patrick.net

Patrick says

Your downpayment can be wiped out by a couple of bad years. And it does happen.

And consider that that house is draining your money for property taxes, insurance, and maintenance literally forever.

yep, lets say we have a downturn. if you arent strapped, you take this as an opportunity and buy another property. Nobody can time it....so having cash available is key to success.

i am always thinking long term.

yes, taxes, insurance and maintenance. still cheaper in the long run then renting? If i need cash, i can refi and push my PITI down. My mortgage is always fixed or will get lower. Rents always go up longterm. And its much more fun to own. I love being a landlord and i hated being a renter. Luckily, renting was short term in my life....never again.

Onvacation says

mell says

Around your midlife you should have enough liquid investments such as stocks and funds so that selling 10%-40% of those will give you a 200k down-payment. So you can buy a house if you want and keep investing.

Should. Tell that to over half the population that can't reach into their bank account for a $400 emergency.

That's an American thing though, esp. womyn are chronically bankrupt, almost no matter how much they make. It's the constant keeping up with the Joneses and expecting to go on vacation 4 times a year and using the Uber and Uber eats for everything instead of doing it yourself. Sure it's tougher these days for the youth fighting inflation but that problem has been around long before. In other countries families go on a long vacation once or twice a year into a cheap summer/winter cabin more as a family retreat, not spa vacations and celebrity bullshit. The amount of time people eat out or go out, even if they have zero monies is mind boggling. Live frugal and invest, you can still travel and have lots of fun, just go off the beaten path. Back in the bachelor days men who should have been investing and saving used to flash their bling and fancy cars and whatnot to get a shot at fucking a hot girl and it was always a fun competition to see if you can get her instead by pure virtue of game and take her home into your studio with your old beat up car. Once you discover game and the forces of nature it works quite often. One should save and invest at the minimum deep into ones 30s.

WookieMan says

I've been hesitant to get back into the real estate market, but we're thinking of getting a vacation rental in St. Thomas. St. John would be better, but more money. We'll see what's on the market in October, but we might pull the trigger when we're down there.

I look these up on the Treasury website the first of each month, when the interest is accrued/posted.

The I-bonds I spent $15k to get in Q3-Q4 of yr-2000 are worth $48.9k today. All interest accrual tax deferred, and when redeemed, exempt from state income tax. And I got a lot of derision for getting those, when dot.com, SP500, and Real Estate were all so Hip and Cool.

I could get a whole lot of timeshare or whatever days or whatever with that.

Patrick, your house in the hills just sold. You could have lived in this for the price of your monthly rental (taking into account a refi at 2003 rates).
Berkeley home sells for $1 million over asking price
A Berkeley home just sold for double its asking price, an unusual feat even in an ultra-competitive market like the Bay Area.
The mid-century house sold for $1 million over its asking price at $2.3 million and received 29 offers in 11 days, as first reported by CBS San Francisco.

It's history is interesting.
2000 Sold $749,000
2011 Sold $847,000
2021 Sold $2,300,000

https://www.realtor.com/realestateandhomes-detail/6-Harvard-Cir_Berkeley_CA_94708_M11774-36395

There would be no way in hell I would sell 200K of an IRA account and pay taxes, penalties, to buy a house.
A Roth allows it of course.
So, how about I sell a non retirement mutual fund? I would owe 2 capital gains taxes if I were in California.
I just put the Vanguard app on my phone.
It has a “news feed”, it says my investment return since April 2020 was 57.8%

clambo says

There would be no way in hell I would sell 200K of an IRA account and pay taxes, penalties, to buy a house.
A Roth allows it of course.
So, how about I sell a non retirement mutual fund? I would owe 2 capital gains taxes if I were in California.
I just put the Vanguard app on my phone.
It has a “news feed”, it says my investment return since April 2020 was 57.8%

Yeah preferably not an IRA but a (day)trading or savings account, or mutual fund, Roth may work too. You can also take a loan against your 401k, those are usually either interest free (cares act) or the interest goes back into your 401k to you. Plenty of options to get 100k or 200k together.

