patrick.net

One round of WAGE inflation . . .

SFace says

One round of inflation will destroy the rent case and two will blow it away

deflation will blow away owners, two will put them living under a bridge. Works both ways. This country can print money until all the trees are gone, and inflation will be little threat, when you have more than 20% under or unemployed. Try increasing rates, the only effect will be you end up with lots of inventory. I've got relatives in the retail business and today's regular prices were yesterdays sale prices

E-man says

What's so hard to understand? You can leverage 4:1 up to 30:1 with real estate. A typical 3% annual appreciation/inflation will give you a 12% to 90% ROI.

IRentingForHalfTheCost says

deflation will blow away owners, two will put them living under a bridge. Works both ways. This country can print money until all the trees are gone, and inflation will be little threat, when you have more than 20% under or unemployed. Try increasing rates, the only effect will be you end up with lots of inventory. I've got relatives in the retail business and today's regular prices were yesterdays sale prices

I don't understand why people are arguing over and over and over again on the same thing (maybe in slight different forms) on this forum. Like I said, it depends on your crystal ball.

1. Scenario 1: deflation dominates, all prices including rent drop, cash is king, renters who SAVED win out.

2. Scenario 2: strong inflation gets hold, owners win big, renters get blown away.

However, although I see scenario 2 much less probable (due to the gas price bottle neck,) it is a no brainer for me to purchase a house in CA (a non-recourse state) when the PITI is comparable to rent.

1.US stocks/US bonds have outperformed real estate since 2009
investing in stocks/bonds over the last 3 years will have made much more than investing in real estate, even if you had invested at the bottom of the real estate market

2. if in 2009, you could look into the future and knew the rates of return of RE and equities in 2012 (talking about indices; not specific houses or specific stocks). most people that were looking to grow their net worth would pick equities.

3. historically stocks/bonds outperform real estate.
over the long term (next 1, 2 and 3 decades), stocks and bonds should continue to outperform real estate. if you care only about increasing net worth, the smarter bet is stocks/bonds over real estate; even in the bay area.

4. i save over $4k/month (on a pretty typical white collar bay area salary) and rent. my investments grew significantly more than my savings over the last 3 years.

We bought in early 90's, all cash no mortgage. Right away obviously it was a big hit financially. But not having to pay interest over years made this work out over years. It's not like it's free, taxes and fixing old stuff does add up.

This would have been a bad proposition if we had high interest mortgage, interest was really high back then since the value of our property today is almost same as it was in the early 90's. Of course everything can go any way. If we spent all that money buying stocks we'd be millionnaires today too, but hey who would have known that BOA would drop to 4 and GE would drop to 6 in next 15 years? No one had a crystal ball.

E-man says

You can leverage 4:1 up to 30:1 with real estate. A typical 3% annual appreciation/inflation will give you a 12% to 90% ROI.

And a 3% annual depreciation will wipe you out.

People forget that so quickly.

Hysteresis says

4. i save over $4k/month (on a pretty typical white collar bay area salary) and rent. my investments grew significantly more than my savings over the last 3 years.

You are in the market recovery period. Good time to be in high growth portfolio. But don't be passive, if you see economy slow down in next few years, get more conservative to do well during the low end of bell curve.

Yeah, we'd all be rich if we could see into the future. Strange that.

Anyway, you can apply leverage to stock too. What matters is the risk-adjusted return, not absolute return. If you've increased your risk via leverage, those higher returns in real estate are not as real as they look.

The risk of leverage in stock purchase has been always higher (much higher) than fixed mortgage. A margin call can wipe out your account right away.

FortWayne says

Hysteresis says

4. i save over $4k/month (on a pretty typical white collar bay area salary) and rent. my investments grew significantly more than my savings over the last 3 years.

You are in the market recovery period. Good time to be in high growth portfolio. But don't be passive, if you see economy slow down in next few years, get more conservative to do well during the low end of bell curve.

pretty decent advice. periodically adjusting allocation is a good idea; although it's quite difficult to implement even if you have a sound strategy (and many don't have one).

