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1   HeadSet   2023 Jan 27, 5:06pm  

GNL says

Isn't renting supposed to cost more than buying? When it is the opposite, what is the reason for it?

That used to be referred to as an "inflation premium." A home loan back in the old days typically was a little more than rent, as the owner of the house benefitted from the house rising with inflation along with tax savings. The first few houses I bought by assuming VA loans were rented out at a slightly negative cash flow. I figured I was buying a house for $100 per month.
2   Patrick   2023 Jan 27, 5:16pm  

@GNL

I think the main reason is that the buyer is betting that house price increases will give him capital gains which compensate for the loss in owning relative to renting the same thing.

That is, the buyer is betting that he can resell later for so much more than he paid that it doesn't matter if he overpaid. A house has a fair sale price, which is determined by what you can rent it out for per year, divided by the current interest rate. For example:

Say rent is $1000/month, so $12,000/year. Say the current interest rate is 6%. So the fair value of the house is about 12000 / 0.06 = $200,000

That's a slight simplification, but approximately correct. You can either rent a house, or rent money, or some combination of the two. Even if you own it, you are giving up the interest or other income you could have gotten on the cash, which is, again, about the current interest rate.

Prices go beyond fair value when people think the market will eventually compensate them for overpaying right now. Same thing happens with stocks.

If such people are right, they win with leverage. If they are wrong, they get killed. You really don't want to borrow money to buy in a falling market. Your downpayment can be wiped out pretty damn quickly.

All of this was the main theme of patrick.net for years.

The NY Times (though they always support the violent far-left and I hate them for it) has a pretty good calculator to figure out fair value more exactly:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
3   B.A.C.A.H.   2023 Jan 27, 5:32pm  

Patrick says

you are giving up the interest or other income you could have gotten

and the Property Tax is Sunk Capital.
4   Onvacation   2023 Jan 27, 5:49pm  

B.A.C.A.H. says

and the Property Tax is Sunk Capital.

And will go on forever...
5   B.A.C.A.H.   2023 Jan 27, 5:56pm  

Onvacation says

And will go on forever...

will go on up forever..
6   Eric Holder   2023 Jan 27, 6:19pm  

There is no rational reason. But people mix emotions into their RE decisions all the time.
7   porkchopXpress   2023 Jan 27, 6:41pm  

Owning is more fun if you have the money. I rented all my life until now, and the joy of making my place into how I want it can’t be quantified.
8   Patrick   2023 Jan 27, 7:17pm  

Eric Holder says

There is no rational reason. But people mix emotions into their RE decisions all the time.


This is essential to the profits of the NAR.
9   clambo   2023 Jan 27, 7:39pm  

House owning is expensive but worth it for the owner if he's not financially ruined by it.

I was very fortunate in my rental experiences except when I had to move out; this is tolerable to a single guy, but not so much for a family.

Today foreigners are sucking up the rentals in droves, making it worse for everyone.

I feel sorry for young guys today, they have everyone against them (unless gay or trans maybe).
10   REpro   2023 Jan 27, 8:20pm  

In healthy market: Rent should be more expensive then Own. This is how business works.
Short terms often mean the highest service quality, worry free.

The most expensive is shortest term going to less expensive, long term.

Hourly renting (e.g., tool rentals, bike rentals, escort)
Daily rental (e.g., Hotel rooms)
Weekly rentals (e.g., car rentals)
Monthly rentals (e.g., furnished apartments, machinery)
Yearly rentals (e.g., apartment, house)
Long term rental, lease (e.g., commercial leasing)
11   GNL   2023 Jan 27, 10:29pm  

REpro says

In healthy market: Rent should be more expensive then Own. This is how business works.
Short terms often mean the highest service quality, worry free.

The most expensive is shortest term going to less expensive, long term.

Hourly renting (e.g., tool rentals, bike rentals, escort)
Daily rental (e.g., Hotel rooms)
Weekly rentals (e.g., car rentals)
Monthly rentals (e.g., furnished apartments, machinery)
Yearly rentals (e.g., apartment, house)
Long term rental, lease (e.g., commercial leasing)

This is what I thought also.
12   Misc   2023 Jan 28, 1:06am  

There is also the tax aspect that should be addressed. There are many who rent out their property for less than they could sell it for because they would have to pay a capital gains tax on the sale.
13   Al_Sharpton_for_President   2023 Jan 28, 5:12am  

Builders overbuild rental units. RE investors bail on rental investments. Glut of rentals. Under siege renter candidates hammered by inflation can only pay so much.

