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Show HN: Should you buy a house and rent it out?

• anm89 8y ago
  This is pretty cool. One thing that feels like a serious oversight though is that it isn't factoring in taxes. Rental income is taxable income. If you depreciate the property to avoid or reduce your taxable income you'll end up taking a big hit on the eventual sale as it will all be capital gains. Another issue I'd take with this is that it's a lot smarter to focus on cashflow then gross income because odds are you aren't going to last 30 years to watch your net worth grow if you are losing cash on a monthly basis, even if you are technically building equity. I'm currently getting out of being a landlord because while it was overall profitable, the margins are alot tighter after factoring in taxes and it's also a massive headache. That income certainly does not feel passive.
  • refrigerator 8y ago
    Thanks! Yeah you're totally right about taxes — it does make a big difference. We had to make simplifications somewhere, and taxes are quite country-specific so we didn't want to be too prescriptive. We hoped you could increase "Annual Costs" as a very rough proxy for taxes. Cashflow is a really good point, and something we hadn't considered much. You can get a rough idea of cashflow in the "Net monthly earnings" section of the output, but it probably deserves more focus for sure. Operational headache is interesting to account for haha — we'll add these things to the model explanation :)
    • Terretta 8y ago
      You should probably default the Annual Costs to something like 5%, and let people bump it back down if they need to. Anything that draws attention to that field, as 1% doesn’t draw attention. In my case, taxes are roughly 2.5% alone. Then while a given year maintenance doesn’t feel like 5%, over 30 years you have to peanut butter the big expenses such as roof replacement, or kitchen renovation, and those really do add up. By and large, all fields should be a bit pessimistic, let people bias them back down, or simply add a “risk” field that can fold in pessimistic outliers into the simulations.
    • propogandist 8y ago
      >We hoped you could... Given you're positioning this app and article as a means to answer the question on buying a home and renting it out, you should disclose these items (liabilities) to the reader and let them figure out the scenario for their local market, rather than hoping for the reader to do something. Property tax is a large expense, and insurance is also a required expense if you have a mortgage (in the US). Finally, income you generate from the house (Rental Income) is taxed at your effective tax rate, and this will be a Large Liability at the end of each year. Although there may be deductions you can take to minimize some of the expenses (in the US), you will be required to pay taxes on the income you generate and I suspect that's the case across all countries.
  • zentrus 8y ago
    Just fyi, depreciating the property isn't a choice in the US. When you sell, the government assumes you did depreciate on your previous tax returns. If you didn't, you missed out on those deductions and depreciation will be reclaimed regardless.
  • benj111 8y ago
    "Another issue I'd take with this is that it's a lot smarter to focus on cashflow...." Surely it depends on your aims? If its your pension you may not mind adding money in every month, as long as you get that lump sum/ steady income at the end.
  • chrisweekly 8y ago
    Another subtlety to the taxes and cap gains: the building per se can depreciate while the land value appreciates. This can make a big difference when it comes to selling. Highly recommend talking with an accountant.
  • evrydayhustling 8y ago
    For anyone using this model to make a decision: it looks like it doubles your rent input (maybe assuming two units?). Also not taking into account tax on rental income. You can work around these in how you set your parameters.
• amscanne 8y ago
  This compares against the opportunity cost of investing the initial down payment, but does not seem to factor the opportunity cost of ongoing carry costs. For example, I was able to easily craft a model where my expected monthly income was negative. (Just bump the expected annual costs to 2.0%, which is actually more realistic since 1.0% = tax and 1.0% = maintenance.) Surely the couple hundred dollars a month could also be continuously invested and producing returns if they weren’t being driven into the real estate asset.
  • Lukas1994 8y ago
    Good points — We did kinda assume that the buyer would set the rent to at least cover her ongoing costs. In the UK, for example, you can only get a “buy to let” mortgage if you can prove that you can reasonably charge enough rent to cover your mortgage payments. You’re totally right about reinvesting the earnings into stocks etc — we excluded this in the model to simplify things and not be too prescriptive. But if I were thinking of doing this, I’d definitely want to take that into account :)
    • amscanne 8y ago
      It’s more than just mortgage payments — taxes, maintenance, management fees, empty losses, etc. all make it easy to have negative carrying costs. There are _lots_ of people owning to rent that don’t cover their actual carrying costs. They just justify it by thinking about the equity growth. In fact, even the default example has negative carry costs. The initial interest on $480k plus $6k isn’t covered by $2k monthly rent, let alone principle payments and a more realistic maintenance amount.
  • nostrademons 8y ago
    I plugged in some reasonable numbers for rent & home prices in my area and found that basically all of the net worth was due to home price appreciation. While houses here are appreciating at rates far higher than the 4% of the model, that's because the stock options of the buyers have been going up at ~25% annually. My takeaway: bubbles rule. As long as you're in a region eating the rest of the world, owning property will let you share in that windfall. As soon as that economic engine sputters, they will be ruined, and so will you. Better watch for that next big thing, and then hop on something else once it's no longer the next big thing. Also, it seems wrong to assume 4% annual appreciation of an asset whose discounted cash flows are negative. At some point that gets unsustainable, and nobody will bother to buy the asset.
