Author Topic: rent v buy  (Read 14984 times)

FI40

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Re: rent v buy
« Reply #50 on: December 02, 2015, 07:32:42 AM »
What I do not understand, and was more of my point, is when someone (an investor ) buys a place, even with 0% down, low interest rate and a long term, how they justify more money out than in? Even if the rent covers all expenses and some principal, it is still worse than a gov bond at 1%, which is much more solid than a downtown condo.

In my area, people buy with significant negative cashflow (and mortgages fixed for only 5 years, after that you need to renegotiate) and call it a great investment because of the price appreciation. The renter isn't even covering the mortgage payment, in some cases not even the interest portion, yet they say it's great because the renter is "helping them" pay off the mortgage. They feel that eventually when the mortgage is paid off the house will be worth "a lot more". I use quotations because I've heard this many times from friends invested in real estate here. It's speculation, pure and simple. It certainly works in a booming market.

In my opinion a lot of these amateur investors are making bad decisions on a risk adjusted basis. They have yet to be burned by it though, in my area.
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nobodyspecial

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Re: rent v buy
« Reply #51 on: December 21, 2015, 09:55:46 AM »
What I do not understand, and was more of my point, is when someone (an investor ) buys a place, even with 0% down, low interest rate and a long term, how they justify more money out than in? Even if the rent covers all expenses and some principal, it is still worse than a gov bond at 1%, which is much more solid than a downtown condo.
Because money is still flowing in, even if the rent only covers 90& of the costs you are still getting a tenant to pay 90% toward buying you an asset.

And in this neighborhood the value of the asset is going up by 20%/year


afox

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Re: rent v buy
« Reply #52 on: February 11, 2016, 04:17:56 PM »
Good thread and good example nereo.  I think that the situation is worse for homeowners (and RE investors) than is depicted here.

That 0.75% cost of "maintenance" isn't going to cover the remodel that's needed every 25 years.  Houses are consumables.  The renter in this scenario (Alex) will be the cream of the crop as far as renters go and landlords will fawn over him and he will be able to find rentals that are recently remodeled, in the best locations, etc.  Landlords will give Alex all kinds of discounts to keep him because as every landlord knows having a decent tenant is worth major monthly discounts.  Part of the reason for this is american societies insistence that everyone must own their own home.  Few renters can afford or qualify to buy their own home. 

Also, if you dont understand that RE only appreciates at the rate of inflation you haven't done your homework.  Dont take my word for it, go back and read MMM blog posts on RE.  There are always short term exceptions but if you are counting on major appreciation you're almost certainly going to be disappointed. 

I know a lot of people that invest almost all of their money in RE. They forgoe matching funds in their 401k's and other tax deferred low hanging fruit so they can add one more property to their list.  I must be honest and say that these people aren't reading MMM, dont understand how inflation affects home prices, do not track their expenses, use investment advisors and do not even understand what index funds are.  They have'nt run the numbers and determined that the RE investment will come out ahead of another investment.  These are really hard working individuals, they have day jobs and at nite they take loads of leaves to the dump, paint fences, hassle tenants for rents, show properties, etc.  Im certain they all could make more money by maxing out their 401k's, and roth IRAs and working a little harder on their careers.  Its really sad actually.

Some more reading and scenarios for ya'all:

http://www.gocurrycracker.com/renters-for-life/

http://www.gocurrycracker.com/how-i-made-102k-in-real-estate/



Think

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Re: rent v buy
« Reply #53 on: February 21, 2016, 07:58:33 PM »
... I keep reading that people somehow think renting is cheaper than buying, ..., but I cannot figure out how someone with a calculator figures this to be a good investment.
1) Many people do not use (good) calculators, even when spending $100ks on a home
2) The real-estate industry is filled with bad advice about how your home is the best "investment" you'll ever make you should buy the biggest you can afford.
3) People look at the purchase price and the selling price and conclude owning a particular home was a phenominal deal, ignoring interest, maintenance, taxes, inflation and investment cost.  Example, my neighbor swears the house he bought in 1972 for $42k was the greatest deal ever because it's now worth over $700k.  He had a 30yr mortgage at 8.5%, redid the roof twice, spent tens of thousands renovating it several times, and paid god-knows how much in taxes.  A similar amount invested in the SP500 would be worth over $2.8MM today.
4) the media and reality shows hype profits that can be made with house-flipping and unusual markets where home appreciation has average 6% for many years.  Again, this almost always ignores things like maintenance, taxes etc.

