Why do we consider cash flow from rentals but not our own homes?

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mbasherp
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Why do we consider cash flow from rentals but not our own homes?

Post by mbasherp » Tue Aug 22, 2017 11:00 am

I've been thinking a lot about why some say that equity in an owner occupied home can't be counted on the same way as cash flow from a rental property. As such, an owner occupied home is more of a consumption expenditure than an investment.

Until now I pretty much agreed with this sentiment. But recently I did some math and feel that there's an inherent error in this logic if specifics aren't factored in. For instance:

My PITI is $1200/month. An high estimate for repairs and maintenance is $500/month. (Estimated home value currently $290k) Comparable rentals are $2000. Aren't I realizing an immediate cash flow benefit of $300 every month? Further, since I am in year 2 of a 30 year mortgage, the gap between my monthly payment and comparable rents will only widen. This is ignoring any appreciation on the house. Essentially, on my balance sheet I have real estate (home value minus mortgage balance) and I choose to rent it to myself at below market rate forever.

Aren't I realizing an immediate cash flow boost of minimum $300 per month for 30 years by putting down the $40k I put on the house and moving in? This is certainly situation specific, but it appears that a single owner occupied residence can indeed be a cash flow positive investment from day 1. I invested $40k and am paid $3.6k/year (9%) for 30 years for it. Then I get (an appreciated) home as return of my principal.

Am I missing something?

UKFred
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by UKFred » Tue Aug 22, 2017 11:09 am

Can you eat that cash flow?

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8foot7
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by 8foot7 » Tue Aug 22, 2017 11:10 am

UKFred wrote:
Tue Aug 22, 2017 11:09 am
Can you eat that cash flow?
Since you can't, will you send that cash flow to me?

jbolden1517
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by jbolden1517 » Tue Aug 22, 2017 11:16 am

mbasherp wrote:
Tue Aug 22, 2017 11:00 am
Am I missing something?
No you are absolutely correct. Your home is part of your portfolio as a non-diversified real estate holding paying a return to you of the rent equivalent minus upkeep expenses & taxes, ... Your mortgage is a short bond position and is also part of your portfolio.

jbolden1517
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by jbolden1517 » Tue Aug 22, 2017 11:16 am

UKFred wrote:
Tue Aug 22, 2017 11:09 am
Can you eat that cash flow?
He is eating that cash flow by not paying rent.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by JGoneRiding » Tue Aug 22, 2017 11:17 am

It comes up sometimes as "imputed rent" of the home. I don't think you can call it "cashflow" but maybe savings. I completely agree when you can say look if I rented this EXACT same house this is what it would cost you can count that in improved finances of owning. Its what most people forget when they say owing isn't better than renting--they aren't counting the apples comparison of what they would pay if they had to rent there house--yeah you don't necessarily "get" that money but you aren't spending it either.

strafe
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by strafe » Tue Aug 22, 2017 11:21 am

I think your logic is sound.

I see a home (specifically a "nicer" home) as a consumption item to the extent that its cost (or imputed rent) exceeds that of basic housing.

Afty
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by Afty » Tue Aug 22, 2017 11:30 am

jbolden1517 wrote:
Tue Aug 22, 2017 11:16 am
mbasherp wrote:
Tue Aug 22, 2017 11:00 am
Am I missing something?
No you are absolutely correct. Your home is part of your portfolio as a non-diversified real estate holding paying a return to you of the rent equivalent minus upkeep expenses & taxes, ... Your mortgage is a short bond position and is also part of your portfolio.
+1. Note that the "return" or "imputed rent" also has favorable tax treatment. For any other kind of investment, you would have to pay tax on the return. In this case the imputed rent is untaxed. If your income and tax rate are high, this can be a substantial benefit.

More info: http://www.businessinsider.com/imputed- ... ers-2016-9

mbasherp
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by mbasherp » Tue Aug 22, 2017 11:44 am

Afty wrote:
Tue Aug 22, 2017 11:30 am

+1. Note that the "return" or "imputed rent" also has favorable tax treatment. For any other kind of investment, you would have to pay tax on the return. In this case the imputed rent is untaxed. If your income and tax rate are high, this can be a substantial benefit.

More info: http://www.businessinsider.com/imputed- ... ers-2016-9
Fascinating article! I had no idea that this was already being taxed in some countries. Over the long term, it is a huge benefit!

As far as eating the cash flow, I suppose I can. Since money is fungible and that's roughly my grocery budget, I'll accept 30 years of free groceries and then have my paid off house for dessert. :wink:

4th and Inches
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by 4th and Inches » Tue Aug 22, 2017 11:45 am

Cool concept that I hadn't really thought of. Thanks for sharing everybody!

bigred77
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by bigred77 » Tue Aug 22, 2017 11:52 am

I don't consider potential cash flow from rentals as income, I only consider ACTUAL cash flows. If I have a rental property that I can't get rented out for 4 months, that's a problem and I don't derive any benefit from the "imputed rent" of that property. Potential cash flows may justify a rental property's value, but they don't do much for me until I sell the home.

Same with my personal residence. I understand the concept of "imputed rent" but I don't find it particularly useful to me. I do think it's useful to consider in buy/rent decision but once I own the home I pretty much couldn't care less.

Just to be clear, I do consider a personal residence a asset, part of one's net worth and all that, but I don't place any value on imputed rent considerations.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by jbolden1517 » Tue Aug 22, 2017 11:56 am

bigred77 wrote:
Tue Aug 22, 2017 11:52 am
Just to be clear, I do consider a personal residence a asset, part of one's net worth and all that, but I don't place any value on imputed rent considerations.
How do you then distinguish between these cases in a consistent way?
a) John occupies his entire house
b) John occupies part of his house and rents part to Colin
c) John pays for a rental and rents the house he owns to Colin at a higher rent than (c).