Michael Cooke says

A rich neighborhood is simply paying more to live a local "brand name" neighborhood. You get the same identical Polo shirt without the label. I can see very little difference between middle or upper middle class neighborhoods and "rich" neighborhoods here.

I could be wrong on this pt; feel free to correct me if you know, but these neighborhoods aren't necessarily tied to a specific public school

Michael Cooke says

Here it's about $200 maybe $300 per month.

80-100k euros take home in Germany is a ton of money; a person making minimum wage who is single makes 1100 which is 250 euro more than the average monthly cost of living

https://www.learngermanonline.org/salaries-and-living-costs-in-germany/

Bitcoin says

taxes, insurance and maintenance. still cheaper in the long run then renting?

Yes, for me in Silicon Valley, it has clearly been better to rent and put my "principal" payments into the stock market. But I admit that this area is strange that way. Houses around here never "pencil out" as they say. That is, you can never cover a mortgage by buying a house and renting it out in Silicon Valley, or San Francisco.

Patrick says

Bitcoin says

taxes, insurance and maintenance. still cheaper in the long run then renting?

Yes, for me in Silicon Valley, it has clearly been better to rent and put my "principal" payments into the stock market. But I admit that this area is strange that way. Houses around here never "pencil out" as they say. That is, you can never cover a mortgage by buying a house and renting it out in Silicon Valley, or San Francisco.

I’m sure you are getting a solid rental deal in Menlo (affluent areas typically have terrible rent:price ratios)

But boy have you missed out on a lot of equity upside. I don’t have to tell you that though.

Assuming a 20% DP, that 5x lever in real estate is pretty attractive compared to the 1x you see in the stock market. My two cents...

If you don't meet the income requirements for Roth IRA,

makes sense if you plan to be worth more at 59.5 yrs of age than when you open it (assuming you do this early in career)

https://www.investopedia.com/how-to-set-up-a-backdoor-roth-ira-4584775

https://www.daveramsey.com/blog/backdoor-roth-ira


mell says

There would be no way in hell I would sell 200K of an IRA account and pay taxes, penalties, to buy a house.
A Roth allows it of course.

mell says

Uber and Uber eats for everything instead of doing it yourse

fees and tips are routinely 30%+ of the entire bill. Almost makes you want to at least do takeout. Womyn notoriously, on average, do not cook. reason: because men......

BayArea says

Assuming a 20% DP, that 5x lever in real estate is pretty attractive compared to the 1x you see in the stock market. My two cents...

Bingo!

mell says

on vacation 4 times a year a

Ultra common in Manhattan. Its just difficult to live there and I'm sure people post their awesomeness on social media but they also usually are doing it to get a respite from living in high density quarters and always having people on your ass everywhere you go. Most single people making 150K or more are taking more than 2 vacations per year. 4 is a very popular number, a neat quarterly respite.

MMR says

usually are doing it to get a respite from living in high density quarters and always having people on your ass everywhere you go

exactly. If you live in a nice area with great weather you are less likely to feel the need to always go away. Kind of sad to think about living in a shitty place and always wanting to escape....problem is, you have always have to come back to your shitty place. I rather pay the sunshine tax and enjoy every day. I would even pay more for what I am getting here. Still fun to travel and you are thankful to be coming home.....

BayArea says

Assuming a 20% DP, that 5x lever in real estate is pretty attractive compared to the 1x you see in the stock market. My two cents...

It's a sunk cost until you sell. Then you won't have a place to live any more. And in the meanwhile, "house poor" because of too much going to the mortgage and property taxes.

WookieMan says

say it's smooth sailing, they haven't had to do anything in 10 years.

Its not smooth sailing, claiming RE professional status takes leg work, but most of the work can be done remotely. the hardest part is building up an investment, renovation, property management, banking and general contractor and having a strong relationship.

It is smoother sailing than being a developer per se, but it is more involved than buying a building or two and having a property manager.

Ideally a person should be married filing jointly and either you or your spouse does the real estate stuff. minimum 750 hrs per year with greater than 50% of working hours spent on real estate. Can't be working 2000 hrs per year and then another 2000 as a RE professional without being audited.

its the best tax shelter I've seen for doctors/salaried professionals whose effective returns murder( correction: absolutely obliterate)index funds like no tomorrow though. People who say that the returns from real estate don't match the stock market aren't claiming REPS. If it were easy and straightforward, everyone would be doing it. Its easier to get a consistent 25% effective return (without taking appreciation into consideration) on investment using tax laws than being prone to market forces.

