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First, why on earth would you be paying 1200/month rent for something that a homeowner would be paying 4k/month for? What planet are you currently on? You're throwing out height-of-the-market ratios that make absolutely no sense in our current market. I hate coming off as rude, but I can't stress this enough: you're about 5 years behind in your philosophy.
Not one property I've sold this year below $300,000 as an income property, didn't cash flow by more than $200/month. Meaning, that the market rents not only weren't cheaper than the mortgage, they were MORE than the Principle, Interest, Taxes and Insurance for that property by more than $200 dollars every single month. In many areas, it's now cheaper to own than it is to rent. At any open house in the Bay Area, over half of my potential clients/visitors are investors.
It doesn't work in high-echelon properties. You can't use $700,000 properties as cash-flowing income properties, but let me know when you're able to rent one of those for $1,200/month - i.e. you can't.
Secondly, who's going to give you rent money? No one is paying you $36,000 in rent for those 3 years. What's the pragmatic difference between renting for 3 years and spending $36,000 to rent a home, and then moving....
And taking a net financial loss of $36,000 on a home that you owned for 3 years?
There isn't a difference.
(P.S. And I don't recommend owning for just 3 years, either. If you're not making a purchase you could potentially keep for the long-term, you shouldn't buy it.)
I've tried making similar points to people in the past and have had just as difficult of a time getting through to them. Some people just think that it makes more sense to be a renter... and maybe it is for them... but as Parti has pointed out here and in various other posts on this thread, on a long term basis it does make more sense to buy rather than to rent. As a buyer, I would certainly hate to see my RE investment drop by even the slightest bit, but I wouldn't want to see my stock values to drop either. However, we need to look at this as a long term basis. A home IS an investment. There are no renters that will get free rent after 30 years of paying rent to someone else.
I'm certainly not trying to say that buying is the right thing for everyone. If you are planning on moving in a relatively short period of time and it doesn't look like the market in your area will be increasing at a rate that would give you a net savings over renting, then buying isn't the right thing for you.
I've tried making similar points to people in the past and have had just as difficult of a time getting through to them. Some people just think that it makes more sense to be a renter... and maybe it is for them... but as Parti has pointed out here and in various other posts on this thread, on a long term basis it does make more sense to buy rather than to rent. As a buyer, I would certainly hate to see my RE investment drop by even the slightest bit, but I wouldn't want to see my stock values to drop either. However, we need to look at this as a long term basis. A home IS an investment. There are no renters that will get free rent after 30 years of paying rent to someone else.
I'm certainly not trying to say that buying is the right thing for everyone. If you are planning on moving in a relatively short period of time and it doesn't look like the market in your area will be increasing at a rate that would give you a net savings over renting, then buying isn't the right thing for you.
This happened to be the last pro-"owning" post, so I figured I'd reply to this one...
The first thing that I think you have to concede is that "past performance doesn't guarantee future results". It's like the standard disclaimer in any prospectus. Almost all long time RE folks take this for granted with your typical cliches about RE being cyclical or that it always bounces back or similar "we've seen this before". In most cases they've experienced making a good amount of money "investing in RE" themselves and speak down at us "from experience".
So if you want to speak of a home as an investment, then you should treat it like any other investment when reviewing its "value". I'm talking mark to market accounting (what it's worth this minute) vs. mark to fantasy accounting (what it's "likely" to be worth at some future point in time). The mark to fantasy version is the classic Enron accounting style that regulators allowed to bury that company and all its shareholders. It's a similar variation that put the whole financial sector on its ear - making assumptions on future values in net worth calculations.
It's similar to what you're seeing in the stock market since The Fed began its Quantitative Easing... Propping the market via direct injections of money so that the market can go up on absolutely no volume. People look at the stock market and count the current value of their portfolio like they count the current value of their home. "This is what it's worth" as if it was a liquid asset - meanwhile you really don't know what it's worth until you find a buyer.
In both cases, the underlying asset (the land + replacement value or the equity stake in the company) is measured in a fiat currency subject to incredible inflationary forces that will have a shadow effect on the asset itself. We're not talking commodities here. So even when that investment may be "performing", is it really? My main point here is that it's an important distinction on how you measure the performance of an "investment". It's not a straight up proposition and it has many, many factors impacting the "current value" and even then, its not sold until it's sold. If you want to call it an investment, then really treat it like one.
Additionally, we tend to call people homeowners when they "own" as little as 3,4,5% of the appraised value of a property. Well, we all know that it's going to cost you at least 5% in fees to get out of a house. This is a "homeowner"? It's really a debtor paying almost all interest monthly and to call it anything else is kind of silly. Note that I am not including those who own property outright - those people are truly homeowners. Yet even for them; taxes, insurance, and maintenance are eating into the "investment"... especially when you consider that each of those are escalating exponentially. Maintenance often does not factor in the real maintenance costs of replacing a roof, furnace, water heater, etc - large substantial costs that are not to be taken lightly and do not go away after the mortgage is paid off.