What you're missing is that he couldn't have borrowed 42k to put into the market.  Leverage is key here.  It's what makes a real estate investment so powerful.   

arebelspy

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Re: rent v buy
« Reply #54 on: February 22, 2016, 02:56:34 AM »
... I keep reading that people somehow think renting is cheaper than buying, ..., but I cannot figure out how someone with a calculator figures this to be a good investment.
1) Many people do not use (good) calculators, even when spending $100ks on a home
2) The real-estate industry is filled with bad advice about how your home is the best "investment" you'll ever make you should buy the biggest you can afford.
3) People look at the purchase price and the selling price and conclude owning a particular home was a phenominal deal, ignoring interest, maintenance, taxes, inflation and investment cost.  Example, my neighbor swears the house he bought in 1972 for $42k was the greatest deal ever because it's now worth over $700k.  He had a 30yr mortgage at 8.5%, redid the roof twice, spent tens of thousands renovating it several times, and paid god-knows how much in taxes.  A similar amount invested in the SP500 would be worth over $2.8MM today.
4) the media and reality shows hype profits that can be made with house-flipping and unusual markets where home appreciation has average 6% for many years.  Again, this almost always ignores things like maintenance, taxes etc.

What you're missing is that he couldn't have borrowed 42k to put into the market.  Leverage is key here.  It's what makes a real estate investment so powerful.

Leveraging into a bad investment doesn't make it good.
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nereo

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Re: rent v buy
« Reply #55 on: February 22, 2016, 05:27:15 AM »
... I keep reading that people somehow think renting is cheaper than buying, ..., but I cannot figure out how someone with a calculator figures this to be a good investment.
1) Many people do not use (good) calculators, even when spending $100ks on a home
2) The real-estate industry is filled with bad advice about how your home is the best "investment" you'll ever make you should buy the biggest you can afford.
3) People look at the purchase price and the selling price and conclude owning a particular home was a phenominal deal, ignoring interest, maintenance, taxes, inflation and investment cost.  Example, my neighbor swears the house he bought in 1972 for $42k was the greatest deal ever because it's now worth over $700k.  He had a 30yr mortgage at 8.5%, redid the roof twice, spent tens of thousands renovating it several times, and paid god-knows how much in taxes.  A similar amount invested in the SP500 would be worth over $2.8MM today.
4) the media and reality shows hype profits that can be made with house-flipping and unusual markets where home appreciation has average 6% for many years.  Again, this almost always ignores things like maintenance, taxes etc.

What you're missing is that he couldn't have borrowed 42k to put into the market.  Leverage is key here.  It's what makes a real estate investment so powerful.
I assume you're referring to #3.  The example was just to give a point of comparison to show how valuable a $42k 'investment' would be worth whether it was a home purchased on leverage or money put into the market.   The core point was that you can't look at purchase price and sale price and conclude a home was or was not a good deal.  Arebelspy's comment about leverage on a bad investment is spot on. 
If my neighbor truly wanted to evaluate how good an investment his home was compared to renting, he would need to include taxes, insurance, and renovation costs and then compare that to what he could have invested while renting a similar place (for examlpe: the $8400 down payment plus ~$75/month).

If you look upthread you'll notice I worked out such an example.  This isn't to say all homes are poor investments - just that some are.
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Xlar

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Re: rent v buy
« Reply #56 on: March 10, 2016, 05:47:18 PM »

At some point an investor of rental properties would say "WWWhhhaaaaat? I'm losing money. I better sell this place and buy something with a good return like a business, index funds, or even low yield gov't bond!" Hence the over priced places would go down in purchase price, due to the lack of demand(the self realized investors dumping their rental property) until there was a better equilibrium to rent.
The other part of my first post was the realization that this only seems to happen in big cities, I have never lived or spent much time in a big city, and wanted some insight as to why this happens.

So I'm going to answer this question with anecdotal evidence, hahaha.

My landlord is loosing money every month and has been since he bought it in 2006! He bought it for 500k putting 3.5% down with a mortgage payment of $2303 per month and taxes of $520 per month. (Not including PMI!)

Out of pocket he spends $2803 and is paying down the principle. He lived in this house until 2010 when he had to move for work. At that point the house was only worth about $250k so he decided to rent it for $1600 per month. One previous tenant rented until I moved in and their rent had gone up to $1900 per month by the time I moved in in 2014. I am renting for $2100.

Assuming that the rent went up an even $100 every year until I moved in he has earned a total of $109200 over the last 5 years. In that time he has paid a total of $168180 in mortgage payments and taxes. When he started renting the mortgage would've been about 446k and now he owes about 382k but the house is currently only worth 430k. So he has definitely lost out. He has paid $59k out of pocket (over 10k per year!) and currently has $48k in equity in the house.

This doesn't include all the maintenance/cap ex (seems like a fair bit) he has put into the house, insurance, and all the time (a ton, he does it all himself) he has invested in managing the place. If you assume a fairly standard 0.75% maintenance he has spent another $18k on maintenance over the 5 years which seems reasonable given the things he has fixed since we've been there.

The reason he has been renting it out: He wants to wait until the house return to in value to what he bought it for and then he'll sell.

nereo

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Re: rent v buy
« Reply #57 on: March 11, 2016, 05:52:37 AM »
...

