patrick.net

Eman says

I’m a real estate investor and flipper in the Bay Area. I live in the trenches. IMO, today’s real estate prices are ridiculous. I’m not smart enough to know when the housing market will drop/crash and how bad it would be. One thing I see is that paying today’s housing prices would make one an indentured servitude on the property taxes alone.

Fed hiked interest rate quarter percent. I was hoping they would hike it a lot more to deal with inflation so we can stabilize everything.

Everything is insane lately.

Fortwaynemobile says

Eman says

I’m a real estate investor and flipper in the Bay Area. I live in the trenches. IMO, today’s real estate prices are ridiculous. I’m not smart enough to know when the housing market will drop/crash and how bad it would be. One thing I see is that paying today’s housing prices would make one an indentured servitude on the property taxes alone.

Fed hiked interest rate quarter percent. I was hoping they would hike it a lot more to deal with inflation so we can stabilize everything.

Everything is insane lately.

The general consensus of the Federal Reserve board is 7 rate hikes this year. There’s no rush for a big hike now as the entire world is unstable at the moment.

BayArea says

I rented a small 2bd house in San Carlos for 5yrs. The landlord made $500-600k in home equity during the time I was renting his home. That stung.

The question is what you would have made in an index fund over that time period.

I know for a fact I've done better in the stock market than I would have in housing.

BayArea says

Did you buy your house in full in the same way you bought your SP500 shares in full? Or do we need to adjust your 3.3x figure?

Most people put down 20% or less for a 5x or more lever.

That's why, after stating the house went up 3.3x and the S&P went up 4.0x I stated that the house was probably the better investment. I had originally written out another paragraph about 20% down creating 5x leverage whereas I would have been buying the S&P every month with the money saved from not paying the mortgage, taxes, upkeep, etc. Plus the mortgage rates are somewhat subsidized by the federal government with Freddie and Fannie.

Actually, I did pay off the house after about 15 years rather than dealing with getting another refinancing. I figured my investment portfolio was 100% stocks and no bonds... not paying on a 4% or 5% mortgage is as good as having a 2% or 3% bond.

An additional consideration with an expensive house is that selling it is all-or-nothing. That's going to be one heck of a capital gain! Here in California capital gains are progressively taxed, so better to spread them out over a few years. I think there's also a 3.8% Obamacare™ tax on large capital gains. Oh.... my stock broker charge $7/trade commission, but I'm pretty sure I can't get the real estate cartel down that low!

Patrick says

BayArea says

I rented a small 2bd house in San Carlos for 5yrs. The landlord made $500-600k in home equity during the time I was renting his home. That stung.

The question is what you would have made in an index fund over that time period.

I know for a fact I've done better in the stock market than I would have in housing.

The ownership premium over rent that recent buyers are paying for mortgage interest and property taxes is money they are neither saving nor investing.

They are not investing it for their retirement nor their kids' college fund.

Nor are they spending it.

They are not spending it for childcare, private K-12 tuition or private lessons.

They are not spending it for Status Symbols like Teslas, and they are not spending it for $6 per gallon gasoline for driving to work.

They are not spending it for vacations.

They are not spending it for food which is going up a lot with inflation.

Nor are they saving it to spend on those things, and they are not saving it for a period of unemployment.

They are spending it, Sunk Capital, pissed away for an excessive ownership premium. Like a Timeshare.

B.A.C.A.H. says

They are not investing it for their kids' college fund.

Does a primary residence count as "net worth" when applying for financial aid? Sinking all your spare money into your house might be the perfect way to look poor to the college.

SunnyvaleCA says

BayArea says

Did you buy your house in full in the same way you bought your SP500 shares in full? Or do we need to adjust your 3.3x figure?

Most people put down 20% or less for a 5x or more lever.

