Author Topic: Houses *can* be a good investment  (Read 4262 times)

lightmyfire

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Houses *can* be a good investment
« on: August 19, 2016, 04:58:34 PM »
https://www.yahoo.com/gma/brady-bunch-star-eve-plumb-closes-3-9m-201003126--abc-news-house-and-home.html

Eve Plumb (Jan Brady) sold the Malibu house she bought for $55K when she was 11.

nereo

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Re: Houses *can* be a good investment
« Reply #1 on: August 19, 2016, 05:59:43 PM »
https://www.yahoo.com/gma/brady-bunch-star-eve-plumb-closes-3-9m-201003126--abc-news-house-and-home.html

Eve Plumb (Jan Brady) sold the Malibu house she bought for $55K when she was 11.

Not as great a return as one might think;  She bought the house in 1969 for $55k and sold it in 2016 for $3.845MM, a return of just under 7,000% For comparison, the SP500 has returned 8,276% over that same time period.

The article says she hasn't lived in the home for some time, plus there's taxes (likely minimal thanks to California's Prop 13), up-keep, etc.  No idea if she got renters and if so how much they paid.

obstinate

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Re: Houses *can* be a good investment
« Reply #2 on: August 20, 2016, 11:18:03 PM »
Of course they can. It's just hard to tell in advance. I bought my house three years ago for $1.7M and it's worth $2.1M right now conservatively. But that's just luck.

Mississippi Mudstache

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Re: Houses *can* be a good investment
« Reply #3 on: August 22, 2016, 10:58:19 AM »
Of course they can. It's just hard to tell in advance. I bought my house three years ago for $1.7M and it's worth $2.1M right now conservatively. But that's just luck.

That's still just a 7% return. And transactional fees will likely cost you ~6-7% when you sell. Plus you paid for taxes and maintenance.

On plus side, you are probably highly leveraged (thus increasing your return) and you get to live in the house. The S&P 500 has returned 10% plus (including dividends) over the last 3 years, but you probably can't get similar interest rates and loan terms for leveraging, and you can't live it it while you own it.

Unless you own rentals, home ownership is not something to pursue for its investment return.

nereo

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Re: Houses *can* be a good investment
« Reply #4 on: August 22, 2016, 11:35:42 AM »
I just gotta ask - why would an 11 year old buy a house in the first place?  For her parents?

obstinate

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Re: Houses *can* be a good investment
« Reply #5 on: August 22, 2016, 01:24:40 PM »
That's still just a 7% return. And transactional fees will likely cost you ~6-7% when you sell. Plus you paid for taxes and maintenance.

On plus side, you are probably highly leveraged (thus increasing your return) and you get to live in the house. The S&P 500 has returned 10% plus (including dividends) over the last 3 years, but you probably can't get similar interest rates and loan terms for leveraging, and you can't live it it while you own it.

Unless you own rentals, home ownership is not something to pursue for its investment return.
Excellent analysis! All the more reason to view houses as a consumption good.

Jack

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Re: Houses *can* be a good investment
« Reply #6 on: August 22, 2016, 02:01:58 PM »
I just gotta ask - why would an 11 year old buy a house in the first place?  For her parents?

Why ask when you can simply read the article?

Quote from: article
Plumb, who began her TV career as the middle daughter on “The Brady Bunch” in the late 1960s, purchased the three-bedroom, two-bath home at that time as a weekend getaway for her parents, according to one of the property’s listing agents, William Baker.

nereo

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Re: Houses *can* be a good investment
« Reply #7 on: August 22, 2016, 04:25:23 PM »
I just gotta ask - why would an 11 year old buy a house in the first place?  For her parents?

Why ask when you can simply read the article?

I did read it.  Perhaps I should ahve punctuated it differently.  As in: "for her parents??!!"  According to the article she purchased it as a 'weekend getaway for her parents'.  Granted this was the end of the 60s, but I'm pretty sure a child-actor today cannot give (or be compelled to give) their parents a vacation home.

It just surprised me is all... another era I guess.

