Article: Renting is better than owning in the long run.

[davelj]

TheChaz,

Yes, you can margin securities, but only 2-1, unlike real estate which can be levered 10-1 (or more, with 0% down). Also, mortgage rates for a “standard” loan (i.e., not subprime or funky) will almost always be at least 200 bps below broker’s call rate which is what you’ll have to pay to use margin.

CONCHO,

Remember, I said “fairly valued” real estate, not freakishly overpriced as we see today. I’ll give you an example. I bought a condo in Carlsbad back in 1999 that I lived in, but for argument’s sake, let’s say I was going to rent it out forever. When I bought it, it would have been slightly cashflow positive from a rental standpoint, after a 20% down payment and including HOA, taxes, etc. Now, prices happened to skyrocket and I sold a few years later, but lets assume I hadn’t sold. 3% annual appreciation in the home would have led to AT LEAST a 15% annualized return before considering rental increases. There’s no magic – it’s just math. The trick is that you can’t buy when prices are through the roof as they are right now. But, make no mistake, there are LOTS of wealthy folk who have used this approach and logic for years. The author of the article is NOT a clown because he can’t earn 15% per year on his investments; he is a clown because he didn’t take into account one of the single most important considerations where real estate returns are concerned: leverage.

“Sounds like you’ve invented the financial perpetual motion machine. Why are you wasting your time posting here on Piggington when you should be frolicking in the Mediterranean on your 100ft yacht?” – CONCHO

I’m not into sailing. But, otherwise, I do often ask myself similar questions. My answer: I’m just trying to help out; deep down I’m a philanthropist.

[no_such_reality]

When I bought it, it would have been slightly cashflow positive from a rental standpoint, after a 20% down payment and including HOA, taxes, etc.

That’s the basis of cashflow investing. If the cashflow isn’t covering your expenses, there isn’t any 12% return.

If it isn’t a rental, there isn’t any 12% return unless you happen into a bubble market.

The key, whether you refi or not, is that someone else actually covers all the expenses of the leverage.

Since you said freakishly overvalued, I suspect you realize just how far most ‘homes’ need to fall to be cashflow positive on their induced expenses.

I suspect it will go there again, I’m not sure how quickly, nor am sure just how much psychological and economic carnage is going to result from that kind of landing.

[surveyor]

ROE calc

I don’t buy the 12% year after year inflation returns in the general case. If you were really able to get real estate returns like that with such a simple method, no one would even bother with stocks or bonds.

Here is the calculation:

Return = (Cash Flow + Appreciation + Loan Reduction + Tax Benefit)/Downpayment

(all numbers annualized)

Analyzing properties using this formula, it is very possible to achieve more than 20% annual returns. A few people I know get more than 30%.

And it doesn’t surprise me that people don’t get into real estate because they don’t know about this. How many times have I read on this site about how moronic people are still buying houses? How many people here have derided the financial acumen of those who posted “well should I buy now or not?” And then you’re surprised that most people don’t know about how powerful real estate can be if used properly?

And to be honest, it’s a lot of work. But for those people who think that stocks perform better than real estate, I shrug and wish them luck.

Lastly, your home is an asset that you can live in. You can pay the mortgage, expenses, and all that, but it’s possible for you to use it to make your life easier. Now maybe it’s too risky, and maybe it shouldn’t be used that way. But if the equity gets to be great enough, it’s like having money socked under a mattress – sooner or later, you’ll ask yourself if you can somehow make the money work harder for you. Can you make your money work harder for you? Can it be efficient? If it’s too risky, great. Go ahead and sleep well at night. A lot of people do the standard – savings, 401k, Roth/Regular IRA, pension, CD’s, stock market. I do too. However I go the extra step and use the equity. That way, 100% of my money is working hard.

My suggestion is to research it yourself and see if he is correct. From where I stand, he’s wrong. I know a lot of people will read this guy’s article and think, yeah yeah he’s totally right because it fits with the bubble. However, like I said, don’t let your ideology blind you.