That's why, after stating the house went up 3.3x and the S&P went up 4.0x I stated that the house was probably the better investment. I had originally written out another paragraph about 20% down creating 5x leverage whereas I would have been buying the S&P every month with the money saved from not paying the mortgage, taxes, upkeep, etc. Plus the mortgage rates are somewhat subsidized by the federal government with Freddie and Fannie.

Actually, I did pay off the house after about 15 years rather than dealing with getting another refinancing. I figured my investment portfolio was 100% stocks and no bonds... not paying on a 4% or 5% mortgage is as good as having a 2% or 3% bond.
...

Stock trading should be done by the individual and always for free. If you must invest in funds for your 401k or otherwise have zero time or knowledge, then choose those funds carefully. Many constantly underperform. It's true that with a house/mortgage you can get much better leverage, but even with stocks you easily get 2:1 which is a good starter leverage as it works both ways. If you get to live in your house that leverage is worth it as you can walk away in the rare event there is a housing bust or other monetary issues and you saved the rent. For investment properties the math is not that rosy imo and highly depends on interest rates. I could pay off the primary residence but at 3% interest I make more money in the market. Now that rates are rising I expect a slowdown, but with these small hikes it will take a while to have any significant effect. At least this year I predict high growth in the double digits fueled by inflation and a run on securing fixed mortgages.

Investing in stocks vs real estate:
Only idiots leave equity in real estate.
You refinance and take all your money back out, as well as tax-free profits as soon as equity is high enough to do so.
Then you re-invest all that money into either more real estate or stocks, if you go with more real estate you repeat this process over and over.

In case you can’t hang in there financially when the market nosedives, just send the keys to the bank, they will eat the loss for you (try that with stocks, lol).

If you rent, 100% of your money is LOST forever, you have to deal with huge annual rent increases and get kicked to the curb when your Lord wants to sell to cash out his huge profit after you paid off his house for him.

JimSpatzenfeld says

If you rent, 100% of your money is LOST forever

But it's less money that I would have lost by owning.

Try the NY Times rent-vs-buy calculator:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?source=patrick.net

Takes leverage into account as well.

So, rates finally go up after 3 years. And will be raised 6 times this year.

https://citizenfreepress.com/breaking/federal-reserve-raises-rates-for-first-time-in-3-years/?source=patrick.net

Nothing a few more million illegals can't cure.

Patrick says

WillyWanker says

I am now living between homes in Spain and Andorra.

That sounds interesting. How are prices and rents compared to here? Do you own or rent there?

Do you have Spanish or other EU citizenship?

I'm currently renting while my main residence is being remodeled to my specifications. I had been hoping to purchase some rental units but I don't think I will be going that route. I lease an 1800 square foot apartment in Barcelona's best street, Paseig de Gracia, for 3000k euros per month. I'm sure I'm paying total gringo prices but it's fully equipped with everything so I just needed my suitcase and carry-on while my stuff is coming in a container later this year. This apartment would probably sell for 2.5M euros so that should give you an idea of what you get if one thought of it as an investment. I have Spanish and Andorran citizenship through descent.

RE Prices in Europe are even more ridiculous than in the US. Higher density and low rates. In Germany their mortgage rate is 1.5%.
Great discounts on Ukrainian Real Estate though.

WillyWanker says

This apartment would probably sell for 2.5M euros so that should give you an idea of what you get if one thought of it as an investment.

This is called cap rate compression. All the money floating out there is looking for a home (yield). All assets are competing for the same pool of money. This is why prime real estate will always command a premium price (low yield/return).

Using the NY calculator is the wrong approach. Palo Alto assets will never trade for the same cap rate as Stockton or Modesto.

Patrick says

Try the NY Times rent-vs-buy calculator:

I can't tell, does NYTimes include the SALT caps these days?

EBGuy says

Patrick says

Try the NY Times rent-vs-buy calculator:

I can't tell, does NYTimes include the SALT caps these days?

No. They handle taxes by just a marginal tax rate box. I'm not really sure how its used (i.e. is it used just for computing cap gains upon the sale, or possibly on other calculations?)

