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you may not know their whole deal ... heck i can pay cash for a rental property and have positive cash flow , but then if i was getting 15 or 20k in income on that money i bought with , that stops . so it really is not accurate when you look at the property by itself .
you really need to look at what you have vs the alternatives if you have that sum of cash free . then you can compare .
like i said i can buy a co-op just like my apartment that we rent . i can save 6k a year or more by buying ---on the surface .
but that 375k i buy with is no longer giving me a min of 14k a year in income so my cash flow is actually less by buying and it is not worth it .
these are the things very few consider when they talk about what owning cost them . they don't realize if they sold and rented they could buy a bond with that money in the house or they can put it in an index fund and really come out a head most likely over the longer term .
that would give them a lot of income towards the rent , they did not have before when it was tied up in that house .
in our case we rented the last 15 years but i invested a lot in commercial real estate in manhattan . that blew the doors off anything else i could have done with the money . in fact if we had the house i would not have been able to take part in the ventures i did . so don't get me wrong , i love real estate . but not my personal residence .
Oh I get it.
Here's my simplistic version:
We are about to pay off our mortgage, on which we are currently paying nearly $1000 each month in INTEREST. That's pretty typical from what I've seen from most buyers (I sold real estate for years and the vast majority of buyers in the upper middle class market I was comfortable selling in financed their homes, rather than paying cash). We have owned the house for four years and we pay double our mortgage payment but still...all that interest, thousands of dollars a year, for what? So as soon as we pay the house off, we will be invested in something that is appreciating at about 6 percent a year, AND we also won't be paying that interest. So that's money making 6 percent, plus $6k or more in savings which will also make somewhere between 6 and 12 percent a year (we are not market gurus - I'm happy with a 6 percent return on investments). I didn't say a $12k savings because we will still have to pay for insurance and property taxes which comes to about $5.5k a year.
If I was paying rent, I'd still be paying rent every single month, and paying someone else's property taxes, and insurance, and maybe even their interest on a mortgage. And I would be constrained on what I could or couldn't do regarding property improvements - heck, I don't like that light fixture - I'll buy another one, for the same price of a new purse!
So that's my simplistic take but like I said, I am not a market guru or financial wizard, just an ordinary person trying to keep a diversified portfolio so that I'm not poor in retirement. One of the things that is part of our retirement plan is living without a rent or mortgage payment.
i always say for most people they are better off with the house because most Americans suck at investing simply because the exhibit poor investor behavior , they do the opposite of what they should .
instead of rebalancing and adding equities , they are selling at losses .
my point is that while owning may work for them , there is a whole other side to renting , when you are able to generate far greater growth and income then what you get by buying . so there is a cost to buying and having that money locked up where it can only be utilized through loans , using the house really as collateral to borrow the lenders money , or a sale of the house ..
... we will be invested in something that is appreciating at about 6 percent a year, ...
That's the crux of it. You found a reliable (more or less) investment that appreciates by 6% annually. Full stop. Congratulations! It doesn't really matter if your investment is an owner-occupied house, rental property, a mutual fund, a stake in a copper-mine, a painting, pork-bellies, diamonds, pet-rocks... if this thing appreciates - reliably! - by 6% annually, you're all set. The rest is details.
But what if your "investment" depreciated 1%/year - reliably? In ten years, your "investment" becomes worth only about 90% of what you paid for it (meanwhile, inflation has made the erstwhile $1 now worth $0.83, so your "investment" is really only worth about $0.74 on the dollar). In 30 years, it's only worth 41% of what you paid for it, in current-year dollars. And so forth. Every year, you're just a little bit poorer... whereas the carrying costs of the "investment" are just a little bit higher. Then what?
That's the crux of it. You found a reliable (more or less) investment that appreciates by 6% annually. Full stop. Congratulations! It doesn't really matter if your investment is an owner-occupied house, rental property, a mutual fund, a stake in a copper-mine, a painting, pork-bellies, diamonds, pet-rocks... if this thing appreciates - reliably! - by 6% annually, you're all set. The rest is details.
But what if your "investment" depreciated 1%/year - reliably? In ten years, your "investment" becomes worth only about 90% of what you paid for it (meanwhile, inflation has made the erstwhile $1 now worth $0.83, so your "investment" is really only worth about $0.74 on the dollar). In 30 years, it's only worth 41% of what you paid for it, in current-year dollars. And so forth. Every year, you're just a little bit poorer... whereas the carrying costs of the "investment" are just a little bit higher. Then what?
Most properties do not decrease in value over thirty years though. I mean, within reason. And all investments have risks, including real estate.
