Real Estate in a “Normal” Market

[New Guy]

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.

[(former)FormerSanDiegan]

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

[(former)FormerSanDiegan]

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

[(former)FormerSanDiegan]

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

[JWM in SD]

“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.

[JWM in SD]

“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.

[JWM in SD]

“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.

[pepsi]

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.

[pepsi]

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.

[pepsi]

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.

[kewp]

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.

[kewp]

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.

[kewp]

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.

[(former)FormerSanDiegan]

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.

[(former)FormerSanDiegan]

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]

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