whose payout equals rent savings (minus costs). You can calculate the rate of return on that. In my estimation, that return these days is less than stocks and more than bonds. You can look at a detailed example I did here on another thread.

Renting vs Owning Your Home

In that example, I got a 2.4% on a condo in Seattle assuming constant rents and costs (in real terms) and no real price appreciation.
Thanks. That is very helpful. How did you estimate the $300/mo maintenance cost?

The 0% mortgage example is fairly straight forward. I am not as sure about the 100% mortgage example. It seems to me that you'd be borrowing at nominal ~ 4.5% (I'm guessing) to buy an asset with a real 2.4% return. Now that looks like betting that inflation will be no higher than 2%. Considering the lack of liquidity and transaction cost, I'm not sure I would make that bet. So the 100% mortgage doesn't seem like a sound investment.

Ben Mathew wrote:
Tue Jul 10, 2018 8:52 pm
danielc wrote:
Tue Jul 10, 2018 3:06 pm
My question is: Do you think I can think of a condo, from an investment POV, as something in-between renting and buying a stand-alone home? I'm thinking that the purchase price of a condo might be lower than a stand-alone home, but the regular outgoing cashflow, which now includes condo fees, might be greater. You can see it as "renting" part of your home and "owning" part of your home.
From a financial perspective, I think buying a condo is more like buying a stand alone house than renting. Stand alone houses have maintenance and property tax costs that are far from negligible.
Thanks. Arguably a condo might have more predictable costs, but I know that condo fees can suddenly go up too, so I'm not even sure about that.

Ben Mathew wrote:
Tue Jul 10, 2018 8:52 pm
I do view my home as part of my overall asset allocation. The big categories for me are stocks/bonds/home. Each offers a different risk-return profile. What's the right mix of the three? For me, it was +stocks/+home/-bonds(mortgage and student loans)
That sounds like a useful way to view AA. Right now I have +stocks/0/+bonds.

As an example, if I have $600K/0/$200K and I huy a $500K home, the new allocation would be $600K/$500K/-$300K. Then I can compute the return on the $500K the way ou did it and decide whether it seems to be worth the leverage.

JonSnow
Posts: 10
Joined: Mon Jan 28, 2013 11:27 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by JonSnow » Tue Jul 10, 2018 9:45 pm

As a condo owner myself, I do appreciate the fact that I've never mowed the lawn. The entire community also just got new roofs. However, the condo fee have almost doubled since I purchased back in 2011. Is the condo fee worth it? Maybe.

In terms of what makes the most financial sense, I feel like its debatable and its more of a personal preference.

User avatar
LadyGeek
Site Admin
Posts: 48533
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Home ownership vs investing -- condos vs renting, etc

Post by LadyGeek » Tue Jul 10, 2018 9:52 pm

This thread is now in the Investing - Theory, News & General forum (general question).

The wiki has some background info: Paying down loans versus investing
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
Sandtrap
Posts: 5360
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Home ownership vs investing -- condos vs renting, etc

Post by Sandtrap » Tue Jul 10, 2018 10:26 pm

1. Purchase R/E such that you will be able to sell it in the short term without losing money. If you can't do it, you paid too much, or did not buy in an area with a history of appreciative value.
2. Purchase R/E such that you will be able to rent it out and pay your expenses with the rent. Even if your original motive was to live in it yourself.
3. Purchase R/E with the motive to rent it out, but if it is not rented, also have the option of enjoying living in it yourself.
4. In a sense, all R/E purchases are better off weighed as "a sound business investment", whether lived in or rented, etc. Because, by doing so, you will be more insured of making a sound financial decision and not an emotional one.
j

WanderingDoc
Posts: 1126
Joined: Sat Aug 05, 2017 8:21 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by WanderingDoc » Wed Jul 11, 2018 4:56 pm