As you move from (a) to (b) where did the extra money come from?

bigred77
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by bigred77 » Tue Aug 22, 2017 12:04 pm

jbolden1517 wrote:
Tue Aug 22, 2017 11:56 am
bigred77 wrote:
Tue Aug 22, 2017 11:52 am
Just to be clear, I do consider a personal residence a asset, part of one's net worth and all that, but I don't place any value on imputed rent considerations.
How do you then distinguish between these cases in a consistent way?
a) John occupies his entire house
b) John occupies part of his house and rents part to Colin
c) John pays for a rental and rents the house he owns to Colin at a higher rent than (c).

As you move from (a) to (b) where did the extra money come from?
A.) John receives no income from his personal residence.
B.) John receives income from his personal residence, albeit less than the potential max income he could receive from that property.
C.) John does not own a primary residence. He owns a rental property and receives income from it. He is trying to maximize that property's income.

In A I don't care about potential or imputed rent.
In B, I only care about potential rent I can derive renting the portion of the house I'm willing to.
In C, I do care about potential rent from the property.

aristotelian
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by aristotelian » Tue Aug 22, 2017 12:06 pm

Isn't this a fancy way of saying that "renting is throwing money away"?

I would say OP is in a somewhat rare situation where the monthly payment is lower than market rates for rental. At least in my renting days, that was not the case at all. If that was the norm, pretty much everyone with decent credit would own.

I would also ask, if money saved on rent is considered cash flow, wouldn't the same apply to any long term investment against future expenses? For example, you could say that a solar panel is producing cash flow by saving energy costs, having a vegetable garden produces cash flow saves on groceries etc. But there is a difference between reducing negative cash flow and cash flow.

Also how do you measure this cash flow? Is it against renting a comparable house, or renting the cheapest possible housing (e.g. a cardboard box)?

Anyway, it doesn't matter what you call it, as long as you understand the investment and the risks and costs.
Last edited by aristotelian on Tue Aug 22, 2017 12:07 pm, edited 1 time in total.

IMO
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by IMO » Tue Aug 22, 2017 12:07 pm

You're bringing up again the "rent vs. own" issues/arguments. And you're bringing in the argument of is a home considered an investment vs. a "sink hole" or consumption expenditure like a car.

I don't think I'd use the term cash flow, but would say you're gaining equity in your home (presuming value is going up) and have at least $300+ to invest relative to someone renting a very similar home (but who never locked up the funds in a downpayment and has those funds invested for the long term).

There are many things that can make your getting to the end of your 30 yr mortgage an issue (such as job relcation, etc). If you do stay put, your home appreciates then in 30 yrs you should have situation where you're housing expense consists of your taxes/maintenance/insurance (utilities of course). You can then opt to sell it and move/up down in housing, sell it and rent, stay put, when you're old enough consider the reverse mortgages (which a recent post put in more positive light), or pass the property onto your heirs. If you want to call your home an investment that's really a moot point, what it can end up being if all goes right is a significant asset in your overall financial situation (or it could not).

I know many people that ended up in that very beneficial situation. This forum will remind you that many for a variety of reasons don't end up the same, or don't desire to own for a variety of reasonable reasons.
Last edited by IMO on Tue Aug 22, 2017 12:29 pm, edited 1 time in total.

jbolden1517
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by jbolden1517 » Tue Aug 22, 2017 12:23 pm

aristotelian wrote:
Tue Aug 22, 2017 12:06 pm
I would also ask, if money saved on rent is considered cash flow, wouldn't the same apply to any long term investment against future expenses? For example, you could say that a solar panel is producing cash flow by saving energy costs, having a vegetable garden produces cash flow saves on groceries etc. But there is a difference between reducing negative cash flow and cash flow.
I'd agree with both of your examples as well. The solar panel is an investment producing electricity and the garden an investment producing food.
aristotelian wrote:
Tue Aug 22, 2017 12:06 pm
Also how do you measure this cash flow? Is it against renting a comparable house, or renting the cheapest possible housing (e.g. a cardboard box)?
Renting a comparable house. The rent equivalent. That way if you decide to sell the house and rent expenses likely drop a bit since your new rent is lower than your rent equivalent and your portfolio doesn't any differently than if you sold some stock you were holding partially on margin.

mbasherp
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by mbasherp » Tue Aug 22, 2017 12:26 pm

This mental exercise was more about trying to make an apples to apples comparison of buying and renting. I realize that in plenty of other situations, similar calculations may not immediately yield a positive result. However, any home might turn positive from an imputed rent standpoint at some time down the road. And all of this ignores property appreciation, the effect of inflation on long duration mortgages, taxes, etc.

What really blew my mind was the bottom line of my own situation. 9% tax free yield for 30 years, followed by the return of principal which used to represent 15% equity in 2016 dollars but now represents 100% equity at whatever valuation 2046 has in store. That yield is not income, but it's positive on a cash flow basis to my monthly budget and balance sheet because it is a reduction in expenses. At the end of the day, it all nets out.
Last edited by mbasherp on Tue Aug 22, 2017 12:37 pm, edited 1 time in total.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by KyleAAA » Tue Aug 22, 2017 12:35 pm

I would agree that owner equivalent rent in excess of replacement cost does technically count as income. For most people it's not significant enough to matter but if it is for you, count it.

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Oicuryy
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by Oicuryy » Tue Aug 22, 2017 4:39 pm

IMO, you should be charging yourself $2000 rent. That is what you would have to pay if you did not own the house.

