Somewhat OT - Real Estate

In my situation I was not able do a detailed buy vs rent calculation when we bought our current fairly expensive (too me) house. My wife wanted the house so we bought it. :rofl:

I’m wondering what percentage of folks buying houses are in the same situation as I was, where it’s basically an emotional and not a strictly rational purchase? 50-60%? Higher?

I’m wondering what percentage of folks buying houses are in the same situation as I was, where it’s basically an emotional and not a strictly rational purchase?

Can’t answer this question, but I run a 10 year profit projection spreadsheet on a home I look at purchasing. Obviously we are not renting out our residence, but it’s a good way to evaluate what your costs may be and what your fallback position could be if you decide to move.

https://www.mortgage-investments.com/resources/spreadsheet-d…

3rd spreadsheet from the top.

I suspect I am pretty unusual in this way. Even one of my friends with 13 rental properties doesn’t do this, but I find it to be very helpful.

WRT rent or own calculators, the one’s I have found on-line scream towards buying in our area. Rents are super expensive.

IP

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Inheriting my family home free and clear of mortgage meant that despite living in a declining rapidly neighborhood I was still able to cash it out and invest in equities and buy a cheap house elsewhere with a low mortgage. I’m damn glad my parents bought that house because they were depression-era kids and never invested a dime into the stock market. I can only imagine what their 50+K in savings could’ve been had they put it into an index fund, never mind BRK!!

Lots of people I know these days are annoyed as hell that they rented when they could’ve bought. Houses in the Hudson Valley were often under 100K in 1997. 150K would’ve gotten you an acre or maybe 2! These days? Same county? Anything not needing extensive work is 300K-700K, depending on size and usually with very little land.

SD

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When I run the numbers I always get renting to [sic] better than buying financially…<<

Good post! And true, based on your numbers.

But here is the caveat: Past performance is no guarantee of future returns.

Dang it.

BUY

House purchase $600,000
Closing cost $12,000
20% down payment ($123,000)
30 yr mortgage at 4% $28,188

Annuity required to pay mortgage assuming return on investment is inflation (3%) plus 7% (after tax which is minimal) $294,000

Annual expenses that are subject to inflation (assume 3%) Insurance, HOA, Maintenance, Tax etc. $12,000/yr

Annuity required to pay for annual inflation adjusted expenses $124,000

Total required cash outlay to own home for 30 years = $123,000+$294,000+$124,000=$541,000

House value after 30 yrs = $600,000 * 1.04)^30 = $1.48M (assume house increases at 1% above inflation rate)

RENT

Rent = 5% of house cost increased by inflation (3%)

Invest $541,000 at inflation plus 7% in BRK. Capital gains tax minimal on the amount removed each year to pay for rent.

At 30 years, BRK value is $2,28M or $600k better than buying

I’m not sure your conclusion would be any different, but your calculation seems to be missing a few considerations, unless I am missing something. You’re assuming that a BUY expense at year 29 is the same as a BUY expense at year 0, which is clearly not going to be the case. That $541k you used for RENT is probably more like $400k in today’s money, just guestimating.

If you’re looking at it as an investment, you should maximize your house as an investment. No one pays 20% down anymore, 10% is decent, you can get away with 5%. Also for me the home mortgage interest deduction is key, try to max it 750k, depending on your tax bracket and your interest this is maybe $15k a year in fed tax savings, maybe a couple in state tax savings. It seems likely that you’d have some moving expenses with RENT as you’d be unlikely to stay in the same place for 30 years. Also, rent goes up faster than inflation, how much, the first link on google says since 1980 rent has gone up 8.9% a year, I think inflation is generally lower than that (maybe not this year).

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>>When I run the numbers I always get renting to [sic] better than buying financially…<<
…
Good post! And true, based on your numbers.
But here is the caveat: Past performance is no guarantee of future returns.

Indeed.
That might be more applicable than you might think: Never mistake the cycle for the trend.
Don’t let a recent bull market and some inflation make you think that they’re a good investment on average. (true for lots of things)
The average house price rise 1900-2000 in the US was 1%/year above inflation, adjusted for quality of facilities. Be still my heart.

Top neighbourhoods in absolute top cities might be an exception.
And the math presumably changes somewhat if you can get a long term mortgage at a negative real rate and get even more from a tax deduction.
But investing in housing sure is a long way from a sure thing.

The main reason to buy rather than rent is because you want to own for reasons of control,
or because you can’t find a place to rent where you want to live, not because it’s particularly likely to be a good investment.

Jim

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Also, rent goes up faster than inflation, how much, the first link on google says since 1980 rent has gone up 8.9% a year, I think inflation is generally lower than that (maybe not this year).

Yes, the rents we use in our profit projection spreadsheet for our area for increase in rents is 7%. I am very conservative in my projections. What we normally see is around 10% with it gapping up 20-30% this year. Ours were slated to increase 25% if we kept the rental instead of selling it, and it would have been on the lower side of what the market would bear for comparable rentals.