Patrick says

Your downpayment can be wiped out by a couple of bad years. And it does happ

This is why using the loan (particularly if single) for. a multifamily makes sense, Conventional can be used for upto 4 units. If its a fixer upper, forced equity add followed by renting out the units, re-appraised and cash out refinance. Again, its not for everyone because it requires one to carry debt. But it's not the same type of debt as HELOC and taking a vacation, living high on the hog. It allows you to pull out your downpayment pretty quickly and apply to another property or put it into the market or some alternative investment.

Bitcoin says

I rather charge less rent and have them long term then charge premium

margins are low in California, but the investments are stable in the sense of it is easier to rent out than in other markets where there is a shortage of 6 figure earners. Coastal California, for its part, does not have this problem, regardless of exodus. the issue is the cost of entry and the generally business unfriendly environment.

HunterTits says

Indians & Chinese with lots of cash will flood CA housing markets.

as of now, there have been capital controls in place due to the top 0.1% of China, or the top 1.3 million people pulling money out of the country and investing abroad. Now that Biden is in office, china is now talking about easing capital controls

https://www.bloombergquint.com/markets/china-mulls-easing-capital-controls-on-offshore-investments

MMR says

Bitcoin says

I rather charge less rent and have them long term then charge premium

margins are low in California, but the investments are stable in the sense of it is easier to rent out than in other markets where there is a shortage of 6 figure earners. Coastal California, for its part, does not have this problem, regardless of exodus. the issue is the cost of entry and the generally business unfriendly environment.

Great comments MMR. Totally agree with what you say.

B.A.C.A.H. says

BayArea says

Assuming a 20% DP, that 5x lever in real estate is pretty attractive compared to the 1x you see in the stock market. My two cents...

It's a sunk cost until you sell. Then you won't have a place to live any more. And in the meanwhile, "house poor" because of too much going to the mortgage and property taxes.

Cash out refi sir

BayArea says

But boy have you missed out on a lot of equity upside.

I think people who put their money into houses lost out on massive stock market upside.

I’m with Patrick,
I had a stock market equity “upside”=increase since April 2020 which is the price of a house in Santa Cruz or Aptos.
Edit: I just realized that it is a large increase partly because of the previous large decrease from the panic from the Wuhan pandemic, my error.

I used annuity calculators and would plug in the numbers of guys in Santa Cruz who bragged how much money they “made” with their house. I did it out of curiosity, what was the rate of return?

It never was as good as stock investments.

Will be interesting to see what happens when the lumber / building materials shortage is over and people start moving back to cities (at least some of them will).

Patrick says

BayArea says

But boy have you missed out on a lot of equity upside.

I think people who put their money into houses lost out on massive stock market upside.

If you strategically invested, made the right selections, and had some luck on your side, you may be right.

If you invested in the market and got market level gains, you absolutely did not beat the 5x leveraged gains available with Bay Area housing during this bull run.

clambo says

I’m with Patrick,
I had a stock market equity “upside”=increase since April 2020 which is the price of a house in Santa Cruz or Aptos.

I used annuity calculators and would plug in the numbers of guys in Santa Cruz who bragged how much money they “made” with their house. I did it out of curiosity, what was the rate of return?

It never was as good as stock investments.

Me too. 2020 was by far my best year, mostly due to Shopify.

It's all locked up in a 401k though, which kinda sucks. So I couldn't really get the house price out of it because of taxes, esp CA taxes. And the early withdrawal penalty. If I had only bought SHOP in my Roth IRA, damn, it would all be tax-free now. But it was just one bet among many. I didn't know that would be the one to rise so much.

Still, I feel very confident that the stock market was always a much better bet than the housing market.

BayArea says

Patrick says

BayArea says

But boy have you missed out on a lot of equity upside.

I think people who put their money into houses lost out on massive stock market upside.

If you strategically invested, made the right selections, and had some luck on your side, you may be right.

