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
Sandtrap
Posts: 5359
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii๐Ÿ˜€ Northern AZ.๐Ÿ˜ณ Retired.

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

Post by Sandtrap » Thu Jul 12, 2018 10:09 am

Pajamas wrote: โ†‘
Thu Jul 12, 2018 9:05 am
Engineer250 wrote: โ†‘
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.
Good point.
There comes a time for many folks in life where a luxury townhouse near or on a resort or golf course in a quiet neighborhood with no yard work, and close to conveniences and medical support, becomes the priority.
j

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 10:19 am

Pajamas wrote: โ†‘
Thu Jul 12, 2018 9:05 am
Engineer250 wrote: โ†‘
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.
Of course my experience is limited by my age and geographic location. But all I said was, don't buy a condo if what you really want is a house.

Also friend of mine in his mid-60s sold his condo here to move to a lower COL area and he bought a house. My parents (70s) would love to downsize, but to a smaller house, not a condo. So it's not just fellow children like myself who want to upgrade to homes.
Where the tides of fortune take us, no man can know.

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Thu Jul 12, 2018 11:23 am

mbasherp wrote: โ†‘
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.
I agree with you, that it does depend on where one lives. In my hometown, DC, even assuming no appreciation and ignoring imputed income, buying has been cheaper than renting provided that you itemize deductions, and plan to stay a few years. However, under the new tax, many fewer people will be itemizing, and they've capped the interest deduction. I wonder if buyers have caught on this. So far, I would say they have not. The market is still very hot.

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 12:17 pm

gmaynardkrebs wrote: โ†‘
Thu Jul 12, 2018 11:23 am
I wonder if buyers have caught on this. So far, I would say they have not. The market is still very hot.
They have caught on and rising interest rates have dampened prices, as well, at least in some areas.
Springtime in Manhattan was far from sunny for home sellers, as inventory increased, prices continued to decline and sales volume dropped to its lowest level in nine years, according to new market reports.

Real estate agents pointed to rising mortgage interest rates and uncertainty surrounding the federal tax overhaul that went into effect late last year. The result was a widening gap between buyers and sellers, who often hit an impasse on price.
https://www.nytimes.com/2018/07/03/real ... attan.html

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Thu Jul 12, 2018 12:47 pm

Pajamas wrote: โ†‘
Thu Jul 12, 2018 12:17 pm
gmaynardkrebs wrote: โ†‘
Thu Jul 12, 2018 11:23 am
I wonder if buyers have caught on this. So far, I would say they have not. The market is still very hot.
They have caught on and rising interest rates have dampened prices, as well, at least in some areas.
Springtime in Manhattan was far from sunny for home sellers, as inventory increased, prices continued to decline and sales volume dropped to its lowest level in nine years, according to new market reports.

Real estate agents pointed to rising mortgage interest rates and uncertainty surrounding the federal tax overhaul that went into effect late last year. The result was a widening gap between buyers and sellers, who often hit an impasse on price.
https://www.nytimes.com/2018/07/03/real ... attan.html
Thanks, I hadn't read that article. Quite interesting. Having looked at buying a small condo in Manhattan fairly recently, it doesn't surprise me that so many people decide to rent. Even under the old tax laws, you had to have substantial appreciation to have it makes sense financially. It's probably even worse now.

WanderingDoc
Posts: 1123
Joined: Sat Aug 05, 2017 8:21 pm

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

Post by WanderingDoc » Thu Jul 12, 2018 12:47 pm

gmaynardkrebs wrote: โ†‘
Thu Jul 12, 2018 7:08 am
WanderingDoc wrote: โ†‘
Wed Jul 11, 2018 10:18 pm
gmaynardkrebs wrote: โ†‘
Wed Jul 11, 2018 9:46 pm
WanderingDoc wrote: โ†‘
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.
Roughly speaking, if you have a 65% LTV loan on a rental property and claim depreciation and mortgage interest as an expense on taxes, you will be right around paying $0 in taxes, "break even" on paper, whilst still collecting rental income.

The criteria for 1) choosing a place to rent 2) choosing a place to buy and live in and 3) choosing a place to buy and rent out, are starkly different in my world. So while I get your theoretical example, it doesn't apply to a prudent individual and investor.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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 » Thu Jul 12, 2018 2:12 pm

Engineer250 wrote: โ†‘
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. 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.
This is potentially very important. What were their reasons for wanting to upgrade later? In addition to the sunk cost, the transaction cost in buying a house is enormous. You really don't want to be "upgrading" like that.

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 2:53 pm

danielc wrote: โ†‘
Thu Jul 12, 2018 2:12 pm
Engineer250 wrote: โ†‘
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. 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.
This is potentially very important. What were their reasons for wanting to upgrade later? In addition to the sunk cost, the transaction cost in buying a house is enormous. You really don't want to be "upgrading" like that.
The reason is basically, that they would have bought a house to begin with if they could have afforded it. They couldn't afford it, but could afford a condo somewhere. They see prices rising, but not their wages, and are worried if they don't buy now they will get priced out of the market for decades. So they buy a condo, count on prices going up and then gaining equity, and use that equity to afford the 20% on a house.