Lets for a moment assume that real estate appreciates at historical inflation rate of 3% while stock market appreciates at historical rate from 1926-2011 which is 8%. Per 72 rule, it would take 24 years for the home to double in value while it would take 9 years for the stock mutual fund to double in value. That is assuming that average holds. Lets assume that a buyer puts 20% down on a $500K property and has $100K in cash. Lets assume that a different person instead invests $100K into a mutual fund outright and does not buy on margin since most "regular" people don't do this. In 24 years, the homebuyer has a home that's worth $1 million. The mutual fund equity investor will have the following scenario - 9 years from now - $200K portfolio. 18 years from now $400K portfolio. 27 years from now - $800K portfolio. Thus despite the fact that on average equities return more than real estate due to leverage the homebuyer will come out ahead if histrorical returns hold. I believe that this analysis should only apply when deciding to do buy vs rent analysis. For those who already own a home and are wealthy enough to have tons of other funds and are considering whether to invest them into rental properties or equities, I would do equities simply cause they are more liquid and to me being a landlord would be a headache. My conclusion - buy primary residence instead of being a lifelong renter, but invest in equities/bonds instead of real estate when it comes to additional decisions.

dublin hillz says

...

your analysis is missing --ALL-- of the large costs associated with financing a house.

use patrick's calculator or nytimes rent/buy calculator for more accurate numbers.

RentingForHalfTheCost says

The big assumption is I am able to keep getting 12% after tax return on my investments, which I believe I can.

Getting 12% after tax ongoing??? In Texas there's a saying. "The man's pissing on my boots and telling it's raining". I smell urine, not spring rain.

Hysteresis says

dublin hillz says

...

your analysis is missing --ALL-- of the large costs associated with financing a house.

use patrick's calculator or nytimes rent/buy calculator for more accurate numbers.

If one believes that historical averages are likely to repeat themselves in the long term, then the principal part of the mortgage payment should be considered forced savings and should not be counted as a "cost." It is more of a cash flow issue so the pertinent question is "am I confident that I can make the required payments." Which means that the biggest threat to making payments is a life altering negative event such as job loss, etc and the good idea is to have substantial liquid savings if that were to occur so that the situation can be handled adequately and without stress. Also, I am a big believer in mortgage prepayments which in bay area can easily save you hundreds of thousands of dollars over the life of the loan and factor heavily into buy vs rent equation.

While it is certainly possible that someone can rent under market (pay equivalent of property tax + maintenance or property tax + HOA) it is very unlikely to have such a benevolent landlord who does not care to make any profit. At very least, they will want to make some profit if they lease the place out. But you guys have to admit, this situation cannot apply to rental martket as a whole. There are too many renters to even fathom to fit into this scenario. Vast majority of renters live in apartment complexes where rent increases are a direct and a realistic threat year in and year out.

dublin hillz says

While it is certainly possible that someone can rent under market (pay equivalent of property tax + maintenance or property tax + HOA) it is very unlikely to have such a benevolent landlord who does not care to make any profit. At very least, they will want to make some profit if they lease the place out. But you guys have to admit, this situation cannot apply to rental martket as a whole. There are too many renters to even fathom to fit into this scenario. Vast majority of renters live in apartment complexes where rent increases are a direct and a realistic threat year in and year out.

It is possible. I'm sort of in the same situation. The home I'm in is in a gated community in Irvine, and a similar model sold in the high 800s this year. The HOA is nearly $300, and the effective tax rate with MR is 1.5%.

My rent: $2400 a month. This is my 3rd year of not having a single rent increase.

You property owning barons can do the math yourself. I'm pretty sure I'm saving a lot of money by not buying this house. :)

When I read peoples posts on these matters, it seems like many forget that, if not for the taxpayer stepping in and plugging the chazm in the ole dam, everything housing AND financial would have been wiped all the way out.

Using OPM other peoples money is right, lol!

High five

Goran_K says

My rent: $2400 a month. This is my 3rd year of not having a single rent increase.

$2400 is definitely more than just property tax+HOA. This amount likely comprises Interest + Property Tax+ HOA.

dublin hillz says

$2400 is definitely more than just property tax+HOA. This amount likely comprises Interest + Property Tax+ HOA.

It's close.

Rent amount per year: $28,880

Tax: $875,000 * 0.015 = $13,125
HOA: $280 * 12 = $3,360
3.6% jumbo (or about $700 month over 360 payments): $8,800

HOA/Tax/Interest = $25,285

We're talking about $300 a month profit, and that's assuming everything is paid off! (this house was built in 2001!) If it's not, then all bets are off.

Don't forget maintenance (my water heater was replaced in September), and any "special assessments".

All I know is I'm here for a while, and I am saving money from what I was paying in rent. Plus my taxes keep going down.
Last night my wife and I were discussing how on Zillow and Trulia they are saying our house is valued back to where it was when we bought. While the county appraisers office has it 40K lower. In any event I'm still not upside down, as I'm not selling, my payments are fixed for the next 30 years so it's a non issue.

My Wife asked if our house went upto 300K and we sold it for that, that means that 150K profit would be ours? I said yeah, but by then, where in the hell would we go. If our house would be worth 300K that would mean an even better house would cost 400-500K and up of course.
This isn't a board game, we're staying where we are.
I could see a scenario where we buy a new house and rent this one out as two units, someday. But this is not some investment vehicle with hopes of flipping into bigger a exposure. This is easy, that is not.

