Home ownership vs investing -- condos vs renting, etc

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gmaynardkrebs
Posts: 886
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 4:18 pm

willthrill81 wrote:
Fri Jul 13, 2018 3:50 pm
gmaynardkrebs wrote:
Fri Jul 13, 2018 3:37 pm
willthrill81 wrote:
Fri Jul 13, 2018 3:30 pm
danielc wrote:
Fri Jul 13, 2018 3:25 pm
gmaynardkrebs wrote:
Fri Jul 13, 2018 8:17 am
Houses are appreciating 10%-15% a year in some gentrifying neighborhoods around where I live. While they will plateau at some point, it's hard to envision a scenario in which they will decline from what one would pay today. It seems to me like you would say that riding it up for a while with 10% down a 5% mortgage is not a good idea, but I can't see why. When I do the math, it seems pretty lucrative on the upside, even granting that 5% is going to the bank. I guess I don't grasp where you are coming from. I will admit I'm not an RE speculator genius, although I've been tempted lately to try it. A lot of my friends have done pretty well, and they aren't Warren Buffets either.
If I was certain that houses would grow at 10% then buying a house with a mortgage at 5% would be the steal of the century. What I said (or intended to say) is that the "leverage" people talk about is not a simple multiplicative factor, and the value that it increases is the return difference. This is the kind of point that intellectually everyone knows, but some people often forget. In your example, 10% is more than 5%, so you'd make a fortune. If I knew that would happen, I would buy as many houses as I could get my hands on. As it turns out, I do not feel confidence that I can predict when that will happen, and I know that the typical appreciation rate on a house is very small.
Spot on. A lot of professional real estate investors with decades of experience got lulled into thinking that appreciation would always trump mortgage rates and went bankrupt in the last recession as a result (being leveraged to the hilt didn't help matters at all either).
The numbers pale in comparison to those who got rich both before and after the subprime crisis. Note also, their LLC's went bankrupt; they kept the dough they had made from their many previous LLCs.
So start an LLC, buy real estate in that LLC with as much leverage as you can, profit while appreciation is higher than mortgage rates, siphon that profit out of the LLC, and then walk away if things go south?
Welcome to America...It's totally legal, and actually very smart.
Just to clarify, however, the developers typically set up separate LLC's for each new project. Siphoning is a not really the right word, because they don't loot the LLC; it just goes bust because they got caught with their shorts down on this particular project. Someone once said that the greatest subsidy in the history of mankind is corporate limited liability. I have to agree.

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willthrill81
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Re: Home ownership vs investing -- condos vs renting, etc

Post by willthrill81 » Fri Jul 13, 2018 4:21 pm

gmaynardkrebs wrote:
Fri Jul 13, 2018 4:18 pm
willthrill81 wrote:
Fri Jul 13, 2018 3:50 pm
gmaynardkrebs wrote:
Fri Jul 13, 2018 3:37 pm
willthrill81 wrote:
Fri Jul 13, 2018 3:30 pm
danielc wrote:
Fri Jul 13, 2018 3:25 pm


If I was certain that houses would grow at 10% then buying a house with a mortgage at 5% would be the steal of the century. What I said (or intended to say) is that the "leverage" people talk about is not a simple multiplicative factor, and the value that it increases is the return difference. This is the kind of point that intellectually everyone knows, but some people often forget. In your example, 10% is more than 5%, so you'd make a fortune. If I knew that would happen, I would buy as many houses as I could get my hands on. As it turns out, I do not feel confidence that I can predict when that will happen, and I know that the typical appreciation rate on a house is very small.
Spot on. A lot of professional real estate investors with decades of experience got lulled into thinking that appreciation would always trump mortgage rates and went bankrupt in the last recession as a result (being leveraged to the hilt didn't help matters at all either).
The numbers pale in comparison to those who got rich both before and after the subprime crisis. Note also, their LLC's went bankrupt; they kept the dough they had made from their many previous LLCs.
So start an LLC, buy real estate in that LLC with as much leverage as you can, profit while appreciation is higher than mortgage rates, siphon that profit out of the LLC, and then walk away if things go south?
Welcome to America...It's totally legal, and actually very smart.
Just to clarify, however, the developers typically set up separate LLC's for each new project. Siphoning is a not really the right word, because they don't loot the LLC; it just goes bust because they got caught with their shorts down on this particular project. Someone once said that the greatest subsidy in the history of mankind is corporate limited liability. I have to agree.
It sounds immoral to me and riskier than it may seem on the surface.
“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

gmaynardkrebs
Posts: 886
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 4:22 pm

