Real Estate in a “Normal” Market

[ucodegen]

@Fearful

You generally have addressed the three factors correctly, except for this: Leverage does not increase the inherent returns of an investment, but rather increases the risk of those returns.

Actually it does increase the rate of return, but he did not calculate the rate of return right because he was using different comparison types. It also does increase the risk associated with those returns. In fact risk and rate of return go hand in hand. On a more risky asset, you will always expect better returns. What this points to is the difference in ROI and ROE. ROI = Return On Investment. ROE = Return On Equity. In the scenario, The equity is the price of the house, the investment is your down payment and the sum of monthly payments (discounted by time). In the scenario above, if the purchase was cash (no mortgage), the results would roughly be
ROE = 4%
ROI = 4%

With the mortgage as described, the numbers end up being:
ROE = 4%
ROI = 20% because only the down was the invested capital considered. The monthly payment was omitted, which is also invested capital.

There is one problem here. The amount for payments on the mortgage are offset against the rent it displaces. The comparison shown is not appropriate for this scenario. You want to compare return on the $80,000 when invested (rent scenario) vs the gain in owning the house (buy scenario). Doing this, you can balance out the monthly rent vs mortgage payment. You would have to get 20% or better return on $80,000 to make renting match buying. Less than 20% return on $80,000 would mean buying is better, greater than 20% return means renting is better (of course not taking into account taxes on gains).

In terms of leverage increasing returns on investment, look into something known as ‘carry trade’ and spreads. Leverage gains you when the growth rate of the asset is higher than the interest rate you are paying on the loan for the asset. If it is the other way around, you are sucking wind.

[sdduuuude]

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

I don’t think that is accurate at all. We simply feel it is a timing issue, that’s all. This isn’t a normal market. It is bubble popping.

It is occasionally said, however, (as you also point out) that because you can buy real-estate using leverage, it can be an excellent investment, even if growth is moderate.

Leverage also accentuates the downside risk. a 1% home price reduction in 1 year on a home purchased with 20% down is -5% that year, not adjusting for inflation, and not including interest.

[sdduuuude]

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

I don’t think that is accurate at all. We simply feel it is a timing issue, that’s all. This isn’t a normal market. It is bubble popping.

It is occasionally said, however, (as you also point out) that because you can buy real-estate using leverage, it can be an excellent investment, even if growth is moderate.

Leverage also accentuates the downside risk. a 1% home price reduction in 1 year on a home purchased with 20% down is -5% that year, not adjusting for inflation, and not including interest.

[sdduuuude]

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

I don’t think that is accurate at all. We simply feel it is a timing issue, that’s all. This isn’t a normal market. It is bubble popping.

It is occasionally said, however, (as you also point out) that because you can buy real-estate using leverage, it can be an excellent investment, even if growth is moderate.

Leverage also accentuates the downside risk. a 1% home price reduction in 1 year on a home purchased with 20% down is -5% that year, not adjusting for inflation, and not including interest.

[(former)FormerSanDiegan]

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

I second sdduuuude on this one. I do not believe that RE is a horrible investment over the long-term **

**when purchased under the right conditions.

[(former)FormerSanDiegan]

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

I second sdduuuude on this one. I do not believe that RE is a horrible investment over the long-term **

**when purchased under the right conditions.

[(former)FormerSanDiegan]

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

I second sdduuuude on this one. I do not believe that RE is a horrible investment over the long-term **

**when purchased under the right conditions.

[sdduuuude]

P.S. It’s a good question, though – it gives the bears a chance to qualify their position a bit and point out that we are not, in fact against logical financial decisions and against housing in general. The numbers just don’t work right now.

I predict someday this forum will be the forum of crazy people who want to buy real estate after it collapses when everyone is afraid to. Maybe powayseller will even come back as powaybuyer.

[sdduuuude]

P.S. It’s a good question, though – it gives the bears a chance to qualify their position a bit and point out that we are not, in fact against logical financial decisions and against housing in general. The numbers just don’t work right now.

I predict someday this forum will be the forum of crazy people who want to buy real estate after it collapses when everyone is afraid to. Maybe powayseller will even come back as powaybuyer.

[sdduuuude]

P.S. It’s a good question, though – it gives the bears a chance to qualify their position a bit and point out that we are not, in fact against logical financial decisions and against housing in general. The numbers just don’t work right now.

I predict someday this forum will be the forum of crazy people who want to buy real estate after it collapses when everyone is afraid to. Maybe powayseller will even come back as powaybuyer.

[sdrealtor]

That would be a personal tragedy for her as she expects to come back as RSFbuyer

[sdrealtor]

That would be a personal tragedy for her as she expects to come back as RSFbuyer

[sdrealtor]

That would be a personal tragedy for her as she expects to come back as RSFbuyer

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