That's a good attitude to have. As a place to live, I think it's all a personal choice.

As an investment, I think $875,000 homes are horrible.

RentingForHalfTheCost says

I agree, more like $3500/mth savings.

I am not sure how I would save 3500/month by renting? Since the refi I am saving more money monthly than when we were renting. Something like 350 a month more than when we rented.

Please lay down your math of how you are saving $3500 a month?? Living with the parents for free would be the only option but who wants to live with the parents for 10 years??

I have just one question for you all:

Is it cheaper to rent or to own the house you bought over the median holding period of 6 years? Remember that half of all buyers own for even less than 6 years.

Thats a non sense assumption I think. I know way more people that have been in their houses for more than 10 years. Most of our neighbors (except the renters) have been here for more than 10-20 years or even longer.

I think if you have a job that calls for constant moving then...don't buy. I personally work from home and can live pretty much anywhere as long as within a 1hr drive to the city where I have an occasional meeting. So, I am not moving anytime soon, if ever. Will only change around / update the house around over time...and completely mold it to my taste and liking. Been looking forward to that my whole life. We so much hated rentals, always in bad shape and never a landlord that doesn't want to just update in the cheapest possible way...need a new floor...how's that linoleum working out for ya guys? - argh!
It's such a crappy life quality and we used to travel a lot and spend a lot more money outside of the house because we hated being home. So in essence, we saved way less in those times than just comparing rents to mortgage.

To each is own.

But even in your assumption of 6 years patrick. I could move if I wanted to because as of right now, I could rent the house out for $500 more a month than what we pay. So if I wanted to move to Florida, I rent out this house and move...just like anybody else.

dodgerfanjohn says

All of the above feature a commute of at least an hour to the westside or DTLA and as such peaked lower, and crashed harder than closer in areas

Who says you need to commute to the West Side??
TO for example has its own job infrastructure.

Look at traffic in the morning. The 101 going towards TO is PACKED, bumper to bumper. It seems like a lot of people from LA are traveling that way. puzzles me but thats a fact. Every morning. The side going towards LA is empty.

On the flip side of the coin.
I really wish like hell, all of the rent I payed on the same house for 11 years, went to my current mortgage.

That's $158,000 I'll never see again. In fact, it's $2K shy of what I paid for my house, that I'm paying a mortgage on.

$1200 a month
X12
X11 = $158K

$432K will be what I end up paying on my house if I take 30 years to pay it off. That's only a 160K loan. But it's the same I would pay for rent, provided my rent never went up due to inflation in that 30 year period.
Never happen.

Plus there's a bonus, I will actually end up with a house I own out right free and clear in 30 years or less. That would also never happen as a renter, renting the same house for 30 years.

CaptainShuddup says

On the flip side of the coin.
I really wish like hell, all of the rent I payed on the same house for 11 years, went to my current mortgage.

YES.

In my case that is 10 years of renting places for around $2400.- = 288k! I never see again! Ouch!

RentingForHalfTheCost says

Aside from showing my my trading statements for the last 15 years, not much I can do.

lets see them! btw, deflation is very easy to fix (just ask Bernake HA HA HA) but inflation happens every year.

RentingForHalfTheCost says

Here is some light reading for you then. I employ a strategy like BXY

And what does that have to do with my post??

Good for you, you spend your days following the stock market. I rather be at the dentists office.

SubOink says

CaptainShuddup says

On the flip side of the coin.

I really wish like hell, all of the rent I payed on the same house for 11 years, went to my current mortgage.

YES.

In my case that is 10 years of renting places for around $2400.- = 288k! I never see again! Ouch!

Well, as far as your mortgage payment goes, you'll never see your interest, taxes, or insurance portion of the payments again either, and the principal repayment would only be realized, if you sold the house. After paying 6% commish to a realtor and giving the buyer assistance. And at that point, you're back to homeless

errc says

Well, as far as your mortgage payment goes, you'll never see your interest, taxes, or insurance portion of the payments again either, and the principal repayment would only be realized, if you sold the house. After paying 6% commish to a realtor and giving the buyer assistance. And at that point, you're back to homeless

The interest portion (throw away portion) is a fraction of what my rent used to be. And it helps with taxes on top of it.

robertoaribas says

RentingForHalfTheCost says

Just doing it against the SP500 nets you over 10% annual since 1990. My approach is more specific to only high dividend paying stocks. These are where I get the 15-20% returns annually.

total bullcrap... so much in fact a shovel won't do, you need a bulldozer and a truck to handle this amount.

