Rental anniversary: reflections thereof

[cashman]

As I come upon the second anniversary of renting, I find myself inspired to reflect upon my experiences and feelings.

First let me say, RENTING SUCKS! I am 52 years old and have been a homeowner since I was 26. Bought my first home in Colorado on a VA loan with nothing down for $41K. I sold it a year later for $62K and moved to So. Cal. where I bought my first home here in Diamond Bar for $89K at 12.75 percent! That was a pretty good deal back in 1980. Since then I have bought and sold three more houses and a couple of rentals. The last home I sold almost two years ago for $2M. I cashed out, and am renting and waiting. And waiting. The house I’m renting is for sale, has been for a year and a half. Delusional seller, of course. Asking $1M for a POS. He put it on the market about six months after I moved in. So naturally I have to put up with the weekly looky -loos and the occasional evil eye from some disgruntled realtor. And almost two years later, I still have lots of stuff still in boxes, unpacked, framed artwork orphaned on the floor, beckoning me to stub my toe on. Home theater? Forget it. Not in a rental, with all the wiring and custom fabrication involved. I’m sure the owner would be thrilled if I attempted something like that. The last time he dropped by, he complained about a door knob dent in the wall that I had patched but didn’t touch up with paint. I think you catch my drift.

So as I wait here in my lovely rental, that restricts my freedom of lifestyle, how have I benefited financially? Well, let’s see, I pay $2700 per month rent, which means in two years I have shelled out roughly $65K so far. During that time, my $2M in the bank has earned me about $200K in interest. Not bad, I guess. But let me tell you, the property I sold two years ago, has not come down in price. In fact, based on comps in the neighborhood, it’s probably gone up about $300K from where I sold it. But hey, that’s life. I’m not greedy. I’m actually happy to have sold it when I did. But looking at it purely from an objective and financial perspective, I would have been better off holding it, and having the enjoyment of home ownership for a while longer.

What does the future hold? To tell you the truth, I am frustrated and uncertain. Some “experts”, including many regulars on this blog, say we are headed down anywhere from 20 to 50 percent. That’s what I put my money on two years ago. More recently, I’ve been reading other “experts” that claim with an aggressive Fed moving rates lower, dropping money from helicopters, and with a devalued dollar causing inflation, real prices will not go much lower at all. America is “on sale”, with housing looking cheap to foreigners, especially the Chinese, who have tons of cash with their 50 percent savings rate and stock market boom. In fact, I have personally observed in my area, the housing market being so strong due to the Chinese buyers. I recently checked on a new townhome development which I have kept tabs on since they opened about a year and a half ago. Guess what, boys and girls. They just recently sold out, models and all. Over 130 units. And the last phase won’t even be completed until next April! According to the sales people, ninety percent of the buyers were Asian. Doesn’t sound like an impending crash to me. And resales? The same 1200 sq. ft. built in 1963 POS that was listing for $580K two years ago, is now listing for $560K. BFD. Sad, but true.

So what do I do? At the rate of $32K a year in rent, I feel that I could have (and should have) just gone ahead and bought a small home here to wait out the still upcoming decline, which I still, stubbornly believe will come. In a few years, the rent paid would surely more than equal any declines in value. And during that time I could install and enjoy my home theatre and hang my paintings! Any of you have rental experiences you would like to share?

[Anonymous]

Buy a $700,000 house – you can get a nice house for that price even in Encinitas and Carlsbad now. Pay cash. Live off of the remaining 1.5 million. Put it in a savings account paying 5% and live off of the $75,000 interest per year. If only we were all so lucky…

[Bugs]

Repeat after me – LA is on a different clock than San Diego. And while there’s no accounting for what the FOB Chinese will do there’s also not enough of them to prop the market up. From the outskirts to the central areas – that’s how it’s going to go.

Riverside (city) is getting it pretty hard right now, and that trend is going to come marching west on the 60 like a swarm of army ants.

[cashman]

Bugs, I like your prose. Let the army of ants come. I’m ready. But you say not to be concerned about the influence of the Chinese as there aren’t enough of them. Aren’t there over a billion of them? True, they don’t all have money, but I’m reading that ordinary housewiives are investing in the stock markets over there and making a killing. The Chiinese people I see here im my neighborhood are heavily armed—-with cash.

[Sandi Egan]

ordinary housewiives are investing in the stock markets over there and making a killing

OK, cashman, that is the best indicator of a bubble. It is going to explode, likely following the “correction” in the US.

The Chiinese people I see here im my neighborhood are heavily armed—-with cash.

Chinese people that are here are in the same position as the rest of us, only they save more and shun borrowing money. Weird, I know. But other than that consider them Americans. Now, for Chinese from China it is waay too difficult to visit our country let alone invest in real estate over here. I am not saying there will be no foreigners at all buying houses in San Diego, but favorable currency rate is not nearly enough to trigger wholesale RE acquisitions by Chinese.

Your personal situation aside, I think affluent foreigners buying homes in my neighborhood is generally a good thing.

[Fearful]

First let me say, RENTING SUCKS!