Supply and demand.
14   pudil   2023 Jan 28, 6:56am  

You need to look at expected returns for other investment types. Sure, I could sell my house for 700K and stick it in the stock market and next year have 500K. Or I could rent it out and make $40K. So a rational person might decide to hang tight and rent it out. In which case if you are a responsible tenant who has a long history of not trashing places and causing problems, that tentant is actually helping the landlord out by paying for the privilege of being onsite maintenance, security, etc while the LL waits for a better opportunity.
15   GNL   2023 Feb 2, 9:42am  

@Eman,

How come you haven't commented on this?
16   Eman   2023 Feb 2, 10:55am  

GNL says

Eman,

How come you haven't commented on this?

What I’ve learned is that I can’t convince anyone of anything even if I present facts. I have been sharing numbers and reasoning on here for years. However, people have their own reality and always find excuses. They work at a job they dislike and are looking forward to retirement. In my case, I’ll work until the day I die. No excuses, and I can take off “work” anytime I want. No obligations.

This is why community like Biggerpockets thrive because it’s mostly like minded folks who like real estate as a vehicle to get out of the rat race. People like me believe it’s possible and there are good people willing to help others succeed.

Let me share with you what my trustee sale mentor said a decade ago. There are good people out there who are willing to help others succeed.
17   Eman   2023 Feb 2, 11:00am  








This is my real estate trustee mentor. I met him in 2015 for the first time in San Diego before he relocated to North Carolina to be close to his only daughter and the grand kids.
18   NuttBoxer   2023 Feb 2, 8:54pm  

I've been checking rentals, purchase prices still have a LONG ways to go to line up with interest rates. In Yuma I'll see these outliers every once in a while. Places listed for $500 over what everyone else is asking for a similar property. My guess is someone who wanted to cash in on the rental market in places people normally don't live, but have gotten hot with the move to remote work. But they way overpaid on their mortgage, and now will have to make the choice to take the loss, lose the property, or move in.

If your purchase of property is business related, then make it a business decision, not an emotional one. Don't over-leverage yourself, don't take on unnecessary risk.
19   GNL   2023 Feb 3, 5:27am  

Eman says

What I’ve learned is that I can’t convince anyone of anything even if I present facts.

@Eman, I meant, why haven't you commented on if owning being more expensive than renting is a sign of anything.
20   Eman   2023 Feb 3, 6:00am  

GNL says

Eman says


What I’ve learned is that I can’t convince anyone of anything even if I present facts.

Eman, I meant, why haven't you commented on if owning being more expensive than renting is a sign of anything.

It has always been that way, especially in our Bay Area market, except on a couple occasions where real estate was on fire sale like the mid 1990’s and early 2010’s. These were opportunities. Facts were presented, but people kept arguing based on their bias, or shall I say ignorance.

If you zoom out and look at it from a macro level, then it makes sense why it’s more expensive to buy than to rent.
21   GNL   2023 Feb 3, 6:18am  

Eman says

GNL says


Eman says



What I’ve learned is that I can’t convince anyone of anything even if I present facts.

Eman, I meant, why haven't you commented on if owning being more expensive than renting is a sign of anything.


It has always been that way, especially in our Bay Area market, except on a couple occasions where real estate was on fire sale like the mid 1990’s and early 2010’s. These were opportunities. Facts were presented, but people kept arguing based on their bias, or shall I say ignorance.

If you zoom out and look at it from a macro level, then it makes sense why it’s more expensive to buy than to rent.

You're saying it's perfectly normal for a landlord to subsidize their tenants? Monthly, you're subsidizing them.
22   Eman   2023 Feb 3, 8:58pm  

@GNL,

I wouldn’t call it subsidizing. I’d call it making a bet. Also, real estate investing has a few puzzles. Financing is one of them. Mortgage rate is 6.5% for the average Joe/Jane. For some, it can be in the 4%ish… Also, you have factored in the principal pay down, all deductions that the landlord/investor gets from owning the rental, etc…..In addition, rent tends to go up every year. Some landlords find it acceptable to have 3-5 years of negative cash flow before breaking even.

Now, let’s zoom out and look at things from a macro level. From a historical perspective for my market, not sure about your example, real estate doubles itself every 12 years or so. This means that property should worth $1.5M in 12 years. $150k down payment will gain $750k in equity, about 500% return, not including principal pay down and positive cash flow after year 5, and all the deductions that come with owning rentals, etc….