So I would NOT recommend that, and think if you want a house at some point, and aren't willing to live in a condo for the rest of your life, than you should not buy a condo. That said, this has financially worked out for people I know. Friend bought a condo at the bottom of the crisis in a nice area for $300k and recently sold for $800k. They could have used that to out right own a house in the commuting suburbs, but instead bought a large home in a nice part of town and still have a mortgage they needed two people for. But I suspect they think they made the right decision.
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 2:56 pm

Engineer250 wrote: โ†‘
Thu Jul 12, 2018 2:53 pm
But I suspect they think they made the right decision.
Then didn't they? They couldn't have what they ideally wanted and chose something else instead. You would have made a different decision but that's the decision they made.
Last edited by Pajamas on Thu Jul 12, 2018 3:28 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 » Thu Jul 12, 2018 3:02 pm

Engineer250 wrote: โ†‘
Thu Jul 12, 2018 2:53 pm
The reason is basically, that they would have bought a house to begin with if they could have afforded it. They couldn't afford it, but could afford a condo somewhere. They see prices rising, but not their wages, and are worried if they don't buy now they will get priced out of the market for decades. So they buy a condo, count on prices going up and then gaining equity, and use that equity to afford the 20% on a house.
Well, I sympathize with that concern. Wages have been stagnant since the 1970s. All the GDP growth has gone into corporate earnings. My own view is that the best I can do about that is put what fraction I can of my own wealth into equities. So in the scenario you describe, instead of buying the condo I would have put the downpayment in equities for a few years.

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Thu Jul 12, 2018 3:19 pm

danielc wrote: โ†‘
Thu Jul 12, 2018 3:02 pm
Engineer250 wrote: โ†‘
Thu Jul 12, 2018 2:53 pm
The reason is basically, that they would have bought a house to begin with if they could have afforded it. They couldn't afford it, but could afford a condo somewhere. They see prices rising, but not their wages, and are worried if they don't buy now they will get priced out of the market for decades. So they buy a condo, count on prices going up and then gaining equity, and use that equity to afford the 20% on a house.
Well, I sympathize with that concern. Wages have been stagnant since the 1970s. All the GDP growth has gone into corporate earnings. My own view is that the best I can do about that is put what fraction I can of my own wealth into equities. So in the scenario you describe, instead of buying the condo I would have put the downpayment in equities for a few years.
Buying a home works better because it's leveraged.

User avatar
monkey_business
Posts: 690
Joined: Thu Jan 21, 2010 2:21 pm

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

Post by monkey_business » Thu Jul 12, 2018 3:28 pm

gmaynardkrebs wrote: โ†‘
Thu Jul 12, 2018 3:19 pm
danielc wrote: โ†‘
Thu Jul 12, 2018 3:02 pm
Engineer250 wrote: โ†‘
Thu Jul 12, 2018 2:53 pm
The reason is basically, that they would have bought a house to begin with if they could have afforded it. They couldn't afford it, but could afford a condo somewhere. They see prices rising, but not their wages, and are worried if they don't buy now they will get priced out of the market for decades. So they buy a condo, count on prices going up and then gaining equity, and use that equity to afford the 20% on a house.
Well, I sympathize with that concern. Wages have been stagnant since the 1970s. All the GDP growth has gone into corporate earnings. My own view is that the best I can do about that is put what fraction I can of my own wealth into equities. So in the scenario you describe, instead of buying the condo I would have put the downpayment in equities for a few years.
Buying a home works better because it's leveraged.
Folks forget about the leveraged part when citing real estate appreciation. Consider this:

1. You buy a house for $250,000 with $50,000 down, i.e. you borrow $200,000.
2. The house appreciates at 3% over the next 10 years and is valued at ~$336,000.
3. You sell the house for $336,000, paying 6% commission, i.e. about $20,000.
4. The net gain is $66,000 ($316,000 - $250,000) on the initial $50,000 investment, which is about a 8.78% yearly gain.

Of course, this does not include a myriad of additional factors and expenses, including repairs, interest, and closing costs. But, the point is that the return (and the loss), since the investment is most often leveraged, is amplified.

niners9088
Posts: 66
Joined: Mon Jul 07, 2014 9:50 am

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

Post by niners9088 » Thu Jul 12, 2018 3:37 pm

I think you really need to compare to 6 different options.
1. Rent a single family house
2. Buy a single family house
3. Rent a condo
4. Buy a condo
5. Rent a smaller apartment

Renting like assets, for most cases, is always more expensive then buying them. This is assuming the owner is making money and not accepting a loss. Therefore, if you can buy and plan to live in the home for around at least 5 years it is in most cases the financially best thing to do.

Without knowing all the details it is hard to judge on a standard of living / risk-adjusted curve what is the best case for you. Most people tend to buy more house then they need and more likely rent closer to what they need. I've been in both of these buckets in the past and my conclusion is the most economical is to buy a condo/townhouse, but from a standard of living perspective it doesn't always mesh 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 » Thu Jul 12, 2018 3:56 pm

gmaynardkrebs wrote: โ†‘
Thu Jul 12, 2018 3:19 pm
Buying a home works better because it's leveraged.
That would only be true if the appreciation rate of a house is higher than the rate at which you borrow. Borrowing at 4% to buy an asset that grows at 2.5% means that you are losing 1.5%.

