There is also a low barrier to new construction for condos and townhomes. New construction tends to leave older builds with only price as a selling point. SFHs tend to appreciate faster. 600SF condos in particular have near zero flexibility for living arrangements. Get married? Have kids? Have to move. Very limited number of eyeballs for this type property.
Boston is very geographically constrained to new construction. Almost anything does quite well there…depending on you entry point. Though Boston does quite well with time, it too has experienced less than stellar real estate markets.
IP,
who grew up in the Boston area and left it to live in a lower COL place to be able to do more than tread water financially
There are many other reasons condos have lower appreciation rates. For example, because there’s less control over expenses. If the condo board says “need to change the roof THIS year” then you’re going to pay the $5000 assessment right now. If you own your own home, you can check out the roof and maybe determine that it has another couple of years in it, and delay the expense if you so decide. Another example is that condos come with more “skim” than your own home. Most condo boards hire a management company that takes a goodly percentage of the condo fees for their services (sometimes those services are worth the fee, and quite often they aren’t, but either way you don’t have a choice in paying them). And another recent example, changes in local regulations can sometimes cause VERY high unexpected condo expenses, this phenomenon is very rare for individual homes.
Let’s see - the price of the house you chose to follow in Houston had little or no appreciation during the last 20 years. On the other hand , the house I actually purchased in Houston appreciated at over 3.3% during that same time frame.
I’ll tell you what. The next time I want to lose money on a property, I’ll ask you for your advice on choosing it. Until then, I will stick to my methods on how to choose homes.
That $1.5MM Solana Beach CA condo I provided the link to has tripled in price since 2006. The condo I currently occupy in a working class neighborhood in a Portland suburb has nearly quadrupled in price since 2012. If you’re intelligently applying the “rent vs. buy” analysis, you can do very will with unleveraged real estate. It’s just that the opportunities to get an S&P 500-like return are few.
What I have noticed is that the people collecting “the skim” in Real Estate (Real Estate Agents, Mortgage Brokers, Developers taking a 2%-4% fee off the top on a project, etc.) tend to do well. It’s the investors that are absorbing the risk of leverage that are left holding the bag. If I can get the skim-free return of the S&P 500 by holding a low-cost index fund with literally no work, why would I mess with Real Estate? My time is too valuable.
No. You want to look to me to identify the properties you should rent , not buy. A home with 3.3% appreciation is definitely in the “not buy” category for me. But of course, it may be a very pleasant place to live – as a renter.
I found the Galleria area of Houston to be a great place to live. Obviously being an Engineer, Houston was an excellent place to earn a living. It just wasn’t a good place to own real estate.
Geographically limited resources, like waterfrontage, tend to do quite well. Not only is there a limited amount of space to build on, there tends to be high zoning regulations that further limit new construction. That would be one of the types of condos that appreciate…until of course condo fees go through the roof, or the building collapses from ground instability like happened in FL: Surfside, Florida, condominium collapse investigation : NPR. You have no control over your costs, as Mark pointed out.
But are you? Frankly you don’t seem to consider a wide swath of types of properties and only look at the bottom feeders. Further you don’t seem to account for alternate value of lost investment income on purchase cash in excess of 20% down to avoid PMI. You should retitle your article to address why it doesn’t pay to buy the cheapest property possible, and rent instead. In essence, you are cherry picking the worst data possible to prove your point.
Absolutely! I wouldn’t touch a Florida condo, anywhere in the State, with a 40-foot pole. Years ago I saw a “60 minutes” story with good old Morely Safer where he was interviewing a Florida condo developer who was still collecting a fee, 20 years later, for the use of pool at one of his developments. Like I said, the people collecting “the skim” tend to do very well in Real Estate.
When I bought my condo, my real estate agent was a little confused with me. I told him that the only thing I needed to see was the condo documents and the last 12-months of Board Meeting minutes. I could drive by the properties by myself without taking any of his time. He said “Nobody looks at those”.
Unfortunately, the only way you get to see the condo documents is by making an offer. So I think I made 8-10 offers before I found a place that was being governed and managed to my liking.
You mentioned condo expenses. My annual HOA fee is around 0.80% of market value. I figure maintenance costs in the Pacific NW should be running about 1.50% of market value, so there’s a good chance the condo board is running cheap and light. But that’s fine. If they doubled the HOA fee and started putting extra money in the Reserve Account, they’re only allowed to invest the money in something safe like a CD. I’d rather keep it invested in an S&P 500 fund in my own account, and then pay the $20,000 or $50,000 lump sum assessment when it comes. That said, over the last few years, the HOA has replaced the wooden decks on both the front and back of the my unit, so the property is being well maintained.