Jack

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Re: Houses *can* be a good investment
« Reply #8 on: August 22, 2016, 04:59:10 PM »
I did read it.  Perhaps I should ahve punctuated it differently.  As in: "for her parents??!!"  According to the article she purchased it as a 'weekend getaway for her parents'.  Granted this was the end of the 60s, but I'm pretty sure a child-actor today cannot give (or be compelled to give) their parents a vacation home.

It just surprised me is all... another era I guess.

Ah, that inflection makes more sense!

Presumably that's why she's the legal owner (unless it got put in her parents' name and then willed back to her).

I'm not at all surprised at the idea that the parents decided (to their benefit) how their kid's money got spent. At least this was better than blowing it on services and depreciating goods, right?

PhysicianOnFIRE

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Re: Houses *can* be a good investment
« Reply #9 on: August 22, 2016, 05:11:53 PM »
It worked for Mr. 1500. Of course, he put a lot of sweat income into his homes.


Bateaux

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Re: Houses *can* be a good investment
« Reply #10 on: August 22, 2016, 05:16:11 PM »
It's not so much the building as it is the property it sits on that has gained the value.   Property is a good investment in many cases.   Buildings not so much.  Housing in general cannot surpass the  ability to pay.  If housing increases 7% per year and wages increase 3% a year then a bubble pops.  If not then housing costs absorbs 50, 60, 70, eventually 100 percent of wages.  Automobiles, medical care and college education are hitting a brick wall of affordability now.  The rate of price increases hasn't slowed so debt for such things has extended.  Since we have finite wage earning lives, you run out of time to service the debt.   I'll keep my money in index funds and live in a cheaper house.
« Last Edit: August 22, 2016, 05:18:58 PM by Bateaux »

nawhite

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Re: Houses *can* be a good investment
« Reply #11 on: August 24, 2016, 02:22:54 PM »
By any metric my house has been a good investment but primarily because of leverage and luck. Bought in 2013 for 220k with only 10% down. If I wanted to sell, it would be gone within 24 hours of listing for $310k. Minus 6% is 291k. Being generous we've put 10k into maintenance so 281k. Minus 8k in solar panels is 273k. 273-220= 53k vs 22k invested or about 35%/year for 3 years.

I thought about including interest, taxes and insurance but those ended up being less than we would have paid in rent for a similar property in the area so it doesn't bring down the investment performance any.

So leverage has been very good to us and so has buying in a rising market. That said though, I don't think local household incomes are keeping up with housing prices and I don't like being a landlord while we're on the road (see signature) even with a manager so we're probably going to sell in the next year or so.

thd7t

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Re: Houses *can* be a good investment
« Reply #12 on: August 24, 2016, 02:31:41 PM »
By any metric my house has been a good investment but primarily because of leverage and luck. Bought in 2013 for 220k with only 10% down. If I wanted to sell, it would be gone within 24 hours of listing for $310k. Minus 6% is 291k. Being generous we've put 10k into maintenance so 281k. Minus 8k in solar panels is 273k. 273-220= 53k vs 22k invested or about 35%/year for 3 years.

I thought about including interest, taxes and insurance but those ended up being less than we would have paid in rent for a similar property in the area so it doesn't bring down the investment performance any.

So leverage has been very good to us and so has buying in a rising market. That said though, I don't think local household incomes are keeping up with housing prices and I don't like being a landlord while we're on the road (see signature) even with a manager so we're probably going to sell in the next year or so.
I realize that you needed a place to live during this time, but you still have to account for PITI and PMI as costs, along with inspection and other initial costs. I suspect that your return would still be good, but your current analysis seems light.

nawhite

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Re: Houses *can* be a good investment
« Reply #13 on: August 24, 2016, 02:58:43 PM »
By any metric my house has been a good investment but primarily because of leverage and luck. Bought in 2013 for 220k with only 10% down. If I wanted to sell, it would be gone within 24 hours of listing for $310k. Minus 6% is 291k. Being generous we've put 10k into maintenance so 281k. Minus 8k in solar panels is 273k. 273-220= 53k vs 22k invested or about 35%/year for 3 years.