I echo your frustration. I am sitting in a 1700 sf Torrey Hills house. Everything in here is cheapest of the builder cheap, and daily I ponder whether to just install a good faucet, good dishwasher, and so on, myself. I could put $1K into fixtures and make this a happier place, no doubt. Of course, I draw the line at the crappy laminate flooring and cheap builder carpet; too much $$ to replace those.

Would I rather be still sitting in my $900K San Jose house? Hell no. When I need consolation I just log in to schwab.com. This is what I had to do to get myself, my kids, and my dog out of the bay area, and I’m not looking back.

Your concern about Chinese propping up values is fringe speculation and equates to the “immigration will bolster housing prices” argument. Sure, some overseas folks will buy U.S. properties, but that hardly seems enough to prop up the values across large areas. Anecdotal reports of immigrant buyers are belied by the indices, which continue to march downward.

You are embittered by your rent payments, but how do they compare with the cost of mortgages, property taxes, maintenance, HOA fees … and let’s not forget, if you are a cash buyer, the opportunity cost of the money … that $700K could have been earning you 5% or so, almost risk free.

And lest we forget, the immense transaction costs associated with selling a house. Casually buying a $700K house … you’ll incur a, say, $35K transaction cost when you sell it.

So a question for you: With your $millions, why not rent a phat house with all the goodies, like home theater, that you seek? Treat yourself to a really great place, to console you for the lack of ability to customize. Get away from your looky-loos and nosy landlord, and get a pool, a view, whatever gives you a woody. You’ve got the dough; pay some dudes to come in and pack up all your stuff for you and move you.

[cashman]

Fearful, it’s just against my grain to spend any more than I have to on rent. Yes, I could afford $5K a month and get a really cool pad, but to me, that’s wasteful, and insane! I have run the numbers, factoring in opportunity costs and so forth, and at around $300K, buying equals renting at my current rent. Remember, I’m currently renting a house listed for $1M, and it’s a real POS. Can you imagine what $300K buys? A crappy 2 bd. condo, that’s what. I need to stay in this area for my business, or else I would have bought something around Temecula/Murrieta, where the bargains seem to be for now. It just seems like if this housing decline, that has yet to come to my area, drags on for many years, eventually I could have bought something with all the rent money I will spend over those years. Let’s see, 5 yrs. of rent at $32K per year equals $160K. 10 yrs. equals $320K! I think you’ll agree with me that there is something to be said for owning your own home. Right now, it only makes sense for a $300K home, which doesn’t buy you much, sadly. I agree with you, when I log into my online accounts, I feel better….for a while.

[bob2007]

Cashman, I hear you and understand the frustration. I too think prices will come down, but every year that goes by moves the average opinion of this board out 2-3 years more when the drop does not meet expectations. The last round threw around 2012 quite a bit, and I’m sure that will be extended further in 2010. With that type of progress we will eventually be able to just skip the whole house thing and start looking at retirement homes.

That said, there was actually an interesting suggestion that you could up the rent paid now and start enjoying your money. If you spend 6k to 7k on rent you can probably get a pretty nice place for the next few years and see how things pan out in the market. With the cash you have I wonder if it might be a good idea to start looking for unique properties that might come one the market in the next year or two – ones that would be very desirable in any market to give you an edge if you want to sell it.

[bsrsharma]

Cashman: I gather you are in LA area. After the recent FED actions I share your thoughts: FED will not allow any kind of depression scenario to repeat. All such risks will be eliminated by sufficiently inflating the currency to make idiots of savers like you and me. My thinking, for anyone with multi-million $ in cash, is to invest in prime real estate in the main international gateway port cities (LA/SF/SEA/NY/Boston etc). I don’t think SD fits properly into the list. The reasons are exactly what you have said – FED will devalue the $ to unburden our debts, public & private. With the cheap $, prime property in these international cities will be juicy targets for foreigners. When $ becomes cheap, not just Chinese, but Japanese, Koreans, Europeans, South Americans, Rich Mexicans will all like to buy property here.

Would you like to tell what ties you down to Southern California? I am wondering if your investment activities (assuming in Real Estate) in non-bubble areas may be less riskier.

[cashman]

bsrsharma, I am tied to the LA area by my business, mostly. I own a diagnostic ultrasound repair business that I started 23 years ago. I think I can squeeze a few more years out of it, so my central location in Diamond Bar is ideal for commuting to all points, south, east, north and west. Over the past 27 years that I have lived here, I have seen this once small suburb evolve into a full blown incorporated city, and the mix of people shift to predominately Asian, with a good smattering of Indian. I’m not implying that any of this evolution is bad, but I have witnessed firsthand the effects of foreign money. Someone commented how that Chinese immigrants couldn’t easily buy here. Nonsense. I live in a gate guarded neighborhood of multi-million dollar homes, and much of the sales here are by Chinese nationals. Many of the realtors here are Chinese, and they advertise heavily in Shanghai, Taiwan and Hong Kong. In fact, the person that bought my home a couple of years ago was a single lady from China, who’s a pharmaceutical representative for an American company in China. She paid mostly cash, financed less than a mil. I am worried that with the continuing bubbles of many foreign markets, and the aggressive easing of the Fed, we may be in for many years of flat, not declining, markets in the more desirable areas where these foreign nationals want to buy, such as the better neighborhoods of LA. In real terms, adjusted for inflation, which could seriously pick up in the near future, prices might be slightly adjusting downward, making investment attractive to foreign money. But in nominal terms, they could stay flat, making it a nightmare for us patient renters and savers hoping to buy in at lower prices.