The Surfside condo collapse was caused by lack of maintenance and little to no Florida Gov’t regulations forcing that maintenance as a health & safety issue. Condo owners like super low fees. I saw that behavior in the condo board where I’m currently living early on. Now the majority of the board is absentee real estate investors who understand the value of adequate maintenance. They still like low monthly fees, but realize that there’s a certain amount of stuff you can’t ignore or delay.
I’m only considering the properties in convenient locations with the amenities I want at the time of rental or purchase. Few people would consider a California beach property a “bottom feeder”. The upsetting aspect is apparently the “rent vs. buy” analysis
Paying 3% for a mortgage when you have sufficient funds sitting in a money market fund at 2% is kind of dumb. But you can never explain that to a real estate “investor” {{ LOL }}.
Until of course you start getting 5% on your money, and retain the ability to write off interest payments on your taxes if you turn your property into a rental down the road. A mortgage, as an inflation HEDGE, is insurance that defrays the costs of rising inflation: To hedge, in finance, is to take an offsetting position in an asset or investment that reduces the price risk of an existing position . Hedge Definition: What It Is and How It Works in Investing. I see passing up a relatively unusual, and unlikely to last long, 3% rate as short sighted. I fully expect to have the interest in my favor at some point in the 30 years of the life of the loan, particularly with a starting rate like that. Further, having excess cash at my disposal allows me to invest in opportunities that may come up, be it real estate, stocks, etc. I don’t mind taking risks, but at the same time I mitigate those risks.
Real estate works best as a long term holding. When you put blinders on any long term strategies, you leave a lot of money on the table.
Over the last 50 years, you’d have about 15 times as much money had you invested in the S&P 500 vs single-family real estate. Of course, there’s a whole industry out there intent on convincing you otherwise. Don’t drink the Kool-aid.
Actually, I don’t think I want you look for places for me at all - to rent or to buy. I don’t think we value the same criteria, even though I’m an engineer, too.
Then why are you a homeowner? You obviously think of real estate purchases only in investment terms, and you also obviously think that real estate is a bad investment.
Personally, I like living in a place that I own. It’s a lifestyle choice, not an investment. And for my real estate purchases, I like using other people’s money - the bank and my tenants - to make my cash-flow positive real estate purchases.
I’m willing to be a homeowner in that 1 out of 100 instance where real estate provides me with the return of the S&P 500, otherwise I’m a renter. And I rent/buy properties that provide me with the space and amenities I want, in locations convenient to my daily travels (i.e., work office, golf course, airport, etc.) A simple “rent vs. buy” calculation informs my decisions, but it violates what you may have learned from your parents, and reinforced by the real estate industry. Arithmetic will set you free. {{ LOL }}
It’s no different than the nonsense the investment industry has been pedaling for years with high fee advisors and annuities.
No, you’re a renter who is living in your investment account. You will never truly be a homeowner, who owns their home for the lifestyle that it provides, regardless of the investment potential. There is no reason that the place where one chooses to live has to provide them an investment return. It just has to provide them a place where they can feel comfortable living without costing them so much that they can’t reach their other financial goals. Not everything in life has to be viewed in investment terms.
Well, you can keep claiming that, but the article you linked to does not take all of the factors into account, and therefore, is flawed.
Yeah, it is different. It’s a lifestyle that is chosen without regard to investment. I would likely not be able to rent the house that I live in now, since if it was not owner-occupied, it would earn more money as a short-term vacation rental than it would as a long-term rental. In fact, if I ever move out without selling the house, I will probably turn it into a vacation rental.
That said, the price of the house has appreciated at a 7% annual rate since I’ve owned it. If I wanted to look at it as an investment, because of leverage, I’m sure that return would be well in excess of the S&P 500. But I don’t bother to do that because it’s not an investment. It’s where I live.
I hope you don’t mind me asking, but how many times have you moved? Are moving expenses factored in? And the labor?
I totally hate moving. As I accumulate stuff they get progressively harder. (Yes, part of that is that I am someone who does accumulate stuff.) My major moves were from apartments to my first house (3 years there), to my wife’s house when we married (35 years), and finally to my retirement home (3 and counting) near my daughter.
Have to say I disagree with this. I agree with Intercst that your home should be considered an investment, and there is no reason why it is not. Where we disagree is the frequency with which home ownership can be profitable, if you follow certain guidelines, as well as the need to account for more than just cheapness in property selection. There are so many options for home ownership. Taking the time to wait for the right property, and timing, that meets both profitability and personal requirements is key. It’s rather like stock picking. If you know what to look for, what data to use in analyzing, most often you will do well in real estate.
Life offers many options, and it’s important to assess the alternative value for the money spent on those options when determining the right choice.
Unlike Intercst’s claim that he analyzes his home regularly, there is no need to do that analysis in perpetuity, just when you want to evaluate whether to buy or move. For most people, the hassle of moving just doesn’t make that realistic to do annually, even if the savings, at that specific time, show it to be a good thing to do. As you know, real estate is not very liquid and there are significant transaction costs that need to be recouped over time. While it CAN be done, trading in and out of real estate is extremely difficult to do well, and is subject to higher risks than I care to take on.
