Just thought this might be interesting to people, I found this the other day over at MSN:

http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?page=1

Quote:

"What about the pride of homeownership?"

It's not for me. I define ownership as no longer having to pay for something and being able to do as I please with it. I own my coffee maker. Homeowners must pay taxes each year even when their mortgage payments are done. In certain markets they can't even make changes to the houses they've paid for without seeking the approval of others. Personally, I feel the pride of ownership for shares of businesses, and I'm proud to occupy a nice place while leaving the burden and poor returns and maintenance to someone else."

I have a brain-twin somewhere!

Interestingly though I've been pondering the home buying dilemna and I'm starting to come to a similar conclusion namely that :

Homes are a bad investment.

If you buy even a reasonably priced home ($275,000), and only take two hundred of that out on loans (over 20% down), you'd still pay (assuming 6% fixed interest, not including early payoff or refinance) $230k or so in interest over the life of the loan. That's not including land tax expenses, maintenance costs (est. 4x the total mortgage cost), etc.

Compare this to taking that $75,000 and putting it into an index fund - you'd finish that 30 year period with like $2+ million dollars.

One of his assumptions, that rent prices will continue to pace inflation, might be flawed though.

My wife and I own three houses, one of which we live in and two of which we rent out. I've been renting houses out for about ten years now, and we've owned or rented our own dwelling over that same period of time.

I've found that, since we bought both houses before the 'housing boom' of the past five years, we are able to rent both houses out for enough money to cover the payments and maintenance/upkeep. I've also found that the rent we ask, and the rent other comparible houses in the same market ask, has gone up about the same rate as inflation (our townhouse has gone from $900 / month in 1998 to $1200 / month this year). I also expect that rent to go up 10-15% over the next three years. Why will that differ so much from the previous ten years?

Pretty simple, really - the law of supply and demand. For the past three or so years, it's been close to impossible to buy a house with the specific goal of making it a profitable investment rental property. Housing costs relative to local rents are just too high to enable an investor to do that. Without a drastic reduction in housing costs to pre-2003 levels (highly unlikely), this trend will continue for a while (I'll throw ten years out there for the sake of argument). During that period, existing rental properties will continue to be sold or torn down and replaced, thus reducing the existing supply. Limited new rental construction + reduced existing supply + increasing demand due to fewer folks being able to afford to buy a house at the current cost = sharp increase in rent.

This is already apparent in the SOCAL area, where rental property owners are capitialzing on the short-term profits they can make by selling their rental property to homeowners. You can bet the folks that bought that $750K house last year that used to be a rental aren't going to turn around and try to rent it out immediately - they'll never cover their mortgage if they do. There's enough existing rental properties to cover the gap...for now. But I definitely expect that to change. If the cost of housing won't come down to meet the rent, the rent will increase to meet the cost of housing. (*)

I'd also add that he's in NYC, which is its own unique rental market with its own unique controls in place to artificially keep rents down. Of course its smarter to rent in a place like that - you keep market forces at bay with regulations that are in place to make renting affordable.

Something else to think about: it may entail some headaches, but renting out a house that you own is, in essence, free money. The tenants in our townhouse pay enough rent to cover the mortgage, insurance and property taxes, as well as periodic maintenance, upkeep and my yearly travel expenses to the area. I even have a bit of money left over each month which I tuck away to cover non-periodic maintenance. In another two years or so, I'll be able to take out a home equity loan on the property and use that for other investments - and their rent will cover the interest on that loan.

I've got other theories on real estate, why it will continue to appreciate in value, why it's still a good investment, etc, but I've got to get back to work...

Kastellyn the Devourer of Magic, Lord of Legends

*** Email me your testimonials or two-line blurbs. Help our marketing efforts! ***

(*) Anecdotally, we rented a house for the past two years in Coronado (granted, that place is its own weird SOCAL real estate market) for $2300 / month. When we bought the house that we currently live in, that rental property sold within a month for $1.2M. And it was a total dump. I'll let you do the math, but I expect there to be practically no rentals left on Coronado in about five years.

Year by year the details vary but over a long enough period of time the years you save and years you spend average out. Similarly speaking, for every guy that becomes an overnight millionaire from a weird real estate market boom there's a few thousand who foreclose on their variable rate mortgage. You'll notice that NYC has great rent laws, but also the 2nd highest rent in the country. So its 6 of one, half a dozen of the other - sure you have tons of rights to not get thrown out but on average you pay 2x as much to live somewhere.

Its a complicated thing and because its complicated you can only compare different situations by looking at averages that are so watered down that they are really oversimplified.

The bottom line is that if you want to have a high net worth, don't take out loans - in essence you're just filtering your income by giving a chunk of it to a bank. But obviously real life isn't quite so simple, otherwise no one would buy houses.

We bought our house in Nevada Iowa for 87K. It was valued at 97k at the time. So if we turn around and sell it, we automatically have a significant profit. In the mean time I've grown grass where there largely was none before, and plan to paint the house in the near future. By picking the right house, and doing some neglected basic maintenance you can turn some pretty good profit quickly. Also, if you are the one that pays for the appraisal (offer to pay for it), you don't have to share what it appraised for with the owner.