[CardiffBaseball]

You should re-figure your calculations based upon your rental being less than 1 million. If they haven’t sold the place at that price for all this time, then the home is not worth what they are asking.

I’d estimate your rental at 8-900K, instead, maybe that will make you feel better?

[utcsox]

Cashman,

Sadly, your observation is correct. When RICH asians that want to send their children to United States for education, they like to send them to heavily Asian populated areas such as San Francisco, Los Angeles and New York. Since they are already spend tons of money to send their kids to get education in the United States, it is natural they will like to send them into areas with the BEST school district. In Los Angeles, that means areas such as South Pasadena, San Marino, Arcadia, Diamond Bars, PV and etc. You need to spend about $100K/year if you have two kids that are getting school in one of those areas. Housing cost (even Rent), housekeepers, Cars (BMW, Audi, MB.. you get the idea), air flight tickets for your kids and yourselves and other spending. Imagine, if you can afford to spend this much money on your kids getting education here, you don’t think they can easily buy a house for $1 million to $2 million? Those Asians usually buy the house with a lot of cash since they can’t get mortgage deduction from the US government. They are NOT your typical American home buyers. In my opinion, you cannot really analyze those areas with price and local income. It is VERY VERY clear that majority of those foreign buyers DO NOT work in the United States. I hope this information help.

[lu]

First let me say, RENTING SUCKS!

I’m renting, and I don’t think it’s so bad. I live in Cardiff. My place is a good size 2 bed / 2 bath with nice cabinets, nice bathrooms, and crown molding. Sure, it has beige carpet and off-white walls, and it could use more closet space. But it also has a panoramic ocean view. My unit is the entire second story of a duplex with a large 2 car (unattached) garage. I am 4 blocks from the beach — and it’s a great surf spot. There is a fancy grocery store down the street, nice shops, restaurants, breakfast places, and of course, VG’s.

What does all this cost? $2200 per month. I think that’s a great deal.

Regarding Cardiff, it doesn’t seem like house prices have come down very much here, which is frustrating for sure, but that’s a topic for a different post.

– Lu

[Ex-SD]

Cashman, congratulations on having the good sense to sell when you did. You may not see prices dropping in your old neighborhood yet but you probably don’t see nearly as many sales either. I sold in the spring of 2005 and left CA. I’ve been convinced since around 2001-2002 that the housing market would collapse and I’ve always thought that it would take 4-5 years for it to spiral down to the bottom from the very top. Condos are always the first to drop……..then the SFR’s in the outlying areas like Temecula, Riverside, etc. I’m convinced that it will work it’s way to the more desirable areas. If you follow the other housing blogs in CA and in other cities, you will see that the burners are starting to warm up. There is plenty of info in the area-specific blogs that communities like Pacific Palisades and Santa Monica are also starting to build inventory, see significant price drops and feel the heat. IMHO, you have done exactly the right thing if you’ve going to live in CA for the next two to four years because I think it’s going to take that long for everything to shake out. My prediction is that mid 2011 to mid 2012 will likely be the bottom which when reached, will sit for quite a while before any appreciable ramp-up is seen again. Countrywide presently has over 12,500 REO’s (3000 in CA) at the present time and they are only one of many lenders who are sitting on foreclosed inventory. Sooner than later, these lenders will need to convert these REO’s to cash and start slashing prices. If you can avoid it, you do not want to be a property owner in a bubble market like CA when this happens. There are also over 5.1 million homes for sale nationwide.

Mo…………Total…Exist. homes…months to sell….New for sale
Aug 07…5.11 million….4.58 million……..10.0 mo………529,000
Aug 06..4.49 million…..3.92 million……….7.5 mo………568,000
Aug 05..3.34 million…..2.86 million……….4.7 mo………479,000
Aug 04..2.88 million…..2.48 million……….4.6 mo………404,000

Look at the growth in inventory of homes for sale in the USA since Aug of 2004. We are headed into a bad recession and very possibly, a depression. You do not want to be a knife-catcher and you ARE doing the right thing at the present time.

[eccen in esc]

eccen in esc
Cashman – A lot of us here share your sentiment. I am even older than you and I haven’t rented since 1984. You’re right – it sucks. I have been treated like a second class citizen, white trash by my prop management. It is humiliating. They think because you rent you are too poor to buy. Anyway if you can hang in there another 6 months you will begin to see the light and be glad you hung in there. It is hard to wait in a rental while half your house sits in storage. I hate it too but I can’t justify buying now when I sold in 9/06. Maybe all those Chinese who bought will be the next batch of foreclosures. Who knows. Let us suffer in rentals for a while longer. Things are starting to change.

[Author]

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