… climate change isn’t any better in New England.
The bigger tragedy is that the owners paid $557,500 for the home in 1995. The same amount invested in the S&P 500 since 1995 would be worth $8.2 MM today. “Rent vs. buy” people.
Also, I don’t think the $2.8 MM value on zillow reflects the Health Department’s condemnation of the property. {{LOL}}
I continue to see value in maintaining a small real estate footprint in these times of precipitious climate change.
intercst
Since they bought the property almost three decades ago sea level has risen a bit over 3 inches. Methinks the loss of 35 feet of dunes has a more proximate cause – such as erosion.
It’s an old story. Land and homes have been lost to the sea for generations on Nantucket…It’s why native islanders have often shied away from the coast when building their homes, or placed them on movable skids if they built near the sea.
www.savenantucketbeaches.org/overview
“Yes, erosion has existed for millennia and has made, and continues to make, Nantucket Nantucket. Our shoreline has always been shifting, as are all shorelines. The fact is that shorelines are not “lines” at all but instead are transition areas between the land and the sea…”
DB2
Larger and more frequent storms are often a cause of erosion. You’re also starting to see erosion in these mountain river valleys after Biblical rainfall events, like the recent unpleasantness in Vermont
intercst
Everything bad is Climate Change and its evil villain sidekick, CO2. Governments spend billions in grants to prove it.
The Captain
We don’t know how they financed the house. Did they plunk down $557,500? Or maybe they put down $57,500 and invested $500,000 in the S&P 500. I wonder how much it would have cost them to rent that particular house for the last 28 years? And would they really have $8.2 million? What about the LT capital gains tax they would owe. And there’s the $250k home exclusion rule. And there’s no tax deduction for mortgage interest and RE taxes if you rent. And taxes and interest and maintenance are built into rent expense, unless the owner intends to go bankrupt. Did they overpay or underpay for the home asset? How fast did the home value appreciate vs how fast did the equivalent rent expenses increase? And more.
I think the rent vs buy decision is a bit more complicated than you presented it in this scenario.
Obviously you know that that isn’t how to do a rent versus buy calculation. You need to look at all the cash flows and the associated dates, and then calculate the IRR for each option. In this case, it was probably a negative cash flow of 20% down on day 1, plus 4% closing costs on day 1, followed by monthly payments amortized over 30 years at 6-7% or so interest, and they likely refinanced to 3-4% at some point, add maintenance costs when incurred, etc.
There is! The owner of the property takes all those deductions (and more, depreciation, etc) when it is a rental property. The rent is determined by the market, which is another way of saying what the aggregate cohort of owners in that area are willing to rent for (and what the renters are willing to pay) which is determined by their overall costs … including the aforementioned tax deductions. So your rent effectively “includes” those deductions.
Yep. So too are the tax deductions built in.
Of course the owner gets the deductions.
I was trying to address home rent vs buy, not buying an apartment complex.
The only way I’ve been able to reconcile home ownership is that it is a quality of life thing for me that I want for the family. The costs of home ownership are high. I’ve done a roof (out of pocket), an HVAC system, two water heaters, flooring, tens of gallons of paint, tons of landscaping, three sprinkler systems, the list goes on. From an investment standpoint, that’s totally the wrong way to look at it. Home ownership is about having garage space, no shared walls with neighbors, a backyard, etc. etc. All the things apartment living never gave me.
It has nothing to do with ROI. And people who look at it that way are way too focused on $$$.
I once knew a man from Nantucket…
It is not an investment, it is an expense. In fact, it (housing) is often your biggest expense, or one of your biggest expenses. Now, it is entirely possible, even probable, that its value will keep up with inflation, and even beat inflation sometimes, but that’s not a sure thing, and that still doesn’t make it an investment.
It is an expense but it can also be an asset. In these conversations people tend to look only at price appreciation, but overlook one of the main financial benefits: The imputed value of rent. You have to take that into consideration when doing the analysis.
Every single home I have owned (9 over 40 years from my early 30’s to the present) has given me a very large ROI, beating most of my securities investments. I definitely DO buy homes to get amenities I relish but that are rarely available to renters, but I also always have bought based on how much potential there is in a property for big returns on investment of my TIME and MONEY.
I early mastered the crucial building codes for Los Angeles, and the City building inspectors respected me and my work and gave me no problems on my do it yourself efforts, and so investing TIME to leverage my MONEY could and did have huge payoffs. This went far beyond the (valuable but risky) tactics of “flipping houses” – the fine art of cleverly giving not too expensive facelifts to properties.