Buying a home to live in is not an investment. See my signature.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

gmaynardkrebs
Posts: 922
Joined: Sun Feb 10, 2008 11:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by gmaynardkrebs » Wed Jul 11, 2018 9:43 pm

Sandtrap wrote:
Tue Jul 10, 2018 10:26 pm
1. Purchase R/E such that you will be able to sell it in the short term without losing money. If you can't do it, you paid too much, or did not buy in an area with a history of appreciative value.
2. Purchase R/E such that you will be able to rent it out and pay your expenses with the rent. Even if your original motive was to live in it yourself.
3. Purchase R/E with the motive to rent it out, but if it is not rented, also have the option of enjoying living in it yourself.
4. In a sense, all R/E purchases are better off weighed as "a sound business investment", whether lived in or rented, etc. Because, by doing so, you will be more insured of making a sound financial decision and not an emotional one.
j
Conditions 1 & 2 are virtually impossible to satisfy in many, if not most, dynamic real estate markets. I don't know from where you pulled out 3 & 4, but they are highly presumptuous and largely irrelevant.

gmaynardkrebs
Posts: 922
Joined: Sun Feb 10, 2008 11:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by gmaynardkrebs » Wed Jul 11, 2018 9:46 pm

WanderingDoc wrote:
Wed Jul 11, 2018 4:56 pm
Buying a home to live in is not an investment. See my signature.
Your sage "signature" seems to ignore the impact of an obscure factor called "taxes."
I suggest that you and your neighbor in the identical house switch residences and pay rent to each other, which will satisfy both prongs of you two-part advice. The IRS will thank you for your generous donation to the US Treasury.

WanderingDoc
Posts: 1126
Joined: Sat Aug 05, 2017 8:21 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by WanderingDoc » Wed Jul 11, 2018 10:18 pm

gmaynardkrebs wrote:
Wed Jul 11, 2018 9:46 pm
WanderingDoc wrote:
Wed Jul 11, 2018 4:56 pm
Buying a home to live in is not an investment. See my signature.
Your sage "signature" seems to ignore the impact of an obscure factor called "taxes."
I suggest that you and your neighbor in the identical house switch residences and pay rent to each other, which will satisfy both prongs of you two-part advice. The IRS will thank you for your generous donation to the US Treasury.
I have no idea what you're talking about.

There is nothing obscure about taxes. Where I live, my landlord pays them. In the real estate I own, my tenants pay them.

My tenants (in my rentals) cover my principal, interest, taxes, insurance, repairs, CapEx, and some extra income to me to boot. Then I legally pay no taxes on my rental income. While earning generous tax benefits, principal paydown by tenants, and equity appreciation.

I discovered the virtues of renting two years ago. No risk, no paying taxes, no dealing with community rules/towns/HOAs, no spending money or time on repairs, no geographic pigeon-holing, no mowing lawns or cleaning yards, true freedom. I ain't never going back! :D
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

gmaynardkrebs
Posts: 922
Joined: Sun Feb 10, 2008 11:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by gmaynardkrebs » Thu Jul 12, 2018 7:08 am

WanderingDoc wrote:
Wed Jul 11, 2018 10:18 pm
gmaynardkrebs wrote:
Wed Jul 11, 2018 9:46 pm
WanderingDoc wrote:
Wed Jul 11, 2018 4:56 pm
Buying a home to live in is not an investment. See my signature.
Your sage "signature" seems to ignore the impact of an obscure factor called "taxes."
I suggest that you and your neighbor in the identical house switch residences and pay rent to each other, which will satisfy both prongs of you two-part advice. The IRS will thank you for your generous donation to the US Treasury.
I have no idea what you're talking about.

There is nothing obscure about taxes. Where I live, my landlord pays them. In the real estate I own, my tenants pay them.

My tenants (in my rentals) cover my principal, interest, taxes, insurance, repairs, CapEx, and some extra income to me to boot. Then I legally pay no taxes on my rental income. While earning generous tax benefits, principal paydown by tenants, and equity appreciation.

