4 ms·

He's assuming that the rent stays constant. A lot of what he says is correct, but this is a critical point. Buy, with a standard compound rate mortgage, and yo

by neffy 9y ago

He's assuming that the rent stays constant. A lot of what he says is correct, but this is a critical point. Buy, with a standard compound rate mortgage, and you essentially freeze your rental payment. Yes, for the first few years of the mortgage you won't pay back much equity - but you can compensate for that if you overpay your mortgage (make sure terms and conditions allow you to do this without penalty), say by the amount your rent would have otherwise increased. Do that, and you can make quite a dramatic difference in the cost, and the duration of the mortgage...further reducing your rent. Broadly, house prices track the money supply growth, and money supply growth is approximately 2x a decade in the USA. Unless you're moving a lot, it is usually better to buy if you can.

loxs 9y ago
No, he is not assuming that. Go read the article again
- neffy 9y ago
  You're right, I didn't get that far... but what he does is actually worse. He assumes a 2% increase in rent (no, just no) - rents track real estate increases quite well too, the common link is the cost of the landlord's mortgage to buy the property, and an ROI of 8% on an MMF. Also no. All of this is linked back to monetary expansion - in periods of high inflation, when you also get high returns on MMF's, your rent is equally increasing rapidly. In periods of low inflation, you don't get those kinds of return without unacceptable risk.
  - Bartweiss 9y ago
    > He assumes a 2% increase in rent (no, just no)... and an ROI of 8% on an MMF. Also no. I don't think the example was an MMF - isn't it a whole-market index fund? (The link under that phrase doesn't really clarify, it's just a driver for internal traffic.) Even so, I just checked examples for those, and that class of fund has been earning about 6.5%. That's quite a difference from 8% The 2% rate on rent isn't insane as a national average, but failure to break it down still invalidates large parts of the article. In particular, the P/R section is ruined by that assumption. We're told that at P/R ~15 Owen and Rachel break even, and at P/R >20 Owen loses badly. But high P/R is basically inextricable from rapidly increasing rents. San Francisco, with national-high P/R of 45, has seen 10% average rent increases. Boston, with P/R of 28, has been averaging 4% rent increases. Individual circumstances vary, of course, but the toy example is rendered seriously misleading by overstating market returns while ignoring the fact that rent growth is guided by home price growth.

by neffy 9y ago

loxs 9y ago

No, he is not assuming that. Go read the article again

neffy 9y ago
You're right, I didn't get that far... but what he does is actually worse. He assumes a 2% increase in rent (no, just no) - rents track real estate increases quite well too, the common link is the cost of the landlord's mortgage to buy the property, and an ROI of 8% on an MMF. Also no. All of this is linked back to monetary expansion - in periods of high inflation, when you also get high returns on MMF's, your rent is equally increasing rapidly. In periods of low inflation, you don't get those kinds of return without unacceptable risk.
- Bartweiss 9y ago
  > He assumes a 2% increase in rent (no, just no)... and an ROI of 8% on an MMF. Also no. I don't think the example was an MMF - isn't it a whole-market index fund? (The link under that phrase doesn't really clarify, it's just a driver for internal traffic.) Even so, I just checked examples for those, and that class of fund has been earning about 6.5%. That's quite a difference from 8% The 2% rate on rent isn't insane as a national average, but failure to break it down still invalidates large parts of the article. In particular, the P/R section is ruined by that assumption. We're told that at P/R ~15 Owen and Rachel break even, and at P/R >20 Owen loses badly. But high P/R is basically inextricable from rapidly increasing rents. San Francisco, with national-high P/R of 45, has seen 10% average rent increases. Boston, with P/R of 28, has been averaging 4% rent increases. Individual circumstances vary, of course, but the toy example is rendered seriously misleading by overstating market returns while ignoring the fact that rent growth is guided by home price growth.