5 ms·

What about interest? What about property price falls during housing downturns (it will happen). Interest is equivalent to setting it on fire IMO.

by meric 11y ago

bane 11y ago
It doesn't matter, it's still a smaller fire. It has to be an absolutely bizarre market for a renter to find an equivalent place to rent, then have enough money left over that they can invest in some mythical financial instrument that will earn them all that rent back plus whatever valuation a property owner is earning while their property appreciates in value. At the end of the mortgage the owner now only has to pay any applicable taxes and the cost of living is more or less "free" (minus maintenance). A renter will rent forever.
- meric 11y ago
  >> It has to be an absolutely bizarre market A renter can rent a small room as part of a larger house, but you can't buy a small room.[1] My personal investment fund has had 50% per year gains since 2012[2]. Perhaps we do live in a bizarre market because I've done exactly what you described. [1] Do that here. https://flatmates.com.au https://flatmates.com.au [2] 2012-2014 in tech. TSLA & SCTY contributed the bulk of my gains. 2014- in Australian gold miners, whose index has doubled in a year. https://www.google.com/finance?cid=16106836 https://www.google.com/finance?cid=16106836
  - kazinator 11y ago
    Can't buy a small room? Says who? A house could be turned into a strata property. The hallways and bathrooms become common areas, and the bedrooms are free hold. :)
  - bane 11y ago
    > but you can't buy a small room. Sure you can. Housing units come in all shapes and sizes. In the U.S. at least small places are usually sold as condos and can be as small as any efficiency. > Perhaps we do live in a bizarre market because I've done exactly what you described. No, you rented a smaller place than a house, then invested the difference. I said "equivalent place to rent". I'll say it one more time and maybe this time your reading comprehension will kick in, unless you live in an absolutely bizarre market, where rents are vastly under mortgage costs, and you can rent an equivalent property (same size, same number of bedrooms, etc.) at those vastly lower rates, you'll never have enough money extra that you would have spent on property ownership that will earn back the money you've set to fire by renting. For example (since you seem to need a specific one): A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that. But, let's suppose you cut a deal and rent it for $2,000/mo. That leaves you with $600/mo. You need to turn that $600 into $2,000 every month to make up for the loss on rent. I laugh at your 50% return, because now you're only $1,100 a month in the hole each month. Suppose your landlord is a real cool guy and let's you keep the same $2,000/mo for 30 years (unlikely, but let's suppose he's an idiot), You've now burned about $400,000 and still have to figure out how to cover housing costs until you die. Your smart friend on the other hand, after 30 years, has $600,000+ in property, no more major housing costs for the rest of his life and spent less than you to get there. Suppose your friend hits it big, he can refinance after a few years, lower his mortgage payment below your rent (which has probably gone up by then), and can now make 50% gains on his investments and he's still buying his property. Let's say he hits it really big on his investments, he can just pay the house off early, not pay the balance of the interest, his housing costs go to near zero and now he can invest all the money he'd spend on housing on your 50% return investment plan. If he's real smart, he'll just buy a second house, and rent it out to you since you'll just pay most of that mortgage for him. After 30 years he now owns two houses, has made a fortune on your investment plan and you're still paying what are probably much higher housing costs for renters. Maybe you're a real clever guy and after 30 years you've somehow saved up enough to just buy a house outright and skip all the other costs (minus maintenance), maybe you but the house your renting from your friend. Great, you now own property, and your friend still has his house and the money you paid to buy his second house (now valued well in excess of the $600,000 he paid for it) plus the fortune he earned investing in your stock tips, plus you'll probably have paid him back for all the interest he ever paid on the house via your purchase price. (okay okay, I'm handwaiving away interest and taxes and such, but the math doesn't change all that much once considered and most competent landlords simply pass along those costs to their tenants).
    - kazinator 11y ago
      > A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that. Even if rents are a bit lower now, that $2600 payment will stay approximately the same. In ten, fifteen years, those initially lower rents will have surpassed the $2600. Moreover, rent continues to be money set on fire. Less and less of that $2600 is burned on interest as time goes on. Mortgages have ways to reduce the burn. You can choose accelerated payment plans with more frequent, smaller payments. There are ballooning options: pumping some money yearly into the mortgage to pay down principal.
    - chrishynes 11y ago
      You're handwaving a lot more that that -- all maintenance and upkeep. Over 30 years you'll likely have to replace all appliances and the roof at least once, which could easily be 100k on a 600k house. You've also got hundreds a month in day to day maintenance and upkeep, not to mention the taxes and insurance and hoa fees. Oh, and a point of PMI unless you've got 120k in your back pocket for a 20% down payment. Don't forget 6% commission, closing costs and other taxes on the sale. Buying doesn't pencil out against renting when the rent is lower than a 30 year mortgage payment.
      - bane 11y ago
        > Over 30 years you'll likely have to replace all appliances and the roof at least once, which could easily be 100k on a 600k house. You seem to think that renters don't pay for that and owners operate a housing charity where they foot all the maintenance and other costs while renters just pay some kind of courtesy "I'm occupying your property" fee. In many 30 year models, given a $500k home up for rent or purchase, the owner comes out somewhere between $1mil-$2mil ahead of the renter in terms of total asset ownership. After which the owner has only maintenance and taxes to pay for living while the renter continues to burn their money at higher and higher rental rates. During the same 30 year period, the owner will have a diminishing cost of living while the renter will maintain around a steady cost (on average) meaning that not only will the owner come out wealthier than the renter, it will be easier for them to gain that wealth as per inflation.
- kazinator 11y ago
  Yes. Moreover, although interest rates fluctuate, that is all they do. Mostly they stay in the single digits. Whereas rent just rises absolutely with time. If you're near the end of, say, a very long 30 year mortgage, chances are that the payments you're making are ridiculously small compared to what people are paying in rent in the same area.
  - bane 11y ago
    Correct. Assuming everything tracks over the long term with inflation (a historically accurate guess): mortgage payments stay nominally the same or shrink, rent goes up. This means that the cost of living goes down for owners while staying relatively the same for renters. There is almost no long-term scenario where renting wins over buying in the long-term. It would require a magical multi-decade convergence of oracle-like investment ability and absolutely bizarre and sustained housing market that has no historic precedent anywhere in the world.
    - deleted 11y ago
      [deleted]
      - bane 11y ago
        didn't down-vote you but I think you got my meaning backwards

