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So if everything is completely "unknown" as you describe and one can use no deductive reasoning to predict what might happen, would you rather go into debt for 30 years on an "unknown investment" or just pay a monthly rent until perhaps things become a bit more clear?
SFace
2014 Aug 5, 3:23am
So if everything is completely "unknown" as you describe and one can use no deductive reasoning to predict what might happen, would you rather go into debt for 30 years on an "unknown investment" or just pay a monthly rent until perhaps things become a bit more clear?
I'm just saying basing a decision becuase the % is bad is a mistake. The best locations, the locations you, and everyone covets will always have a premium, that will never change and in fact will be even more premium prospectively.
patrick tries to simplify a low number is bad while a high number is good, which is basically the opposite of reality. You know that because owners in prime area are doing better than renters (which is opposite of his claim and point) The best invesment are always associated with low yield. It is simply a function of high demand and low supply which creates the low yield. The better question is, is the premium worth it or the subsidy (for high yield) worth it?
Well, during the 2011-2012 time frame, I bought in both the nice areas and the ghetto. The return from the nice areas have resulted in about 50-100% price appreciation in three years on top of 5-8% rental yield after all expenses, including mortgage interest cost. 3x-5x times that rate in terms of ROI thanks to leverage.
In the ghetto, the return from price appreciation is 100%-200% two years after buying near the bottom. The rental yield is 20%-40% without leverage (bought with cash as those buildings could not be financed), but had to wait 6mo to a year of negative return due to renovation and gradually filling the buildings with good tenants.
There are merits to both strategies. One strategy took guts to load up on debt when everybody and his dog was saying not to buy; the other took guts to carry the buildings while they were being renovated and every month was showing negative cash flow. You can't make money without taking risks.
hanera
2014 Aug 5, 9:55am
Well, during the 2011-2012 time frame, I bought in both the nice areas and the ghetto. The return from the nice areas have resulted in about 50-100% price appreciation in three years on top of 5-8% rental yield after all expenses, including mortgage interest cost. 3x-5x times that rate in terms of ROI thanks to leverage.
Either you are lucky or have perfect market timing skill. Those numbers are incredible. My stats are: 46% appreciation and 5% gross yield.
The return from the nice areas have resulted in about 50-100% price appreciation in three years on top of 5-8% rental yield after all expenses, including mortgage interest cost. 3x-5x times that rate in terms of ROI thanks to leverage.
In the ghetto, the return from price appreciation is 100%-200% two years after buying near the bottom. The rental yield is 20%-40%
some fact checks.
for Nice areas :
The average return in bay area is 35% appreciation from bottom.
rental used to be 5%. substract the 4% (mortgage interest..etc) and you are left with 1% rental yield.
lets not talk about some unique lucky cases here. generally speaking:
with leverage (5x) , you could have gotten 175% return on investment.
if you had put the same money in stock market during the crash, you could have tripled it safely (300% return) with 3.5 to 4% yield. if you don't believe my numbers , go to zillow and look at the price chart for any zipcode ..i have left 2 or 3 zipcodes which are outliers.
i didn't do the math for ghetto areas.
ofcourse both real estate and stocks did well compared to cash ( disaster)
hanera
2014 Aug 5, 12:34pm
AAPL, bottom $11.14, current $95.12, gain 750%.
$200k becomes $1.70 mil.
JH
2014 Aug 5, 1:18pm
I'm just saying basing a decision becuase the % is bad is a mistake.
I, like many people, did the math in 2005. Home appreciation was a lock, and rent was going up annually in my apartment. Well, that was a bust. Lost money when I sold, but at least I got free from that piece of shit ball and chain and have perfect credit.
Now, 2014, the same arguments are being made. Several on this thread alone.
Well, during the 2011-2012 time frame, I bought in both the nice areas and the ghetto. The return from the nice areas have resulted in about 50-100%
Have you cashed that in yet? You have gains on paper.
AAPL, bottom $11.14, current $95.12, gain 750%.
$200k becomes $1.70 mil.
Yep, that is the norm. Home prices always go up and stocks always go up. Everyone is an expert at timing the market when it is going up. It always goes up. I once won slots and turned $1 into $100. Shoulda bet the farm on that one.
Have you cashed that in yet? You have gains on paper
At present time, collecting $3-4k/mo net operating cash flow off each building and writing off $10k+/yr in depreciation and $15k+/yr in interest expense is better than selling each building at about $1m, paying off mortgage, commission, marketing cost and capital gains tax then sit on about half a mil cash. My skin in the game was about $100k to $150k in each building like that. Not saying it's a good time to buy now however. LOL
"2.Because it's usually still much cheaper to rent than to own the same size and quality house, in the same school district. In rich neighborhoods, annual rents are typically only 3% of purchase price while mortgage rates are 4% with fees, so it costs more to borrow the money as it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 8% of purchase price, which is more than twice the cost of renting and wipes out any income tax benefit. "
There is no answer as the factor that determine whether rent or buying is cheaper is based on unknown future factors.
without knowing future rents, interest rates, price, taxes, there is no such calculator that can compute #2. Everything is just input bias.
3 years ago, patnetters use negative appreciation and flat rent. So it was no shit shetlock, the bias was to rent. Obviously the error and bias is in the input. Applying this like may did in 2011 was disasterous.
Don't let the calculator fool you, the result is just a function of the factors which are unknown. It's really just the extension of #1, buy the Ghetto and rent in prime, which is basically opposite of reality.
#housing