You have a real estate asset worth $290k. Your cash flow for this asset is $2000 rent as income and property taxes, insurance and maintenance as expenses.

You have a debt of the amount of the mortgage. Cash flow for the debt is principal and interest as expenses.

You pay $2000 in rent as a living expense.

Net assets are $290k minus the amount of the mortgage.

Net cash flow is $2000 rent received minus property taxes, insurance, maintenance, principal, interest and $2000 rent paid. Net cash flow is clearly negative. For that outflow you are getting a place to live and an equity stake in residential real estate. Is it worth it?

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Watty
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by Watty » Tue Aug 22, 2017 11:40 pm

Afty wrote:
Tue Aug 22, 2017 11:30 am
jbolden1517 wrote:
Tue Aug 22, 2017 11:16 am
mbasherp wrote:
Tue Aug 22, 2017 11:00 am
Am I missing something?
No you are absolutely correct. Your home is part of your portfolio as a non-diversified real estate holding paying a return to you of the rent equivalent minus upkeep expenses & taxes, ... Your mortgage is a short bond position and is also part of your portfolio.
+1. Note that the "return" or "imputed rent" also has favorable tax treatment. For any other kind of investment, you would have to pay tax on the return. In this case the imputed rent is untaxed. If your income and tax rate are high, this can be a substantial benefit.

More info: http://www.businessinsider.com/imputed- ... ers-2016-9
Another problem is that "imputed rent" is already counted as a reduction in your expenses so if you did count it somewhere else in your calculations then you could easily be double counting it.

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Pajamas
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by Pajamas » Tue Aug 22, 2017 11:50 pm

"Cash flow" has a particular meaning related to ingoing and outgoing cash and cash equivalents, so it doesn't apply to what you are trying to apply it to.

ArmchairArchitect
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by ArmchairArchitect » Wed Aug 23, 2017 12:02 pm

Your logic is sound. However, I wouldn't even include principal in your equation because that's just a transfer of money from your bank account to your home (it's not an expense).

I would only include expenses in your calculation, and I always use the interest associated with a 100% mortgage for calculation purposes (to make it a more apples-to-apples comparison to renting where you have no equity in the property). So your savings compared to renting an equivalent home is likely greater than $300/month. Call it "cash flow" "cash savings" or whatever, more accurately it's "savings as compared to renting the same property".

However if you want an even more accurate calculation, you need to take closing costs (transfer tax, title insurance, appraisal, loan fees, agent commission, etc. etc.) from both buying and selling the home and amortize those expenses based on how long you will own the home. All of these are expenses that are not present when renting a home.

If you want to get even crazier in your analysis, you can factor in the opportunity cost of not having the equity in your property instead invested in higher-yielding investments (such as a Vanguard fund). But then you would counter/offset that with the projected appreciation on the entire property (not just the equity portion). And I would use very conservative estimates.

All that being said, buying is almost always a better financial decision than renting as long as you don't sell the home within a year or two. Still, the "renting is throwing money" phrase is misleading as only a fraction of that rental payment is the savings you would achieve if you had owned that same property.

I'm a CPA, by the way.

ianferrel
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by ianferrel » Wed Aug 23, 2017 12:23 pm

One way to think about this (in an even broader sense) is that humans are naturally short on all the things necessary for our survival. We are born with a need for food and shelter (at a minimum), and generally we also have societal needs for things like transportation and medicine.

If you buy an asset that provides for those needs, then you can reasonably count the imputed cost that the asset covers against the cost of the asset.
Buy a house, and you get imputed rent. Buy a farm, imputed groceries. Drill a well, imputed water bill. Get a medical degree, imputed medical care (sort of).

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Pajamas
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by Pajamas » Wed Aug 23, 2017 12:45 pm

An interesting application of these concepts is that valuation for calculating property taxes on co-ops and condos in NYC relies on the imputed value of the entire building as compared to "equivalent" rental buildings. The equivalency issue is one source of distorted property values and disparate property taxes on co-ops and condos vs. single-family dwellings.

https://www1.nyc.gov/assets/finance/dow ... _guide.pdf

LARGER CONDOS AND CO-OPS – 11 UNITS OR MORE

State Law mandates that condos or co-ops be valued as rental buildings.
Your co-op or condo is owned by unit. We have to value your building as if it were
income-producing, so we do not start with your unit’s value. Instead, we compare your
building to similar rental buildings. We use statistical modeling techniques to assign
estimated income and expenses to your property based on rental properties that are similar to
yours in terms of size, location, number of units and age. We then apply a capitalization rate to the
estimated net income (income after expenses). The capitalization rate is the expected rate of return
based on the income assigned to your property. You can find the comparable properties we selected
and used to produce your Market Value at nyc.gov/finance. You can also view the estimated income,
expenses and capitalization rate.

CO-OPS: Your building receives a Market Value for the entire building. You can view the Market Value
for your building at nyc.gov/finance.

CONDOS: We first determine Market Value for your entire building. Based on the unit allocation factor
that your condo board has given us for your unit, we determine the Market Value for your unit. If you live
in a newer building, the unit allocation factor is usually what was in the sales offering plan for your unit.

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bligh
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by bligh » Wed Aug 23, 2017 12:56 pm

One caveat, if you are living in a country or region with property taxes, you are basically still renting. Just at a discounted rate.

For example, let's say you are paying $2000 to rent a place that costs $500,000 to buy.