You can leverage stocks too, for example with margin accoutns or stock options.

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 » Thu Jul 12, 2018 4:12 pm

monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
Folks forget about the leveraged part when citing real estate appreciation. Consider this:

1. You buy a house for $250,000 with $50,000 down, i.e. you borrow $200,000.
2. The house appreciates at 3% over the next 10 years and is valued at ~$336,000.
Correction: 2. You borrow at 4.5% to buy an asset that grows at 3%.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
3. You sell the house for $336,000, paying 6% commission, i.e. about $20,000.
Addition: 3.5. You have paid ~ $45,000 in interest assuming a 10-year mortgage. You also have a 6% commission when you buy. That's another $15,000.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
4. The net gain is $66,000 ($316,000 - $250,000) on the initial $50,000 investment, which is about a 8.78% yearly gain.
Correction: 4. The net gain is $316,000 - $250,000 - $45,000 - $15,000 = $21,000, which is about a 1.11% yearly gain. If you exclude the 6% for the initial purcahse, you have a 3.6% yearly gain.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
Of course, this does not include a myriad of additional factors and expenses, including repairs, interest, and closing costs.
Indeed. And the things you did not include turn the calculation completely upside-down.

monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
But, the point is that the return (and the loss), since the investment is most often leveraged, is amplified.
You are borrowing at 4.5% to buy an asset that grows at 3% (optimistically). The leverage is a BUG not a FEATURE.

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 » Thu Jul 12, 2018 4:16 pm

niners9088 wrote: โ†‘
Thu Jul 12, 2018 3:37 pm
Renting like assets, for most cases, is always more expensive then buying them.
Indeed, renting is always more expensive than buying.

User avatar
Sandtrap
Posts: 5359
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii๐Ÿ˜€ Northern AZ.๐Ÿ˜ณ Retired.

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

Post by Sandtrap » Thu Jul 12, 2018 4:31 pm

WanderingDoc wrote: โ†‘
Thu Jul 12, 2018 12:47 pm
gmaynardkrebs wrote: โ†‘
Thu Jul 12, 2018 7:08 am
WanderingDoc wrote: โ†‘
Wed Jul 11, 2018 10:18 pm
gmaynardkrebs wrote: โ†‘
Wed Jul 11, 2018 9:46 pm
WanderingDoc wrote: โ†‘
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.
Roughly speaking, if you have a 65% LTV loan on a rental property and claim depreciation and mortgage interest as an expense on taxes, you will be right around paying $0 in taxes, "break even" on paper, whilst still collecting rental income.

The criteria for 1) choosing a place to rent 2) choosing a place to buy and live in and 3) choosing a place to buy and rent out, are starkly different in my world. So while I get your theoretical example, it doesn't apply to a prudent individual and investor.
Well said.
Good point of view based on personal experience.
j

Nate79
Posts: 3572
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

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

Post by Nate79 » Thu Jul 12, 2018 4:36 pm

danielc wrote: โ†‘
Thu Jul 12, 2018 4:12 pm
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
Folks forget about the leveraged part when citing real estate appreciation. Consider this:

1. You buy a house for $250,000 with $50,000 down, i.e. you borrow $200,000.
2. The house appreciates at 3% over the next 10 years and is valued at ~$336,000.
Correction: 2. You borrow at 4.5% to buy an asset that grows at 3%.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
3. You sell the house for $336,000, paying 6% commission, i.e. about $20,000.
Addition: 3.5. You have paid ~ $45,000 in interest assuming a 10-year mortgage. You also have a 6% commission when you buy. That's another $15,000.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
4. The net gain is $66,000 ($316,000 - $250,000) on the initial $50,000 investment, which is about a 8.78% yearly gain.
Correction: 4. The net gain is $316,000 - $250,000 - $45,000 - $15,000 = $21,000, which is about a 1.11% yearly gain. If you exclude the 6% for the initial purcahse, you have a 3.6% yearly gain.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
Of course, this does not include a myriad of additional factors and expenses, including repairs, interest, and closing costs.
Indeed. And the things you did not include turn the calculation completely upside-down.

monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
But, the point is that the return (and the loss), since the investment is most often leveraged, is amplified.
You are borrowing at 4.5% to buy an asset that grows at 3% (optimistically). The leverage is a BUG not a FEATURE.
Buyers almost never pay a commission. Sellers pay the commission.

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 » Thu Jul 12, 2018 4:40 pm

Nate79 wrote: โ†‘
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.