If you invested in the market and got market level gains, you absolutely did not beat the 5x leveraged gains available with Bay Area housing during this bull run.

You're conflating leverage with the increase in value. Dow did a 5x, houses did not do that. However the leverage that a low interest mortgage gives you can make up for the total amount gained and more if you're on the right side, as margin is typically a leverage of 2x or 3x at best, whereas with a house you can get 80% financed if not more. The greater the risk though the more leverage you use, so as with everything, pros and cons.

BayArea says

If you invested in the market and got market level gains

I totally blew away the market level gains over the last year.



But again, that was mostly just one very lucky pick.

BayArea says

Cash out refi sir

Said differently,
even bigger debt. Even more sunk cost.

BayArea says

If you invested in the market and got market level gains, you absolutely did not beat the 5x leveraged gains available with Bay Area housing during this bull run.

We are comparing owned stocks to an owned house. Your mortgaged house would need to be compared to stocks purchased on margin, or maybe options.

I used duck duck go.
If you invested $30,000 in the S&P 500 in 1964, today the account would show $7.65 million.
The land and house my parents had built in 1964 in Martha's Vineyard cost $30,000
Today Zillow shows it's worth about $1.5 million.
BUT, don't forget the property taxes; my mother told me they were $12,000/year in 1977.
Surely they have kept rising.
The S&P Index investment could be pretty tax efficient.

clambo says

I used duck duck go.
If you invested $30,000 in the S&P 500 in 1964, today the account would show $7.65 million.
The land and house my parents had built in 1964 in Martha's Vineyard cost $30,000
Today Zillow shows it's worth about $1.5 million.
BUT, don't forget the property taxes; my mother told me they were $12,000/year in 1977.
Surely they have kept rising.
The S&P Index investment could be pretty tax efficient.

You can still own real estate by buying REIT's as well if someone feels strongly about it. Or housing builders, but that's a finicky stock area.

I do think you should own your primary residence though. If you're going to get into RE investment I wouldn't do residential ever again besides a vacation rental I'd turn into a retirement home and have my current home paid off and then that one by the time I'm that age.

Vacation home financing is a grey area, but you can get beneficial financing so you don't need 20% down. They'll ask if you're going to do short term rentals. So theoretically you'd be committing mortgage fraud. Just make sure to have a back up excuse as to why you needed to turn it into a vacation rental if it ever gets caught. Very hard to prove that was the intention when purchasing the property. Hold it for a couple months and then start marketing it and you should be good (not legal advice).

Harder to leverage, but industrial park type properties are the money maker. My uncle nets $100k/mo roughly on what he's acquired over the years. He owns 20-30% of the stock in the bank that financed everything. So friendly loan terms. You'll never be a big boy in real estate without the banking relationship. Commercial is the way to go. No emotions, just business and math. No water bills, broken dishwashers, leaky sinks, etc. NNN all the way in good areas or niche properties and you make bank.

Or as I said just buy a REIT stock and set and forget if it's a trusted one or has good upside. Unless it's your job/business, almost everyone fails at side gigging real estate unless it was inherited. It's worse than restaurants. Watched/witnessed it for 15 years.

WookieMan says

You can still own real estate by buying REIT's

If you own stocks of many operating companies, you own Real Estate.

WookieMan says

I do think you should own your primary residence though

I think many should own their primary residence, as it gives them a measure of control over their living situation. Maybe worth paying a sane "ownership premium" for that. Much of the time, including now, ownership premiums here in the Bay Area, (which was the original focus of Patrick's website) have not been sane. They are completely insane. Till you have the insanity like "Bay Area" shared here, that Bay Area house equity is not sunk cost because one can just do a cash-out refinance. It means, more debt, more sunk cost, and a bit less measure of control over one's living situation. Insane.

All that said, clambo, who had his boots on the ground living here in this part of California for a long time, decided that he should not own his own home, and he has shared this reasoning. Who are we to know what's better for him?

Booger says

our mortgaged house would need to be compared to stocks purchased on margin, or maybe options.

Booger, you can't buy stocks on no down margin, nor 10% down margin, nor 20% margin. If he put 50% down margin on his house then maybe we have something to discuss.