Did you know that Tesla Model X is tax deductible? That’s over $100k in deduction. iPhone, phone bills are tax deductible. Meals = 50% tax deductible. MacBook, iPad, AirPods, etc….are all tax deductibles to name a few. CPA fee preparation is also 100% tax deductible.

As I mentioned above, financing is one of the puzzles. For full-time investors, we would like to buy value-add deals where we want to be all-in at 75-80% of fair market value. Then we would refinance. What we get is sweat equity with 100% loan amount from the lender. Then let time do the heavy lifting. We also get a lower property tax basis due to buying the property at a depressed price.

Lastly, real estate is about “control and leverage” while let time do the heavy lifting. Our real estate portfolio is $30M at the moment. We have amassed this in the last 8 years. Assume we don’t do anything else, they should worth $60M in 12-15 years….IF history is any indication. That’s $15M for each guy, not including our $10M in sweat equity and principal pay down thanks to our tenants. Each guy should worth over $20M+ for 2 decades of work. That’s about $1M/year. Not bad….
23   GNL   2023 Feb 4, 5:02am  

Eman says


GNL,

I wouldn’t call it subsidizing. I’d call it making a bet. Also, real estate investing has a few puzzles. Financing is one of them. Mortgage rate is 6.5% for the average Joe/Jane. For some, it can be in the 4%ish… Also, you have factored in the principal pay down, all deductions that the landlord/investor gets from owning the rental, etc…..In addition, rent tends to go up every year. Some landlords find it acceptable to have 3-5 years of negative cash flow before breaking even.

Now, let’s zoom out and look at things from a macro level. From a historical perspective for my market, not sure about your example, real estate doubles itself every 12 years or so. This means that property should worth $1.5M in 12 years. $150k down payment will gain $750k in equity, about 500% return, not including principal pay down and positive cash flow after year 5, and all the deductions that come with owning rentals, etc….

Did you know that Tesla Model X is tax d...

Hey @Eman, thanks for the detailed response. So, getting started, a person needs to lose money for the first 5 years and then the hope is that he/she will be cashflow positive and the property has appreciated? Does this mean, most likely, that the second property cannot be bought until 5 years go by (I assume the second property is bought using some equity from the first property)?
24   porkchopXpress   2023 Feb 4, 6:45am  

The cost equation of rent vs buy changed over time when we lost control of prudent monetary and fiscal policy, thereby sending inflation permanently to the stars. As a result, any desireable asset with finite supply will ALWAYS rise over the long run at an accelerated rate...it's economics.

Before this phenomenon, renting was more expensive than buying (as it should be), but policy screwed up that concept. Now, it's all about hedging against long term inflation on our net worth
25   Eman   2023 Feb 4, 6:55am  

It’s not my approach, but this is how retailers do it and find it acceptable as they’re too busy making money from their W2. I’ve seen high income earners such as surgeons, doctors and lawyers use brokers/agents to help them invest in commercial real estate and manage the assets.

For me, I’m a sweat equity guy. Without sweat equity and positive cash flow after less than a year, it’s not viable and scalable as I don’t have a W2 to supplement the losses. I need to get my seed capital back ASAP so I can rinse and repeat.

Find what works for you and your risk tolerance and go from there. There are many ways to skin a cat just like many paths to financial freedom. It doesn’t have to be real estate. Real estate is only one of the vehicles to our destination.
26   clambo   2023 Feb 4, 7:08am  

A few people I have met in Baja California Sur have rentals and like the 1. absurdly low property taxes 2. rent=unreported income for the IRS 3. AirBNB, etc. easy to advertise with .

My GF here wants me to take some of my money and buy one; when I told her my net worth decreased by $$$ last year she said "Why don't you take some money and buy a house!"
The locals are getting pissed off; foreigners are bidding up prices to rent to foreign tourists, and the locals get priced out.
If I get a place I will rent it to "starving student" females, as a service to the community of course.
27   GNL   2023 Feb 4, 7:56am  

clambo says

1. absurdly low property taxes

Low taxes in Cali?

clambo says

2. rent=unreported income for the IRS

Even if they know about it? That does not compute.
28   GNL   2023 Feb 4, 7:58am  

@Clambo and @Eman,

Ok, that makes a lot of sense. Yes, this are more than 1 way to find financial freedom. My path is a bit different but real estate is interesting.

@Eman, are you managing all of your real estate? Everything from snow removal to collecting rent?
29   clambo   2023 Feb 4, 8:18am  

GNL, I meant Baja California Sur state in Mexico; places like Cabo San Lucas, La Paz, etc. are in this state.

The property taxes are miniscule in Mexico; I think it's about $50 bucks per year for my GF's house for example.