User avatar
monkey_business
Posts: 690
Joined: Thu Jan 21, 2010 2:21 pm

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

Post by monkey_business » Thu Jul 12, 2018 6:20 pm

danielc wrote: โ†‘
Thu Jul 12, 2018 4:12 pm
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
Folks forget about the leveraged part when citing real estate appreciation. Consider this:

1. You buy a house for $250,000 with $50,000 down, i.e. you borrow $200,000.
2. The house appreciates at 3% over the next 10 years and is valued at ~$336,000.
Correction: 2. You borrow at 4.5% to buy an asset that grows at 3%.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
3. You sell the house for $336,000, paying 6% commission, i.e. about $20,000.
Addition: 3.5. You have paid ~ $45,000 in interest assuming a 10-year mortgage. You also have a 6% commission when you buy. That's another $15,000.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
4. The net gain is $66,000 ($316,000 - $250,000) on the initial $50,000 investment, which is about a 8.78% yearly gain.
Correction: 4. The net gain is $316,000 - $250,000 - $45,000 - $15,000 = $21,000, which is about a 1.11% yearly gain. If you exclude the 6% for the initial purcahse, you have a 3.6% yearly gain.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
Of course, this does not include a myriad of additional factors and expenses, including repairs, interest, and closing costs.
Indeed. And the things you did not include turn the calculation completely upside-down.

monkey_business wrote: โ†‘
Thu Jul 12, 2018 3:28 pm
But, the point is that the return (and the loss), since the investment is most often leveraged, is amplified.
You are borrowing at 4.5% to buy an asset that grows at 3% (optimistically). The leverage is a BUG not a FEATURE.
You're missing the forest for the trees. The point here was not to exhaustively enumerate all the costs of a real estate purchase and sale.

The point, rather, is to illustrate that when citing real estate appreciation returns, the leverage has to be considered in the calculation, which changes the return percentage. That is all.

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 » Thu Jul 12, 2018 6:40 pm

monkey_business wrote: โ†‘
Thu Jul 12, 2018 6:20 pm
You're missing the forest for the trees. The point here was not to exhaustively enumerate all the costs of a real estate purchase and sale.
No. The point was that leverage made buying a home a superior investment with an incredible 8.8% return.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 6:20 pm
The point, rather, is to illustrate that when citing real estate appreciation returns, the leverage has to be considered in the calculation, which changes the return percentage. That is all.
The leverage argument just encourages magical thinking. A calculation using PITI more accurately shows that the mortgage interest is a cost, not a feature. The fact that you are acting like borrowing at 4.5% to buy an asset that apprecites at 2.5% might be a good idea shows the danger in the "leverage" argument.

WhiteMaxima
Posts: 1443
Joined: Thu May 19, 2016 5:04 pm

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

Post by WhiteMaxima » Thu Jul 12, 2018 6:46 pm

A home is both consumption item and investment. It could appreciate or depreciate in value in short term, will keep up with inflation in longer term. A house could be bought with leveraged loan (low interest). So a 5X leverage would enlarge your gain or loss 5X. House ownership has a lot cost (repair, property tax, insurance, etc).

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Thu Jul 12, 2018 6:49 pm

danielc wrote: โ†‘
Thu Jul 12, 2018 3:56 pm
gmaynardkrebs wrote: โ†‘
Thu Jul 12, 2018 3:19 pm
Buying a home works better because it's leveraged.
That would only be true if the appreciation rate of a house is higher than the rate at which you borrow. Borrowing at 4% to buy an asset that grows at 2.5% means that you are losing 1.5%.

You can leverage stocks too, for example with margin accoutns or stock options.
The downside risks of leverage with stocks is magnitudes greater. When was the last flash crash (a 20% drop in one day) in housing prices? When was the last time a homeowner got a margin call on their house? How many non-recourse brokerage loans are there for stock investors during the 2008 crash? Will your broker accept jingle mail? Leverage is the reason that for many people, their home is by far their major asset. But, yes, nothing is guaranteed, and home prices can go down. But remember, rents can go up suddenly too, when the lease ends.

User avatar
willthrill81
Posts: 6053
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 » Thu Jul 12, 2018 6:54 pm

danielc wrote: โ†‘
Tue Jul 10, 2018 3:54 pm
A home is an investment in so far as it produces a ROE in the form of reduced living costs.
:thumbsup

In that light, if I compare owning our home versus renting a comparable one, our net ROE (inclusive of mortgage interest [very little of that now], insurance, taxes, and maintenance) is about 5%. That seems like a decent investment to me in today's world, especially since that is net of taxes, very consistent from year to year, and should at least roughly keep pace with inflation (because comparable rental prices will continue to go up along with our holding costs [aside from mortgage interest which goes down).
โ€œIt'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.โ€ J.R.R. Tolkien,The Lord of the Rings

kmurp
Posts: 277
Joined: Fri Jun 01, 2007 1:53 pm

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

Post by kmurp » Thu Jul 12, 2018 7:06 pm

WhiteMaxima wrote: โ†‘
Thu Jul 12, 2018 6:46 pm
A home is both consumption item and investment. It could appreciate or depreciate in value in short term, will keep up with inflation in longer term. A house could be bought with leveraged loan (low interest). So a 5X leverage would enlarge your gain or loss 5X. House ownership has a lot cost (repair, property tax, insurance, etc).
Not all homes keep up with inflation long term. Ours has not over almost 30 years and thatโ€™s not even considering what we have put into it in upgrades.

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 » Thu Jul 12, 2018 7:07 pm

WhiteMaxima wrote: โ†‘
Thu Jul 12, 2018 6:46 pm
A home is both consumption item and investment. It could appreciate or depreciate in value in short term, will keep up with inflation in longer term. A house could be bought with leveraged loan (low interest). So a 5X leverage would enlarge your gain or loss 5X. House ownership has a lot cost (repair, property tax, insurance, etc).
This precisely is the kind of magical thinking that I was referring to earlier. A 5X leverage DOES NOT enlarge the gain or loss 5X. It enlarges the difference between the return of the thing that you bought and the interest rate that you pay. For example, say you invest $100 with 5X leverage (so $500) with a 5% interest to buy something that nets you a return of 3%

net return = $500 x 1.03 - $400 x 1.05 = $95 = -5% return on your $100.