I thought about including interest, taxes and insurance but those ended up being less than we would have paid in rent for a similar property in the area so it doesn't bring down the investment performance any.

So leverage has been very good to us and so has buying in a rising market. That said though, I don't think local household incomes are keeping up with housing prices and I don't like being a landlord while we're on the road (see signature) even with a manager so we're probably going to sell in the next year or so.
I realize that you needed a place to live during this time, but you still have to account for PITI and PMI as costs, along with inspection and other initial costs. I suspect that your return would still be good, but your current analysis seems light.

All closing costs on purchase were paid for by the seller so no initial costs (it was awesome). ITI+PMI worked out to $9000/year. Renting a similar home over the same period would have cost us at least $12000/year. Principal payments would only impact the house return by the opportunity costs of investing them vs the interest on the mortgage. Total principal over 3 years is only around 10k. So being conservative, 15% annual return in the S&P minus 3.75% in interest is 11.25% per year *10k is about 3k in lost opportunity costs.

So in my opinion, that stuff still comes out in the wash.

thd7t

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Re: Houses *can* be a good investment
« Reply #14 on: August 24, 2016, 04:43:13 PM »
By any metric my house has been a good investment but primarily because of leverage and luck. Bought in 2013 for 220k with only 10% down. If I wanted to sell, it would be gone within 24 hours of listing for $310k. Minus 6% is 291k. Being generous we've put 10k into maintenance so 281k. Minus 8k in solar panels is 273k. 273-220= 53k vs 22k invested or about 35%/year for 3 years.

I thought about including interest, taxes and insurance but those ended up being less than we would have paid in rent for a similar property in the area so it doesn't bring down the investment performance any.

So leverage has been very good to us and so has buying in a rising market. That said though, I don't think local household incomes are keeping up with housing prices and I don't like being a landlord while we're on the road (see signature) even with a manager so we're probably going to sell in the next year or so.
I realize that you needed a place to live during this time, but you still have to account for PITI and PMI as costs, along with inspection and other initial costs. I suspect that your return would still be good, but your current analysis seems light.

All closing costs on purchase were paid for by the seller so no initial costs (it was awesome). ITI+PMI worked out to $9000/year. Renting a similar home over the same period would have cost us at least $12000/year. Principal payments would only impact the house return by the opportunity costs of investing them vs the interest on the mortgage. Total principal over 3 years is only around 10k. So being conservative, 15% annual return in the S&P minus 3.75% in interest is 11.25% per year *10k is about 3k in lost opportunity costs.

So in my opinion, that stuff still comes out in the wash.
Nice!

Seadog

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Re: Houses *can* be a good investment
« Reply #15 on: August 24, 2016, 08:22:40 PM »
Of course they *can* be, you could easily cite an example on each side eg: a home which rents for $100,000/mth, but sells for $250k. Or, some rental markets may dictate you receive less than the interest alone on your mortgage, let alone other taxes/fees/repairs or even thinking about building equity by having "someone else pay your mortgage". Cash flow negative and getting worse. While these are extremes, it should be at least proof that an equality point lay in between.

Housing as an investment, is one of the most difficult ones to evaluate. So give it to people who are piss-poor at evaluating easy investments(ie 80% of public + mass media) and you have no hope. Basically you have to sum and compare: compounding/time discounting with potentially variable rates, dividends/cap gains of market investments, expected cap gains of homes, increased leveraging on homes, non-cash gains(ie free rent), cash inputs which offset gains(tax, repairs), statistics, short term bias, tax consequences, numerical worth of "pride of ownership", interest trends, opportunity cost, all of which most people know nothing about, some of which are impossible to put a number on, working together.

Investment value of a house even varies with your income. For one to live in, it's a worse investment for a guy with 40k dividend income (ie all income is tax free anyways) than it would be for a guy making $250k, 40k dividend income because the rent he would otherwise be paying from dividends becomes tax free. But that's assuming cap gains on house + price/rent is same as cap gains + dividend returns on stocks pre-tax? Is it? Does the average person even track how much money goes into their home?