If I had a Mexican place I would have the people pay me cash for rent; that money would be for my expenses in Mexico.

I am not yet a real estate investor; I just bought some JEPI which is paying me a monthly dividend. I haven't put a large amount of $ into it, but it's yield is now 11%.

My other money is largely comprised of stock mutual funds which I love; you can start investing today with $100 at Fidelity and get professional management of your money.

Fidelity even has some "zero funds" which have 0% management fees.

The only reasons I would buy a place in Mexico is to have an escape plan if the arrangement with my GF becomes untenable, and tax aviodable income.
30   WookieMan   2023 Feb 4, 8:28am  

GNL says

clambo says


1. absurdly low property taxes

Low taxes in Cali?

clambo says


2. rent=unreported income for the IRS

Even if they know about it? That does not compute.

Unreported income is tenants that pay cash. You then show a loss on taxes but still had your monthly nut covered and get to write off any expenses put into the property and depreciation.

My biggest beef with residential real estate is dealing with humans. “My sink is broken (that I broke) can you send someone to fix it?” Or “I had to pay to put my dog down and I’ll be short rent this month.”

I’m starting to get the itch to get back into RE but I think it’s going to be industrial and non-retail commercial properties. Think people that have online sites, work from home and need space for inventory not at their home. Like someone that makes wood tables, cabinets, etc. A small sized plumber that can buy in bulk for cheaper and store pipe and material and old water heaters they have to take and recycle. So many businesses need 2k square feet. You can do basic leases or NNN where you just need to make sure they pay the rent to you and taxes. That’s 5 min a month.

You still may get the sob story of business being slow, but you have more recourse as the landlord because it’s business and not housing. Longer leases generally as well. I’m not a people person so I just don’t do well in the residential sector. People are liars and too emotional.
31   Eman   2023 Feb 4, 8:45am  

GNL says


Clambo and Eman,

Ok, that makes a lot of sense. Yes, this are more than 1 way to find financial freedom. My path is a bit different but real estate is interesting.

Eman, are you managing all of your real estate? Everything from snow removal to collecting rent?

No snow where we live, which is San Francisco Bay Area. We have a full time property manager for our rentals. You want to be an investor, not a landlord. Landlords get burned out. We also have a full time handyman to help us repair stuff and turnover the units.

The formula is simple, but we need to put in the efforts. It’s like planting a tree, then 2, then 3, etc… A decade later and look back, they’re all bearing fruits. We just have to harvest. It’s the gift that keeps on giving. Rent used to be $1k/month for a 1-bedroom when I started. It’s now $2k. 2 bedrooms used to be $1.2k, now $2.4k.

The best part about this job is that there’s no deadline. No one to report to. I can take off anytime. I put in a couple hours each day to make sure things run smoothly….kind of like watering the plants instead of having to dig, fertilize and plant the tree. One time effort for decades of rewards.
32   krc   2023 Feb 4, 8:57am  

@Eman - as a rental prop owner in the bay area, do you worry about regulatory changes like rent control in particular or any caps on rental increases?
Also, did you have anyone not paying during covid and did you get compensated by the state at some point?
For evictions, do you have a team that takes care of that or do you vet potential renters well enough that eviction is never needed?
RE seems great - but it also seems that there are groups now that really want to limit RE profitability and ability of landlord to control his own property. Agree?
Or are your properties more in the suburbs (east bay) which is less restrictive than say SF?
33   Eman   2023 Feb 4, 9:29am  

krc says

Eman - as a rental prop owner in the bay area, do you worry about regulatory changes like rent control in particular or any caps on rental increases?
Also, did you have anyone not paying during covid and did you get compensated by the state at some point?
For evictions, do you have a team that takes care of that or do you vet potential renters well enough that eviction is never needed?
RE seems great - but it also seems that there are groups now that really want to limit RE profitability and ability of landlord to control his own property. Agree?
Or are your properties more in the suburbs (east bay) which is less restrictive than say SF?

@krc,

Yes, we had 1 tenant who fell behind during Covid shutdown. He wrote a letter in pencil with broken English, and sent the letter to our PM company. He said he would pay us back every penny he owes. He kept his promise and paid everything within 3-4 months when things opened up. He’s a blue collar worker.

I own a 4plex in Oakland. I was shocked that all tenants paid through Covid till now. I bought it because it was cheap and on an oversized lot where I could learn about development without holding costs vs. buying land. This 4plex cash-flows like mad. 🤑

Late 2021 to early 2022, a couple tenants “intentionally” fell behind and used the Covid Rental Assistance Program to pay for their rent for like 3 months. We didn’t feel a dent in our operation actually.