• burlesona 8y ago
  As others have pointed out this model is oversimplified and doesn’t break out maintenance and taxes. 1% is unreasonably low for both considering that 1% is a low property tax rate first of all and second because rental income itself is taxable. Another point in actual real estate proformas is expected vacancy and leasing costs. Ie. you will have tenants leave and when you do it isn’t always easy or fast to find good tenants to replace them. There’s also the significant consideration of transaction costs missing. Conservatively you should budget 8% to sell and 4% to buy. The asset is also highly illiquid compared to stocks, and also has ups and downs just like the stock market but in slow motion. If you happen to want to cash out your equity during a downturn it can be years before you get back to where you’d be with your “long term expected appreciation.” And one last bit: since a house isn’t fungible you need to accumulate the entire downpayment all at once, and to liquidate you must sell it all at once, whereas stocks you can accumulate and release incrementally. TLDR; this model makes it look a lot more attractive than it really is to be a single-property landlord.
• wsdfsayy 8y ago
  I've been looking on Redfin for potential investment properties in SF but I cannot find a single home on the market where rent would remotely cover the mortgage.
  • anbop 8y ago
    That’s because massive expected appreciation is baked into SF prices.
• areyouseriousxx 8y ago
  No. The literal definition of the economic drag on value creation is "rent seeking". Be a part of the solution and build something. Do not be a part of the problem and become a landlord.
  • xvedejas 8y ago
    Even if you don't rent out your residence (you live there), you're still collecting implicit rent. It's the value you would have been paying to be a renter, society loses because you exclude others from your residence. And every residence has to be owned by someone. You cannot escape rent seeking unless you're homeless or live in a jurisdiction with a "Land Value Tax".
    • rwnspace 8y ago
      That's an incredibly thin argument (society loses because you don't let someone pay rent to live in your home). You have to deny the existence of second-order intangibles which seed first-order tangible economic value such as community and social cohesion. If you like, ownership-based behavioural incentives. A 'stake in society'.
      • xvedejas 8y ago
        You misunderstand my argument entirely. The problem isn't that society loses because you don't let someone pay rent in your home. Society loses because you don't let someone else live in your home for free, but you do let yourself do that. This is the value you extract from owning the land, which nobody else can extract.
        • Retra 8y ago
          Who lives in their home for free? I didn't know that was possible. Children maybe.
        • rwnspace 8y ago
          Apologies, I misunderstood your exact meaning. But I think you misunderstood my point that 'society loses' is a non-sequitur in any case.
• jaabe 8y ago
  I live in a 3 room 90m^2 apartment in central Aarhus in the middle of the university. It’s worth $350,000, but and you can rent out each room for $700-$800 a month, to an endless stream of students. The guy who was elected head of our ownership organisation/community (might be a danish construct) bought two apartments when he moved in. He did have $150,000 to make both loans not-bank loans (again this might be a Danish thing, but we have special loan institutions that cover 70-80% of personal house loans at really low rates). Anyway, the one he rents out pays for both loans, taxes and added expenses and after 20 years those loans will both be paid out. It’s really kind of silly how easy life can be if you start out with a little money and use them wisely.
  • benj111 8y ago
    "It’s really kind of silly how easy life can be if you start out with a little money and use them wisely." Could you clarify? Is it a comment on the randomness of life? Because at the moment it doesn't read like that at all.
    • tluyben2 8y ago
      I read it as, but I could be wrong, that if you start out in life with money (parents/inheritance/...) and you decide wisely, like buying a house close to uni and putting in a shitload of students, then you have it easy. I owned a student home which I bought from partly smart and mostly lucky stock investing (I had savings from strawberry picking (yes, really; that made money faster than coding in those days for me) and I put it on Borland before 2000; they went up big time, I sold at the right time and student me could buy a house suddenly); it was in a city with high student housing prices and it was a really good house for it; it was big and could house 8 (to 16 if pairs) students paying 8*400 euros/mo. It was not easy money though; I lived there too for a while and the constant maintenance drove me up the wall. I am (always was) mostly someone who lives in his head and thinking about code and leaking toilets, pipes, flooding etc really is something I cannot deal with. So I sold it after 4 years of getting stressed. I definitely wouldn't do real estate again; I like virtual assets and the stock market & starting + selling companies treated me a lot better than real estate ever can do. Without the worries of brick & mortar.
• bertjk 8y ago
  very cool. Please make your next demo about retirement planning.. or kids' college fund planning...