Lastly, homeowners don't live "rent free" when the P&I disappears... they still have to pay taxes, insurance, and maintenance. In certain metros this easily exceeds 2k per month. To call that "free" is clearly being stated from a position of bias.
So like with any other investment, even long term holdings do not guarantee anything... Many folks with retirements tied into the stock market and/or their home have learned that the hard way. To a point where I think that a typical family buying a SFH for "investment purposes" and purely from a financial perspective would find that renting is the much safer bet. If there are any definitive numbers based on today's economy to offset that conclusion, I have not seen them.
This happened to be the last pro-"owning" post, so I figured I'd reply to this one...
The first thing that I think you have to concede is that "past performance doesn't guarantee future results". It's like the standard disclaimer in any prospectus. Almost all long time RE folks take this for granted with your typical cliches about RE being cyclical or that it always bounces back or similar "we've seen this before". In most cases they've experienced making a good amount of money "investing in RE" themselves and speak down at us "from experience".
So if you want to speak of a home as an investment, then you should treat it like any other investment when reviewing its "value". I'm talking mark to market accounting (what it's worth this minute) vs. mark to fantasy accounting (what it's "likely" to be worth at some future point in time). The mark to fantasy version is the classic Enron accounting style that regulators allowed to bury that company and all its shareholders. It's a similar variation that put the whole financial sector on its ear - making assumptions on future values in net worth calculations.
It's similar to what you're seeing in the stock market since The Fed began its Quantitative Easing... Propping the market via direct injections of money so that the market can go up on absolutely no volume. People look at the stock market and count the current value of their portfolio like they count the current value of their home. "This is what it's worth" as if it was a liquid asset - meanwhile you really don't know what it's worth until you find a buyer.
In both cases, the underlying asset (the land + replacement value or the equity stake in the company) is measured in a fiat currency subject to incredible inflationary forces that will have a shadow effect on the asset itself. We're not talking commodities here. So even when that investment may be "performing", is it really? My main point here is that it's an important distinction on how you measure the performance of an "investment". It's not a straight up proposition and it has many, many factors impacting the "current value" and even then, its not sold until it's sold. If you want to call it an investment, then really treat it like one.
Additionally, we tend to call people homeowners when they "own" as little as 3,4,5% of the appraised value of a property. Well, we all know that it's going to cost you at least 5% in fees to get out of a house. This is a "homeowner"? It's really a debtor paying almost all interest monthly and to call it anything else is kind of silly. Note that I am not including those who own property outright - those people are truly homeowners. Yet even for them; taxes, insurance, and maintenance are eating into the "investment"... especially when you consider that each of those are escalating exponentially. Maintenance often does not factor in the real maintenance costs of replacing a roof, furnace, water heater, etc - large substantial costs that are not to be taken lightly and do not go away after the mortgage is paid off.
Lastly, homeowners don't live "rent free" when the P&I disappears... they still have to pay taxes, insurance, and maintenance. In certain metros this easily exceeds 2k per month. To call that "free" is clearly being stated from a position of bias.
So like with any other investment, even long term holdings do not guarantee anything... Many folks with retirements tied into the stock market and/or their home have learned that the hard way. To a point where I think that a typical family buying a SFH for "investment purposes" and purely from a financial perspective would find that renting is the much safer bet. If there are any definitive numbers based on today's economy to offset that conclusion, I have not seen them.
Mikey,
Mostly valid idea (except for 2k per month in insurance/taxes). What price point are you referring to? Property taxes on a $300,000 home in California are roughly $310 per month. My most recent sale for an investor with an income property is paying $54 per month in insurance: hardly $2,000 per month and certainly worth achieving.
In addition, when you rent, you're also paying part or all of the landowner's property taxes and insurance - you just don't think of it that way. Just as market rents dictate the landowner's asking price, so to are his asking prices affected by his expenses. Essentially, you can pay the government your share of the property taxes or you can your landlord his share of his owed property taxes - either way, you're paying for it.
In a previous post, I mentioned how without fail, every single income property that was purchased with me this year has cash flowed by no less than $200 per month every single month (I live in the Bay Area, I know that's not entirely possible everywhere). It's important to know your localized market and so my advice isn't meant to be blanketed everywhere - part of my point to another poster.
You're extraordinarily correct about one thing: people consider that they own a home when they actually have very little equity, and that's just an Americanism that isn't limited to the housing market - cars, homes, etc. Americans think they own a lot more than they do own.