My favorite type of properties have outwardly very daunting problems, seemingly very difficult, risky, and expensive to mend, properties that very few buyers are willing to cope with. My best was a superb old house in the Hollywood Hills that seemed to be in a state of collapse as, amongst other problems, the floors had sunk up to 2 inches along the full length of the front of the house in the rooms facing the spectacular $$$ views of the city far below. This readily apparent structural issue screamed “ongoing Earthquake prone hazards!!” to any intelligent person who has lived in Los Angeles. Additionally, the electrical system was from the 1920s with illegal, badly designed, jerryrigged circuits added on in a hodgepodge fashion, the water supply pipes were undersized galvanized pipe almost squeezed shut by deposits, and a hot tub that had been added to a bathroom was rotting and giving off bad odors.
I saw that the sunken floors were almost certainly not earthquake related, but rather caused by poorly executed installation of wide 1960’s picture windows shifting too much weight on to too few structural posts that were therefore crushing the wood floor “plate” below. In my offer I required permission before escrow opened to make a small and easily repaired inspection hole in a carefully chosen spot in the ceiling of the floor below so as to check my theory, which proved correct. I bought the house and immediately slightly jacked up the roof above, then ripped off the (old dying plaster) walls around the guilty picture windows, added to and repaired the wall posts and plates, nailed on earthquake grade plywood to achieve modern shear wall specs, and also added modern electrical conduit and copper water pipes everywhere useful while the walls were open, finishing by repairing/leveling the oak floor slats. All that I did with one helper on weekends over the course of two months of intensive sweat. Two years later, after 40 or 50 hours in the nasty tight crawl space under the house replacing and enhancing water gas sewerage pipes and electrical conduits and junction boxes and installing modern breakers, while my husband designed, carried out and supervised restoration of the glorious 1920’s woodworked interior, we had far more than doubled the value of the house.
This is an extreme version of what can be done, but RE provides fantastic investment opportunities because most buyers and brokers are ignorant, lazy, and acting on false prejudices, habits, and emotional impulses.
david fb
When I was about to get married I asked Mr. Jones, a friend and insurance agent, whether I should buy or rent. His reply, “It depends, if you are going to be an employee, buy, if you are going into business, rent and put your money in the business.” This sounded perfectly reasonable. I rented most of my life. I only bought a beach condo when I was rich enough to pay cash, before the dot-com crash. I planned to split my time between Caracas, the marina, and going sailing. “The best laid plans of mice and men…”
The Captain
Yes. But the costs of home ownership often eat up a lot of the “imputed value of rent”, so you’re really not getting much more than the price appreciation. That’s why your “20% down payment” will almost always see a better return in the S&P 500 rather than poorly appreciating residential real estate.
I’m lucky that I live in an area with low property taxes. And over the years, they’ve replaced 4 of the 5 condo board members with absentee real estate investors rather than homeowners. I found that leads to more professional management and attention to doing the required maintenance, rather than just keeping the monthly HOA assessment as low as possible. Low HOA fees and deferred maintenance likely killed all those people in the Florida condo collapse a few years ago.
But I agree that if you 're doing the “rent vs. buy” analysis, and buying at the right time, you can do well. It’s just that those opportunities in real estate are very rare – more like “buying DELL in 1992” than investing in an S&P 500 index fund
The condo I bought for cash in 2012 is now almost 4 times it’s purchase price. The annual total of property taxes, condo fees, and a reserve for fixing items inside the unit that a landlord would be responsible for amount to about 20% of the rent being charged on the unit across the street. So yes, the imputed rent can be considerable, but I suspect that my experience as a homeowner is in the top 2 or 3% of outcomes. The average homeowner isn’t seeing this.
intercst
Hey Captain, I agree with your friend’s perspective, and your flat looks gorgeous…
I made my homes one of my subsidiary businesses, and like you I bounced from opportunity to opportunity whether as an employee, a employer, or a DIYer on a ferocious scale.
david fb
Ex-flat. The early buyers flipping these apartments made a lot of money. I sold getting ready to quit the country. The Chavez revolution had already ruined the marina. The marina’s founders were forced to sell out. The new owners cancelled the Bahia Redonda website I hosted. Instead of world cruising visitors it became mostly militants who got rich from the revolution. They paid for most things with bills in brown paper bags.
The Captain