• frabcus 8y ago
  Owning a property is work - sudden repairs at an otherwise busy time in your life. Phone calls and customer service for tenants. New tenants. Paperwork. It's partly the time actually worked, but also the unpredictability and out-of-hours nature of the work. Looking at the model I guess the nearest factor is Annual Costs (maintenance). But it doesn't feel properly measured. I note that for someone on Hacker News, it needs charging at the day rate for a programmer. Or even as an opportunity cost - charging with a risk-based possibility of the reward of starting a successful technology startup. Or of spending more time with family or in sunlight, amongst trees. At peace.
  • rwmj 8y ago
    Exactly! Own shares instead, they're the same thing but require none of this ongoing work. Historically house prices have risen enormously and a whole lot of people have made money, so everyone believes this will continue forever despite a huge political movement behind building more houses and other (good) policies that will reduce prices. On the linked page I typed in "-20%" into the annual appreciation field and lost $717,000.
    • benj111 8y ago
      "Historically..... so everyone believes this will continue forever" You know the same thing applies to stocks and shares. And in fact stocks and shares have risen more historically [1] Shares also have liquidity, you can easily sell them in part or whole. You can diversify. One incident could easily destroy a house, if it destroys your well diversified stock investments you've probably got other problems. So agreed the stock market is the better investment, but as we can't see the future, both are based on past performance. Yes there are headwinds, there always are, I can think of many many reasons why stocks could fall, that doesn't really change what has happened historically though. Of course the beauty of investing is that if you disagree you can put your money where your mouth is :) [1] https://www.investopedia.com/ask/answers/052015/which-has-performed-better-historically-stock-market-or-real-estate.asp https://www.investopedia.com/ask/answers/052015/which-has-pe...
      • 8y ago
• zestyping 8y ago
  I think this is supposed to be more about demonstrating the simulation modelling tool than about houses and rent. The tool looks like a copy of getguesstimate.com. What's new or different?
  • refrigerator 8y ago
    We’re big fans of Guesstimate, and chatted to those guys a fair bit about this! They’ve sadly stopped working on it but there’s a few differences: - We’re moving away from a spreadsheet-y UI (e.g separate sections for inputs, model, output vs all homogenous cells/nodes). UI might seem like a trivial differentiator, but I think it significantly affects use-cases for the product. - Guesstimate doesn’t handle certain things very well, like time dependent models, conditioning on variables, etc - Building for enterprises requires certain bells and whistles (e.g integrations with data sources) The first version of Causal won’t be a million miles away from Guesstimate, but the vision is to build a general tool that lets non technical people work seriously with data. Specifically, right now we’re working on letting models learn from data (“machine learning”) via Bayesian inference, and letting people build causal models. Probability and random variables are a great unifying framework for dealing with data. We’re trying to make this more accessible, so there’s a lot to do beyond what the demo model shows :)
• deleted 8y ago
  [deleted]
• refrigerator 8y ago
  Hey HN, I’m one of the makers. Enjoying the discussion about buying to rent! We’re building a tool to let anyone create models like this one — models that incorporate uncertainty in their variables and outputs. This is the kinda stuff people do in Excel right now, with much difficulty. We’re working on a couple more demo models — let us know if you have any suggestions. And if this kind of tool resonates with you, then we’d love to chat — hi@causal.app. Thanks!
  • jedharris 8y ago
    I didn't see how to look at the model "code". How can we see that?
  • kartickv 8y ago
    It looks polished at first glance. The bottom line isn't clear because there's too much information. I'm expecting a single number in 60-point font like "You'll save X amount of money by renting instead of buying". Some information can be hidden behind progressive disclosure. Also, it's US-specific. Let me choose a currency, and format numbers accordingly, like "₹2 crore", not "$20m". In India, we use lacs and crores, not millions. I also like that you're using Monte Carlo simulations. Though it would be good to augment that with real-world data from the user's country. If I'm in India, which Indian city has had the worst-case real-estate investment performance? The worst-case is useful information to consider when making an investment.
  • georgespencer 8y ago
    Hey! I'm a really big fan of this idea! Well done on tackling something really important. I think the examples you've chosen are good but not great examples of where you can add significant value. A house being rented where there are a few variables and a good/better/best outcome is not especially gnarly Excel for the Hacker News audience. I think marketing and sales forecasts and stock option pricing and DCF might be more impactful, if more esoteric, in showing the power of what you're building. BTW, it'd be cool to be able to anchor a variable to a historical base or average. So maybe if you have seven or eight forecasts of CAGR, Casual could accept 'citations' and in its output show a user of the model that this isn't totally speculative. Love what you're doing and have signed up. Well done again.
• fouc 8y ago
  No support for not getting a mortgage?