If you buy the place outright, with cash, you still need to pay your local property taxes which will vary from place. Let's keep it simple and say it is 1.2% so $6000/year. or $500/month. Also since you now own a huge expensive asset, you will want to get home owners insurance, let us assume you pay $100/month for that. So you are at $600/month just to keep what you own. I am going to leave out home maintenance and assume upkeep is the same.
I will assume no HOA.

So in essence your $500,000 didn't give you imputed rent of $2000 but $1400. Works out to a ~3.25% return in this example.

This is an oversimplification of course. There are tax advantages of course, but the big (in my opinion) advantage comes from not having to worry about housing cost inflation. In most places I have seen the property taxes go up with the cost of housing though, so you may not be completely immune. Also you may have the benefit of being able to draw upon any appreciation in home value at a later date by moving to a lower cost of living area.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by avalpert » Wed Aug 23, 2017 1:11 pm

mbasherp wrote:
Tue Aug 22, 2017 12:26 pm
This mental exercise was more about trying to make an apples to apples comparison of buying and renting.
This is all any rent/buy comparison is doing - in this case instead of comparing the cost of owning to the cost of renting you are incorporating the cost of renting into your calculation of the value of owning - you would then compare that rate to alternative investments.

But the basic debt/buy calculators online are doing the same exact comparison.

As others have said, it really isn't 'cash flow', it is expense reduction, and you get it with all the costs associated with the house plus the cost of parking the capital in the asset as opposed to alternative investments. If those costs are less than rental costs owning is better - I disagree with those who assert that is typically the case but it is highly market and situation dependent.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by avalpert » Wed Aug 23, 2017 1:16 pm

ArmchairArchitect wrote:
Wed Aug 23, 2017 12:02 pm
Still, the "renting is throwing money" phrase is misleading as only a fraction of that rental payment is the savings you would achieve if you had owned that same property.
That phrase is misleading because it is outright wrong and serves only to confuse rational decision making. Renting isn't throwing money away anymore than buying anything else is - it is paying money in exchange for housing. When you own a house you pay a big chunk up front (not all as you have recurring costs like taxes and insurance and continuous expenses associated with maintenance and repair), when you rent you pay as you go.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by mortalsonofmortal » Wed Aug 23, 2017 5:53 pm

mbasherp wrote:
Tue Aug 22, 2017 11:00 am
My PITI is $1200/month. An high estimate for repairs and maintenance is $500/month.
Did you factor in possible rise in property tax? I am wondering if it is common to have PITI that low for a house with such high rent estimate. It got to be an exceptional case.

Also one time high expense maintenance can throw a wrench into your equation.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by dbr » Wed Aug 23, 2017 6:27 pm

Pajamas wrote:
Tue Aug 22, 2017 11:50 pm
"Cash flow" has a particular meaning related to ingoing and outgoing cash and cash equivalents, so it doesn't apply to what you are trying to apply it to.
I imagine this is correct. One particularly bothersome aspect of considering imputed rent as cash flow is that the number is arbitrary, more exactly a figment of an alternative scenario. It is a disconnect that such a fiction could actually enter a cash flow accounting. In the case of rentals someone is actually writing you a check on a regular basis. I suppose if you wanted you could write yourself a rent check, perhaps by having the home owned by a sole proprietor corporation of your own. Then you wouldn't really own a home. Most likely this would not be a good tax strategy, but I don't know.

Other posters have mentioned that there is a legitimate "alternative scenarios" analysis called the rent vs buy decision.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by Admiral » Wed Aug 23, 2017 6:36 pm

avalpert wrote:
Wed Aug 23, 2017 1:16 pm
ArmchairArchitect wrote:
Wed Aug 23, 2017 12:02 pm
Still, the "renting is throwing money" phrase is misleading as only a fraction of that rental payment is the savings you would achieve if you had owned that same property.
That phrase is misleading because it is outright wrong and serves only to confuse rational decision making. Renting isn't throwing money away anymore than buying anything else is - it is paying money in exchange for housing. When you own a house you pay a big chunk up front (not all as you have recurring costs like taxes and insurance and continuous expenses associated with maintenance and repair), when you rent you pay as you go.
This is not precisely true, or is an oversimplification. Renting and owning both cost money, just like leasing and buying a car. The difference is that you're putting money toward an asset that has value and can be sold when you buy a car/home. In the car, it's depreciating, in the home, it's hopefully appreciating... if only at the rate of inflation, because the cost (price) is fixed when you buy it. This is NOT the case with renting. It's of course accurate that taxes do go up, but so does rent, either because taxes go up and the rent with it, or because the market will bear higher rents, or both.

Owning is also subsidized by the government in the form of the mortgage deduction, while renting is not. This makes it a move favorable "cost" than the equivalent money paid for rent, which is not subsidized. Even if one assume that real estate will, over the long term, only keep up with inflation and not appreciate beyond that, it's still a better deal (for the equivalent home that is rented) because the payment is not subject to market forces.