They have separate fields for property tax, and the 250k cap gains deduction. But no SALT or other tax specifics.

IMO tax implications are a very underrated / underutilized factor when comparing investments. They can significantly alter the "which is better" calculus, and especially on RE where you tend to have massive cap gains in a single year, making you an "evil rich fuck who needs to pay their damn fair share of taxes" for that 1 year. Of course, sometimes those cap gains are really just 30 years of 3% annual inflation, looking impressive, but little growth in real value, but youre still an evil rich fuck for the year.

Eman says

Using the NY calculator is the wrong approach. Palo Alto assets will never trade for the same cap rate as Stockton or Modesto.

Could you elaborate why the calc isnt suitable? The calc allows inputs for many fields, including rent and home price growth annual %.

The main drawback I see to their calc is lack of ability to personalize tax implications. Not that I blame them for omitting it. But otherwise it's the best calc I've seen.

JimSpatzenfeld says

Investing in stocks vs real estate:
Only idiots leave equity in real estate.
You refinance and take all your money back out, as well as tax-free profits as soon as equity is high enough to do so.
Then you re-invest all that money into either more real estate or stocks, if you go with more real estate you repeat this process over and over.

In case you can’t hang in there financially when the market nosedives, just send the keys to the bank, they will eat the loss for you (try that with stocks, lol).

If you rent, 100% of your money is LOST forever, you have to deal with huge annual rent increases and get kicked to the curb when your Lord wants to sell to cash out his huge profit after you paid off his house for him.

Why take equity out vs just getting a loan? I’ve never done equity, so don’t know the difference.

We bought a house in Idaho. Not sure yet what to do with CA one. Can rent it out, or sell it and not have a mortgage on the new purchase.

Hircus says

Could you elaborate why the calc isnt suitable?

It’s just garbage in, garbage out IMO. I’d rather use local market parameters. If Palo Alto is trading at 2.8 cap, anything above 2.8 cap is a bargain. Thus, if one is buying at 3.5 cap, one is getting a 20% discount. I don’t care what the buy/rent calculator says.

As a real estate flipper, if I can buy an asset for $1M, put $150-$200k into rehab and resell it for $1.5-$1.6M, do I care if it can only rent for $3.8-$4k/mo?

The same goes with buy-and-hold apartments. If I can buy and asset at $1.3M, put $200k into rehab and get an ARV of $2M, then I’ll keep doing it and scaling up the portfolio. The market dictates the cap rate. I don’t have any say in that. I can only buy “right” and force appreciate the value of the asset, do a cash out refinance, take my equity out of the deal, play with house money, rinse and repeat.

Fortwaynemobile says

Why take equity out vs just getting a loan?

Take equity out = do a cash out refinance aka getting a new loan with cash (equity) out.

With single units, like a condo or SFH, the rent/price ratio is not favorable. Duplex to 4plex get a little better ratio. To get more favorable ratio, one has to look at 5+ unit apartment. In fact, the more units/building, the better the ratio. I’m looking to scale up to 20 units rather than staying at 6-12 units.

Congrats on the house in Idaho. 🚀🚀

JimSpatzenfeld says

You refinance and take all your money back out, as well as tax-free profits as soon as equity is high enough to do so.
Then you re-invest all that money into either more real estate or stocks, if you go with more real estate you repeat this process over and over.

Sounds exactly like someone I knew in 2008. Defaulted on his 3 rental single-family homes in 2009 as well as the home he was living in. We hear mostly from the success of that sort of high-stakes gambling, so have a biased perspective. It's the kind of information bias that leads people to think athletics and acting are a better way to riches than buying lottery tickets. (Yes, as bad a deal as lottery tickets are, athletics and acting are even worse!)