KlangFool wrote:
Fri Jul 13, 2018 4:03 pm
gmaynardkrebs wrote:
Fri Jul 13, 2018 3:26 pm

Thanks for answering. In the real estate context, imputed income (rent is a form of income) is a very significant tax savings compared to renting. When you are a landlord for someone else, the rent the tenant pays you is taxable income; when you are a landlord for yourself, ie, when you live in your own home, in effect, paying rent to yourself, the IRS doesn't recognize the rent as income and does not tax it. I'm sure someone else can explain the tax implications better than me, but that's the basic idea. It does make owning your own home a significantly more advantageous versus renting in many cases.
gmaynardkrebs,

<< imputed income (rent is a form of income) is a very significant tax savings compared to renting.>>

This only works when someone is not overspending on their house. Then, they contribute nothing to their tax-advantaged account. In fact, they pay the most taxes. They were shocked to hear that I pay so little taxes.

KlangFool
Klangfool ain't no fool, that's for sure. :beer

gmaynardkrebs
Posts: 886
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 4:35 pm

willthrill81 wrote:
Fri Jul 13, 2018 4:21 pm
gmaynardkrebs wrote:
Fri Jul 13, 2018 4:18 pm
willthrill81 wrote:
Fri Jul 13, 2018 3:50 pm
gmaynardkrebs wrote:
Fri Jul 13, 2018 3:37 pm
willthrill81 wrote:
Fri Jul 13, 2018 3:30 pm


Spot on. A lot of professional real estate investors with decades of experience got lulled into thinking that appreciation would always trump mortgage rates and went bankrupt in the last recession as a result (being leveraged to the hilt didn't help matters at all either).
The numbers pale in comparison to those who got rich both before and after the subprime crisis. Note also, their LLC's went bankrupt; they kept the dough they had made from their many previous LLCs.
So start an LLC, buy real estate in that LLC with as much leverage as you can, profit while appreciation is higher than mortgage rates, siphon that profit out of the LLC, and then walk away if things go south?
Welcome to America...It's totally legal, and actually very smart.
Just to clarify, however, the developers typically set up separate LLC's for each new project. Siphoning is a not really the right word, because they don't loot the LLC; it just goes bust because they got caught with their shorts down on this particular project. Someone once said that the greatest subsidy in the history of mankind is corporate limited liability. I have to agree.
It sounds immoral to me and riskier than it may seem on the surface.
There definitely is risk, to the extent that the developer puts in his own capital. Banks and other investors will often want to see some skin the game from the developer. But the guys (or gals) who have been doing for a while, and have a track record of making money, don't really have to put in much of their own capital. In addition, even if the creditors can't "pierce the corporate veil," you can bet they are going to try -- and unless you have all your papers in order, they may well succeed. Still, if I started tomorrow, even with 100% my own money, I would set up an LLC or S-Corp to protect my other assets if things go south. As far as the morality, look at what happened in the late 80s when the Wall St firms went from partnerships (with full personal liability) to publicly traded corporations, with limited liability, like all corporations. Michael Lewis thought that they would blow up the system in a few years, Instead, it too two decades. But you can bet Lehmann would never have been so leveraged if it were a partnership. I guess that's why the word "moral" appears in "moral hazard."

stoptothink
Posts: 4398
Joined: Fri Dec 31, 2010 9:53 am

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

Post by stoptothink » Fri Jul 13, 2018 4:47 pm

willthrill81 wrote:
Fri Jul 13, 2018 4:21 pm
gmaynardkrebs wrote:
Fri Jul 13, 2018 4:18 pm
willthrill81 wrote:
Fri Jul 13, 2018 3:50 pm
gmaynardkrebs wrote:
Fri Jul 13, 2018 3:37 pm
willthrill81 wrote:
Fri Jul 13, 2018 3:30 pm