If you do decide to move elsewhere, consider 30+ day furnished rentals, rather than short term. It gets around the legal hassles of short term rentals that most municipalities are imposing, and is still quite lucrative. Frankly, if the capital gains we have accrued on the house in the less than 5 years we have owned it were not so large, it is what we would be doing with our property, rather than sell it.
I know you asked Intercst, not me, but excluding all the moves from apartment to apartment before home ownership at 22, I have moved 12 times…13 if you include moving DH out of his townhome and into my house when we married. Including DH’s townhome, we have owned 7 houses, my 6 being SFHs. Hopefully soon to be down to 1.
Not all of those moves involved purchase/sale of real estate, nor were they all of our choice. Many were corporate, for which we were moved by the company, including one sale where we payed only income taxes on the expense of selling, which was picked up by employers. Two other residences were corporate housing, which was part of our compensation, again with corporate movers. We were moved to NJ, where I could not bring myself to buy a property, winding up renting a house for 18 months. We had to move to another rental on our own dime, when it went on the market and our lease not renewed. PITA for the remaining year there before retiring. Frankly, for a short distance move I prefer one vanload at a time to a tractor trailer vomiting the contents of your old home into the new. Talk about overwhelming! We have moved ourselves ever since, including a move that was 8 hours away, one way, using handymen on each side to load some furniture that we desire to never lift again, but will be given to Habitat ReStore for pick up this time.
I hate the lack of control of renting, but will do it if the timeframe is too short to buy or the real estate investment conditions I look for are not appropriate. We have also been landlords, often keeping as rentals homes we moved out of when staying local. Most of our moves have been work related and long distance, however.
The new chapter of our life will have more of a gypsy component, renting 30+ day furnished properties that require only the personal property we bring with us. (Furnishedfinder.com) We are keeping our vacation home as a home base and place to store our extra furniture we can’t bring ourselves to part with, but expect to be on the road for about 8 months of the year. Part of this is to find a new location we love to call home, or more than one if the opportunity arises. We will likely buy places in areas we want to come back to regularly, putting it on the 30+ day furnished rental market when not there. We did a trial run this summer and loved it.
Wow!!! While I lived in many rentals (probably about 10 of them over the years) as a single person in my youth, after my wife and I married, about two years later we bought a house (late 90s). Till today, this is the only house we have ever owned and we still live in it. All of our children (now young adults) were born and grew up in this house. It is also the only piece of real estate that we have ever owned*. And we purchased it in conjunction with a corporate relocation, so almost all the transaction expenses were paid by my employer at the time.
* Many years ago, my dad, my uncle, and I together bought a retirement apartment for my grandparents, but I don’t count that one because I only paid for part of it, I never owned any part of it.
Not @intercst but since I graduated with my bachelor’s degree, I’ve moved 12 times, purchased 8 different personal residences (sold 7), purchased 4 different rental properties (sold 1) and was a partial owner of 5 different inherited properties (all sold), for a total of 12 real estate purchases and 13 real estate sales that I have personally signed for.
Nonsense. An investment in the S&P 500 with the same amount of leverage would return far more. Leverage adds risk, whether in stocks or real estate, as homeowners sadly learn in housing downturns. (Though admittedly, those sad circumstances create opportunities for those doing “rent vs. buy”.) Don’t drink the Kool-aid people!
Whatever kind of home you own in Houston, I’m pretty sure I could find an equivalent property as a rental.
Holy cow! You’re the Real Estate “skim collectors” dream. I hope they were all company-paid corporate relocations.
I do the “rent vs. buy” calculation every time a lease comes up for renewal, but things don’t change that quickly, that you’re moving every year.
In the 25 years I lived off and on in Houston, I rented 3 different Houston apartments and stayed in each one about 5 years. Being in the oil & gas industry, I was out of town periodically (London UK and Stavanger, Norway on assignments with Exxon, 3 years in California waiting for the oil & gas industry to recover from the 1986 oil price collapse.) Then I returned from California to a job with a chemical company in Baton Rouge, lived in a resort-style apartment complex near LSU the entire time, 5 years later I had enough capital to quit working and retired in 1994 at age 38, and moved back to Houston.
The high point of my rental activities was the penthouse apartment overlooking the Thames River in London. The product of Margret Thatcher crashing the UK economy and the British pound collapsing to an exchange rate of $1 = 1 pound sterling. I normally wouldn’t rent something that extravagant, but Exxon’s housing allowance was “use it or lose it” so I made sure to milk it for what it was worth. Even got the landlord to furnish the apartment with modern furniture to my liking. At the time, American expats were like Saudi Princes.