Now, if there's deflation, then that's different.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by avalpert » Wed Aug 23, 2017 6:47 pm

Admiral wrote:
Wed Aug 23, 2017 6:36 pm
avalpert wrote:
Wed Aug 23, 2017 1:16 pm
ArmchairArchitect wrote:
Wed Aug 23, 2017 12:02 pm
Still, the "renting is throwing money" phrase is misleading as only a fraction of that rental payment is the savings you would achieve if you had owned that same property.
That phrase is misleading because it is outright wrong and serves only to confuse rational decision making. Renting isn't throwing money away anymore than buying anything else is - it is paying money in exchange for housing. When you own a house you pay a big chunk up front (not all as you have recurring costs like taxes and insurance and continuous expenses associated with maintenance and repair), when you rent you pay as you go.
This is not precisely true, or is an oversimplification. Renting and owning both cost money, just like leasing and buying a car. The difference is that you're putting money toward an asset that has value and can be sold when you buy a car/home. In the car, it's depreciating, in the home, it's hopefully appreciating... This is NOT the case with renting. It's of course accurate that taxes do go up, but so does rent, either because taxes go up and the rent with it, or because the market will bear higher rents, or both.
In many cases your rental can be sublet - so the right to occupy can be an asset that has value and can be sold as well. But the key there is 'hopefully' - it may or may not appreciate, that is a risk of home ownership that isn't there with renting. That is why when comparing renting vs housing you need to account for the returns of alternative uses of the capital used to purchase the house - whether you can sell or not you still have paid for it upfront and are not deploying that capital in other ways (as opposed to with renting).
Owning is also subsidized by the government in the form of the mortgage deduction, while renting is not. This makes it a move favorable "cost" than the equivalent money paid for rent, which is not subsidized.
Most homeowners don't benefit from the mortgage deduction at all as they don't itemize and many that do get minimal benefit. This doesn't make it a 'more favorable cost' - a cost is a cost, you can adjust the for the after-tax cost but you still are looking at all in costs.
Even if one assume that real estate will, over the long term, only keep up with inflation and not appreciate beyond that, it's still a better deal (for the equivalent home that is rented) because the payment is not subject to market forces.
Again, you cannot say this without actually doing the math on the specific rent and purchase price. The home value is subject to market forces too, even if the mortgage payment isn't. The mortgage payment is just one component of housing costs for homeowners and it is completely wrong to just compare it to the rent.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by MindBogler » Wed Aug 23, 2017 6:53 pm

avalpert wrote:
Wed Aug 23, 2017 1:16 pm
ArmchairArchitect wrote:
Wed Aug 23, 2017 12:02 pm
Still, the "renting is throwing money" phrase is misleading as only a fraction of that rental payment is the savings you would achieve if you had owned that same property.
That phrase is misleading because it is outright wrong and serves only to confuse rational decision making. Renting isn't throwing money away anymore than buying anything else is - it is paying money in exchange for housing. When you own a house you pay a big chunk up front (not all as you have recurring costs like taxes and insurance and continuous expenses associated with maintenance and repair), when you rent you pay as you go.
Your whole statement perpetuates the fallacy that renters are getting a free lunch or paying for a lesser set of costs. Your landlord, if he/she plans on staying in business for any period of time, is charging you for the exact same costs of an owner and probably more. Landlords are in the game for a profit. Taxes, maintenance/upkeep, insurance are not services landlords provide out of the goodness of their heart. When you rent you're paying your landlords taxes, maintenance as a percent of property value and insurance. You are paying for all of it!

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by avalpert » Wed Aug 23, 2017 6:53 pm

mortalsonofmortal wrote:
Wed Aug 23, 2017 5:53 pm
mbasherp wrote:
Tue Aug 22, 2017 11:00 am
My PITI is $1200/month. An high estimate for repairs and maintenance is $500/month.
Did you factor in possible rise in property tax? I am wondering if it is common to have PITI that low for a house with such high rent estimate. It got to be an exceptional case.

Also one time high expense maintenance can throw a wrench into your equation.
The PITI is a function of how much was borrowed and at what rate - it isn't really informative in comparing buying vs. renting (other than the interest expense). Comparing house value to rent is more useful - and in this case, assuming his numbers are accurate, it is a relatively high rent for that price house making buying likely the better decision. That a 12:1 price to rent ratio which is way below average in most markets.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by avalpert » Wed Aug 23, 2017 6:58 pm

MindBogler wrote:
Wed Aug 23, 2017 6:53 pm
avalpert wrote:
Wed Aug 23, 2017 1:16 pm
ArmchairArchitect wrote:
Wed Aug 23, 2017 12:02 pm
Still, the "renting is throwing money" phrase is misleading as only a fraction of that rental payment is the savings you would achieve if you had owned that same property.
That phrase is misleading because it is outright wrong and serves only to confuse rational decision making. Renting isn't throwing money away anymore than buying anything else is - it is paying money in exchange for housing. When you own a house you pay a big chunk up front (not all as you have recurring costs like taxes and insurance and continuous expenses associated with maintenance and repair), when you rent you pay as you go.
Your whole statement perpetuates the fallacy that renters are getting a free lunch or paying for a lesser set of costs. Your landlord, if he/she plans on staying in business for any period of time, is charging you for the exact same costs of an owner and probably more. Landlords are in the game for a profit. Taxes, maintenance/upkeep, insurance are not services landlords provide out of the goodness of their heart. When you rent you're paying your landlords taxes, maintenance as a percent of property value and insurance. You are paying for all of it!
And your statement perpetuates the far more prevalent fallacy that landlords (or any other business) get to set their price at whatever level they like. They can charge what the market will bear, the profitable ones will be the ones who can lower their costs - including lower maintenance cost, lower interest expense, lower purchase costs etc. When you buy you are also paying for all of it - and you are paying for all of it without the economies of scale that allow professional landlords to lower costs and profit from lower rents.