Spot on. A lot of professional real estate investors with decades of experience got lulled into thinking that appreciation would always trump mortgage rates and went bankrupt in the last recession as a result (being leveraged to the hilt didn't help matters at all either).
The numbers pale in comparison to those who got rich both before and after the subprime crisis. Note also, their LLC's went bankrupt; they kept the dough they had made from their many previous LLCs.
So start an LLC, buy real estate in that LLC with as much leverage as you can, profit while appreciation is higher than mortgage rates, siphon that profit out of the LLC, and then walk away if things go south?
Welcome to America...It's totally legal, and actually very smart.
Just to clarify, however, the developers typically set up separate LLC's for each new project. Siphoning is a not really the right word, because they don't loot the LLC; it just goes bust because they got caught with their shorts down on this particular project. Someone once said that the greatest subsidy in the history of mankind is corporate limited liability. I have to agree.
It sounds immoral to me and riskier than it may seem on the surface.
As someone who was in real estate development right before the crash, I couldn't do it and ended up paying much of the LLC debt out of my own pocket when our major project went belly-up. I was in my mid-late 20's and it cost me almost the entirety of my life savings, but I didn't think I could live with myself otherwise. Several of the people I worked with just walked away.

Walkure
Posts: 41
Joined: Tue Apr 11, 2017 9:59 pm

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

Post by Walkure » Fri Jul 13, 2018 4:51 pm

gmaynardkrebs wrote:
Fri Jul 13, 2018 2:18 pm
Phineas J. Whoopee wrote:
Fri Jul 13, 2018 2:04 pm
danielc wrote:
Thu Jul 12, 2018 4:40 pm
Nate79 wrote:
Thu Jul 12, 2018 4:36 pm
Buyers almost never pay a commission. Sellers pay the commission.
That's interesting. Thanks, I did not know that. Ok, so 3.6% it is.
All the money that crosses the closing table originates from the buyer and if necessary the buyer's lender.

PJW
Isn't this perhaps analogous to what economists call a "tax incidence" question, insofar as who ultimately bears the burden is not necessarily the same as who the fee is formally levied on? It has something to do with elasticities etc, but in just an intuitive sense, isn't the seller just raising his asking price by the amount of the commission, so in that sense they buyer, whose demand is probably less elastic than the seller's, is actually paying commission.
I think that incidence is exactly the right way to look at it. The real point is that, regardless of whether the burden of the commission is on the buyer or seller, for the purposes of determining the total ROI of a home which involves symmetrical transactions (i.e. first bought, then lived in/rented, and finally sold) the total commission is incurred precisely once by the investor in question. There should be no double counting of the commission in the sense that he "both" overpaid as a buyer and accepted less as the seller.

fasteddie911
Posts: 120
Joined: Fri May 16, 2008 3:13 pm

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

Post by fasteddie911 » Sat Jul 14, 2018 7:03 am

KlangFool wrote:
Fri Jul 13, 2018 11:00 am
fasteddie911 wrote:
Fri Jul 13, 2018 10:49 am
Maybe not a direct answer to the OP, but I've run the numbers of rent vs buy in my HCOL where price to rent ratio is 25+, and it's pretty much a draw. Making some reasonable assumptions (house price/rent rises with inflation, 3% real returns, etc.), if I invested the difference between buying a house (including taxes, maintenance, etc.) vs renting a similar place, my portfolio at the end of 30yrs is nearly equal to the house price. Renting a lesser place, which I'd be willing to do, would favor renting more. However, I'd likely buy a house to live in long-term and call my own, not necessarily for investing purposes, but renting wouldn't be a bad idea either and does offer other benefits.
fasteddie911,

In my area, the house price just recovered from the 2004/2005 level. So, it has not kept up with the inflation. Much less with 3% real return. So, I would argue that 3% real return over 30 years is not a reasonable assumption. With the rule of 72 and assuming that 3% inflation, the nominal return is 6%. It takes 72/6 = 12 years to double. Over 30 years, in order to get a 6% nominal return, the house price has to increase at least 4 times. It has to double at least twice over 24 years.

You may want to check the housing history over the last 30 years to confirm.