  • refrigerator 8y ago
    You could simulate this by setting the down-payment equal to the property value, so it’s essentially a cash purchase :)
• andrewfromx 8y ago
  just take the loan out of the equation. don't borrow money trying to make money. that's like having a margin account with etrade! You don't pay interest on a loan and use the money from that loan to buy stocks do you? Just saying, real estate is a fine thing to buy, with all cash! hashtag https://en.m.wikipedia.org/wiki/Dave_Ramsey https://en.m.wikipedia.org/wiki/Dave_Ramsey
  • pjc50 8y ago
    The leverage is what makes it worthwhile in the first place. You generally can't take out a six figure loan to buy shares, but you can for property. Only the 1% have the free cash to just buy upfront, outside of events like inheritance or pension maturity.
  • speedplane 8y ago
    > don't borrow money trying to make money. that's like having a margin account with etrade! You don't pay interest on a loan and use the money from that loan to buy stocks do you? The difference is that interest rates on margin accounts are far higher than they are on real-estate. A margin loan may be 8% or more. So you have to invest in something that grows faster than that to make any money. However real estate loans are 3-4%/year, and in addition they generate rental revenue which is also roughly 3-5%/year. Taking out a loan on real-estate makes far more sense than taking out a margin loan.
  • lazyjones 8y ago
    > Just saying, real estate is a fine thing to buy, with all cash! The model clearly proves you wrong (even though it's not very realistic in general). If you have cash lying around, you're better off investing in the stock market, or buying houses with loans anyway (just more of them).
• nodesocket 8y ago
  I've been thinking about buying a house recently (I am in a ultra-fast growing area Nashville, TN) but not sure the risks and frankly annual returns can beat the stock market (specifically S&P $SPY). S&P average annual returns are 8%, it seems unlikely to beat that long term with real-estate.
  • scarface74 8y ago
    If you’re buying a house to live in and you plan on living there for awhile, buying a house, especially in a fast growing area should be considered an inflation hedge. We moved into a three bedroom apartment (1652 square feet) in 2012 and we were paying $1200 a month. When we left in 2016, rent was $1700. Now rent is $1925. Our mortgage three exits up is less than $2100 for a 3000 square foot house. Besides slight changes in property taxes and insurance, our house payments are not going to increase. This is in the suburbs of Atlanta.
    • tinyhouse 8y ago
      True but if you need to replace the roof tomorrow you suddenly have an unexpected expense of $20K+. But in general I agree with your point. Buying a place is about stability and control. Especially no one can kick you out as long as you make your payments. I don't think it's a better investment option out there but it's safer for most people than investing in things they don't understand. And if you happen to buy a place in an area that is booming in the next few years then it can really be worth it. But that's the same like buying early a stock of a company that makes it big.
      • scarface74 8y ago
        I wouldn’t go that far. If that place is “booming” likely so is all the other places that are similar that you would like to live. Unless you sell and move to a much lower cost of living area, the equity in your house doesn’t help you. If you go by the popularly accepted rule of thumb, you should put 1% of your house’s value in savings for unexpected home repairs per year. Feels a little high to me.
• Kip9000 8y ago
  This is not about buying or renting, it's about an alternative to Spreadsheet for model building. But not much info on the process itself.. can creators expand on this.
  • refrigerator 8y ago
    Haha yes — glad that came across :) It's still very early days for the product, but the basic "building block" for models will be these nodes that you see on the demo. They can be fixed constants, inputs, functions of other nodes, etc. You can create these nodes and define how they related to one-another — this is the "model". Then you can decide what kind of outputs you care about and how you want to show them. Probably sounds quite abstract! If you leave your email on the site then I'll drop you a line as soon as we're ready to show the product :)
• lazyjones 8y ago
  Where's inflation in this model?
• time4tea 8y ago
  What a horrible idea Buy-to-let is causing immense social and economic problems in the UK. It's a nice way for the rich to tax the poor. Atlas shrugged.
  • amelius 8y ago
    See also recent demonstrations in Berlin. Increasing housing costs are changing the character of the city.
    • bubblewrap 8y ago
      And you think if everybody would buy their own houses, that wouldn't be the case? Like the poor artists who made Berlin famous, who thrived when there was an endless supply of living space (because of the wall and other issues), they would just have bought their own places and gentrification would have been staved off forever? Are you sure it is not the other way round: increasing attractiveness of the city (change of character) has lead to increased housing costs?
      • kitten_mittens_ 8y ago
        70% of Germans rent. Any increase in rents is broadly felt, especially compared to America, where most political power in most cities resides with homeowners (~63% of the population). https://www.bloomberg.com/news/articles/2019-04-13/berlin-housing-backlash-spurs-drive-to-nationalize-real-estate https://www.bloomberg.com/news/articles/2019-04-13/berlin-ho...
        • sokoloff 8y ago
          Increases in rent are driven more by people wanting to rent in a given area (typically driven by jobs) than by an owner or landlord selling a house to a different landlord. Rental demand is much more variable over time than the change in supply from marginal landlords buying existing properties.