On any given day there are stocks that go up 15-20%. 10,000 isn't a very significant profit - by the time you pay the selling fees, closing fees and capital gains taxes you're down to like $2000. I'm not sure its the best way to turn a "quick profit". House prices are anticipated to drop for another 2 years or so as well, depending on where you live it could be more or less.

I think the article's limitation is that it speaks of home ownership in terms of a long-term investment - it creates a mythical home buyer who doesn't exist in reality to drive home his point. Most people (at least me) see homes as a short term investment that is highly dependant on the area you are buying in. I agree with you and the article writer that buying a home as a 30-year investment is basically the equivalent of socking away a few hundred thousand dollars into your Sealy mattress. But let's be honest - how many people do you know that buy a home and expect to live in it for 30 years and think that is an ideal long-term retirement plan? I don't know anyone that fits that description.

Do you still live in the Bay Area, and if so, how do you manage to afford to own a place (if you do?)

I occasionally look at moving back, but it always seems like there's really no way to own a decent house for less than a million dollars now. I'm hoping you know something I don't!

Yes - I still live there. It's very hard to buy a decent place for less than a million if you are looking at Marin/SF/Peninsula. I do it by going across the Bay BART is extremely efficient, even by car, the furthest possible time you'd have to commute is one hour (that's way too long of a commute for me, but it's the extreme), and some of the communities are very nice. Another big plus is the diversity - and the public schools tend to be better across the Bay, as well. You can definitely find a 4BR/2BA house in a great school district with less than 45 minute commute for under a million.

Huh. Still might be too rich for my blood, though I haven't seriously tried to price myself in that market in some time.

I lived in Hayward for about 6 months and BART really isn't all bad, but I sure do love the city. Le expensive living sigh!

I wouldn't say the average person plans on buying a "fixer upper", put a lot of work into it and turn it around for a profit. There's some people who make a very lucrative amount of money doing that, but then again there are some people who have 200% returns on stocks because they know their #### and stay on top of it.

The article talks about it from the perspective of an investment. Not everyone is going to look at their house as an investment - some will look at it like a business (you), some will look at it like a luxury item (Valg), some will look at it like a cost savings mechanism (people with 5+ children, for instance), some will look at it as a convenience of not having to deal with a landlord (Nep), etc.

Very few things are black and white. This article deals with it as a long term investment and I think in that light its probably not worth it. If your goal is to have a beautiful place to live in and pass down to your kids, a home is great. If you're looking at "what ways can I have a very high net worth in 30 years", its not. Personally I'm more interested in the latter rather than the former, which won't be the same for everyone.

But I personally would have enjoyed it more if it compared Homes the way real life investors treat them (as five year tax-free turnarounds), and compare that to stocks within the same time period - so I personally could evaluate the relative merits.

Comparing the 30 year return on a house to the 30 year return on stocks is just too limited (and useless) in my opinion because in real life, investors do not treat housing investments like that.

That's all I was saying.

The two are impossible to really compare. I'm sure you could pick anecotes supporting one or the other. If real estate was definately the best turnaround - banks would be investing solely in real estate. If stocks were the best turnaround - banks would be solely investing in stocks.

Presumably, you need to live somewhere. If it's an apartment or other rental, that's an extra cost vs. the house plan.

That said, I don't necessarily disagree with you on the economics of it. I sort of see it like buying a diamond ring: it's something you do because you decide you want it, and people who do it thinking it's going to be an investment are probably suckers.

The author in particular was talking about renting an apartment vs. buying a house. That's not really apples for apples, particularly if you have a family and/or want some land. It's much harder to find a house for rent, excepting some very small ones.

He says: "I prefer an apartment for now. I like not having to fill it with stuff. I like using a fifth of the energy of the average American. I like being 20 minutes from work and not having owned a car in 10 years. I like not stressing over whether to get the marble countertops or the imported tiles or the 52-inch flat screen."

As an owner, making those decisions is a pleasure-- you can choose to re-make your house however you like, or you can choose to not do them. A renter generally can't change any of those things, excepting the TV.

As for HOAs and how much you really "own" your home, it's not hard to find places where the HOA is non-existent or contractually relatively powerless. They can't do anything to you that you don't sign away. And if you're renting, your landlord is going to have a lot more control over your living space than any HOA. (And the landlord can also just tell you to move, or change your rent.)

valguarnera@carrionfields.com

(And the landlord can also just tell you to move, or change your rent.)

There are some places more renter-friendly than others, but even in very rural areas they usually have some sort of legislation on how quickly a landlord can raise your rent and under what circumstances they can boot you. Here in NYC we have it pretty good. I think it takes an act of god to get booted out of an apartment here, volcanic eruption, raining frogs...something like that.

The benefit of this over say, land taxes, is the government has no conflict of interest in helping the landlord over you, so you at least have a reasonably fair shot at fighting it.