You cannot easily get -5% by multiplying 5x anything. The "5X leverage" term invites you to think that your return will be 15% instead of -5%.

User avatar
willthrill81
Posts: 6053
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 » Thu Jul 12, 2018 7:10 pm

kmurp wrote: โ†‘
Thu Jul 12, 2018 7:06 pm
WhiteMaxima wrote: โ†‘
Thu Jul 12, 2018 6:46 pm
A home is both consumption item and investment. It could appreciate or depreciate in value in short term, will keep up with inflation in longer term. A house could be bought with leveraged loan (low interest). So a 5X leverage would enlarge your gain or loss 5X. House ownership has a lot cost (repair, property tax, insurance, etc).
Not all homes keep up with inflation long term. Ours has not over almost 30 years and thatโ€™s not even considering what we have put into it in upgrades.
That's a good point. Homes require maintenance and even then they tend to slowly depreciate in value while the real estate itself tends to appreciate. Also, a specific area can become less popular with buyers over time.
โ€œIt'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.โ€ J.R.R. Tolkien,The Lord of the Rings

User avatar
monkey_business
Posts: 690
Joined: Thu Jan 21, 2010 2:21 pm

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

Post by monkey_business » Thu Jul 12, 2018 7:27 pm

danielc wrote: โ†‘
Thu Jul 12, 2018 6:40 pm
monkey_business wrote: โ†‘
Thu Jul 12, 2018 6:20 pm
You're missing the forest for the trees. The point here was not to exhaustively enumerate all the costs of a real estate purchase and sale.
No. The point was that leverage made buying a home a superior investment with an incredible 8.8% return.
It's a bit rude to put words into people's mouths and then argue against them. I explicitly said what the point of my post was. Here:
monkey_business wrote: โ†‘
Thu Jul 12, 2018 6:20 pm
The point, rather, is to illustrate that when citing real estate appreciation returns, the leverage has to be considered in the calculation, which changes the return percentage. That is all.
I never said houses are a superior investment. You are taking my simple example to show the effects of leverage and chewing it out with pedantry. It does not matter what the actual return is in my example. The numbers are to illustrate how leverage has an affect on the returns. I explicitly said I intentionally omitted many details. Because they are not relevant to the point.
danielc wrote: โ†‘
Thu Jul 12, 2018 6:40 pm
The leverage argument just encourages magical thinking. A calculation using PITI more accurately shows that the mortgage interest is a cost, not a feature. The fact that you are acting like borrowing at 4.5% to buy an asset that apprecites at 2.5% might be a good idea shows the danger in the "leverage" argument.
There is no leverage "argument". For the last time: you cannot talk about returns on a leveraged investment without including said leverage in the calculation. The Shiller data that is frequently cited as the ROI on personal real estate does not include leverage, which affects most people's actual returns. So, the numbers must be adjusted to account for that if we are to talk about whether a house is a good investment or not.

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 » Fri Jul 13, 2018 12:18 am

monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
It's a bit rude to put words into people's mouths and then argue against them.
I'm not trying to pick a fight. But your entire example was about how "leverage" supposedly turned a 3% appreciation into an ~8.8% return.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
I never said houses are a superior investment.
I did not think that you said that, nor did I claim that you said that.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
You are taking my simple example to show the effects of leverage and chewing it out with pedantry.
Showing a critical flaw is not pedantry. You specifically said that "Folks forget about the leveraged part when citing real estate appreciation" and you attempted to illustrate that with an example. But it is not leverage at all to borrow at high interest to buy stuff that appreciates at low interest. This is a pretty important point. The whole "leverage" argument for house appreciation is critically flawed. It is almost never the case that a house appreciates faster than the interest rate you have to pay. This is not "leverage", this is getting in debt in order to buy an asset that can hardly beat inflation.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
It does not matter what the actual return is in my example... I explicitly said I intentionally omitted many details. Because they are not relevant to the point.
I think I showed that the fact that you are borrowing at a high rate to buy a thing that earns almost nothing is very relevant.

monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
There is no leverage "argument".
Quote: "Folks forget about the leveraged part when citing real estate appreciation. Consider this:..."
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
The Shiller data that is frequently cited as the ROI on personal real estate does not include leverage, which affects most people's actual returns. So, the numbers must be adjusted to account for that if we are to talk about whether a house is a good investment or not.
This is precisely the magical thinking I'm talking about. "Leverage" is not a magic pill that will turn a house into an investment. The "leverage" is exactly going to make you lose money. For every $1 that you gain in "leveraged appreciation" you will send $1.67 to the bank.