Here's one instance where home ownership is different from a stock, and although it is an investment into your future (ironically, so that you don't have to rent for the rest of your life), in one form or another, you HAVE to purchase the right to live under a roof. Where are we getting the idea that housing expenses (of any kind) aren't a mandatory living expense? So, yes, you do have expenses with regard to home ownership but they're necessary expenses because without that purchase, you have to rent a like-kind space from someone else.
If you own a home for 10 years and sell and break even - a complete financial net gain of $0 dollars and a net loss of $0 dollars, isn't that a victory? What would your rent have been over that same decade? $50,000? $100,000?
So yeah, buying a house is like playing in the stock market, except that you're forced to play one way or another. Even long-term holders of real estate can find selling to be a financially-beneficial idea. But by missing out on an opportunity doesn't mean that all of a sudden, taking pride in long-term rentalship is now the best answer instead.
We're way off topic - the OP clarified her post and I think we're talking about quite a bit different things than what they intended, because they're right too - there are certainly many instances where renting short-term is superior to purchasing.
There is more to this than whether or not the housing market is going to go up or down. As with investing in the stock market, you need to consider all of the alternatives... What would you otherwise do with the money that you are considering to use as an investment? How quickly do you need to have access to your money? What are the costs associated with making / selling this investment? If you're worried about being able to get to your money quickly and don't want to take the risk that at some point your investment will dip below your original investment, then you are probably better off putting your money into a bank account or CD. However, if you don't need quick access to your money and are okay with taking a little risk, maybe you want to consider investing in the stock market. Even then you need to do some research to decide what stocks are best for you. What stocks are performing and will continue to perform in a manner that is acceptable to you?
This is a similar and just as risky investment. However, in the case of buying property, you also have to consider the cost of alternative housing. As in Parti's previous example, what's the difference between taking a net loss of $36,000 on a home you owned for 3 years or paying $36,000 in rent over that same 3 year period of time? The difference is that you might be able to recoup some of your investment in the purchase of a house, you will never be able to recoup your rental expenses.
As for your comment regarding taxes, insurance and maintenace costs of $2k per month... as a tenant you would be covering that for your landlord as well as their cost of financing their investment. Even if the landlord is to pay off their mortgage, they aren't going to reduce your rent and in most cases, your rent is going to go up every year, regardless of your landlord's expenses on this property.
Again, I'm not saying that buying real estate is the right answer for everyone, but sometimes is does make more sense than renting...
If you own a home for 10 years and sell and break even - a complete financial net gain of $0 dollars and a net loss of $0 dollars, isn't that a victory? What would your rent have been over that same decade? $50,000? $100,000?
Best argument for why you should purchase now rather than later that I have seen anyone make thus far in this thread.
Was talking about GA and FL. Homes are dirt cheap there. In AZ and Vegas you can also get really good deals there as well. In GA in and out of the Atlanta area homes are VERY cheap. That is where I was referring to. $50K can get you a good deal in GA & FL.
Here's the cheapest single family home for sale in my zip code right now at a little above $50K:
Brandon, in Atlanta and the Atlanta metro you can get homes for $50K and nice ones at that. They aren't tear downs either. Just a year ago the homes were on fire and much less than $50k. I own 2 homes there. They do things way different in GA so realtor.com is not a source I would use to look at properties there. I was shocked to see homes in the Marietta, Duluth, and Roswell areas at $50k and or less and I'm not talking about condos. FL, AZ, NV same thing, was shocked.
Patti, we are going to have to agree to disagree. Again, just last year and even this year rentals were at an all time high. Landlords were doing everything they could to get people to rent them. My place is 1600 sqft. My rent is only $1200/month and got 2 months free. When I moved back to the bay about a 1/2 ago never thought I'd see those type of deals. You can believe it or not. But I'm not sure what area you work in that $1200/month is ubelievable. But I live in one of CA's wealthies neighborhoods. The jumbo loan comment again you and I are making two entirely different points. Also, why exactly are you making points about income property, this was not the point of the thread nor was I basing any of my comments on them? The bayarea market is not as you describe. But we can agree to disagree.
Mostly valid idea (except for 2k per month in insurance/taxes). What price point are you referring to? Property taxes on a $300,000 home in California are roughly $310 per month. My most recent sale for an investor with an income property is paying $54 per month in insurance: hardly $2,000 per month and certainly worth achieving.
Sorry for the delay in replying, my son had little league... I was speaking in general terms with my own bias to growing up on Long Island where a 300k home in good schools (if you can find one) can easily be close to $10k a year for property taxes. You'll find similar stories throughout the NE. I was including maintenance, but will concede I was likely on the high side. But if it's not 2k, it's certainly not 1k.