I've lived in this area for nearly 30 years. Real estate has proven over and over again, even in economic slumps, to be a sound investment with a decent return. In fact, I even sold a home during the market downturn (2009) and no, I didn't get what i would have gotten from it three years earlier, but I still got more than we paid for it six years earlier. And I bought another house in that "down" market so I also didn't pay what I would have paid three years earlier for the new house. Now the real estate market is back up to it's usual 6 percent growth and the slump was an aberration.
Like the stock market, you don't really lose till you sell. I mean, that's simplistic but my overall approach is simplistic. Buy in a healthy, growing market, get a good deal (they can be found generally), don't over customize and over invest in the property, and try to pay cash or pay it off as quickly as possible to avoid paying exorbitant interest. Location location location.
In my experience most people overbuy for their primary residence, and mortgage too much so they don't have much equity and they're paying interest out the wazoo. No, you are not likely to get ahead that way. But when renting, you KNOW you are throwing away somewhere between $1000 and $3000 every single month - same as if you are mortgaged to the hilt. And you're paying for someone else's investment.
yes , but it is also what you pay on investments if you are renting and investing elsewhere , which historically has produced much greater returns than home appreciation .
historically markets investments have out paced home appreciation by a wide margin. today the same money in the home i owned in 1987 put in a bunch of fidelity equity funds would be enough to buy two homes today after subtracting out all the rent and taxes .
i paid 169k back in 1987 for my home in queens ny . today it is 950k .... to do an apple to apple comparison for someone who had the resources to have a choice ,
the same money in a bunch of plain ole fidelity stock funds is just shy of 3 million today and that includes going through the lost decade . so i could actually subtract out all that rent and taxes and buy two homes today ... the s&p 500 did about 400k less so even just an index fund would have done pretty close .
so when buying it is always at the expensive of alternative investing if you rent and are inclined to do so , which not everyone is . so yeah , i get that .
real estate is local so your mileage will vary .
Right now, in many Florida markets, it is significantly cheaper to buy than rent, and that has been the story for almost the past 10 years after the crash.
I have a very small pension. But a very nice life-style. I got lucky and bought my condo in Florida at the bottom of the market (it's gone up 350% in value), but my best move was when I sold my normal house in a higher priced urban area, I then also bought an older house in a remote small village. I should have made that move 10 years earlier!
Houses are cheap in many small towns. I have to drive 30 miles for groceries, but that is only a half hour trip through beautiful country side. My taxes are 650/year, and because I sold that house in the urban area, both my condo and the house were paid for in cash. I spend half a year in each place, and I would not change a thing!
Look at small towns. They are a great option.
Quote:
Originally Posted by ohio_peasant
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Again, be careful. Kids have to attend school, roads have to be paved, law-enforcement and fire-departments need their budgets. That money has to come from somewhere. As population gets depleted and property-values fall, taxes have to rise. It's not a political thing; it's basic and inevitable economics. Those cheap houses are going to get even cheaper, but their taxes (and possibly also insurance costs) will keep rising.
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Yup, first I did being the geek I am is look at the villages financial statements. I was shocked to see no debt at all. There still is not debt, yet roads have been repaved and sewers lined. Fire department is all volunteer, with the county supplying the equipment, including ambulance. Police is 30 miles away, but that has not been a problem; we have very little to no crime. Kids can play in one of three playgrounds, including the schools, and you know what is nice? NO helicopter parents hanging around... if there was a problem the kids know they can go to one of the neighbors. Small towns work that way.
and if you sold your house and rented how much income would the money freed up from the house generate that could offset that rent ? you would have to include that as part of the expense of owning that house .
as long as you consume that house that money is costing you at a min about 3% a year in income just in a bond .
that is why we are not buying . there is a 6k difference in rent vs what a co-op would cost a year but with 350-375k tied up in the co-op , it would give us at a min a 12k cut in income to save 6k and that is only assuming a bound , you can double that as a long term market return . . being retired we are concerned about cash flow since the value in appreciation means little since we have no intention of selling it at this stage of life . .
don't forget if you paid off a mortgage that house cost you about 2x the price you paid too . we won't even talk about all those soft costs no one keeps track of over decades of time .
Interest expense can be mitigated by making extra principal payments. So, no, it won't be twice as much. All the rest, I won't care about. Note that I'm not being ignorant. I'm making a choice.
Interest expense can be mitigated by making extra principal payments. So, no, it won't be twice as much. All the rest, I won't care about. Note that I'm not being ignorant. I'm making a choice.
interest can be done away with totally too by paying cash , but then there is the loss of income on that money that you were getting and now you are not . so everything has additional costs to it . every dollar channeled in to the house has a cost associated with it in lost income .
even a treasury bond which has no risk would be paying you on that money . so you really can't pretend there is no other cost because there is .
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