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 8:17 am

danielc wrote: โ†‘
Fri Jul 13, 2018 12:18 am
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
It's a bit rude to put words into people's mouths and then argue against them.
I'm not trying to pick a fight. But your entire example was about how "leverage" supposedly turned a 3% appreciation into an ~8.8% return.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
I never said houses are a superior investment.
I did not think that you said that, nor did I claim that you said that.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
You are taking my simple example to show the effects of leverage and chewing it out with pedantry.
Showing a critical flaw is not pedantry. You specifically said that "Folks forget about the leveraged part when citing real estate appreciation" and you attempted to illustrate that with an example. But it is not leverage at all to borrow at high interest to buy stuff that appreciates at low interest. This is a pretty important point. The whole "leverage" argument for house appreciation is critically flawed. It is almost never the case that a house appreciates faster than the interest rate you have to pay. This is not "leverage", this is getting in debt in order to buy an asset that can hardly beat inflation.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
It does not matter what the actual return is in my example... I explicitly said I intentionally omitted many details. Because they are not relevant to the point.
I think I showed that the fact that you are borrowing at a high rate to buy a thing that earns almost nothing is very relevant.

monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
There is no leverage "argument".
Quote: "Folks forget about the leveraged part when citing real estate appreciation. Consider this:..."
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
The Shiller data that is frequently cited as the ROI on personal real estate does not include leverage, which affects most people's actual returns. So, the numbers must be adjusted to account for that if we are to talk about whether a house is a good investment or not.
This is precisely the magical thinking I'm talking about. "Leverage" is not a magic pill that will turn a house into an investment. The "leverage" is exactly going to make you lose money. For every $1 that you gain in "leveraged appreciation" you will send $1.67 to the bank.
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.

User avatar
willthrill81
Posts: 6053
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 » Fri Jul 13, 2018 10:27 am

gmaynardkrebs wrote: โ†‘
Fri Jul 13, 2018 8:17 am
danielc wrote: โ†‘
Fri Jul 13, 2018 12:18 am
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
It's a bit rude to put words into people's mouths and then argue against them.
I'm not trying to pick a fight. But your entire example was about how "leverage" supposedly turned a 3% appreciation into an ~8.8% return.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
I never said houses are a superior investment.
I did not think that you said that, nor did I claim that you said that.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
You are taking my simple example to show the effects of leverage and chewing it out with pedantry.
Showing a critical flaw is not pedantry. You specifically said that "Folks forget about the leveraged part when citing real estate appreciation" and you attempted to illustrate that with an example. But it is not leverage at all to borrow at high interest to buy stuff that appreciates at low interest. This is a pretty important point. The whole "leverage" argument for house appreciation is critically flawed. It is almost never the case that a house appreciates faster than the interest rate you have to pay. This is not "leverage", this is getting in debt in order to buy an asset that can hardly beat inflation.
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
It does not matter what the actual return is in my example... I explicitly said I intentionally omitted many details. Because they are not relevant to the point.
I think I showed that the fact that you are borrowing at a high rate to buy a thing that earns almost nothing is very relevant.

monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
There is no leverage "argument".
Quote: "Folks forget about the leveraged part when citing real estate appreciation. Consider this:..."
monkey_business wrote: โ†‘
Thu Jul 12, 2018 7:27 pm
The Shiller data that is frequently cited as the ROI on personal real estate does not include leverage, which affects most people's actual returns. So, the numbers must be adjusted to account for that if we are to talk about whether a house is a good investment or not.
This is precisely the magical thinking I'm talking about. "Leverage" is not a magic pill that will turn a house into an investment. The "leverage" is exactly going to make you lose money. For every $1 that you gain in "leveraged appreciation" you will send $1.67 to the bank.
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.
Counting on real estate appreciating in real terms is speculation. Some real estate investors are actually good at this and do well, but many of them lost their shirt and went bankrupt in the last recession. Everyone should have hopefully learned from that event that real estate prices can go down in real terms, at least in the short- and mid-term.
โ€œIt'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.โ€ J.R.R. Tolkien,The Lord of the Rings

fasteddie911
Posts: 127
Joined: Fri May 16, 2008 3:13 pm

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

Post by fasteddie911 » 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 portfolio 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.
Last edited by fasteddie911 on Sat Jul 14, 2018 7:01 am, edited 1 time in total.

KlangFool
Posts: 10379
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri Jul 13, 2018 11:00 am

fasteddie911 wrote: โ†‘
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

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 12:25 pm

KlangFool wrote: โ†‘
Fri Jul 13, 2018 11:00 am
fasteddie911 wrote: โ†‘
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 agree that 3% real is a pipe dream in most markets. Yet, if you use many online rent vs buy calculators, 3% real is often the default rate, which I think is crazy. However, the Opportunity costs box -- ie, what you would earn in the stock market if you rent and save the difference -- often has similarly unrealistic default returns. Perhaps it's a wash.

KlangFool
Posts: 10379
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri Jul 13, 2018 12:31 pm

gmaynardkrebs wrote: โ†‘
Fri Jul 13, 2018 12:25 pm
KlangFool wrote: โ†‘
Fri Jul 13, 2018 11:00 am
fasteddie911 wrote: โ†‘
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 agree that 3% real is a pipe dream in most markets. Yet, if you use many online rent vs buy calculators, 3% real is often the default rate, which I think is crazy. However, the Opportunity costs box -- ie, what you would earn in the stock market if you rent and save the difference -- often has similarly unrealistic default returns. Perhaps it's a wash.
gmaynardkrebs,

I justified my house purchase on imputed rent only. In fact, I count the whole PITI as pure housing expenses. Hence, I do not need to care about the house's value. But, most folks would not use this approach because they have to buy lower priced houses.

