Menu

Home › Forums › Housing › Real Estate in a “Normal” Market

Viewing 15 posts - 1 through 15 (of 73 total)
1 2 3 4 5
  • Author
    Posts
  • August 16, 2007 at 10:35 AM #9900
    New Guy
    Participant

    it’s often said on this board that real estate is traditionally a horrible investment over the long-term.

    However, is it really so bad?

    Take this scenario:

    Richard and Rachel Responsible were recently married and spent two years renting a modest apartment. All the while they have beem frugally saving for a downpayment to one day own a house of their own. Through their savings and gifts from their parents, they muster the old-school 20% down and purchase a home for $400,000 with a 30 year fixed mortgage at 8% (total loan amount = $320,000). They have good, stable jobs and are comfortable with the payments.

    If a comparable home rents for $2,000, the tax benefit effectively makes the PITI (@ $2,750) a wash between renting and owning. After all, they have to live somewhere.

    In a “normal” market, housing increases at a rate of, say, 4%. After year 1, their home should, in theory, be worth $416,000 if it increases by 4% and $432,640 after year 2 and so on.

    With that in mind, isn’t the return really 20% on their money after year 1? $16,000 increase vs. $80,000 down payment. Even if you factor in additional maintenance costs of 1%, the net return is still 15% (12K/80K). The compounding “value” of your home only increases over time, and would increase your rate of return each year. (NOTE: This is completely hypothetical and assummes that housing increase by 4% forever)

    Am I missing something?

    Feel free to start bashing me.

    August 16, 2007 at 10:37 AM #76359
    (former)FormerSanDiegan
    Participant

    What you are missing is that it is never a normal market in Southern California. It’s either going gangbusters or crapping out.

    August 16, 2007 at 10:37 AM #76504
    (former)FormerSanDiegan
    Participant

    What you are missing is that it is never a normal market in Southern California. It’s either going gangbusters or crapping out.

    August 16, 2007 at 10:37 AM #76479
    (former)FormerSanDiegan
    Participant

    What you are missing is that it is never a normal market in Southern California. It’s either going gangbusters or crapping out.

    August 16, 2007 at 10:45 AM #76365
    JWM in SD
    Participant

    “it’s often said on this board that real estate is traditionally a horrible investment over the long-term.”

    I don’t recal a lot people saying that real estate is always a bad investment. It’s all about timing and how much investment is made in the RE if you expect it to cashflow. If you bought between 2003 and 2006 specifically, then the asset price was too high to get an immediate return as an income property. Basically, you would have essentially speculated on the appreciation as opposed to market rents to generate a return. Big difference between and investing and speculating.

    August 16, 2007 at 10:45 AM #76485
    JWM in SD
    Participant

    “it’s often said on this board that real estate is traditionally a horrible investment over the long-term.”

    I don’t recal a lot people saying that real estate is always a bad investment. It’s all about timing and how much investment is made in the RE if you expect it to cashflow. If you bought between 2003 and 2006 specifically, then the asset price was too high to get an immediate return as an income property. Basically, you would have essentially speculated on the appreciation as opposed to market rents to generate a return. Big difference between and investing and speculating.

    August 16, 2007 at 10:45 AM #76510
    JWM in SD
    Participant

    “it’s often said on this board that real estate is traditionally a horrible investment over the long-term.”

    I don’t recal a lot people saying that real estate is always a bad investment. It’s all about timing and how much investment is made in the RE if you expect it to cashflow. If you bought between 2003 and 2006 specifically, then the asset price was too high to get an immediate return as an income property. Basically, you would have essentially speculated on the appreciation as opposed to market rents to generate a return. Big difference between and investing and speculating.

    August 16, 2007 at 10:58 AM #76528
    pepsi
    Participant

    The problem is that the $400K house will not rent for $2000 in SD. $1300 maybe, but not $2000, so the differnece between the rent and mortgage, tax and insurance is about $1600 a month. Invest the difference wisely, in the long run, it beats the real estate.
    The 15% looks good on the first year, but after paying your mortgage down, the leverage is lower and the percentage will not look so good after 15 years.

    August 16, 2007 at 10:58 AM #76383
    pepsi
    Participant

    The problem is that the $400K house will not rent for $2000 in SD. $1300 maybe, but not $2000, so the differnece between the rent and mortgage, tax and insurance is about $1600 a month. Invest the difference wisely, in the long run, it beats the real estate.
    The 15% looks good on the first year, but after paying your mortgage down, the leverage is lower and the percentage will not look so good after 15 years.

    August 16, 2007 at 10:58 AM #76503
    pepsi
    Participant

    The problem is that the $400K house will not rent for $2000 in SD. $1300 maybe, but not $2000, so the differnece between the rent and mortgage, tax and insurance is about $1600 a month. Invest the difference wisely, in the long run, it beats the real estate.
    The 15% looks good on the first year, but after paying your mortgage down, the leverage is lower and the percentage will not look so good after 15 years.

    August 16, 2007 at 10:59 AM #76386
    kewp
    Participant

    You are missing risks and carrying costs.

    You have to pay taxes, upkeep, home owners fee’s, etc. That all adds up.

    There is also the very real risk, especially in SoCal, that it will burn down, fall down (temblor), get eaten by termites, whatever.

    August 16, 2007 at 10:59 AM #76531
    kewp
    Participant

    You are missing risks and carrying costs.

    You have to pay taxes, upkeep, home owners fee’s, etc. That all adds up.

    There is also the very real risk, especially in SoCal, that it will burn down, fall down (temblor), get eaten by termites, whatever.

    August 16, 2007 at 10:59 AM #76506
    kewp
    Participant

    You are missing risks and carrying costs.

    You have to pay taxes, upkeep, home owners fee’s, etc. That all adds up.

    There is also the very real risk, especially in SoCal, that it will burn down, fall down (temblor), get eaten by termites, whatever.

    August 16, 2007 at 11:15 AM #76398
    (former)FormerSanDiegan
    Participant

    I like RE as a long term investment, but you have to buy right. AS JWM point out, it has simply been too expensive relative to rent since about 2003.

    August 16, 2007 at 11:15 AM #76543
    (former)FormerSanDiegan
    Participant

    I like RE as a long term investment, but you have to buy right. AS JWM point out, it has simply been too expensive relative to rent since about 2003.

  • Author
    Posts
Viewing 15 posts - 1 through 15 (of 73 total)
1 2 3 4 5
  • You must be logged in to reply to this topic.