(disclaimer 1: i am not telling you to buy any California property or properties)

[sdduuuude]

A different way of seeing the benefit of owning.

If I live for 60 years after moving out of my parents’ house, I’d rather pay a mortgage for 30, then nothing for 30 than pay rent for 60.

Especially since I will be paying the same mortgage in years 29 & 30 that I was in year 1, while rent will only go up and up.

[WhatGoesUp]

Wow, thanks for rattling another assumptions that was ingrained into my grey matter. It sure feels good to have all these various perspectives available to us on the internet.

[blahblahblah]

Analyzing properties using this formula, it is very possible to achieve more than 20% annual returns. A few people I know get more than 30%.

Possible, yes, but certainly not probable in the general case — if it was then no one would buy stocks. You and your friends are Real Estate experts — most people are not. If everyone else was capable of doing the same thing the returns would rapidly go to inflation-level or below. The most successful RE cash-flow investors are working full-time managing their properties, looking for new ones across the country, and arranging repairs/screening renters/etc… Finding undervalued assets of any type is not easy, especially in an environment of easy credit.

I of course agree that leverage, when employed by an expert, can indeed produce very good returns. Of course the converse is also true, that leverage can be extremely dangerous when wielded by someone who is ill-informed. In my experience, the latter greatly outnumber the former in the general population! No one here (to my knowledge) is saying that you should never buy homes or invest in real estate. The general sentiment among posters on this board is that it is difficult to find good real estate investments here in Southern California since E-Z credit made its debut a few years ago. Almost all of us here think that someday soon it will make sense again and we will buy when it does. I know I’m still watching house prices and when I see one that I can afford that I would enjoy living in, I’ll be on it…

[JJGittes]

The back and forth is interesting. Bottom line for me though is 1. don’t buy at the top of a bubble; 2. always buy in a good neighborhood with good schools and a minimal number of rented properties; 3. stretch a little, but don’t be crazy with the finances; 4. get a good loan; and 5. stay put for a long time and take care of your property. Do all these, and yeah I think you are much better off buying — both financially and quality of life wise.

Regarding no. 1, well we are not at the top of the bubble now, but we are not in 1997-1998 relative territory either….good luck.

[davelj]

CONCHO said, “No one here (to my knowledge) is saying that you should never buy homes or invest in real estate.”

Actually, that’s practically what the author (Jack) is saying in this article. Re-read the article if you doubt me. No, he doesn’t use the word “never,” but he clearly suggests that his preference would be never to purchase a home, but rather to perpetually rent and earn his “7% on shares.” Read the last paragraph of the article again.

One thing where Jack gets completely confused is when he states: “If you have $300,000 and a choice between spending it on a house or shares, you’ll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.)”

Jack is completely wrong here because he ignores the impact of leverage (as I noted before). Assuming a 20% down payment, a mortgage at 6.5% interest, a return on stocks of 8%, inflation/home price/rental increases of 3%/year, and IMPORTANTLY assuming that rent and the costs of owning the home are approximately equivalent (not realistic right now here in SD, but realistic for many people much of the time in much of the country), you’ll come out WAY ahead buying the home. Work through the math as this guy did not (properly).

Now, is buying a home a good idea right now in SD, LA, SF, Phoenix and other bubble markets? Probably not. BUT THAT’S NOT JACK’S POINT. He’s making a blanket statement about buying versus renting as a long-term financial decision – regardless of price – and it’s based on faulty math and reasoning. End of story. Again, go back and re-read the story.

[DaCounselor]

Yeah, what davelj said…

In addition, this article smacks of someone who perhaps, despite his allegations otherwise, really cannot afford to buy a home he would like, so he is therefore constructing an argument in favor of lifetime renting. Regardless, his poor math and his omission of the power of leverage completely undercut any credibility.

Excellent point by sduuude as well. Furthermore, with focus and determination it is very possible to pay off that mortgage in well less than 30 years.

[Author]

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