Quote:
In addition, when you rent, you're also paying part or all of the landowner's property taxes and insurance - you just don't think of it that way. Just as market rents dictate the landowner's asking price, so to are his asking prices affected by his expenses. Essentially, you can pay the government your share of the property taxes or you can your landlord his share of his owed property taxes - either way, you're paying for it.
In a previous post, I mentioned how without fail, every single income property that was purchased with me this year has cash flowed by no less than $200 per month every single month (I live in the Bay Area, I know that's not entirely possible everywhere). It's important to know your localized market and so my advice isn't meant to be blanketed everywhere - part of my point to another poster.
You're extraordinarily correct about one thing: people consider that they own a home when they actually have very little equity, and that's just an Americanism that isn't limited to the housing market - cars, homes, etc. Americans think they own a lot more than they do own.
I think where we're missing each other is that you're thinking of the true RE investor (maybe professional landlord or property manager) and I'm thinking of an owner who may end up needing to lease the property out. The SFH more then the multi-family space. There's rent and there's rent, if you know what I mean. Someone who owns a building could do very well as an investor, I won't argue that. But someone buying in Deer Pees by the Olive Leaf community in McMansionville, state of Transplant isn't getting the power of an investor. Maybe they chose their own colors 3 years ago. Not the type of income property you're talking about I will bet.
These folks (call them landlords under duress) are what most people would become if they couldn't sell their SFH around now... We all know they're not going to give it away. So I think when you consider the "buying as an investment", not all RE is created equal. I know this might play into that whole RE is local meme, but I mean it more for a SFH in general. People don't buy the home to live in with leasing potential in mind.
Quote:
Here's one instance where home ownership is different from a stock, and although it is an investment into your future (ironically, so that you don't have to rent for the rest of your life), in one form or another, you HAVE to purchase the right to live under a roof. Where are we getting the idea that housing expenses (of any kind) aren't a mandatory living expense? So, yes, you do have expenses with regard to home ownership but they're necessary expenses because without that purchase, you have to rent a like-kind space from someone else.
If you own a home for 10 years and sell and break even - a complete financial net gain of $0 dollars and a net loss of $0 dollars, isn't that a victory? What would your rent have been over that same decade? $50,000? $100,000?
So yeah, buying a house is like playing in the stock market, except that you're forced to play one way or another. Even long-term holders of real estate can find selling to be a financially-beneficial idea. But by missing out on an opportunity doesn't mean that all of a sudden, taking pride in long-term rentalship is now the best answer instead.
We're way off topic - the OP clarified her post and I think we're talking about quite a bit different things than what they intended, because they're right too - there are certainly many instances where renting short-term is superior to purchasing.
I'll be repping you for this after this post because that describes very well why I will be buying myself. I shake my hand at you in doom for nailing that better then I've ever read before. Well done sir/madam!
But I'm not sure what area you work in that $1200/month is ubelievable.
I mean, you're not going to concede any points, and that's fine. I work every day in the market and I'd be happy to send over statistics that I've mentioned in posts. I think you have a sense of how it should be (and I don't disagree that houses should cost the middle class less money in CA), and you may even be right that the market will come down a lot more - who knows. It's certainly coming down in some areas of the Bay still, but it's leveling out and going up in others, and that shouldn't be a surprise considering how far we fell and how much outside investment we have.
When I bring up investors, it's because of how saturated the market is with those types of buyers. Investing in home ownership isn't simply relegated to you and I. Their existence has a large impact on how you and I operate in the market. If you're not a huge fan of the fact that so many people want to live in the Bay, there's other locations? That's why so many Californians move to Texas, Idaho, Arizona, etc. It's the reality of where you're from. NYCers are probably pretty irritated about it too. It's also why prices aren't dropping in the manner you think they should/will. The lower they drop, the more investors you'll have. Why? Because market rents allow for landlording to be expansive and profitable. Let me know when there's no longer high demand for housing in one of the country's most sought-after destinations - that's when things will change.
What I'm interested in is knowing what houses in what cities you're able to rent $1,200 for and where you live that you're having to give away 2-months worth of rent for free and you're still having trouble getting your place rented? (I'm a property manager in Alameda, Contra Costa, and Solano, BTW). Is it a 1/1 condo? Where are you located?
If you'd like, I'd be more than happy to send you links to homes and what rents they'll garner in the Bay Area that rent for or that I personally manage -- I'll give you a range between $1,000 and $3,000/month and you'll definitely have a good idea why I can't believe what you're telling me regarding $1,200/month - unless it's a 1/1 or in some far-flung community. I have a 1200 sq. ft SFH in one of Concord's poorer neighborhoods renting for $1,900/month - so yeah, I am more than a little confused why you think houses rent for $1,200/month in the Bay so it's better to rent than to buy.
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Does the couch on cinderblocks COME with the home? If so I want 2!