        • bubblewrap 8y ago
• ww520 8y ago
  It seems the simulation just gives the upper bound and lower bound based on the input ranges. A spreadsheet model can do the same thing by running the model with different input ranges. In fact, that's what a spreadsheet model is for, trying different input to run what-if scenarios. On the rental investment example itself, it would really help to have a finance person to go over the model. A rental investment needs to be modeled like running a business, not like buying a house to live. Its analysis is usually done using net operating income, CAP rate, cashflow, ROI, and IRR. BTW there's no magic 1% to 4% annual appreciation in rental investment. Appreciation is purely based on increasing net operating income faster than market rate, or in simpler term improving CAP vs the market CAP rate. Let's say you buy a property with 4% CAP rate and the market CAP rate is 4% now. 10 years from now your NOI still produces the same 4% CAP but the market CAP rate has risen to 6%, your property will depreciate! Market CAP rate is affected by different things that're out of your control and it's hard to model.
• blunte 8y ago
  For a single property it usually won't be worth it. But if you can build a portfolio of properties in a reasonably small geographic area, then you can gain economic scale benefits (which especially will allow you to outsource more of the management/maintenance). Of course, you need a good source of credit or great people skills to get that started (or wealthy parents to loan you a million or so).
  • HeWhoLurksLate 8y ago
    Did I hear a that a million dollars is a small loan? :P
• throwaway193855 8y ago
  Four percent and higher residential real estate appreciation over that long of a period without massive inflation is mind boggling. I don't think I make that investment just because if it is successful, the inequality in society at the end of the loan is soul crushing.
• elliotpage 8y ago
  No. Let other people buy it. Buy-to-rent should be a crime.
  • bufferoverflow 8y ago
    That doesn't make sense. Renting your property should be a crime? How do you propose people get housing when they can't buy?
    • kd5bjo 8y ago
      I don’t know of any country that does this, but it’s not completely unreasonable for all tenants to be accumulating equity in their residence, so that living in the same place continuously for a long time will eventually result in them owning it.
      • 4rtergsedhg 8y ago
        The future of housing IMHO. Equity based rental models, modeled on REITs. You earn shares in the operation as you pay rent, eventually owning your share of the house in a time period that is similar to a traditional mortgage. End the inflation of the monetary base caused by property speculation. As time progresses, and larger housing loans from Banks is required, we are being robbed of our savings.
        • quickthrower2 8y ago
          What’s in it for the landlord? They’d only agree to this scheme if they get a lot more rent, perhaps double. Also no bank would loan to the landlord for such an arrangement. Governments could provide such a scheme if they are the builder.
    • elliotpage 7y ago
      Housing should be plentiful enough and of a reasonable cost. Failing that, it should be supplied by the state. This isn't difficult.
  • 8y ago
• jgr447 8y ago
  Any data supporting the appreciation of 4% a year? This seems socially much more acceptable to taking a loan and then invest the money in stocks for example, but to me is not that different. True the volatility is much lower, but so is the liquidity if you have to dispose of the propery in a short time due to life circumstances. If this is a single property and plan is to be the bulk of one's net worth it seems risky to me. Then there's the "dealing with tenants" variable which can be none to a ton of work/hassle. REITs are imho an interesting way to get rental income with less hassle and much more diversification if you can stomach the stock price moving up and down. Look at Vanguard VNQ for example.
• myroon5 8y ago
  See also: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
• frankbreetz 8y ago
  Hey, I really like the app and have signed up. One thing I would add is multi- family units. Even better would be the concept of "house hacking" or buying a multi-family and moving into one of the units. This may just be a US thing, but this allows you to have a low down payment and cash flow and live for free. This is a pretty popular thing to do in the US, and I haven't seen any tools that account for it. I am currently doing this and use excel for all my calculations. Also, maybe add a remodel calculator, I. E. If I do a remodel for 10,000 and the rent goes up by 500 my yoy roi is like 60%. This number goes up even more of you get a loan and use leverage.
• evrydayhustling 8y ago
  Is it just me or is it automatically doubling the rent you input??
  • hornbaker 8y ago
    Not just you. I input $3,500 rent, and it used nearly double that for the calculations. Hugely misleading.
  • refrigerator 8y ago
    Hey, sorry for the confusion. The rent you set is at year 0, and your rent increases each year according to "Annual Appreciation" (in reality this isn't quite what goes on!). The "net monthly earnings" in the output section tells you the numbers for the year you selected, so if you're looking 10 years down the line then the rent number will be significantly more than what you set it to be. This is pretty opaque and we should have explained where the numbers were coming from. Had intended to add a tooltip there explaining this but looks like we forgot!