What about interest? What about property price falls during housing downturns (it will happen). Interest is equivalent to setting it on fire IMO.

by meric 11y ago

What about interest? What about property price falls during housing downturns (it will happen). Interest is equivalent to setting it on fire IMO.

bane 11y ago

It doesn't matter, it's still a smaller fire. It has to be an absolutely bizarre market for a renter to find an equivalent place to rent, then have enough money left over that they can invest in some mythical financial instrument that will earn them all that rent back plus whatever valuation a property owner is earning while their property appreciates in value. At the end of the mortgage the owner now only has to pay any applicable taxes and the cost of living is more or less "free" (minus maintenance). A renter will rent forever.

meric 11y ago
>> It has to be an absolutely bizarre market A renter can rent a small room as part of a larger house, but you can't buy a small room.[1] My personal investment fund has had 50% per year gains since 2012[2]. Perhaps we do live in a bizarre market because I've done exactly what you described. [1] Do that here. https://flatmates.com.au https://flatmates.com.au [2] 2012-2014 in tech. TSLA & SCTY contributed the bulk of my gains. 2014- in Australian gold miners, whose index has doubled in a year. https://www.google.com/finance?cid=16106836 https://www.google.com/finance?cid=16106836
- kazinator 11y ago
  Can't buy a small room? Says who? A house could be turned into a strata property. The hallways and bathrooms become common areas, and the bedrooms are free hold. :)
- bane 11y ago
  > but you can't buy a small room. Sure you can. Housing units come in all shapes and sizes. In the U.S. at least small places are usually sold as condos and can be as small as any efficiency. > Perhaps we do live in a bizarre market because I've done exactly what you described. No, you rented a smaller place than a house, then invested the difference. I said "equivalent place to rent". I'll say it one more time and maybe this time your reading comprehension will kick in, unless you live in an absolutely bizarre market, where rents are vastly under mortgage costs, and you can rent an equivalent property (same size, same number of bedrooms, etc.) at those vastly lower rates, you'll never have enough money extra that you would have spent on property ownership that will earn back the money you've set to fire by renting. For example (since you seem to need a specific one): A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that. But, let's suppose you cut a deal and rent it for $2,000/mo. That leaves you with $600/mo. You need to turn that $600 into $2,000 every month to make up for the loss on rent. I laugh at your 50% return, because now you're only $1,100 a month in the hole each month. Suppose your landlord is a real cool guy and let's you keep the same $2,000/mo for 30 years (unlikely, but let's suppose he's an idiot), You've now burned about $400,000 and still have to figure out how to cover housing costs until you die. Your smart friend on the other hand, after 30 years, has $600,000+ in property, no more major housing costs for the rest of his life and spent less than you to get there. Suppose your friend hits it big, he can refinance after a few years, lower his mortgage payment below your rent (which has probably gone up by then), and can now make 50% gains on his investments and he's still buying his property. Let's say he hits it really big on his investments, he can just pay the house off early, not pay the balance of the interest, his housing costs go to near zero and now he can invest all the money he'd spend on housing on your 50% return investment plan. If he's real smart, he'll just buy a second house, and rent it out to you since you'll just pay most of that mortgage for him. After 30 years he now owns two houses, has made a fortune on your investment plan and you're still paying what are probably much higher housing costs for renters. Maybe you're a real clever guy and after 30 years you've