Buying a rental at 250K income means all that rent income is taxed at your top marginal. Someone who only has that rent income pays considerably less tax. Two wildly different returns for the same house being rented out. How many people are even aware this is a consideration, let alone take it into account?

The problem is people are largely blind. The evaluation begins and ends with "Well I have to have a housing payment each month. Mortgage, or renting is the only alternative, but after 25 years of mortgage payments I had a house worth 3x what I paid for it, vs 0 had I paid rent" For someone with an effective savings rate near 0 and zero knowledge of investing, this seems like an easy, reachable, ok deal. And honestly, it is.   

nereo

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Re: Houses *can* be a good investment
« Reply #16 on: August 25, 2016, 06:09:39 AM »
Of course they *can* be, you could easily cite an example on each side eg: a home which rents for $100,000/mth, but sells for $250k. Or, some rental markets may dictate you receive less than the interest alone on your mortgage, let alone other taxes/fees/repairs or even thinking about building equity by having "someone else pay your mortgage". Cash flow negative and getting worse. While these are extremes, it should be at least proof that an equality point lay in between.

Housing as an investment, is one of the most difficult ones to evaluate. So give it to people who are piss-poor at evaluating easy investments(ie 80% of public + mass media) and you have no hope. Basically you have to sum and compare: compounding/time discounting with potentially variable rates, dividends/cap gains of market investments, expected cap gains of homes, increased leveraging on homes, non-cash gains(ie free rent), cash inputs which offset gains(tax, repairs), statistics, short term bias, tax consequences, numerical worth of "pride of ownership", interest trends, opportunity cost, all of which most people know nothing about, some of which are impossible to put a number on, working together.

Investment value of a house even varies with your income. For one to live in, it's a worse investment for a guy with 40k dividend income (ie all income is tax free anyways) than it would be for a guy making $250k, 40k dividend income because the rent he would otherwise be paying from dividends becomes tax free. But that's assuming cap gains on house + price/rent is same as cap gains + dividend returns on stocks pre-tax? Is it? Does the average person even track how much money goes into their home?

Buying a rental at 250K income means all that rent income is taxed at your top marginal. Someone who only has that rent income pays considerably less tax. Two wildly different returns for the same house being rented out. How many people are even aware this is a consideration, let alone take it into account?

The problem is people are largely blind. The evaluation begins and ends with "Well I have to have a housing payment each month. Mortgage, or renting is the only alternative, but after 25 years of mortgage payments I had a house worth 3x what I paid for it, vs 0 had I paid rent" For someone with an effective savings rate near 0 and zero knowledge of investing, this seems like an easy, reachable, ok deal. And honestly, it is.

You make some good points. 
Seeing that you are in Nova Scotia, another thing that must be considered is your country.  Since purchasing a home here in Canada I've come to realize how different real estate is treated within the tax code between various countries.  For example, in the US you can deduct the interest you pay on your mortgage, which helps high earners who take out large mortgages the most.  (It also means that someone who pays cash for a home or takes out a very modest mortgage on a mustachian-type home will probably not benefit at all). Also, providing you live in the home at least 2/5 years you don't pay any taxes on up to the first $250k in the appreciation of the home, so most people will pay no taxes on gains on their home. I'd rather we got rid of the mortgage interest deduction entirely, but it's so entrenched I doubt it will ever go away.

One of my pet pieves is when people calculate the "return" of their house simply by subtracting their purchase price from their selling price, and then (maybe) dividing by the number of years. In truth one needs to factor in taxes, repairs, time, etc. and then balance that against the cost of renting durign that time period while factoring in inflation. THat's much more labor intensive.
My uncle cannot be convinced that the home he bought in 1972 for $35k and sold in 2014 for $325k was not "much better than anything you can get from the stock market".  He just sees a 10x increase in price over 42 years.