Real estate can be a great investment, but you have to know what you are doing and know yourself. It’s not for everyone, which does not mean it’s not for anyone. I am always surprised at how little respect it gets as an investment.

IP

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Houses…or is it sometimes mostly the land?

Where I live, which is waterfront on a large inland lake, it isn’t uncommon at all for a purchase, then tear-down of the original house, and rebuild. Even trendy homes built as recently as 30 years ago are sometimes torn down for a new house.

There are very few empty lots still around. In the end here’s my leanings: In the good times around here on the lake, homes/land sell for the availability of the house with the appreciation of the land and sometimes buyers just want a location so bad they’ll pay anything for the lot (location). In the downturns it is the land that’s appreciated and paid for the most because the house isn’t much special or wanted.

The average house price rise 1900-2000 in the US was 1%/year above inflation, adjusted for quality of facilities. Be still my heart.

The average buyer of real estate doesn’t know what they are doing. The real estate market, just like the stock market, can offer properties below fair value. It’s astonishing how many Realtors don’t know how to pull true comps to use in setting prices, and FSBOs that insist they are saving a ton of money by not having an agent sell it for them, but way underprice. Many houses are put on the market with non-fatal flaws that can be corrected. Buyers always get paid much more than a contractor to take the responsibility for correcting these flaws.

We transferred frequently. I would always get a house that had something that needed correcting and rehab the home to push all the emotional buttons, selling what was a bargain purchase for a premium when we moved on to the next job. I like that I have the control to fix these problems, that I don’t have to depend on a CEO to fix the problems for me. The key was to make sure it was not a fatal flaw, like bad location which is not fixable.

If you are an emotional buyer of real estate, accept that you are likely to lose money.

IP

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Houses…or is it sometimes mostly the land?

Where I live, which is waterfront on a large inland lake, it isn’t uncommon at all for a purchase, then tear-down of the original house, and rebuild.

Any barrier to increased competing inventory is a good thing for an investment. It’s something I actively look for, as I am not interested in competing only on low cost. What is special about that property that makes it hard to duplicate? Location, location, location is what one always should consider in buying real estate, but just what does that mean?

Waterfront, if safe from flooding, is always desirable. There is a limited amount of it. I tend to stay away from condos or townhomes, unless in a city. In most townhome developments, it’s too easy to throw up another row of now much newer properties to compete against the rental or resale of yours. Waterfront close to amenities is great, or if you go rural, close access to highways to minimize the time spent getting there. Views that can’t be obstructed are good, but mountain views can be a dime a dozen, with new homes popping up endlessly, not only increasing competition, but diminishing your view.

Cities that are already built out and have restrictions to building up is another approach, assuming it’s a city that one wants to live in.

For example, our vacation home is on a river, out of the flood plain and 7 miles from a highway that leads to an interstate highway. It’s on a bend of the river so we have long water views upstream and down. Across the street is a National Park, with hundreds of thousands of acres that cannot be built on. Much of the surrounding waterfrontage is either in the floodplain, or too steep to build. There is a hike with a waterfall 3 miles away. The river is clean, clear and kayakable, but not good for motorboats or jet skis. Agricultural zoning requires 4 acres for building a home, so we will not have the congestion of cabins that so often is present on other waterfront lots. We have a neighbor close by so we have eyeballs on the home and are not worried about a meth lab being put in the house while we are gone. Most properties have been held for generations and little comes up for sale…ever. Took us 4 years to find this one.

Real estate for me is more a labor of love. I love the hunt for that hidden gem. If I had to price out the time I take getting to know an area, understanding a market, I might not even be making minimum wage. Nonetheless, it’s great to be rewarded for your hobby.

IP

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Ah, real estate, I know it well both as an owner of industrial, commercial and homes we’ve lived in over the years. We’ve made money and we’ve lost money in these endeavors. I’ve done significantly better in our stock investing than our real estate ownership.

A renter left an indescribable situation in a home that led to my acute understanding of the human brain’s proclivity to release of serotonin and dopamine via buying crap at low price oriented retail stores. We removed seven (7) medium sized commercial dumpsters of “stuff” from that site. Because of that knowledge, when Mungofitch gave the signal about Dollar Tree last September, I jumped on the stock knowing there are folks who buy, buy and buy stuff for the brain hits generated. By the way, here is knowledge to share with those contemplating owning rental homes: do not buy large homes, instead buy small homes, small duplexes or apartments. The rental management company we utilize belatedly told us the fate this home befell is often the issue with large homes. Smaller spaces = less space for accumulation. My bride and I now drive through areas and call out multiple dumpster load sites from evidence viewed in the yards. Should Republic Services or Waste Management ever get down to Buffett’s vaunted 10X of pretax to market cap ratio, I will be heavily loading up on their stock.