I discovered the virtues of renting two years ago. No risk, no paying taxes, no dealing with community rules/towns/HOAs, no spending money or time on repairs, no geographic pigeon-holing, no mowing lawns or cleaning yards, true freedom. I ain't never going back! :D
Perhaps I don't understand your situation -- how (or where?) does one legally avoid paying taxes on rental income? It doesn't sound as though you are operating at a loss, as you say they provide you with some extra income to boot.

As far as renting out the house you own, and paying rent to live in another house, I'm sure you aware that you lose the imputed income " stealth" tax break of living in the house you own. For example, my neighbor's house is for all practical purposes identical to mine. If we simply switched abodes and paid rent to each other, each becoming the others' landlord, we would both end up paying tax on the rental income we received, with absolutely no gain to ourselves financially, lifestyle, or other. Perhaps, in whatever situation you are in, that is not significant to you, but it would be for many people.

3funder
Posts: 758
Joined: Sun Oct 15, 2017 9:35 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by 3funder » Thu Jul 12, 2018 7:37 am

Thegame14 wrote:
Tue Jul 10, 2018 5:34 pm
https://www.moneyunder30.com/why-your-h ... investment

https://www.usatoday.com/story/money/pe ... t/8900911/

According to research by Yale economist Robert Shiller, one of the foremost experts on housing in the U.S., noted that from 1890 until 1990, the real inflation-corrected prices of homes showed almost no change. This is a surprise to many people, as most people expect to be able to sell their home for a gain in the future.

https://www.usatoday.com/story/money/co ... 340516002/
It’s all a fool’s argument. Yes, you might make money if you spot some trend, then buy right, at the right time and the right location, then put lipstick on a pig (which few do well), and flip it. It’s a comforting mythology, like reality TV. Folks routinely fool themselves by calculating returns dead wrong. 

No matter how wonderful your home is, it’s a worse investment than virtually everyone thinks. Yes, home ownership has many benefits. If you didn’t own, you’d pay rent (which is tiny compared with the above almost everywhere).  
+1

lifeisinmirrors
Posts: 33
Joined: Fri Jul 06, 2018 6:15 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by lifeisinmirrors » Thu Jul 12, 2018 7:39 am

In my experience, condo buildings typically are in better condition than similar aged apartment buildings. You have to maintain the interior of a condo yourself, but that does give you the chance to make it seem nicer and more personal - no off-white paint!

I'd be cautious, though, about buying one of the trendy "industrial" condos in a barely renovated mill or factory. Could be hard to sell once that industrial look is no longer in style.

ncbill
Posts: 359
Joined: Sun Jul 06, 2008 4:03 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by ncbill » Thu Jul 12, 2018 7:58 am

gmaynardkrebs wrote:
Thu Jul 12, 2018 7:08 am
WanderingDoc wrote:
Wed Jul 11, 2018 10:18 pm
gmaynardkrebs wrote:
Wed Jul 11, 2018 9:46 pm
WanderingDoc wrote:
Wed Jul 11, 2018 4:56 pm
Buying a home to live in is not an investment. See my signature.
Your sage "signature" seems to ignore the impact of an obscure factor called "taxes."
I suggest that you and your neighbor in the identical house switch residences and pay rent to each other, which will satisfy both prongs of you two-part advice. The IRS will thank you for your generous donation to the US Treasury.
I have no idea what you're talking about.

There is nothing obscure about taxes. Where I live, my landlord pays them. In the real estate I own, my tenants pay them.

My tenants (in my rentals) cover my principal, interest, taxes, insurance, repairs, CapEx, and some extra income to me to boot. Then I legally pay no taxes on my rental income. While earning generous tax benefits, principal paydown by tenants, and equity appreciation.