I'll repeat, the phrase 'renting is throwing away money' is outright wrong and only confuses rational decision making. You shouldn't concern yourself with the landlords cost base and how you cover that - all you should concern yourself with is what it costs you and what it would cost you (not the landlord) to own instead.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by MindBogler » Wed Aug 23, 2017 7:02 pm

avalpert wrote:
Wed Aug 23, 2017 6:58 pm
I'll repeat, the phrase 'renting is throwing away money' is outright wrong and only confuses rational decision making. You shouldn't concern yourself with the landlords cost base and how you cover that - all you should concern yourself with is what it costs you and what it would cost you (not the landlord) to own instead.
I never said renting was throwing away money. Although in some cases it might be. The same can be said about owning. It depends on the circumstances. There are many cases where renting is superior to owning. The decision is market specific but regardless you're still paying for all of the same things. Its an oft spoken trope on this forum that renters aren't paying property taxes, insurance or maintenance. The fact is you still pay for all of those things except your landlord is writing them all off at your expense.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by avalpert » Wed Aug 23, 2017 7:11 pm

MindBogler wrote:
Wed Aug 23, 2017 7:02 pm
avalpert wrote:
Wed Aug 23, 2017 6:58 pm
I'll repeat, the phrase 'renting is throwing away money' is outright wrong and only confuses rational decision making. You shouldn't concern yourself with the landlords cost base and how you cover that - all you should concern yourself with is what it costs you and what it would cost you (not the landlord) to own instead.
I never said renting was throwing away money. Although in some cases it might be. The same can be said about owning. It depends on the circumstances. There are many cases where renting is superior to owning. The decision is market specific but regardless you're still paying for all of the same things. Its an oft spoken trope on this forum that renters aren't paying property taxes, insurance or maintenance. The fact is you still pay for all of those things except your landlord is writing them all off at your expense.
They aren't paying for those things, at least not any more than someone who purchases a car is paying for crash tests, factory emissions testing and manufacturing line maintenance. You are paying rent, that is it - what the landlord does with that income to cover their costs is a distraction at best. You may or may not be providing enough income to cover all those costs, it isn't germane to you decision analysis.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by MindBogler » Wed Aug 23, 2017 7:16 pm

avalpert wrote:
Wed Aug 23, 2017 7:11 pm
They aren't paying for those things, at least not any more than someone who purchases a car is paying for crash tests, factory emissions testing and manufacturing line maintenance. You are paying rent, that is it - what the landlord does with that income to cover their costs is a distraction at best. You may or may not be providing enough income to cover all those costs, it isn't germane to you decision analysis.
You can do mental gymnastics to convince yourself of that but it doesn't make it true. Your rent includes property taxes, insurance, maintenance and also covers any leverage the landlord has. Regardless of whether you rent or buy you're paying for all of these line items. Renting isn't a free lunch. It's just a different kind of lunch with its own series of pros and cons.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by TravelforFun » Wed Aug 23, 2017 7:18 pm

mbasherp wrote:
Tue Aug 22, 2017 11:00 am
I've been thinking a lot about why some say that equity in an owner occupied home can't be counted on the same way as cash flow from a rental property. As such, an owner occupied home is more of a consumption expenditure than an investment.

Until now I pretty much agreed with this sentiment. But recently I did some math and feel that there's an inherent error in this logic if specifics aren't factored in. For instance:

My PITI is $1200/month. An high estimate for repairs and maintenance is $500/month. (Estimated home value currently $290k) Comparable rentals are $2000. Aren't I realizing an immediate cash flow benefit of $300 every month? Further, since I am in year 2 of a 30 year mortgage, the gap between my monthly payment and comparable rents will only widen. This is ignoring any appreciation on the house. Essentially, on my balance sheet I have real estate (home value minus mortgage balance) and I choose to rent it to myself at below market rate forever.

Aren't I realizing an immediate cash flow boost of minimum $300 per month for 30 years by putting down the $40k I put on the house and moving in? This is certainly situation specific, but it appears that a single owner occupied residence can indeed be a cash flow positive investment from day 1. I invested $40k and am paid $3.6k/year (9%) for 30 years for it. Then I get (an appreciated) home as return of my principal.

Am I missing something?
Yes but you also use up that cash flow as soon as it comes in whether you want it or not. That cash flow is not producing anything for you. The rate of return on your home is just the home equity divided by your down payment of $40K, and there is no guarantee that equity will always go up,

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by avalpert » Wed Aug 23, 2017 7:27 pm

MindBogler wrote:
Wed Aug 23, 2017 7:16 pm
avalpert wrote:
Wed Aug 23, 2017 7:11 pm
They aren't paying for those things, at least not any more than someone who purchases a car is paying for crash tests, factory emissions testing and manufacturing line maintenance. You are paying rent, that is it - what the landlord does with that income to cover their costs is a distraction at best. You may or may not be providing enough income to cover all those costs, it isn't germane to you decision analysis.
You can do mental gymnastics to convince yourself of that but it doesn't make it true.
No, it really does make it true - it isn't mental gymnastics at all. Do you consider that you are paying for pesticide when you buy fruit at the supermarket? Most people recognize they are paying for the fruit, it is up to the producer to pay for the costs associated with production.
Your rent includes property taxes, insurance, maintenance and also covers any leverage the landlord has.
My rent includes rent, that is all. If property taxes go up mid-lease my rent doesn't go up, if maintenance goes up my rent doesn't go up. If my landlord has interest expense but the other 10 renting the same units don't or didn't challenge his property tax increase as the others did he shouldn't expect to be able to pass on those costs at all.
Regardless of whether you rent or buy you're paying for all of these line items. Renting isn't a free lunch. It's just a different kind of lunch with its own series of pros and cons.
Nobody said renting is a free lunch - it isn't any more a free lunch than buying strawberries is a free lunch when compared to growing them yourself. It is an exchange of money for a service/product that they (may be able to) provide at lower cost then I can do myself.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by MindBogler » Wed Aug 23, 2017 8:58 pm