It is historically true that real estate is one means to build wealth. Whether it performs better or worse than other investment options, from stocks to bonds to gold to bitcoin, depends on several factors, some that can be controlled others that cannot. Everyone has their own risk tolerance, investing objectives and time horizon that influences whether or not real estate is a "good" investment. For me personally the price of entry has always been too high for me to dip my toe into the waters of real estate investing. Markets have been good to me and a stock never needs a new roof or heating oil.

What drives me crazy is that people started seeing their primary residence as an investment, rather than simply a place to live. Eventually greed trumped common sense and for many it didn't end well once the first bubble popped.

So, is it going to pop again any time soon? I can't understand where all this money is coming from over the last 3-4 years. Did everyone's income double in the last 3-4 years? I don't know a single person whose income has doubled.

I don't see how the answer can be low rates. We've had low rated for quite a while now.

WineHorror1 says

So, is it going to pop again any time soon? I can't understand where all this money is coming from over the last 3-4 years. Did everyone's income double in the last 3-4 years? I don't know a single person whose income has doubled.

I don't see how the answer can be low rates. We've had low rated for quite a while now.

9 trillion dollars were created over the last few years. That money isn’t gone, it got funneled to the top like always, and the rich are busy trying to hedge it against predictable inflation by buying up real estate. Most of the activity is in big trusts and hedge funds. They aren’t buying most of the houses but they are putting a floor underneath prices in many areas. It isn’t going to crash. Not this time. It might not even crash if the vax kills 50% of the population! Real estate is sticky because inflation is really high. I think it was almost 10% last year and will top 15% when the numbers from 2022 are crunched sometime next year. This is 1970s style inflation and seems completely out of control. The Federal Reserve can’t control it anymore. All they can do is stop printing money. They can’t raise rates significantly enough to control inflation. There’s too much money out there buying up things. And the national debt is 30 trillion. Every point of interest on that money is going to cost us in the budget.

WineHorror1 says

So, is it going to pop again any time soon? I can't understand where all this money is coming from over the last 3-4 years. Did everyone's income double in the last 3-4 years? I don't know a single person whose income has doubled.

WineHorror, have you spent some time in Fremont, or working in the office cubicles of Silicon Valley? For an idea of scale, the middle class of India is bigger than the entire population of our country. The elite in that country aspire to live in the SF Bay Area, not Flyover Country. These are mostly not middle class kids: they are the elite Rich Kids of the 1% of their billion people, whose parents can buy them the Best Education Money Can Buy. Why do you suppose the IIT (Indian Institute of Technology) has class reunions in Silicon Valley? With the IIT degree the parents can buy their kids into the top grad schools in the US. For them, the H-1 visa is just a detail to immigrate. Downpayment money is not an issue.

Housing tracts of Cupertino and Fremont Union High School District (not in Fremont, - mostly in Cupertino and some parts of Sunnyvale and San Jose)? That's same sort of thing with Rich Kids immigrating from "Greater" China.

To these sorts of folks, the Bay Area is not crowded/congested: it is uncrowded, spacious, like The Wide Open Prairie. And it is not expensive: it is Bargain Prices.

The Bay Area is a tiny place to shoehorn in those Rich Kids. The ill-liquid Bay Area housing market is an even tinier place.

Small numbers of these folks, and the small number of others with huge stock option/RSU gains, will swamp out the few homes for sale in those zip codes, pushing out other prospective "middle class" buyers to less expensive neighborhoods like my working class neighborhood in East SJ that not so long ago were strictly blue collar.

When those non-immigrant folks who are comfortable living in Flyover Country leave the Bay Area (like some who have posted here), the Asian Contagion on the house prices trickles down to those places, like Boise or Austin or wherever, causing some resentment among those locals.

The steady increase in the house prices has partly depended on the steady flow of demand from the steady flow of those Rich Kids. We shall see if recent changes like work from home, etc., change this equilibrium.

GreaterNYCDude says

What drives me crazy is that people started seeing their primary residence as an investment, rather than simply a place to live

That's Bay Area Smug.