I discovered the virtues of renting two years ago. No risk, no paying taxes, no dealing with community rules/towns/HOAs, no spending money or time on repairs, no geographic pigeon-holing, no mowing lawns or cleaning yards, true freedom. I ain't never going back! :D
Perhaps I don't understand your situation -- how (or where?) does one legally avoid paying taxes on rental income? It doesn't sound as though you are operating at a loss, as you say they provide you with some extra income to boot.

As far as renting out the house you own, and paying rent to live in another house, I'm sure you aware that you lose the imputed income " stealth" tax break of living in the house you own. For example, my neighbor's house is for all practical purposes identical to mine. If we simply switched abodes and paid rent to each other, each becoming the others' landlord, we would both end up paying tax on the rental income we received, with absolutely no gain to ourselves financially, lifestyle, or other. Perhaps, in whatever situation you are in, that is not significant to you, but it would be for many people.
Depreciation can offset income from rents (or a day job)

At least until you sell...

As for the OP, they could always buy a duplex/triplex/etc., live in one unit & rent out the rest.

gmaynardkrebs
Posts: 922
Joined: Sun Feb 10, 2008 11:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by gmaynardkrebs » Thu Jul 12, 2018 8:04 am

3funder wrote:
Thu Jul 12, 2018 7:37 am
Thegame14 wrote:
Tue Jul 10, 2018 5:34 pm
https://www.moneyunder30.com/why-your-h ... investment

https://www.usatoday.com/story/money/pe ... t/8900911/

According to research by Yale economist Robert Shiller, one of the foremost experts on housing in the U.S., noted that from 1890 until 1990, the real inflation-corrected prices of homes showed almost no change. This is a surprise to many people, as most people expect to be able to sell their home for a gain in the future.

https://www.usatoday.com/story/money/co ... 340516002/
It’s all a fool’s argument. Yes, you might make money if you spot some trend, then buy right, at the right time and the right location, then put lipstick on a pig (which few do well), and flip it. It’s a comforting mythology, like reality TV. Folks routinely fool themselves by calculating returns dead wrong. 

No matter how wonderful your home is, it’s a worse investment than virtually everyone thinks. Yes, home ownership has many benefits. If you didn’t own, you’d pay rent (which is tiny compared with the above almost everywhere).  
+1
In top real estate markets like NYC and suburbs, Washington DC, LA. SF, and quite a few other places, the appreciation has been tremendous since 1950. Whether that will continue, I don't know, but it was certainly a good investment in those areas.

gmaynardkrebs
Posts: 922
Joined: Sun Feb 10, 2008 11:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by gmaynardkrebs » Thu Jul 12, 2018 8:08 am

ncbill wrote:
Thu Jul 12, 2018 7:58 am
Depreciation can offset income from rents (or a day job.
As far as the day job, I thought passive income could not be used to offset employment income.

3funder
Posts: 758
Joined: Sun Oct 15, 2017 9:35 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by 3funder » Thu Jul 12, 2018 8:37 am

gmaynardkrebs wrote:
Thu Jul 12, 2018 8:04 am
3funder wrote:
Thu Jul 12, 2018 7:37 am
Thegame14 wrote:
Tue Jul 10, 2018 5:34 pm
https://www.moneyunder30.com/why-your-h ... investment

https://www.usatoday.com/story/money/pe ... t/8900911/

According to research by Yale economist Robert Shiller, one of the foremost experts on housing in the U.S., noted that from 1890 until 1990, the real inflation-corrected prices of homes showed almost no change. This is a surprise to many people, as most people expect to be able to sell their home for a gain in the future.

https://www.usatoday.com/story/money/co ... 340516002/
It’s all a fool’s argument. Yes, you might make money if you spot some trend, then buy right, at the right time and the right location, then put lipstick on a pig (which few do well), and flip it. It’s a comforting mythology, like reality TV. Folks routinely fool themselves by calculating returns dead wrong. 