Believe what you want. Amazing, how people asked for the numbers, and then when presented they can't take it. All is left is to kill the messenger. Good luck to you guys/girls. Last time I share my details here, cause people are downright mean when it goes against their thinking. I'm extremely happy with my choices and they have done me well. Sounds like the OP is as well. Good for everyone. Others just seem mean around here. ;)

robertoaribas says

total bullcrap... so much in fact a shovel won't do, you need a bulldozer and a truck to handle this amount.

Which part? The S&P 500 has 9.6% return rate since 1990. Bond index funds were around 6% since 1990. That's definitely not BS.

What was housings return over that time period?

I have just one question for you all:

Is it cheaper to rent or to own the house you bought over the median holding period of 6 years? Remember that half of all buyers own for even less than 6 years.

The average tenure for owner-occupiers in California is 13.44 years, and over 11 years in Texas and Florida, according to this study - http://dss.ucsd.edu/~miwhite/wasi-white-final.pdf. Where is the 6 year figure coming from? The median and average couldn't be that different.

Goran_K says

Which part? The S&P 500 has 9.6% return rate since 1990. Bond index funds were around 6% since 1990. That's definitely not BS.

What was housings return over that time period?

Depends when you sold (and bought). :D

After reading this site since the beginning and reading Patrick's book, I just joined this site thinking it was far more grounded in fact and realism but what I see is absurd. I am not staying.

Recent threads read to me like the type who troll forums planting seeds of why someone should do precisely what Patrick always warned against. I do not buy into a minute of it. To me this is just more illusion and BS, this blind push on here that was on here in 2004 and I find it now as I found it then, just plain sick.

Thanks to Patrick and this site then I stayed away from that kind of BS talk then and saved my behind by not purchasing a life debt on a dump, while plenty of others did and in the course of it went bankrupt.

I have to say many of you appear to me like nothing but a bunch of ignorant and arrogant amateurs to me trying to prove to your own minds you are hot shots by bragging how much you have or make dreaming of that never ending real estate rise that is largely in my view in your own minds to entice others to follow. I don't buy it. I've seen this all before and find it really sad.

If the bond market crashes as all predictions say is very near I pity many of you in real estate.

robertoaribas says

I pity anyone who has to operate at the cognitive skill level evidenced in this post.

I think you just proved the whole point of his post. Nice.

robertoaribas says

RentingForHalfTheCost says

Also, selling naked call options is a fools game.

He had the physical silver. So, that would make it a covered call. If silver prices skyrocket, the value of his silver would go up as much as the loss on his call option...

Then, your right, I wouldn't call it a naked call. Covered calls make a lot of sense.

I think your analysis is full of assumptions (not sure about edvard's, I didn't see this analysis).

Why don't you break down the numbers so it's less full of assumptions?

- Amount of interest paid out
- maintenance
- Taxes, HOA
- etc

I'm not saying you're wrong, or that your theory is incorrect, but I'd like to see you break it down.

Going forward from this point I think most would agree 10% returns in the stock market is a dream. 6% is probably more realistic.

Goran_K says

Why don't you break down the numbers so it's less full of assumptions?

forget it man.

these guys have been using the same bad math for years. they refuse to include commission, interest, taxes, insurance (not to mention inflation and opportunity cost) to make it look like real estate is this guaranteed great investment.

they make dumb statements like "principal isn't a cost" while ignoring actual costs. there's a gazillion RE calculators they could have used to make their case factoring every conceivable variable, but that would just show the return is less than claimed. the arguments sound like they're coming from used car salesmen. it feels sleazy.

if i thought i could have an intelligent debate i would ask for clarification, but i know it's futile. it's not worth anyone's time. just let them make the same statements they've been making for so many years.

i have faith smart people can draw their own conclusion and dumb people will just follow the loudest loudmouthed sheep. it's actually better for me when people misallocate capital since my net worth will grow relatively faster; if people want to buy million dollar PA houses, by all means go ahead.

i do believe everyone should have some real estate exposure; whether it's buying a primary resident or owning REIT or some other liquid investment. but the lack of sophistication in determining how much is the right amount and what investment vehicle to use is mind boggling.

E-man says

Well, he answered it for me. Anyone with a double digit IQ can do the math.

So... you're not going to break down the numbers?

woppa says

Going forward from this point I think most would agree 10% returns in the stock market is a dream. 6% is probably more realistic.

True, 6% appreciation with a 4-5% dividend, then another 3-5% covered call grab. And that is with companies that have 20-40 years of increasing their dividends. The gov't is broke, housing is broke, large fortune 500 companies are the only real thing that looks strong in today's economy IMHO. WMT, GE, PG, JNJ, MCD, KO, etc. Time will tell if I am right, but so far so good.