Bear in mind I'm talking about home ownership as an investment, not as a "this is something I enjoy doing". If you are buying a house because you want to customize your space and walk on marble tiles or whatever, more the power to you. If you're doing it because its "the poor man's retirement plan", its not the best way to do that. This is particularly relevent in a day and age when people are having less children so the attractiveness of a 2 acre ranch with 8 bedrooms is less of an issue if you don't intend on dropping a litter of 7 children.

>There are some places more renter-friendly than others, but
>even in very rural areas they usually have some sort of
>legislation on how quickly a landlord can raise your rent and
>under what circumstances they can boot you. Here in NYC we
>have it pretty good. I think it takes an act of god to get
>booted out of an apartment here, volcanic eruption, raining
>frogs...something like that.

Having rented in a number of different states, I'd say for all practical purposes you should assume that pro-renter / rent-control laws don't exist anywhere but NYC. It does in places, but in my experience it's on just such a different order of magnitude that it's not even useful to compare the two.

Granted, one of my big frames of reference is living in San Francisco in the dot.com era -- a lot of families who thought something would stop their rent from doubling very quickly found out that, in practice, not so much.

Renters markets tend to have better policies towards renters. The state of NY as a whole has pretty good tenant rights. NYC is extreme, Arkansas is the opposite extreme and everywhere else falls somewhere in between. Having your rent double at the end of the lease isn't the end of the world, you can always just move somewhere else.

It varies place to place but typically the minimum notice is 30 days before the lease renewal and many places have requirements for 90 days notice or 30 days notice with chance to appeal or whatever. Either way, if the landlord wants to say, sell the house, you're probably SOL and have to move but its pretty unlikely that your rent will double overnight.

The cost of that happening the once in a lifetime that it does isn't a dealbreaker in terms of the financial argument. Landlords can be a pain in the ass but there are things you can do to make it not so annoying.

The difference being at least you can fight it, or push a multiyear lease or whatever and have some sort of control over the situation. Land taxes are based on laws that can change - a contract is somewhat better.

Homes appreciate. And mortgage interest is tax deductible. Case in point: my dad's former boss bought a house for about $1mil. Put about $500k of new work into it. Sold it for $6mil after 10 years. That's a good return. The big negative for me is property tax, which in Texas is fairly high. That, and homeowner's insurance.

Another thing: it's not inconceivable to buy a house with cash, if you postpone your purchase and live frugally for a while. That mostly nullifies the argument about all the mortage interest you pay.

That happens. People also have stocks that go up 1400% in 2 months. Its just not something that a betting man would want to place a wager on. The average person doesn't make a lot of money on a house over the course of 30 years.

Mortgage interest is tax deductible but its still a bad deal (you're still paying 3/4 of it, just getting 1/4 returned). It doesn't nullify the overall cost of home ownership though, even if you bought the house outright it'd be a lot smarter to take that $300k or whatever and leave it in a balanced fixed income portfolio.

The risk involved in getting a 1400% return in 2 months isn't comparable to the risk involved in purchasing investment property. It might go down in value, but it's not likely to depreciate much. The kind of stocks that jump 14X in two months typically also drop to 0 in two months.

Where I live, to get an apples-to-apples comparison (w/ regard to standard of living) you'd need to compare a small house (possibly in a posh area of town, possibly not) to a fairly large two or three bedroom apartment. When I used to rent, I was paying $1150/mo for a "luxury" two-bedroom apartment in a "somewhat inconvenient" part of town. My house payement is larger than that now, but my house is also bigger, I'm building equity and it's appreciating.

The author's point isn't so much "house vs. renting: which is a better long-term investment"- clearly he's interested in living simply, being eco-friendly, being able to live extremely close to where he works, etc.

>The risk involved in getting a 1400% return in 2 months isn't
>comparable to the risk involved in purchasing investment
>property. It might go down in value, but it's not likely to
>depreciate much. The kind of stocks that jump 14X in two
>months typically also drop to 0 in two months.

House prices aren't likely to go up by as large of a faction as your associate's - the point I was making is that "results may vary", those sort of returns aren't *typical*.

>Where I live, to get an apples-to-apples comparison (w/ regard
>to standard of living) you'd need to compare a small house
> possibly in a posh area of town, possibly not) to a fairly
>large two or three bedroom apartment. When I used to rent, I
>was paying $1150/mo for a "luxury" two-bedroom apartment in a
>"somewhat inconvenient" part of town. My house payement is
>larger than that now, but my house is also bigger, I'm
>building equity and it's appreciating.

Most places I've seen you can rent a house, yard & all. You're paying a higher mortgage payment and additionally your land taxes have gone from being part of your rent payment to being an additional expense. Also, now you have maintanence fees you didn't have before, insurances you didn't have or need before, etc. Your "total cost of ownership" is much higher. You're paying for that equity (and a lot of that payment is going purely to interest).

>The author's point isn't so much "house vs. renting: which is
>a better long-term investment"- clearly he's interested in
>living simply, being eco-friendly, being able to live
>extremely close to where he works, etc.

I disagree, he cited numbers and financials which clearly support renting as a better long term investment and he's probably right. You don't get the same "ownership" freedoms when you rent, and you pay for it. Whether or not its worth the added price is up to you, but there's no denying that there is an added price.