avalpert wrote:
Wed Aug 23, 2017 7:27 pm
My rent includes rent, that is all. If property taxes go up mid-lease my rent doesn't go up, if maintenance goes up my rent doesn't go up. If my landlord has interest expense but the other 10 renting the same units don't or didn't challenge his property tax increase as the others did he shouldn't expect to be able to pass on those costs at all.
What do you think happens when your lease is up? The landlord increases the rent. If property taxes increase by 5% then in aggregate so will rents. Increased costs are passed through to the consumer or the business will not be viable for long. If you don't agree on that price you will be evicted and forced to find a new place to rent. Rents go up all the time and often every single time the lease is renewed. In many locations around the US rents are increasing as fast or faster than the underlying homes are appreciating. If you own a home you also deal with this in the form of increased property taxes, insurance and maintenance. But around 2/3 of the cost of owning a home is in the PI payment for a typical mortgage with 20% equity down. The difference with owning is that the majority cost is fixed and declines yearly with the rate of inflation. The downside to owning a home is that it can be difficult to sell and the transaction costs are relatively high. Renting is one option but it isn't the panacea that it is often described here. I've been both a renter and an owner. I choose to own but I do so with a full understanding of the costs and the pros/cons to each choice.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by JGoneRiding » Wed Aug 23, 2017 9:04 pm

ArmchairArchitect wrote:
Wed Aug 23, 2017 12:02 pm
Your logic is sound. However, I wouldn't even include principal in your equation because that's just a transfer of money from your bank account to your home (it's not an expense).

I would only include expenses in your calculation, and I always use the interest associated with a 100% mortgage for calculation purposes (to make it a more apples-to-apples comparison to renting where you have no equity in the property). So your savings compared to renting an equivalent home is likely greater than $300/month. Call it "cash flow" "cash savings" or whatever, more accurately it's "savings as compared to renting the same property".

However if you want an even more accurate calculation, you need to take closing costs (transfer tax, title insurance, appraisal, loan fees, agent commission, etc. etc.) from both buying and selling the home and amortize those expenses based on how long you will own the home. All of these are expenses that are not present when renting a home.

If you want to get even crazier in your analysis, you can factor in the opportunity cost of not having the equity in your property instead invested in higher-yielding investments (such as a Vanguard fund). But then you would counter/offset that with the projected appreciation on the entire property (not just the equity portion). And I would use very conservative estimates.

All that being said, buying is almost always a better financial decision than renting as long as you don't sell the home within a year or two. Still, the "renting is throwing money" phrase is misleading as only a fraction of that rental payment is the savings you would achieve if you had owned that same property.

I'm a CPA, by the way.
I really like this analysis. It includes all the different factors. So often we get "my house didn't beat inflation" well that might be but did it beat the cost of renting equivalent place once all factors are taken into consideration over the long period?? Also did you get un-quantifiable "enjoyment"

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by JGoneRiding » Wed Aug 23, 2017 9:10 pm

bligh wrote:
Wed Aug 23, 2017 12:56 pm
One caveat, if you are living in a country or region with property taxes, you are basically still renting. Just at a discounted rate.

For example, let's say you are paying $2000 to rent a place that costs $500,000 to buy.

If you buy the place outright, with cash, you still need to pay your local property taxes which will vary from place. Let's keep it simple and say it is 1.2% so $6000/year. or $500/month. Also since you now own a huge expensive asset, you will want to get home owners insurance, let us assume you pay $100/month for that. So you are at $600/month just to keep what you own. I am going to leave out home maintenance and assume upkeep is the same.
I will assume no HOA.

So in essence your $500,000 didn't give you imputed rent of $2000 but $1400. Works out to a ~3.25% return in this example.

This is an oversimplification of course. There are tax advantages of course, but the big (in my opinion) advantage comes from not having to worry about housing cost inflation. In most places I have seen the property taxes go up with the cost of housing though, so you may not be completely immune. Also you may have the benefit of being able to draw upon any appreciation in home value at a later date by moving to a lower cost of living area.
I would argue strongly if you can rent a house that costs 500k for 2k you should RENT it is a better deal. I rent out a place I paid 210k for 1600/mos and as soon as those renters move out I expect to get 1800-2000. At those prices my renters would be much better of buying but they are short term (local college should always make sure I have enough though a little worried about the rapid building)

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by White Coat Investor » Wed Aug 23, 2017 9:29 pm

jbolden1517 wrote:
Tue Aug 22, 2017 11:16 am
mbasherp wrote:
Tue Aug 22, 2017 11:00 am
Am I missing something?
No you are absolutely correct. Your home is part of your portfolio as a non-diversified real estate holding paying a return to you of the rent equivalent minus upkeep expenses & taxes, ... Your mortgage is a short bond position and is also part of your portfolio.
That's tweetable.
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Re: Why do we consider cash flow from rentals but not our own homes?

