Multi-millionaire doesn't own a home

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@syke6

I don’t think that’s the correct way to view it. The imputed value of rent is be included in the rent or buy calculation.

Exactly! And most of the time when you include all those costs of owning vs. renting an equivalent property, renting comes out cheaper.

My favorite real estate advice is that you should plan to own your home long enough for the price appreciation to pay-off your closing and sales costs. I understand why the real estate industry would advise that, but why wouldn’t I rent an equivalent property over that holding period, keep my down payment invested in the S&P 500, and pocket the skim of the closing & sales costs?

The only reason I can fathom is that “renters are losers” and you should aspire to home ownership because it makes you an upstanding citizen.

The Kool-aid is strong.

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[intercst]

@syke6

Housing is an expense. Since monthly rent and mortgage payments should be roughly equal, we can disregard the expense when calculating the ROI. Same expense either way, right? That means we can look at the return on just the down payment.

Most homeowners are ignoring or underestimating the cost of maintenance and repairs (a cost beyond your mortgage payment). An individual homeowner is paying retail for those services, a large property owner has in-house staff and wholesale pricing.

Maybe you’re doing all the maintenance and repair work yourself? That certainly improves returns since you’re converting wage & salary labor to a capital gain at a lower tax rate, but how many folks are just calling a contractor when something goes wrong? I suspect most.

It’s entirely possible that I’ve lived in unfortunate places at inopportune moments over the past 30 years and that’s why the rent vs.buy calculation didn’t turn positive until the depths of the 2008 housing crash, but I doubt it.

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[syke6]

@intercst

Most homeowners are ignoring or underestimating the cost of maintenance and repairs (a cost beyond your mortgage payment). An individual homeowner is paying retail for those services, a large property owner has in-house staff and wholesale pricing.

Agreed. You have to include the total coast of ownership in the calculation.

However that wasn’t my point. My point was that the proper way to calculation the ROI of ownership is by using the ROI of the down payment, not the rate of return of the house itself. That’s why people are saying they are getting S&P 500-like returns on real estate that appreciating at a slower rate.

@intercst

Exactly! And most of the time when you include all those costs of owning vs. renting an equivalent property, renting comes out cheaper.

It certain does around here. Last time I figured it, it was about twice as expensive to buy than to rent in Seattle.

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@syke6

I bought a rental property in 2010 right at the bottom of the market. I used a HELOC on my primary for the down payment. I sold it in 2019 after some favorable price appreciation. I did a 1031 exchange into a property in Hawaii, so I haven’t even been taxed on the gains.

Sure. That worked out for you. But leverage goes both ways. If an unleveraged investment in the S&P 500 is sufficient to meet my goals, there’s no reason to take on the risk of a leveraged investment.

Similarly, when I bought my home in 2012, I could have gotten a mortgage for 3%, but I had sufficient funds in the fixed income portion of my retirement portfolio to cover the purchase price earning 2% at the time. So I “loaned” myself the 2% money, pocketed the mortgage fees, and replenished the fixed income account with unspent dividend income over the next 2 -3 years. It’s an asset allocation decision. A mortgage-free home can provide some diversification, as long as you’re buying it at a price that has some prospect of providing an S&P 500-like return.

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@aj485

Because sometimes it’s not all about getting rich. I bought my current house because I like watching the cruise ships and container ships go by in my backyard, and watching the whales breach and otters play in my backyard.

That’s wonderful. When I had a beach view when I lived in San Diego, I found I wasn’t spending a lot of time staring at the ocean. So I probably wasn’t getting a lot of value out of paying for the premium view. Similarly, if you don’t play golf, it probably doesn’t make a lot of sense to buy a home on a golf course, on the bet that fairway view homes are luxury properties that appreciate faster. It’s expensive to maintain a golf course to the standard that improves property values.

It’s just another aspect of housing where you look at the cost, and see if it provides you with enough value. And then you make the calculation on whether it’s cheaper to acquire the use of that amenity by renting or buying.

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[aj485]

@intercst

When I had a beach view when I lived in San Diego, I found I wasn’t spending a lot of time staring at the ocean.

Well, when I get bored with the water views, I just look out the front of my house to the mountain views. I don’t have to stare, the views are just there - everywhere I look.

@intercst

And then you make the calculation on whether it’s cheaper to acquire the use of that amenity by renting or buying.

Currently, no rentals on my road - the one that had been a rental got sold to an owner-occupant recently. And even back when I was buying, similarly situated rentals were all short-term vacation rentals. So there was no ‘rent’ option for this type of home.

AJ

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@syke6

However that wasn’t my point. My point was that the proper way to calculation the ROI of ownership is by using the ROI of the down payment, not the rate of return of the house itself. That’s why people are saying they are getting S&P 500-like returns on real estate that appreciating at a slower rate.

Yes. I understand the use of leverage to goose the 4% average return of real estate. But leverage works both ways. It amplifies losses on the downside.

In 1986, who would have thought that many of Exxon colleagues would be bringing $20,000 or $30,000 checks to the closing on the sale of their home because the sales price was insufficient to cover the closing costs and pay off the mortgage. I thought real estate always went up?