We have rent control in both Oakland and San Jose. Oakland is getting stupid with their rent control TBH. City employees are a lazy bunch. It took 2 years to get the project entitled for development, but now I won’t build. I’ll wait and probably sell the 4-plex with approved plans once interest rate comes back down.

Our PM is solid. We have not had 1 eviction from his screening process. We had 3 evictions from legacy tenants during this 8 years. They were being handled by attorney Daniel Paris of Eviction Service Center. Our PM handles this process.

San Jose rent control is not bad. Most of our rentals are around SJSU so we get natural turnovers every 2-5 years and get to reset the rent at fair market. Rent control creates opportunities for investors while it hurts mom-and-pop landlords and retailers. I’m not worry at this point. We all make our bets and live with the consequences.
34   Blue   2023 Feb 4, 9:32am  

WookieMan says


People are liars and too emotional.

A friend of mine complains that the renter who is a single AA woman stopped paying rent for the last few months. Now she says that she is being harassed when asked for the rental payments. My friend trying to find options. Hope it is easy to evict in TX which is one of the land lord friendly states. It is one of the things one should anticipate for being a slumlord although there are lot of tax advantages to maximize the gains.
Recently I met a landlord who is leasing out to fast food restaurant chains for 15+ years in Bay Area. He claims that he is getting about 4%. It doesn't look too great unless he is writing off lot of his expenses, (minus inflation!?) etc. Though its low but he is happy as he doesn't need to spend time on it.
35   krc   2023 Feb 4, 9:34am  

Interesting. I was thinking that investing in RE around colleges might be a less risky proposition as there is built in demand.
I was looking around Chico and there now seem to be commercial groups that buy lots and build 50-100 4 bedroom apartments that fully rent out.
Maybe you need to be a bigger player to be in that sort of market.
36   Eman   2023 Feb 4, 9:41am  

krc says

Interesting. I was thinking that investing in RE around colleges might be a less risky proposition as there is built in demand.
I was looking around Chico and there now seem to be commercial groups that buy lots and build 50-100 4 bedroom apartments that fully rent out.
Maybe you need to be a bigger player to be in that sort of market.

There are new student high-rise housing popping up around SJSU all the time, but the supply doesn’t keep up with demand. Also, they’re much more expensive too.

We’ve been getting record rents since spring of last year till now. Thought about assembling a few parcels, then do new development, but it’s too much work, money and efforts involved. My partner and I only want to enjoy life now and go at our own pace.
37   just_passing_through   2023 Feb 4, 1:10pm  

Blue says


Hope it is easy to evict in TX which is one of the land lord friendly states.


Very easy here. However, I've never had to evict anyone and have had some great single AA women as tenants.

My houses are in one of the most popular subdivisions in San Antonio and so I'm able to screen people pretty well just by the higher than average rents.
38   Eman   2023 Feb 5, 10:55am  

Blue says

Recently I met a landlord who is leasing out to fast food restaurant chains for 15+ years in Bay Area. He claims that he is getting about 4%. It doesn't look too great unless he is writing off lot of his expenses, (minus inflation!?) etc. Though its low but he is happy as he doesn't need to spend time on it.

@Blue,

Sounds like a 4 cap NNN lease on the asset he bought. 4% is in the ballpark for the Bay Area.

If history is any indication and he gets historical appreciation of 6%, he’s good.

I’ve seen people bought assets in “the path of development” and made out like bandits, or if one is lucky and owns an asset in the path of development.

The price of land changes as the cities change their zoning relating to their “Vision of Future Plans and Development”. Higher density = higher land value. In this biz, I’ve seen people downplay their knowledge while they’re very savvy and calculated with their purchases. Things become apparent once unveiled.

There’s a saying in real estate. Riches are in the niches. I’ve fortunately witnessed this first hand on several occasions myself. I’ve encountered quite a few average Joes called “smart and savvy” people stupid for buying things that don’t make any financial sense. After awhile, I just walkaway. No point of convincing anyone of anything. They’re average for a reason, and the smart and savvy folks are rich and successful for a reason.
39   komputodo   2023 Feb 5, 7:53pm  

clambo says

Today foreigners are sucking up the rentals in droves, making it worse for everyone.

do you mean the americans and canadians in mexico fucking it up for the natives?
40   komputodo   2023 Feb 5, 8:05pm  

Eman says

This is my real estate trustee mentor.

For a minute I thought it was Nicklaus.

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