• eruci 8y ago
  Buying a rental property a very simple form of startup for the unskilled, requiring a very high startup cost for a small return. I bought a house one year ago, spent $200k and then another $50k in repairs, and now I'm renting it at $1500 a month ($1200 profit after property taxes and miscellaneous) On the other hand, I also started a new company about a year ago, spent $0 upfront investment, $50 in monthly hosting costs, and it is earning a monthly profit of $2000 currently.
  • bsdnoob 8y ago
    If you don't mind me asking, what does your company do?
• beejiu 8y ago
  It does not seem to take either inflation or lost growth on the down-payment. These two factors have a huge impact on evaluating property against other investments. It would be nice to factor in an interest-only mortgage rather than a repayment mortgage.
  • robertAngst 8y ago
    Its a job to maintain property too. Real Estate is not passive income.
• kyrieeschaton 8y ago
  It's a nice app and all, but the rigorous calculation for these kinds of things really needs to consider tax implications (both depreciation deduction & property taxes), liquidity value, and expected outside returns. It's not a simple thing to simulate even without getting into exotic scenarios.
  • Aeolun 8y ago
    On the whole, I think those other factors you named adjust the result a little bit up or down, but don’t make a significant difference. At least as far is house value is concerned (deducting depreciation raises your wealth, but it hardly increases the value of the house).
    • kyrieeschaton 8y ago
      They make a huge difference. Depreciation in a low land-value area gives you an extra (tax bracket * house value / 27.5) per year. For a 200K house that's easily 2900/y extra return, more if you split out internal components of the house - an extra 1.45% return, when your cap rate might be only a bit higher than 4%! Even when it's fully depreciated, you never actually take the hit from the lowered basis on sale if you keep doing 1031 exchanges.
    • evrydayhustling 8y ago
      Factors that are proportional to house value (property tax, transaction fees, maintenance costs) have a big impact on relative profitability because the marginal gains are actually small. Most of the "advantage" of home buying comes from the ability to borrow money at (e.g.) 4% and hope the home appreciates at (e.g.) 5%. Small taxes and write offs can double or negate profitability. (The down payment part of the investment might also be good diversification, but it is unlikely to appreciate as fast as the same cash would in stocks.)
• le-mark 8y ago
  I did this back in 2010 or so. I wanted to diversify out of the stock market so I put some money into 20% down on a single family home. My sister was a single mom at the time renting an apartment in a good school district for her daughter. I told her "go find a house you'd like to live in", bought and rented to her. She was agreeable. Our plan has been for her to buy the house at a discount when she's able (a little rent to own) but that hasn't happened yet. Financially, from principal paydown I estimate about $400 a month profit from the deal. Last year the house required a new roof, which was $5000 after insurance covered less than half, and broken pipe flooded a bathroom and adjoining bedrooms. So that was my profit for the year. Overall it's been a net gain, but my money would've performed much better in stocks during the this period.
• achenatx 8y ago
  The huge advantage of housing is that the government essentially supports infrastructure to get massive leverage. With 1:5 or 1:10 leverage, 10% appreciation with 1:10 leverage means you double your money. The downside is that with a 10% decrease you lose all your money. Otherwise real estate is not liquid, annoying to manage, and constantly incurs real costs. The stock market is relatively competitive as an investment and includes REITS which let you get some of the returns of real estate without the hassles. I had vacation rentals that cost about 50K each and returned about 8K/year after costs (each). But in the end when there was a problem and the maintenance company wasnt available, I was the one that had to drive 3 hours. I really needed to own at least 5 to make them worth owning. But then there would be the hassle of people constantly coming and going.
• orasis 8y ago
  Having a higher end ($350+/night) house on AirBnB was pretty fun. The higher price plus AirBnB screening kept out the rifraf so we had very few problems.
  • sizzle 8y ago
    Still have it or what happened to it?
• mattrp 8y ago
  It can be a good way to finance a vacation home that you eventually want to live in. There are other more niche cases such as student housing, corporate furnished, Airbnb, etc, that can be interesting, but you need to know the specifics of each case. For ex, in student housing, everything needs to be thought of in terms of durability and security (steel cased doors, durable surfaces). It also pays to be handy - when you turnover an apartment plan on a repaint. You can hire this at $750-$1000 or you can put on your face mask, rent a sprayer, and knock it out. We’ve been lucky not to have extreme maintainable issues but there are usually minor issues that you’d expect to see. In my view, stocks are entirely more liquid and it’s not that difficult to find high yielding companies where you don’t have the complexities of tenant relations, marketing, repairs and fixed expenses like property taxes.