Fortwaynemobile says

We bought a house in Idaho. Not sure yet what to do with CA one. Can rent it out, or sell it and not have a mortgage on the new purchase.

If you rent it out, and for some reason you decide to return to California, you will have a place to land. Someone who posts and comments on Patrick's site relocated from California (maybe San Diego?) to relocate to Arizona only to return here.

Then, if you establish roots in Idaho and your kids assimilate into being Idahoans, and it looks like the move is permanent, you won't need the place to land and that will be the time to sell.

Shaman says

The Federal Reserve can’t control it anymore. All they can do is stop printing money. They can’t raise rates significantly enough to control inflation. There’s too much money out there buying up things. And the national debt is 30 trillion.

Who is the 30 trillion in debt owed to? Part of the great reset will be the people who are owed will lose it all when even governments like USA default on their debt.

But I agree, until the powers that be hit the reset button, there will be no dramatic crash in prices. Higher prices for most goods, and housing are already baked into the cake. Thanks Biden and Klaus

@B.A.C.A.H.

You're only talking about 1 or 2 small areas. As far as I can tell, this is happening country wide.

B.A.C.A.H. says

If you rent it out, and for some reason you decide to return to California, you will have a place to land. Someone who posts and comments on Patrick's site relocated from California (maybe San Diego?) to relocate to Arizona only to return here.

The mistake was thinking we'd make that five hour drive to San Diego monthly. But the bigger mistake was not moving with family. If you know someplace you might be interested in where friends or family are already living, that's the place to target.

We did not move back to the city though, and we will never return. Something else to consider, as cities are going to becoming increasingly un-appealing.

Eman says

As a real estate flipper

In case you haven't heard, it's looking like they are going to outlaw flipping here in CA.

B.A.C.A.H. says

If you rent it out

You lose a lot of rights to your property here in CA. I recommend he sells. If you want rental property do it in a red state.

Are We Headed Into Another Real Estate Collapse?

Is there really any doubt in your mind?

zzyzzx says

Are We Headed Into Another Real Estate Collapse?

Is there really any doubt in your mind?

When? How?

Slowdown maybe, collapse? I don't think so.
Look at the buyer profile who purchased in the last decade. Look at the Demand to supply ratio.

FJB says

Eman says

As a real estate flipper

In case you haven't heard, it's looking like they are going to outlaw flipping here in CA.

Yes, this issue was discussed on the board last week. Let’s see how it goes.

zzyzzx says

Are We Headed Into Another Real Estate Collapse?

Is there really any doubt in your mind?

Yup, there are doubts. Will it be a slow drop, a correction, or a full blown crash? The housing market has been having a lack of inventory issue rather than oversupply. The rise in interest rates will put a dampen on the appreciation for sure. Next year will likely be the top.

GreaterNYCDude says

For me personally the price of entry has always been too high for me to dip my toe into the waters of real estate investing.

This is what I’ve learned. The barrier of entry is always too high. This is to keep most people out of the game. Once you got it figured out, real estate is a great vehicle to build wealth. Your kids will get a stepped up in basis and walk away with millions tax-free. If your kids can manage the assets and build on top of it, it can become generational wealth.

If it were easy, everyone would be doing it.

FJB says

If you want rental property do it in a red state.

Yeah, not to own rental property, but as a landing spot if he or his family changes their minds. Rental SFH in California at today's prices is a horribly sucky value. But if a tenant can pay the carrying cost while they settle in (or not) then they won't be locked into the relocation as soon as they set foot on the ground in Idaho.

WineHorror1 says

zzyzzx says

Are We Headed Into Another Real Estate Collapse?

Is there really any doubt in your mind?

When? How?

This year when the printing finally catches up to the criminals and the economy implodes.

Fiat currency economies operate on bullshit, because if they were honest, they'd die. So diving head first into the details doesn't help you to understand, just makes you smell like shit. You have to look at the big picture, separate the truth from the lies. Only then will you understand probable outcomes.