Post by avalpert » Wed Aug 23, 2017 9:49 pm

MindBogler wrote:
Wed Aug 23, 2017 8:58 pm
avalpert wrote:
Wed Aug 23, 2017 7:27 pm
My rent includes rent, that is all. If property taxes go up mid-lease my rent doesn't go up, if maintenance goes up my rent doesn't go up. If my landlord has interest expense but the other 10 renting the same units don't or didn't challenge his property tax increase as the others did he shouldn't expect to be able to pass on those costs at all.
What do you think happens when your lease is up?
That depends on the market - not the landlord's costs. Businesses don't get to pass on costs to their consumers just because they want to.
Rents go up all the time and often every single time the lease is renewed. In many locations around the US rents are increasing as fast or faster than the underlying homes are appreciating.
And in many places that is reversed. Each market has its own dynamics.
If you own a home you also deal with this in the form of increased property taxes, insurance and maintenance. But around 2/3 of the cost of owning a home is in the PI payment for a typical mortgage with 20% equity down. The difference with owning is that the majority cost is fixed and declines yearly with the rate of inflation.
You are confusing the cost paid up front (the purchase of the home) and the cost of financing that purchase (if it was financed). Yes, the initial cost of purchase is fixed once paid - for better or worse. There is a reason why buy/rent decisions are very sensitive to assumptions about asset appreciation (both the house and the alternative uses of capital).
The downside to owning a home is that it can be difficult to sell and the transaction costs are relatively high.
That is one downside, there are others like taking on the risks associated with owning a property (major repairs/personal liability/asset values) that the renter let's the landlord keep.
Renting is one option but it isn't the panacea that it is often described here. I've been both a renter and an owner. I choose to own but I do so with a full understanding of the costs and the pros/cons to each choice.
I find that interesting, I think the (far) more prevalent view here (and elsewhere) is that home ownership is the panacea and renting is always the wrong choice.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by jbolden1517 » Wed Aug 23, 2017 10:05 pm

White Coat Investor wrote:
Wed Aug 23, 2017 9:29 pm
jbolden1517 wrote:
Tue Aug 22, 2017 11:16 am
mbasherp wrote:
Tue Aug 22, 2017 11:00 am
Am I missing something?
No you are absolutely correct. Your home is part of your portfolio as a non-diversified real estate holding paying a return to you of the rent equivalent minus upkeep expenses & taxes, ... Your mortgage is a short bond position and is also part of your portfolio.
That's tweetable.
Glad you liked. Feel free to steal it for your site.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by White Coat Investor » Wed Aug 23, 2017 10:59 pm

jbolden1517 wrote:
Wed Aug 23, 2017 10:05 pm
White Coat Investor wrote:
Wed Aug 23, 2017 9:29 pm
jbolden1517 wrote:
Tue Aug 22, 2017 11:16 am
mbasherp wrote:
Tue Aug 22, 2017 11:00 am
Am I missing something?
No you are absolutely correct. Your home is part of your portfolio as a non-diversified real estate holding paying a return to you of the rent equivalent minus upkeep expenses & taxes, ... Your mortgage is a short bond position and is also part of your portfolio.
That's tweetable.
Glad you liked. Feel free to steal it for your site.
Already did. Would give you credit if I could fit it into 140 characters.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by jbolden1517 » Thu Aug 24, 2017 5:44 am

White Coat Investor wrote:
Wed Aug 23, 2017 10:59 pm
Already did. Would give you credit if I could fit it into 140 characters.
You got a tough mission. Doctors have a well deserved reputation for loving quirky investments that look really bad on paper. That and hiring staff to compensate for under spending on IT are probably both very harmful to their long term return.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by Chip » Thu Aug 24, 2017 6:29 am

avalpert wrote:
Wed Aug 23, 2017 7:11 pm
They aren't paying for those things, at least not any more than someone who purchases a car is paying for crash tests, factory emissions testing and manufacturing line maintenance. You are paying rent, that is it - what the landlord does with that income to cover their costs is a distraction at best. You may or may not be providing enough income to cover all those costs, it isn't germane to you decision analysis.
This is absolutely correct. Personal example: 20+ years ago I rented a house in a town with a depressed housing market and very high property taxes from an absentee owner. I rented it for $1,000 a month; property taxes were $800/month. The owner had been trying to sell the house for quite a while with no takers. His alternative was to rent to me and get $1,000/month against his expenses or have the house sit empty and get nothing against those same expenses.

I rented the house at that same rate for 3 years before moving away from the town.

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by Admiral » Thu Aug 24, 2017 6:41 am

Chip wrote:
Thu Aug 24, 2017 6:29 am
avalpert wrote:
Wed Aug 23, 2017 7:11 pm
They aren't paying for those things, at least not any more than someone who purchases a car is paying for crash tests, factory emissions testing and manufacturing line maintenance. You are paying rent, that is it - what the landlord does with that income to cover their costs is a distraction at best. You may or may not be providing enough income to cover all those costs, it isn't germane to you decision analysis.
This is absolutely correct. Personal example: 20+ years ago I rented a house in a town with a depressed housing market and very high property taxes from an absentee owner. I rented it for $1,000 a month; property taxes were $800/month. The owner had been trying to sell the house for quite a while with no takers. His alternative was to rent to me and get $1,000/month against his expenses or have the house sit empty and get nothing against those same expenses.

I rented the house at that same rate for 3 years before moving away from the town.
There are certainly lots of examples of underwater landlords/owners who must rent at rates that don't cover their costs. But in general terms that's not how the rental market works. Yes there are owners who overpay (or don't but lose their jobs or other income) but, especially today, homes are being purchased by large companies and institutional investors and rented out and guess what...they're not doing it to lose money.

See:
https://www.nytimes.com/2017/08/10/busi ... stone.html

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Re: Why do we consider cash flow from rentals but not our own homes?

Post by patngordo » Thu Aug 24, 2017 7:28 am

Makes sense to me. We were renting a nice place for $1600. Would have been happy to stay there til we die, but always worrying a little about rent increases, or the owner deciding he wanted to live there, stuff like that.

Then a house next door to wife's best friend was for sale, bought it for $300,000 cash, closing costs and moving were another $5000. Now our monthly housing (taxes, ins, hoa, maintenance set-aside) is $600.

It sure feels like some species of fixed income investment (that we can live inside of), that's paying 3.9%/year tax free, which is better than that money was doing in the bond fund.

Expenses will go up with inflation, but so was the rent we were paying.

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