• raviolo 8y ago
  Calculations of this model are misleading. One hugely important parameter missing: inflation rate. This would tell us what part of that 2.1 million in 30 years is real return and what part is simply inflation, i.e. depreciated money. Put it differently, it’s important to know what the investment will yield in terms of today’s dollars - not depreciated dollars. For such a long horizon of 30 years modeling without accounting for inflation makes little sense. For instance that 7% stock market return used by the model as a default, which perhaps may be used as proxy for inflation, would return 661% over 30 years. Default values for other parameters and their distributions also look very optimistic to me. Like 4% annual appreciation which maybe drops to 2% annual appreciation. How about 40% annual depreciation, your mortgage being 30% underwater, and foreclosure? How about the bank that issued your mortgage going bust, then the bank which bought that bank going bust, and then you 30-story building being shut off from public utilities? What am I smoking? Neh, I just bought investment properties in Miami and other places in Florida in 2007. Anyone too young to know what I’m talking about: I urge you read up on the 2008 crisis before you start buying up investment real estate, after 10 years of unprecedented growth of both real estate and stock market.
  • zenkat 8y ago
    Try using the model with a very high down payment. At 50% of property value, your gains are equivalent to the 7% baseline. Beyond that, the property makes significantly less than the stock market. If you pay 100% up front, you end up making half what the stock market does. In other words, the gains shown by this model are coming from leverage, not from the underlying asset. Leveraged investments always return more, but with higher risk. That's true in the housing market as well as the stock market.
    • evancox100 8y ago
      Leveraged assets are not necessarily always more risk than unleveraged ones. You also have to look at the underlying risk/volatility. That said, I agree with your point in this case that the leverage is the main component of the return, and greatly increases "risk", for some definition of that word. In a non-recourse state where you can default on the mortgage without losing other assets, the risk calculation must also take that into account.
• ianai 8y ago
  I suggest considering REIT stocks that actually own real estate instead. They push through 90% of their income as dividends and enjoy a tax shelter because of it. It’s a liquid and passive proxy for real estate investing. Also, the RE market is just lousy for buyers right now all around.
• 11thEarlOfMar 8y ago
  Nice. Some questions: - How are you modeling property tax payments? - Would be nice to show the annual return for the investment. You have a chart, I can read it so see whether I'd do better than the market, but would be nice to show '13.4% return', vs. a dollar amount after some time period. - Are you modeling tax benefits at all? Mortgage interest, property taxes, maintenance costs and depreciation all impact the net return for the investor. This would be hard to model since the tax situation changes by individual investor and local tax rates. - Have you contemplated whether the investor is self-managing or hires a property manager (perhaps included in the annual 1% expenses?)
• mfatica 8y ago
  Entering 60 for loan term crashes the whole app
  • refrigerator 8y ago
    Thanks for raising - will fix!
• ljsocal 8y ago
  Agree with much of the commentary here. Investment returns on real estate ownership (whether as primary residence or as income property) often ignore externalities and the time investment by the owner. Having the freedom to not worry about or arrange resolution of leaking toilets, gophers in the lawn, broken fences, etc is a great return on non-ownership!
• smallnamespace 8y ago
  The math on appreciation rate is a bit off because of how risk adds up to itself over time. For example, if you assumed 3 +/- 3% appreciation, then the calculator applies that range to every single future year, whether 1 year or 20 years, e.g. 20 years later, the realized appreciation seems to be 3% +/- 3%. However the normal way this is done in economics and finance is to assume independent increments of return volatility (let's say 3% per annum). This gets you: - 1 year out: 3% +/- 3% - 10 years out: 3% +/- 3% / sqrt(10) - N years out: 3% +/- 3% / sqrt(N) Intuitively, imagine if having a 'good year' were simply a coin flip, e.g. either you get 6% in a year or 0%. Over N years, the sum of your total return is a binomial distribution with standard deviation that grows with sqrt(N). Since your annualized return is approximately total / N, the standard deviation of realized annualized return scales at total / sqrt(N). Probability cones should always look like sideways parabolas: https://sixfigureinvesting.com/wp-content/uploads/2018/11/MonteCarlo-vs-theor-simple.jpg https://sixfigureinvesting.com/wp-content/uploads/2018/11/Mo... More here: https://sixfigureinvesting.com/2018/11/predicting-price-ranges-with-historic-volatility/ https://sixfigureinvesting.com/2018/11/predicting-price-rang... One more thing: the chart has no provision for inputing stock market volatility, which (historically) is quite a bit higher than real estate volatility. You're comparing a 'risky' bet to an assumed 7% riskless bet when stocks are also at an all-time high. The better thing to do would be to model the volatility of the stock market (historically ~15% per year), then show the distribution of (real estate return - stock market return) (with some correlation assumption).
  • usaar333 8y ago
    The math on appreciation rate is even worse than you write because the reporting is showing the compounded values as normally distributed which is not valid when a compounding rate is normally distributed. (normal distribution times normal distribution isn't normal). The way people normally work around this is to use a log-normal distribution, which stays lognormal over time. The appreciation math consequently is massively off for any high variance input. I completely distrust the results.