No matter how wonderful your home is, it’s a worse investment than virtually everyone thinks. Yes, home ownership has many benefits. If you didn’t own, you’d pay rent (which is tiny compared with the above almost everywhere).  
+1
In top real estate markets like NYC and suburbs, Washington DC, LA. SF, and quite a few other places, the appreciation has been tremendous since 1950. Whether that will continue, I don't know, but it was certainly a good investment in those areas.
I live in the DC metro area, and my parents benefited from the appreciation. That said, they made a MUCH better return investing in Vanguard's 500 Index Fund. Additionally, it takes quite a bit of money to truly benefit from the appreciation, as the homes are relatively expensive, and you really do need to put down 20%. Otherwise, all things considered, the return will only be OK, at best.

3funder
Posts: 758
Joined: Sun Oct 15, 2017 9:35 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by 3funder » Thu Jul 12, 2018 8:37 am

gmaynardkrebs wrote:
Thu Jul 12, 2018 8:04 am
3funder wrote:
Thu Jul 12, 2018 7:37 am
Thegame14 wrote:
Tue Jul 10, 2018 5:34 pm
https://www.moneyunder30.com/why-your-h ... investment

https://www.usatoday.com/story/money/pe ... t/8900911/

According to research by Yale economist Robert Shiller, one of the foremost experts on housing in the U.S., noted that from 1890 until 1990, the real inflation-corrected prices of homes showed almost no change. This is a surprise to many people, as most people expect to be able to sell their home for a gain in the future.

https://www.usatoday.com/story/money/co ... 340516002/
It’s all a fool’s argument. Yes, you might make money if you spot some trend, then buy right, at the right time and the right location, then put lipstick on a pig (which few do well), and flip it. It’s a comforting mythology, like reality TV. Folks routinely fool themselves by calculating returns dead wrong. 

No matter how wonderful your home is, it’s a worse investment than virtually everyone thinks. Yes, home ownership has many benefits. If you didn’t own, you’d pay rent (which is tiny compared with the above almost everywhere).  
+1
In top real estate markets like NYC and suburbs, Washington DC, LA. SF, and quite a few other places, the appreciation has been tremendous since 1950. Whether that will continue, I don't know, but it was certainly a good investment in those areas.
I live in the DC metro area, and my parents benefited from the appreciation. That said, they made a MUCH better return investing in Vanguard's 500 Index Fund. Additionally, it takes quite a bit of money to truly benefit from the appreciation, as the homes are relatively expensive, and you really do need to put down 20%. Otherwise, all things considered, the return will only be OK, at best.

mbasherp
Posts: 119
Joined: Mon Jun 26, 2017 8:48 am

Re: Home ownership vs investing -- condos vs renting, etc

Post by mbasherp » Thu Jul 12, 2018 8:47 am

It ALWAYS depends on the specific situation. The key is imputed rent, as several have pointed out. I also agree that it is not wise to count on appreciation. If you calculate imputed rent and buying is in favor, you're guaranteed a win. My personal example:

PITI of my home is 1231/month. Equivalent rents are roughly 1900. Maintenance over the long term is estimated at 300/month. Buying was better from day one. Short of some incredible catastrophe which craters rental rates (regardless of what happens to real estate values, interestingly!) I will be ahead forever, because inflation is on my side.

"You have to live somewhere." That's right. For an equivalent house, I invested my down payment to receive a $369 coupon each month for 30 years. 1900 - 1231 - 300 = 369. At the end of the term, my principal has ballooned to equal the future value of the property. It doesn't matter whether it appreciated; my principal used to be 15% (my down payment) and will be 100% of the property value. All while enjoying a yield from imputed rent for 30 years. Most don't visualize it this way, but it is an alternate and accurate representation.

Not all home ownership works out so well. I bought because I could see the numbers, and others can do the same.

H-Town
Posts: 1270
Joined: Sun Feb 26, 2017 2:08 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by H-Town » Thu Jul 12, 2018 8:48 am

danielc wrote:
Tue Jul 10, 2018 3:06 pm
Hello,

I want to think of home ownership from an investment point of view. Consider three "investment" options:

- Buy a stand-alone home.
- Buy a condo -- put any excess money in equities.
- Rent -- put any excess money in equities.