somehow saved up enough to just buy a house outright and skip all the other costs (minus maintenance), maybe you but the house your renting from your friend. Great, you now own property, and your friend still has his house and the money you paid to buy his second house (now valued well in excess of the $600,000 he paid for it) plus the fortune he earned investing in your stock tips, plus you'll probably have paid him back for all the interest he ever paid on the house via your purchase price. (okay okay, I'm handwaiving away interest and taxes and such, but the math doesn't change all that much once considered and most competent landlords simply pass along those costs to their tenants).
  - kazinator 11y ago
    > A house that costs $600,000 needs slightly more than $2,600/mo to service a 30 year loan. Unless you live in an absolutely bizarre housing market, you will not be able to rent the same house for an amount that is significantly less than that. Even if rents are a bit lower now, that $2600 payment will stay approximately the same. In ten, fifteen years, those initially lower rents will have surpassed the $2600. Moreover, rent continues to be money set on fire. Less and less of that $2600 is burned on interest as time goes on. Mortgages have ways to reduce the burn. You can choose accelerated payment plans with more frequent, smaller payments. There are ballooning options: pumping some money yearly into the mortgage to pay down principal.
  - chrishynes 11y ago
    You're handwaving a lot more that that -- all maintenance and upkeep. Over 30 years you'll likely have to replace all appliances and the roof at least once, which could easily be 100k on a 600k house. You've also got hundreds a month in day to day maintenance and upkeep, not to mention the taxes and insurance and hoa fees. Oh, and a point of PMI unless you've got 120k in your back pocket for a 20% down payment. Don't forget 6% commission, closing costs and other taxes on the sale. Buying doesn't pencil out against renting when the rent is lower than a 30 year mortgage payment.
    - bane 11y ago
      > Over 30 years you'll likely have to replace all appliances and the roof at least once, which could easily be 100k on a 600k house. You seem to think that renters don't pay for that and owners operate a housing charity where they foot all the maintenance and other costs while renters just pay some kind of courtesy "I'm occupying your property" fee. In many 30 year models, given a $500k home up for rent or purchase, the owner comes out somewhere between $1mil-$2mil ahead of the renter in terms of total asset ownership. After which the owner has only maintenance and taxes to pay for living while the renter continues to burn their money at higher and higher rental rates. During the same 30 year period, the owner will have a diminishing cost of living while the renter will maintain around a steady cost (on average) meaning that not only will the owner come out wealthier than the renter, it will be easier for them to gain that wealth as per inflation.
kazinator 11y ago
Yes. Moreover, although interest rates fluctuate, that is all they do. Mostly they stay in the single digits. Whereas rent just rises absolutely with time. If you're near the end of, say, a very long 30 year mortgage, chances are that the payments you're making are ridiculously small compared to what people are paying in rent in the same area.
- bane 11y ago
  Correct. Assuming everything tracks over the long term with inflation (a historically accurate guess): mortgage payments stay nominally the same or shrink, rent goes up. This means that the cost of living goes down for owners while staying relatively the same for renters. There is almost no long-term scenario where renting wins over buying in the long-term. It would require a magical multi-decade convergence of oracle-like investment ability and absolutely bizarre and sustained housing market that has no historic precedent anywhere in the world.
  - deleted 11y ago
    [deleted]
    - bane 11y ago
      didn't down-vote you but I think you got my meaning backwards