  • refrigerator 8y ago
    Hey, thanks for taking the time to write a detailed comment! Everything in the model runs by simulation, so we don't do any maths on appreciation rates. Since it's a simulation, I believe the combinatorics sort themselves out! However... it's possible that something we are miscommunicating something — what gave you the impression that the appreciation maths was off? You're right about the chart — we wanted the baseline model to be an extremely rough guide to compare the buy-to-rent scenario with, so didn't want to add volatility there.
• tonywe64 8y ago
  This definitely is missing property tax and insurance, as well as a bucket for maintenance cost, ex, property management (8-10% monthly estimate), vacancy (5-10% monthly estimate), and repairs (5-10% monthly estimate). These are all coming out of the bottom line. Especially if the assumption is that the property will be held for 30 years. For a lot of states, Texas for example, the property tax inflates with property prices, assessed every 2 years, so you can build in some calculation assumption with that. Cash on cash yield from rent may not be great for the most part. But with leverage and tax savings, that is where real money is made in the long run in the rental game.
• usaar333 8y ago
  Pretty cool demo for causal.app. Feedback on the framework itself: * I found the interface to widen/narrow the variance of ranges painful to use. Why not just let me plug in an exact number? * I assume the output for the variance is 95% interval? This should be stated. * There's major math problems with respect to how you are handling variance on compounding rates and reporting it. Most importantly, the distribution should almost certainly not be normal (lognormal makes more sense). If you don't use lognormal distributions, your confidence interval after N years makes no sense as the product of two normal distributions is not normal (nor even symmetric) - I'm actually not even sure how to interpret your confidence interval after 30 years because of this fact! * The line becomes impossible to see if it has no variance! Feedback on the calculation: * I'm guessing all these numbers are real rates, as there is no inflation? * Monthly rent is really "rent realized" as you are ignoring vacancy. * I'm not following how you are calculating accumulated rental earnings. It is more than the sum of historical rental earnings, but less than your rental earnings being re-invested in the market * "We assume that these cover at least the cost of your monthly mortgage payment" -> including interest + principal? I'm not sure if your calculator per se relies on this assumption, but this would not hold in many markets (e.g. SF Bay Area) BTW, for those who want to do a simple buy/rent trade-off: I have a google sheet here: https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calculator-22d0bf9bbbb5 https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul...
  • refrigerator 8y ago
    Thanks for the super detailed feedback! * Yeah the "scrubbing" interface is a little experimental. We originally had it for the mean values too, but that was a bit too crazy so we got rid of it. May well get rid of it altogether. * It's a 2 standard deviation range, so a little more than 95%, but you're right - we should be clear about this! * The entire model runs via simulation, so we're not analytically calculating products of distributions etc. I don't think we're reporting the distribution of compounded returns after N years anywhere, but there may well be something misleading somewhere — what specifically are you referring to? * Thanks for raising the invisible line issue! --- * Yup * Yup * I believe we are just taking the sum of historical earnings! What suggests otherwise? * Yeah including interest and principal. And fair point! In the UK I think it's a reasonable assumption but probably not so in other places. Thanks again — really appreciate your feedback. Happy to chat more here or via email: hi@causal.app :)
• granto 8y ago
  Great visualizations and simple clean presentation. I tried to use a number of these simple tools to evaluate investment properties but they were usually too high level. I ended up building my own very detailed spreadsheet where the inputs can be tailored very specifically. I know it's not "software" in the HN since, but I made the Google Sheet available online [0] here if any one wants to use it. Note that this is a shared demo so your data will be overwritten by other users. [0] https://docs.google.com/spreadsheets/d/1i6xNZiNVn53_bnibfEvKeMQi52ueFYMWFjUDUTprFqs/edit#gid=1180945299 https://docs.google.com/spreadsheets/d/1i6xNZiNVn53_bnibfEvK...
• jeffrallen 8y ago
  This model does not account for the fact that landlords are assholes, and you well likely become an asshole too. Rent seeking behaviors are anti-social, and asshole landlords should face societal shame.
  • loco5niner 7y ago
    Surely some landlords are jerks, but certainly not all. They are, however, providing people with a place to live. You are also using the term "rent-seeking" incorrectly[See other comments in this thread].
• cyphunk 8y ago
  Note that these models are created in an era of great inequality. You can expect that if at any point a correction is made to this disparity these numbers will also be effected.
• agilebyte 8y ago
  I love scrubbing calculators like these that help make complex decision making easier. A year ago I was interested in comparing buying vs renting, the other demo calculator on the Causal app homepage. If anyone is interested in playing around with real code to produce similar charts here is the source: https://github.com/radekstepan/buy-vs-rent https://github.com/radekstepan/buy-vs-rent It's Toronto/Ontario/Canada specific, but you can plug in your own taxes, fees and estimates.
• alok-g 8y ago
  Here's the most complete buy vs. rent calculator that I have come across: https://michaelbluejay.com/house/rentvsbuy.html https://michaelbluejay.com/house/rentvsbuy.html His other articles are also often worth reading.