KlangFool

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 12:50 pm

KlangFool wrote: โ†‘
Fri Jul 13, 2018 12:31 pm
gmaynardkrebs wrote: โ†‘
Fri Jul 13, 2018 12:25 pm
KlangFool wrote: โ†‘
Fri Jul 13, 2018 11:00 am
fasteddie911 wrote: โ†‘
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 agree that 3% real is a pipe dream in most markets. Yet, if you use many online rent vs buy calculators, 3% real is often the default rate, which I think is crazy. However, the Opportunity costs box -- ie, what you would earn in the stock market if you rent and save the difference -- often has similarly unrealistic default returns. Perhaps it's a wash.
gmaynardkrebs,

I justified my house purchase on imputed rent only. In fact, I count the whole PITI as pure housing expenses. Hence, I do not need to care about the house's value. But, most folks would not use this approach because they have to buy lower priced houses.

KlangFool
I'm with you, especially the imputed income part. But pls explain why lower-price houses would be different? FWIW, I went looking for a place to rent for my college age daughter recently, and was surprised how high the rents are for lower cost houses, given how cheap they would be to buy. If I knew for sure she'd be staying there the full four years, I might have bought a place for her.

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 » Fri Jul 13, 2018 1:02 pm

gmaynardkrebs wrote: โ†‘
Fri Jul 13, 2018 12:50 pm

FWIW, I went looking for a place to rent for my college age daughter recently, and was surprised how high the rents are for lower cost houses, given how cheap they would be to buy. If I knew for sure she'd be staying there the full four years, I might have bought a place for her.
Renting lower-end housing can be a lot more trouble for a landlord than renting higher-end housing, especially when college students are involved, so you would expect more of a rent premium to compensate. Poor people often have to pay more than rich people do, and not only with rent. Housing for college students is different but has some similarities.

Most people either can't or don't want to buy a place for their child to live in while attending college, especially since they often only need a place nine months a year for four or five years. Usual guideline for buying vs. renting even under normal circumstances is don't even consider buying for less than five years because of transaction costs.

KlangFool
Posts: 10379
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri Jul 13, 2018 1:21 pm

gmaynardkrebs wrote: โ†‘
Fri Jul 13, 2018 12:50 pm

I'm with you, especially the imputed income part. But pls explain why lower-price houses would be different? FWIW, I went looking for a place to rent for my college age daughter recently, and was surprised how high the rents are for lower cost houses, given how cheap they would be to buy. If I knew for sure she'd be staying there the full four years, I might have bought a place for her.
gmaynardkrebs,

1) I was comparing between renting a 400K townhouse versus buying a 400K townhouse.

A) Buy -> PITI ~ $1,800 per month

B) Rent -> $2,200 to $2,300 per month


2) My income peers would buy a 600K single family home.

A) Buy -> PITI ~ $2,600 per month

B) Rent -> $2,800 to $3,000 per month.

In my area, the difference between rent versus buy for a 600K SFH is not high enough to justify a buy with pure imputed rent.

KlangFool

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

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

Post by ncbill » Fri Jul 13, 2018 1:37 pm

gmaynardkrebs wrote: โ†‘
Thu Jul 12, 2018 8:08 am
ncbill wrote: โ†‘
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.
IMHO it can often absorb all your returns but even hiring a property manager doesn't make your personally-held real estate a passive activity.

The owner is likely still screening tenants & making other decisions about the care/maintenance of the property (e.g. "is it time for a repaint?")

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 » Fri Jul 13, 2018 2:04 pm

danielc wrote: โ†‘
Thu Jul 12, 2018 4:40 pm
Nate79 wrote: โ†‘
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

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 2:18 pm

Phineas J. Whoopee wrote: โ†‘
Fri Jul 13, 2018 2:04 pm
danielc wrote: โ†‘
Thu Jul 12, 2018 4:40 pm
Nate79 wrote: โ†‘
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.

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 2:36 pm

KlangFool wrote: โ†‘
Fri Jul 13, 2018 1:21 pm
gmaynardkrebs wrote: โ†‘
Fri Jul 13, 2018 12:50 pm

I'm with you, especially the imputed income part. But pls explain why lower-price houses would be different? FWIW, I went looking for a place to rent for my college age daughter recently, and was surprised how high the rents are for lower cost houses, given how cheap they would be to buy. If I knew for sure she'd be staying there the full four years, I might have bought a place for her.
gmaynardkrebs,

1) I was comparing between renting a 400K townhouse versus buying a 400K townhouse.

A) Buy -> PITI ~ $1,800 per month

B) Rent -> $2,200 to $2,300 per month


2) My income peers would buy a 600K single family home.

A) Buy -> PITI ~ $2,600 per month

B) Rent -> $2,800 to $3,000 per month.

In my area, the difference between rent versus buy for a 600K SFH is not high enough to justify a buy with pure imputed rent.

