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Valuation of assets typically is a function of how productive the asset is. In the case of housing, it's best to assume you're renting out the property. If you
by the_gastropod 8y ago
Valuation of assets typically is a function of how productive the asset is. In the case of housing, it's best to assume you're renting out the property. If you can rent a property for ~12% of the cost annually, that's probably a pretty decently priced house (your returns after maintenance, taxes, etc. would be pretty close to something like the S&P500). If you can only rent for, say, 5% of the cost annually, some might say the house is overvalued.
- keredson 8y agoIn the Seattle far-suburbs I'm renting at 3.36% by your metric. And people keep asking me "why don't you buy?!?" THIS. :)
- badbug 8y agoBuying isn't always the best option but don't forget about potential appreciation and tax write-offs in your financial decisions.
- keredson 8y agoI haven't. But when my rent is < just the interest on the loan for the house I'm in, it's hard to beat.
- bunderbunder 8y agoThis is the figure I always point to when people ask me why I'm not buying. From there, you can start stacking additional costs and savings on both sides of the argument. I've done that math, too, and found that, at least in my area, that only makes buying look even worse. That said, in a lot of places (e.g., small towns and suburbs), it's slim pickings for apartments that aren't basically bachelor pads or eyesore cookie cutter developments. If I didn't live in a major metro area, I'd probably be buying, too.
- OldSchoolJohnny 8y agoAnd don't forget about the myriad expenses that most people don't realize are a major ongoing part of owning a house. Rarely do people factor in that a house is disintegrating daily and you need to spend serious money on a regular basis to keep it from becoming a pile of garbage.
- stevewilhelm 8y agoPeople also forget the costs of selling a home. For example, sellers usually pay a realtor commission of five to six percent of the final sales price.
- toomuchtodo 8y agoThe seller's commission is always negotiable, but 5-6% is customary.
- cperciva 8y ago3.14% gross here in Vancouver. 2.27% net (aka after subtracting off maintenance/utilities/taxes paid by my landlord).
- JacobJans 8y agoWouldn't ROA (return on asset) be the appropriate metric? For example, a house worth $500,000, with a 5% ROA, would need to net $25,000 a year. Assuming expenses are 1% of the value, you would need to charge $2,500 monthly rent, to get a 5% ROA. The question is then, how does that ROA compare to other options? That answer to that question determines whether the house is overvalued.
- deleted 8y ago[deleted]
- carlob 8y agoI don't know about the US, but I've never heard of any market in Europe where you can get more than 10% of the cost annually. I think on this side of the pond 4-5% is typical. Also I think comparing to the stock market is a bit disingenuous as the revenue stream from renting is fluctuating a lot less (though the market value of your house might), because leases are usually at least year-long.
- bunderbunder 8y agoThe revenue stream, sure. I wouldn't be surprised if the profit stream is quite variable, though, due to the unpredictability of repair and maintenance costs.
- ransom1538 8y agoAgreed. What is also nutty, a mortgage on an investment property is almost always a bad deal. Just to be clear. If you were to use a mortgage at 500k, 20% down, this would be the math: [1]. To break even you would need to charge 3k. Long story short, it is hard to find a renter of a 500k house for 3,300. In SF, 500k wouldn't buy a one bedroom. In the suburbs, 3k a month renter is a hard find. [1] https://imgur.com/a/Hye3Hkj https://imgur.com/a/Hye3Hkj
- JamesBarney 8y agoYour returns on the asset don't really matter for whether you should get a mortgage or not. What matters are what returns you can get with the money from the mortgage.(Opportunity cost) Ex. You own an investment property you bought for 200k, it returns 10% per year. The only available investments to you are the stock market which returns 3%. Mortgages are 5% should you get a mortgage? Obviously no. Same situation but the stock markets are returning 15% per annum. Obviously yes.
- jiveturkey 8y agoTrue but there's an additional factor for a mortgage: leverage on the capital appreciation. You make money 2 ways with a property: income and capital appreciation.
- JamesBarney 8y agoIn this simple model there's not really a difference between appreciation and rent.
- shoo 8y agoA variation of your scenario would be if there were available investments similar to the existing property, then you may wish to get one or more mortgages to acquire multiple such properties.
- zhte415 8y agoAt a super aggregate level, ignoring local disparity: If the stock market is doing 15% per year, then the real economy (or perception of the present value of the future real economy) is doing 15% too, so capital appreciation of real estate, given linking to the real economy, should also be doing 15%. Yield over maintenance on top of that is a bonus and could best be compared to dividends. Property also tends not to be eroded by new entrants (private, VC) unlike the stock market, so could be seen as even more favourable.
- pinky1417 8y agoAsset productivity is what the intrinsic value is; i.e. the future cash flows, discounted to today's money. However, intrinsic value and market value are frequently out of whack. You can see this in the stock market: stock prices change within fractions of a second, but nobody should believe that the company's intrinsic value is actually changing second-by-second. Calling an asset "overvalued" is a judgement call. Same with calling an asset undervalued. You have to do your own analysis to make that interpretation. And when you see something that's undervalued significantly, you buy that asset!
- JamesBarney 8y agoThis will also depend on the interest rate. If the interest rate for a 30 yr loan is 1% vs 10% that will change the appropriate price to rent ratio.
- iambateman 8y agoHow would you quantify the “productivity” of a single-family home that isn’t rented? IMHO, it’s genuinely difficult to establish the underlying value of a property beyond comparing it to similar recent transactions (which doesn’t answer the original question). It’s possible you meant looking at rents in the area as a baseline of how “productive” my SFR is.