The reason he has been renting it out: He wants to wait until the house return to in value to what he bought it for and then he'll sell.
In short - he's price anchoring.  Never a good investment strategy.
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kfire20

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Re: rent v buy
« Reply #58 on: April 03, 2016, 10:50:01 AM »
NYTimes piece  on Rent vs. Buy.  April 1st

http://nyti.ms/25Bvpul

"The study projects that median-income families, or those who earn about $50,000, will often end up with more net wealth if they rent versus own over the 10 years from 2013 to 2022"

BlueHouse

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Re: rent v buy
« Reply #59 on: April 04, 2016, 03:21:14 PM »


My landlord is loosing losing money every month and has been since he bought it in 2006 2005! He bought it for 500k 355k putting 3.5% 20% down with a mortgage payment of $2303 2000 per month and  including taxes & HOA of $350 per month. (Not including PMI!)

Out of pocket he spends $2803 $2000 and is paying down the principle. He lived in this house until 2010 2013 when he had to move for work. At that point the house was only worth about $250k $250k so he decided to rent it for $1600 per month. One previous tenant rented until I moved in and their rent had gone up to $1900 per month by the time I moved in in 2014. I am renting for $2100. one tenant only and never increased rent.

Assuming that the rent went up an even $100 every year until I moved in he has earned a total of $109200 $76800 over the last 5 4 years. In that time he has paid a total of $168180 $96000 in mortgage payments and taxes and fees. When he started renting the mortgage would've been about 446k and now he owes about 382k but the house is currently only worth 430k200k. So he has definitely lost out. He has paid $26k out of pocket (over 10k 6k per year!) including repairs and currently has $48k 60k in equity in the house.

The reason he has been renting it out: He wants to wait until the house return to in value to what he bought it for and then he'll sell.
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kfire20

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nereo

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There's so much in their strategy and their attitudes I object to, but it does show that there are many paths leading to FI, and home ownership is not a prerequisite.
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http://www.cbc.ca/news/business/house-investment-wealth-1.3716641
There's so much in their strategy and their attitudes I object to, but it does show that there are many paths leading to FI, and home ownership is not a prerequisite.

Reading all the way to the end, they do plan to buy, eventually.   Just not in an overpriced market. 

nereo

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There's so much in their strategy and their attitudes I object to, but it does show that there are many paths leading to FI, and home ownership is not a prerequisite.

Reading all the way to the end, they do plan to buy, eventually.   Just not in an overpriced market.
Yeah but what I meant was some of the following sentiments:
[after saving $500,000 for a down payment] they desribed home owners like this: They're not going to have any money for the next 20 years and they're going to be stressed out at work to pay their mortgage.
Hyperbole.

Their description of their workplace sounds incredibly draconian: There were people getting blood clots and actually like collapsing at their desk."
Yet more hyperbole, but with poor grammar.

...but mostly what drew my ire was this: They put 60 per cent in stocks and 40 per cent in fixed income investments like corporate bonds. That ratio shifted when the market turned volatile.
They were already investing very conservatively, and then they altered their investing strategy because of market volatility. 
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Re: rent v buy
« Reply #65 on: August 15, 2016, 04:42:32 PM »
maybe they shifted their allocation more to stocks, buying at discounted prices when other people panicked and sold

nereo

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Re: rent v buy
« Reply #66 on: August 15, 2016, 04:51:34 PM »
maybe they shifted their allocation more to stocks, buying at discounted prices when other people panicked and sold
Perhaps.  I still don't condone changing investment strategies because market volatility increases for a while.  I also wouldn't recommend a 60/40 AA for people in their 30s, but to each their own I guess.

I'm genuinely happy to hear of another ER 'success story,' even if I don't care much for their comments.
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Reynold

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Re: rent v buy
« Reply #67 on: August 16, 2016, 03:19:10 PM »
When we first moved to the NYC region, we rented, since we didn't want to buy a place without knowing more about the area.  We were paying $2400/month for a townhouse, and had to beat out four other people for it, after it being available for rent for all of 2 days.  The owners were way underwater, they bought right at the 2007/2008 market peak, it was newly remodeled just before them, they paid the highest price ever for any unit the complex, and they were hoping prices would bounce right back to what they paid.  That didn't happen, we ended up making an offer on it, and bought it.  They lost around $150k on the deal, we probably overpaid by ~$10k because we saved a lot of moving time and expense by buying the place we had been renting. 

Our mortgage payments were under $2000/month, so in this case it was cheaper to buy than to rent.  We paid it off with savings, because my DW is always concerned that something will happen to us financially and we'll be evicted and have to live under a bridge in a cardboard box.  She is a bit of a worrier. . . :)  So far that hasn't been too bad a move, since market returns haven't been awesome the last few years, and I think we could at least sell it today for a slight gain after expenses.  I'd regret it more in the market of the late 90s.  There are probably units in this area, and maybe even whole towns around here, where it is cheaper to rent than buy, I suspect it depends a lot on location, quality/size of the place, school district, and so on. 

That ignores the "luck" factor of do you live in a hot housing market (I have a relative in Boulder, CO, he was definitely smart to buy), versus how does the investment market do with the extra down payment and monthly payment you would potentially put in to it.