It was especially frightening for the real estate “moguls” with strings of 10-12 rental homes. I know one guy who was still working into his 70’s trying to climb out of the hole.

I know that doesn’t happen often. But the “real estate” guys always seemed busy with their rentals on the weekends, while the “stock” guys were playing golf and tennis. Why take the risk of an actively-managed, time consuming, leveraged investment if you don’t need to? And of course, if you’re hiring a property manager to make it “more passive” and less time consuming, that reduces your return.

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@aj485

Currently, no rentals on my road - the one that had been a rental got sold to an owner-occupant recently. And even back when I was buying, similarly situated rentals were all short-term vacation rentals. So there was no ‘rent’ option for this type of home.

The rentals were right beside the owner-occupied units when I lived in San Diego, so it was an easy choice. It just depends on where you are, what’s available, and your willingness to pay for a “premium” property.

Like flying Business Class, Real estate can be an emotional business.

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[syke6]

@intercst

Yes. I understand the use of leverage to goose the 4% average return of real estate. But leverage works both ways. It amplifies losses on the downside.

It actually doesn’t though. Let’s say that $500K house drops to $400K and you need to sell. Regardless if you pay cash or got a mortgage you’re out the same $100K.

The risk is if the price drops and you don’t have the money. But the loss is the same.

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@syke6

Regardless if you pay cash or got a mortgage you’re out the same $100K.

Yes, plus the cost of originating the mortgage, and the delta between the mortgage rate and funds available to buy the property currently earning a lower rate. If I don’t need the risk of -leverage to meet my goals, why pay extra to use it?

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[intercst]

@syke6

The risk is if the price drops and you don’t have the money. But the loss is the same.

In 1986, the people who didn’t have money, could just send the keys to the mortgage company and not bother with closing a sale. The subrogation clause in the private mortgage insurance was only a concern for those with assets.

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[MarkR]

@intercst

Not if you’re only able to invest it in a home with a 100-yr 4% average return vs. 10.7% for the S&P 500

If you run the numbers, a 4% average return with 20/80 leverage at 3.5% interest has a similar result to a 10.7% average return with 100/0 leverage.

@intercst

and, of course, half the homes in the country are getting less than 4%.

Yep. And more than half the investors in the country are getting less than 10.7% average returns.

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@MarkR

@intercst

and, of course, half the homes in the country are getting less than 4%.

Yep. And more than half the investors in the country are getting less than 10.7% average returns.

Not the ones holding an index fund. I see Vanguard making the same argument today in trying to sell their Personal Advisor Service with the 0.30% annual fee. 'Having a Financial Advisor adds 3.75% to your investment returns"

Putting a value on your value Quantifying Advisor’s Alpha (vanguard.com)

What happened to Jack Bogle’s advice to “hold an index fund and stay the course?” I’m pretty sure they’re not improving on that by 3.75%, they’re likely underperforming by at least the cost of the 0.30% fee.

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[branmin]

@intercst

Like flying Business Class, Real estate can be an emotional business.

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Wow, what a long thread. You know, had many good discussions with many of you over the years and without writing a book, although I don’t agree with personally for my own residence in renting v buying, if it works for one, then good for you. But take the quote above.

I prefer first class(horses for courses) and have done for the last 40 years and just spent over Xmas and new years at the Shard, then the Corinthia and Claridges Hotels in London in suites that literary cost a fortune per night. So what, what’s my point? My better half for over 50 years got severe shingles then dementia(all within one year) and really wasn’t over there or now back again here, aware of much. But did appreciate and remember seeing live the Fireworks on New Years Eve, so mission accomplished. Get your health in order, make sure that’s taken care of, diet, booze, lifestyle etc. That’s the most important aspect, as one never knows what is going to hit you and when, so all the saving this, making that, is to a certain extent irrelevant, as if you lose your partner, yes life goes on but now to me, I still prefer to own my own home due to memories(as I have never ever sat down or even thought of trying to work out would I have been better off renting) but although business class would also be fine, I would not now go economy and wondered how much I saved!! As I said, we are all different with different backgrounds and each have an agenda to try to do it right.
I’ve done very well with annual rentals, just increased the rent by 20% in one area and after Ian hit, we totally had units gutted, but got rebuilt within 4-6 months and although a battle, insurance came through.
Many here I notice have seen huge growth as in selling 3/4 times higher over 20 years and some not so much, others had a return of 100% in 2 years. Good for you, but it’s all irrelevant to a certain extent, as it depends on where you live. I’m in SW Florida and have seen returns x5 in just 4 years here. One specific place has doubled in one year(just rented that out for 5 months from Dec 24 onwards) and like stocks, just because it’s high(Nvidia at $400.00 as an example) doesn’t mean it can’t double from there again and again and again! Need a bit of luck, foresight along the way plus location, location, location.

Yes, hurricanes, HOA fees through the roof, beach front property taxes and don’t get me started with Insurance in Florida, etc, etc, moan, moan.
But it is what is it, as could get run over by a bus tomorrow or as they keep saying be underwater in a few years and yet, talk about global warming? Really? Down here it’s bloody freezing and been that way since last year.
Oh and Happy belated New Year to all.