Hi Doc,
Again, I thnk you for your response and the maturity of your inputs.
A few responses. Apples to apples is a point well taken. But if there is one thing this crisis revealed it is the extent to which individuals will make decisions that bear little resemblance to their financial health. Also, take note that many will make their decision to rent vs. own by fixing the quality of the domicile. In a healthy market, fixing quality allows for an easy comparison. However, during the peak of the boom, prices for very basic homes soared. For the decision-maker, then choice then was between a house with double the monthly cost to own vs. rent.
Just for full disclosure, I am a selective renter in Los Angeles. We rent a place that would cost double compared to the cost to rent. It is the same type of place we would buy. If the prices decline to the point where the monthly payment is the same as the rental payment, I think it makes sense to buy. Until then, I am renting.[/quote]
Exactly my point. And good for you to be renting.
EDIT: let me also make the point that I don't consider 9% return to be all that great for an asset you have to leverage 4:1 AND maintain (and hold!) over a 30 year period. I mean the maintenance of a house when you own it costs money, but also a significant portion of time, certainly more than calling your landlord. The maintenance level on buying an index fund or set of index funds that you balance on an annual basis, is much smaller. Of course it's very difficult to factor the value of that extra time into your model.[/quote]
Assuming that we do not revisit 15%+ inflation as in the 1970s, if I can be guarantees 9% annual return on an asset I must hold over 30 years, I would shovel just about every available $ into such an investment.
In fact, I would do it at 8% as well.
On extraneous costs, you can do a quick and dirty costs estimate by examining how much your landlord must pay to maintain your property. Ask him. Also, not over the long run, there is the change of durable assets like the water heater and the roof. then there are things that can be outsourced--like gardening and weatherproofing (not needed in Pasadena). So come up with some % of the monthly rent as a proxy for the time.
I think we can agree that what is terribly important are the values we stick into these models. And it is these values that inform our opinion on the questions we seek answers to.
We have a primary home and investment properties. Because we bought when we did, the long-term ROI on these investments are going to be modest. That is OK. I thank our lucky stars that we did not get killed by the downturn. Our primary home is much more important as a home than as an investment, although it is important to think about its investment value.
If the market turns down here even more than it has (it might--I have no crystal ball), then the it is likely the pendulum will swing towards RE investments as a good part of one's overall portfolio than it has been. And when those prices get low? Yes, the benefits of leveraging will once again attract. And yes, flippers and short-term holders on housing will once again see excellent gains.
Me? I would love to buy a multiplex--at the right price and right time. If so, it will produce positive cash flow and gain in appreciation. If so, then the ROI should be excellent and with only modest risk.
It is not a difference in opinion that should determine the superior strategy between us, but the numbers and the accuracy of our forecasts. The pros and cons of leveraging are contained therein. But I have seen too many good people brought down by underestimating liquidity risks and net cash flows overestimating their revenue forecasts. And at no time do forecasts yield the worst fruit than at the tail end of booms when things become "can't miss" and RE professionals and laypeople alike begin to think that 20% gains are normal and sustainable (this is what one mortgage broker once pitched to me).
I wish you the best. And go into your home purchase with reduced expectations over its ROI. Expect 2-3% and you should be fine. If you get more, great. If not, you will not have lost your shirt.
Investment homes and multiplexes should offer a higher ROI and more potential with the use of leveraging.
Best, PNK