Our industrial property we rent to our business and it has been a win-win for nearly 30 years. Our personal home is a significant net negative investment. The next owner will be getting a bargain twenty years from now, we we then (hopefully) in our late eighties, will be selling at a market price that will likely not come close to what we have invested in renovations and additions over the years. We are happy and understand that not everything is an ultimate positive cash flow investment.

Uwharrie

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If you have 541K to invest in Berkshire, why the heck are you taking out a mortgage with only a 123k down payment? Curious about that. Also, rent is a heck of a lot higher than 5% of a house cost.

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The rental management company we utilize belatedly told us the fate this home befell is often the issue with large homes. Smaller spaces = less space for accumulation.

Ah, but accumulation makes it hard to move! Easier to increase rents if the tenant has too much stuff.

IP

InParadise, if only it worked that way in real life. We had to evict the renter because of neighbors complaining about trash drifting into their yards. The spent two weeks hauling their possessions to another rental home and still we had seven (7) commercial dumpsters of stuff to remove. Evictions are costly both financially and mentally for all concerned. We are gradually exiting the rental home space as it has been the worst performing part of our investment portfolio.

Like I previously said, we ultimately benefited with a large investment gain in DLTR because of gaining this understanding of folks who buy, buy and continue buying all sorts of non-edible goods that keep filling their living spaces.

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A renter left an indescribable situation in a home that led to my acute understanding of …

Ahh, that brings me back.

We had to evict someone once, as they weren’t clear on the notion of “you pay the rent, you get to stay”.
No problem, it happens. Both parties moved on, but only one of us literally.

But what they left: a seemingly clean empty apartment.
Until you look closely…The pattern on the floor was fuzzy and out of focus.
There were so many fleas that it was like a cloud 8" deep all over the floor.
And of course, since the apartment had been emptied, they were hungry.

The exterminator said he’d never seen anything like it in his decades of experience and had to come back three times.
But did the tenants tell us? No. Had to find out ourselves, after my lovely wife went to check the
place out and brought freeloaders back to our house before she figured out what the deal was…

Ah, the joys of being a landlord.

Jim

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Ah, but accumulation makes it hard to move! Easier to increase rents if the tenant has too much stuff.
…
InParadise, if only it worked that way in real life. We had to evict the renter because of neighbors complaining about trash drifting into their yards. The spent two weeks hauling their possessions to another rental home and still we had seven (7) commercial dumpsters of stuff to remove.

It worked that way for us, but clearly you had a bigger issue than accumulation. We also make it a standard policy that we will replace the HVAC air filters quarterly, not making it the tenant’s responsibility as so many do. This gives us an easy excuse to get eyeballs inside the house to make sure things are not going south, giving us a heads up on potential problems before they snowball to the extreme.

IP,
who does her own management for a reason

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If you have 541K to invest in Berkshire, why the heck are you taking out a mortgage with only a 123k down payment? Curious about that. Also, rent is a heck of a lot higher than 5% of a house cost.

I used 20% down so leverage would be 5:1 which helps make the house value higher. Essentially using the 80$ borrow to invest in BRK.

I based the rent cost on what I am currently paying. I rent a place that is worth about $600k (3BR, 2Ba, double garage) and I pay $30k a year. With regard to rent inflation, I started a 13 month lease in May, 2021. I just renewed the lease for the same $30k per year, no rent increase.

Craig

Waterfront, if safe from flooding, is always desirable. Waterfront close to amenities is great,

Just saw a 50 foot riverfront lot near our trendy town listed for 2.75 million. Will be interesting if anyone goes for it. In might happen, because the more money people have, the more they really want something of their own design.

Back when we owned the rental house, when I got a good tenant, I wouldn’t raise the rent on them. Good tenants were rarer than I had thought and one who paid the rent on time and kept the place in good shape was worth hanging onto.

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Back when we owned the rental house, when I got a good tenant, I wouldn’t raise the rent on them. Good tenants were rarer than I had thought and one who paid the rent on time and kept the place in good shape was worth hanging onto.

Always a risk, but ability to keep rents up with the market pricing is one reason why we don’t buy properties that only have low rent to offer for reasons to live there. I won’t buy a rental I wouldn’t live in, and look for the emotional buttons I can push that’s difficult to quickly duplicate elsewhere. I ask for a higher end credit rating than typical in our area, which usually got me medical professionals or professors that were on a two year contract. That’s a risk in it’s own right, since if they are sticking around they are likely to buy rather than rent, particularly because it’s cheaper around here to buy, but it also meant they had a credit rating worth protecting. Showing my face around the property, be it for filter changes or blowing the roof every fall and collecting the leaves, made the tenants realize just who they would be screwing over if they damaged the place. It’s harder to do that to someone who could be your mom than it is to do to a management co. In theory, anyway. Worked for us.

IP

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