KlangFool
I meant 3% real portfolio returns. Housing in my area didn't dip much in 2008 and historically, at least over the past 30+yrs, has grown about even with inflation.

KlangFool
Posts: 10147
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Sat Jul 14, 2018 8:56 am

fasteddie911 wrote:
Sat Jul 14, 2018 7:03 am
KlangFool wrote:
Fri Jul 13, 2018 11:00 am
fasteddie911 wrote:
Fri Jul 13, 2018 10:49 am
Maybe not a direct answer to the OP, but I've run the numbers of rent vs buy in my HCOL where price to rent ratio is 25+, and it's pretty much a draw. Making some reasonable assumptions (house price/rent rises with inflation, 3% real returns, etc.), if I invested the difference between buying a house (including taxes, maintenance, etc.) vs renting a similar place, my portfolio at the end of 30yrs is nearly equal to the house price. Renting a lesser place, which I'd be willing to do, would favor renting more. However, I'd likely buy a house to live in long-term and call my own, not necessarily for investing purposes, but renting wouldn't be a bad idea either and does offer other benefits.
fasteddie911,

In my area, the house price just recovered from the 2004/2005 level. So, it has not kept up with the inflation. Much less with 3% real return. So, I would argue that 3% real return over 30 years is not a reasonable assumption. With the rule of 72 and assuming that 3% inflation, the nominal return is 6%. It takes 72/6 = 12 years to double. Over 30 years, in order to get a 6% nominal return, the house price has to increase at least 4 times. It has to double at least twice over 24 years.

You may want to check the housing history over the last 30 years to confirm.

KlangFool
I meant 3% real portfolio returns. Housing in my area didn't dip much in 2008 and historically, at least over the past 30+yrs, has grown about even with inflation.
fasteddie911,

Okay. My point is it is not safe to assume the housing price will be keeping up with the inflation.

KlangFool
Last edited by KlangFool on Sun Jul 15, 2018 6:03 pm, edited 1 time in total.

proudsalad
Posts: 2
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Re: Home ownership vs investing -- condos vs renting, etc

Post by proudsalad » Sun Jul 15, 2018 4:57 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.
I'll throw my few cents into the ring.

I own my apartment, I guess it could be called a condo although I am not in the USA so it does not have that terminology. But I do pay monthly HOA type dues that go toward the building maintenance and such.

I have also owned a stand alone home. The home was in a "development" and also had HOA dues. (and rules!) The dues went toward shared facilities like a swimming pool.

So I dont really see the clear line between condo/apartment/home as far as HOA is concerned. Also some stand alone homes are in districts with higher taxes to pay for schools etc - so there may be a lot more parts to consider than condo fees.

I think there are two ways to look at renting vs owning:

1. the emotional or psychological pros and cons of rents vs own
2. the financial pros and cons of rent vs own

As far as #1, you might just want your own piece of land to call your own. You might get great satisfaction out of planting a garden or remodeling a property. You might crave a stable place to grow a family. Financial considerations should play into this but this is more of an emotional decision that is different for everyone. On the flip side you might enjoy moving frequently and not know where you'll want to live in 2 years. In this case your emotional state or personality would probably make home ownership a con for you. You'd probably prefer the flexibility of renting.

For #2: numbers! I think it is kind of silly to debate the pros and cons of renting owning condo home etc without actual numbers where you live. And as many have already stated you dont know the future and whether the housing market will be up or down when you want to sell.
If you are looking at it from purely a numbers perspective, just crunch them. If rent = $X and purchase = $Y then.... which is a better deal monthly or annually. Be sure to include as many possible costs as you can think of. If you are almost certain you will be living in the same exact place for a number of years you can look at the total expected costs over these years and decide what is best. After you look at the hard numbers then you can think again about #1, your emotions and personality.

From my own perspective, I have rented, owned and everything in between. The last place I bought because it was cheaper month to month to own than to rent. I bought the smallest place that I could, and I would have happily rented the same place. However what I failed to consider at the time was the opportunity costs of my money. If I invested that same down payment in the stock market would I have made more return even with a higher rent cost? I'm still not sure but that was one thing I didnt think about. I just wanted a stable place to live with low costs, and buying was the way to do it at the time.

:sharebeer :sharebeer

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