BTW the stocks will have some dividend cash flow.

Maaaaybeeee if he put 50% down margin on his house (at today's prices) maaaaaybeeee he'd have an "ownership discount" of having less monthly cash flow cost to own than to rent. Maybe. I suppose such a "discount" could be thought of as a phantom dividend cash flow kind of a thing.

Maybe with 50% down, have an ownership discount. Maybe. Given the current insanity here in the Bay Area, probably not though.

I never buy stocks on margin because then:

1. I'd have to pay interest on the loan.
2. I could lose more than I invested.

Borrowing to buy a house has both of those problems, plus the additional problems of property taxes, insurance, and maintenance.

I don't pay any property taxes, insurance, or maintenance on my stocks. Just the opposite, most of them pay me a dividend to own them.

But I admit there are many twists and turns, and you need a good spreadsheet to cover most of the possibilities. If it's cheaper to own than to rent a particular kind of house in a particular location then you should buy rather than rent in that case.

I’m going to own something somewhere probably because the nicest areas have few rentals available.

This is the reason I would take the plunge.

I will use the proceeds from stock mutual funds and a few stocks to pay for it.

I’m so reluctant to buy because I know where my money actually works for me.

B.A.C.A.H. says

If you own stocks of many operating companies, you own Real Estate.

True. I should have clarified, I was talking residential rentals with the REIT's. Most stock is all commercial and industrial property on the balance sheet.

B.A.C.A.H. says

All that said, clambo, who had his boots on the ground living here in this part of California for a long time, decided that he should not own his own home, and he has shared this reasoning. Who are we to know what's better for him?

I agree. Coastal areas, where much of the population lives, doesn't appear to be a rational market. So renting can make sense.

But from say Utah to Virgina across the country (fly over country), it most certainly makes more sense to own. The rent versus own ratios is bat shit crazy in most coastal areas unless you inherited the home or inherited cash. The amount needed to save up over FHA limits in coastal areas means you need to save a fuck ton when the median family income is roughly $65k or so.

I think it's better to live cheaper and save either way. Sure you could buy in a high appreciation area and then get out with loads of cash, potentially. I can also live in my nice home for about $15k/yr (PITI), invest 25-30% of our income that's maxed out in tax advantaged accounts (401k, IRA, HSA or Roth) and easily beat appreciation on expensive houses. And not deal with tenants for a rental or massive mortgage payments on a primary. We're literally at a stage in life where don't have to think about money. If I was paying $3k plus per month I'd be miserable like most Americans are.

This also allows our hobby of travel and showing our kids different places instead of being stuck in one spot. I'm developing a site currently for group travel. If you build it they will come. It will take a while, but I may share it here eventually, though it could sink the site/my business if some of my thoughts here got out. This is my place to vent, think and learn random new things from you guys.

Patrick says

I never buy stocks on margin because then:

1. I'd have to pay interest on the loan.

Try a small amount you're willing to lose. Remember, margin doesn't have to go back into stocks either. That's how we bought our house ;)

The market seems bat shit crazy to me, but I'm not at all an active investor with any serious money I personally want to control. But maybe try $5k on margin on something you think might pop and create a funny money account where you don't really care if you lose it all.

I started with $4k maybe a decade ago in one account. Have 4-10 stocks at any one time. I've pulled out $20-30k and keep the balance on that one at $4k most the time. Not life changing by any measure, but it's fun. It's where I get into riskier things. Generally all my other stuff outside of business investment is set and forget in tax advantaged accounts. I hate the fees, but I'm ahead of 98% of people for my age so I'm not complaining.

To be fair, I had a uniquely advantageous living situation in Santa Cruz.

I was also self employed for half of the time there and wanted no expensive monthly nut to achieve if I had to bail out, lost clients, lost interest in the grind, etc.

My friends who got jobs for the City or County bought houses and won’t leave, they have pensions worth a couple million bucks and taxes are just taken out like from their paycheck.

Re: margin; the interest rates are rather low actually. I bought GME for $1500 on margin and paid like 5 bucks interest this month. I’m planning on selling it all soon so I’m pleased.