KlangFool
Don't feel obliged to respond, as you have done so already, but as I look at both of your examples, what I see is that the cost of owning is less than renting, with a greater difference for the less expensive house. That's a good thing, but It's not obvious to me what that has to do with the concept of "imputed income." I think of imputed income as the fact that when you live in a house you own, the IRS does not treat as income the rent you in effect "pay to yourself." It looks to me like what you are saying is that the savings over renting is enough to offset your transaction costs/closing costs plus the other expenses of ownership. I get that. But if if imputed income is taken into account, it may still be better to buy, even when PITI for buying is higher than (even taking to account the mortgage deduction), due to the "stealth" tax break for imputed income (or imputed rent, if you prefer.)

KlangFool
Posts: 10379
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri Jul 13, 2018 2:55 pm

gmaynardkrebs wrote: โ†‘
Fri Jul 13, 2018 2:36 pm

Don't feel obliged to respond, as you have done so already, but as I look at both of your examples, what I see is that the cost of owning is less than renting, with a greater difference for the less expensive house. That's a good thing, but It's not obvious to me what that has to do with the concept of "imputed income." I think of imputed income as the fact that when you live in a house you own, the IRS does not treat as income the rent you in effect "pay to yourself." It looks to me like what you are saying is that the savings over renting is enough to offset your transaction costs/closing costs plus the other expenses of ownership. I get that. But if if imputed income is taken into account, it may still be better to buy, even when PITI for buying is higher than (even taking to account the mortgage deduction), due to the "stealth" tax break for imputed income (or imputed rent, if you prefer.)
gmaynardkrebs,

I used the words: imputed rent.

<<It looks to me like what you are saying is that the savings over renting is enough to offset your transaction costs/closing costs plus the other expenses of ownership. I get that. >>

It meant exactly that.

1) I have no idea what do you mean by imputed income. To me, housing is an expense regardless of whether I buy or rent. I do not consider housing as an income.

2) For my income peers, when they buy the 600K house, they no longer save and contribute to their retirement accounts. They pay 30+% tax for all their additional housing expense. So, I have no idea what do you meant by tax break?

KlangFool

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 » Fri Jul 13, 2018 3:25 pm

gmaynardkrebs wrote: โ†‘
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.

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 3:26 pm

KlangFool wrote: โ†‘
Fri Jul 13, 2018 2:55 pm
gmaynardkrebs wrote: โ†‘
Fri Jul 13, 2018 2:36 pm

Don't feel obliged to respond, as you have done so already, but as I look at both of your examples, what I see is that the cost of owning is less than renting, with a greater difference for the less expensive house. That's a good thing, but It's not obvious to me what that has to do with the concept of "imputed income." I think of imputed income as the fact that when you live in a house you own, the IRS does not treat as income the rent you in effect "pay to yourself." It looks to me like what you are saying is that the savings over renting is enough to offset your transaction costs/closing costs plus the other expenses of ownership. I get that. But if if imputed income is taken into account, it may still be better to buy, even when PITI for buying is higher than (even taking to account the mortgage deduction), due to the "stealth" tax break for imputed income (or imputed rent, if you prefer.)
gmaynardkrebs,

I used the words: imputed rent.

<<It looks to me like what you are saying is that the savings over renting is enough to offset your transaction costs/closing costs plus the other expenses of ownership. I get that. >>

It meant exactly that.

1) I have no idea what do you mean by imputed income. To me, housing is an expense regardless of whether I buy or rent. I do not consider housing as an income.

2) For my income peers, when they buy the 600K house, they no longer save and contribute to their retirement accounts. They pay 30+% tax for all their additional housing expense. So, I have no idea what do you meant by tax break?

KlangFool
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.

User avatar
willthrill81
Posts: 6053
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 » Fri Jul 13, 2018 3:30 pm

danielc wrote: โ†‘
Fri Jul 13, 2018 3:25 pm
gmaynardkrebs wrote: โ†‘
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).
โ€œIt'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.โ€ J.R.R. Tolkien,The Lord of the Rings

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 3:34 pm

danielc wrote: โ†‘
Fri Jul 13, 2018 3:25 pm
gmaynardkrebs wrote: โ†‘
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.
Sure, I see your point. It also explains why an unusually high percentage of home buyers now are cash buyers, who are comparing the return on cash (almost 0 until quite recently). You don't need much appreciation to make the numbers work for that.

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

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

Post by gmaynardkrebs » Fri Jul 13, 2018 3:37 pm

willthrill81 wrote: โ†‘
Fri Jul 13, 2018 3:30 pm
danielc wrote: โ†‘
Fri Jul 13, 2018 3:25 pm
gmaynardkrebs wrote: โ†‘
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.

User avatar
willthrill81
Posts: 6053
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 » Fri Jul 13, 2018 3:50 pm

gmaynardkrebs wrote: โ†‘
Fri Jul 13, 2018 3:37 pm
willthrill81 wrote: โ†‘
Fri Jul 13, 2018 3:30 pm
danielc wrote: โ†‘
Fri Jul 13, 2018 3:25 pm
gmaynardkrebs wrote: โ†‘
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?
โ€œIt'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.โ€ J.R.R. Tolkien,The Lord of the Rings

KlangFool
Posts: 10379
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Fri Jul 13, 2018 4:03 pm

gmaynardkrebs wrote: โ†‘
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

Post Reply