Owning a home can be seen as an investment with a return equal to the money you save in rent, minus the costs of home ownership (mortgage interest, repairs, etc). I can compute the return rate, and compare that to the return I get from equities. I can factor-in liquidity, transaction costs, agasint the price volatility of equities.

My question is: Do you think I can think of a condo, from an investment POV, as something in-between renting and buying a stand-alone home? I'm thinking that the purchase price of a condo might be lower than a stand-alone home, but the regular outgoing cashflow, which now includes condo fees, might be greater. You can see it as "renting" part of your home and "owning" part of your home.

To continue that analogy, you can think of your home as part of overall asset allocation. The choice between owning a stand-alone home vs owning a condo vs renting can be seen as three different allocations for the "housing" asset class and the "equities" asset class.

Do you agree with that view?

Do you know of any guidance for deciding on an asset allocation split between home equity vs stocks?
I agree with you. However, as far as I know, many people fall into a trap of buying house based on emotions (American dream, a place to call home, a "I'm it" statement, etc.). More often than not, they end up with bigger house than the one that will give them financial benefits. Many people work paycheck to paycheck to support the house. This is called a rat race.

Your approach focuses on financial impact. Whether you end up buying or renting, it's likely that you'll make a decision that will increase your net worth.

Engineer250
Posts: 1048
Joined: Wed Jun 22, 2016 1:41 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by Engineer250 » Thu Jul 12, 2018 9:00 am

I know too many people who bought a condo because they couldn't afford a house and were too impatient to wait and keep saving, felt like they'd better get in now before they got priced out. If that's your reason for buying a condo, don't do it.

I don't know anyone that didn't want to trade up their condo for a house when they could. So that was a lot of sunk cost for them, and betting that prices will keep going up, but that their condo fees won't get too bad.

Unless you are willing to live in a condo forever. Which you might be. I've always had better luck with my neighbors when we didn't share walls or a water supply.
Where the tides of fortune take us, no man can know.

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Home ownership vs investing -- condos vs renting, etc

Post by Pajamas » Thu Jul 12, 2018 9:05 am

Engineer250 wrote:
Thu Jul 12, 2018 9:00 am
I don't know anyone that didn't want to trade up their condo for a house when they could.
I know many people who don't want to trade their apartment for a house, including myself, although I agree that an apartment is not a good substitute for a house for someone who really wants a house instead of an apartment.

There are also plenty of people who trade their house for an apartment, often when they are older.

Your experience with this is probably limited by your geographical location and possibly by your age.

User avatar
Sandtrap
Posts: 5360
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Home ownership vs investing -- condos vs renting, etc

Post by Sandtrap » Thu Jul 12, 2018 10:07 am

gmaynardkrebs wrote:
Wed Jul 11, 2018 9:43 pm
Sandtrap wrote:
Tue Jul 10, 2018 10:26 pm
1. Purchase R/E such that you will be able to sell it in the short term without losing money. If you can't do it, you paid too much, or did not buy in an area with a history of appreciative value.
2. Purchase R/E such that you will be able to rent it out and pay your expenses with the rent. Even if your original motive was to live in it yourself.
3. Purchase R/E with the motive to rent it out, but if it is not rented, also have the option of enjoying living in it yourself.
4. In a sense, all R/E purchases are better off weighed as "a sound business investment", whether lived in or rented, etc. Because, by doing so, you will be more insured of making a sound financial decision and not an emotional one.
j
Conditions 1 & 2 are virtually impossible to satisfy in many, if not most, dynamic real estate markets. I don't know from where you pulled out 3 & 4, but they are highly presumptuous and largely irrelevant.
Yes.
You are right.
This can be true as well.
aloha
j :D

Post Reply