4 ms·

... it's literally the first sentence of the second paragraph of the introduction. The rate of return on real estate is the appreciation in its value plus the a

by zemo 7y ago

... it's literally the first sentence of the second paragraph of the introduction. The rate of return on real estate is the appreciation in its value plus the amount of rent you can charge for using it versus its cost to purchase. If you can buy a property for $100k and it yields $5k of yearly income, that's a 5% rate of return. You can't "not include rent", that's literally the function of a lot of real estate purchase.

pascalxus 7y ago
I'm talking about ONLY the capital gain part.
- zemo 7y ago
  that's not what rate of return means. You might as well say "why do real estate assets appreciate in value on average?" Why should a real estate asset that does not appreciate in value continue to exist? Assets that don't appreciate in value can be demolished and replaced with assets that do appreciate in value. Assets that appreciate in value have an intrinsic reason to continue to exist; assets that depreciate in value don't have to continue existing. (And yes of course an asset that is depreciating in value should continue to exist if it is being lived in) Existing housing appreciating in value also does not prevent new housing from being built. If every house is going up in value a little bit each year, an investment-minded person might see this and say "hey, I should build a house, as it will appreciate in value". Once housing -stops- appreciating in value in an area, people stop building additional housing in that area. So appreciation tends to spur construction until the appreciation stops. People don't build additional housing in areas where housing is depreciating in value, so on the average, construction should not be expected to halt appreciation, since appreciation encourages construction specifically in areas where appreciation is likely, and not in areas where appreciation is unlikely. There are many similar effects that lead to appreciation in value on the average. It's not clear why housing appreciating in value should suggest that "we're getting significantly worse at producing housing/shelter".
  - bloomer 7y ago
    I think he is talking about the actual building on the property. It doesn't make sense that an 20 year old house should be worth more than an "equivalent" newly constructed house. It should depreciate through wear and year like any other capital asset. That it appreciates (in real dollars, inflation adjusted) instead is confusing.
    - usaar333 7y ago
      I'm not even sure how they calculate capital gain. If I do maintenance on my house, are the authors viewing that as raising the basis?
      - zemo 7y ago
        it's the change in price at time of sale. The price of the asset is only known at the time of sale. At all other times, the assumed price is speculative. The capital gain is just the difference between the price you sell it at and the price you bought it at. That's all it is.
        dwaltrip 7y ago
        I would imagine that money spent modifying the asset comes into the calculation somehow. Is that not the case? No adjustments to capital gains tax for renovation costs, etc.? Edit: I did a quick Google. It looks like qualifying home improvements can be added to the cost basis. However, maintenance expenses cannot.
        zemo 7y ago
        you're making this way too complicated in your head. Capital gains aren't paid on an ongoing basis. Gains are only realized at the time of sale. It's literally just the difference between price at which you sell an asset and the price at which you purchased the asset. Property taxes are paid on an ongoing basis. Property tax rates are a function of the value of the property. Tax for a property is periodically recalculated by recalculating the fair market value for the property. The fair market value is speculative; it's an essentially a statement of expectation about the market. There's no obligation that a sale be for that price. But again, that's property tax, not capital gains. If you buy a house at fair market value in a market with absolutely no change in housing values, and the house has a crummy kitchen and then you reno the kitchen, you have a reasonable expectation that you'll sell the house at a gain. So yes, improvements "come into the calculation somehow" inasmuch as they help you sell the property at a higher price. But that's not regulated or guaranteed in any way; the gains are just what you can get someone to pay you for the property. You could do lots of work on your house and then a sinkhole opens up in the street in front of your house and you no longer have a road in front of your house and the value will go down. You could make a house -worse- and still realize a gain if there are other factors that would make people willing to pay more for it. You can't just view the intrinsic value of the house as an object to understand its price. The price is not its intrinsic value, it's what people are willing to pay for it. The gains are how much the sale price changed over time; they're not a function of the change in the intrinsic value of the object itself.
turk73 7y ago
Were it only that simple! There are property taxes and maintenance. It's maintenance that kills you on most rental deals. I think unless you own and manage a fairly decent portfolio of properties, being a landlord is more of a break-even to loss type of situation. Where are all these $100K properties, btw?
- christophilus 7y ago
  Avoid the US north-east and west coast, and you can find pretty decent values. I know a guy in his 30s who is "retired". He actually works about 2hrs per week. He has 10 rental properties. He pays 0 taxes due to depreciation exceeding his rent + costs. He makes around $90K / yr take home pay which is enough for his standard of living. So the answer is, yes. Being a land lord can work, if you get the parameters right as he seems to have done.
- zemo 7y ago
  it literally IS that simple, it's an economic model. The example I gave is, of course, incredibly stripped down and incredibly simplified; it's simplified for the purposes of discussing what a "rate of return" is. The rates are adjusted for maintenance cost in the paper. The example I gave is a simpler model than what is presented in the paper: > These net rental yields use rental income net of maintenance costs, ground rent, and other irrecoverable expenditure. These adjustments are discussed exhaustively in the next section. We use net rather than gross yields to improve comparability with other asset classes. did you try opening the paper and searching "maintenance" before you posted? > Where are all these $100K properties, btw? For one thing, it's a thought experiment. We're using our imagination to define our words. Stop looking at everything so unbearably literally. And for real, that is a ridiculous question even when taken literally. Finding houses under $100k is really not confusing so long as you look in places with low costs of living. Randomly picking Tulsa, Oklahoma, for example: https://www.redfin.com/city/35765/OK/Tulsa/filter/property-type=house,max-price=100k https://www.redfin.com/city/35765/OK/Tulsa/filter/property-t...

by zemo 7y ago

pascalxus 7y ago

I'm talking about ONLY the capital gain part.

zemo 7y ago
that's not what rate of return means. You might as well say "why do real estate assets appreciate in value on average?" Why should a real estate asset that does not appreciate in value continue to exist? Assets that don't appreciate in value can be demolished and replaced with assets that do appreciate in value. Assets that appreciate in value have an intrinsic reason to continue to exist; assets that depreciate in value don't have to continue existing. (And yes of course an asset that is depreciating in value should continue to exist if it is being lived in) Existing housing appreciating in value also does not prevent new housing from being built. If every house is going up in value a little bit each year, an investment-minded person might see this and say "hey, I should build a house, as it will appreciate in value". Once housing -stops- appreciating in value in an area, people stop building additional housing in that area. So appreciation tends to spur construction until the appreciation stops. People don't build additional housing in areas where housing is depreciating in value, so on the average, construction should not be expected to halt appreciation, since appreciation encourages construction specifically in areas where appreciation is likely, and not in areas where appreciation is unlikely. There are many similar effects that lead to appreciation in value on the average. It's not clear why housing appreciating in value should suggest that "we're getting significantly worse at producing housing/shelter".
- bloomer 7y ago
  I think he is talking about the actual building on the property. It doesn't make sense that an 20 year old house should be worth more than an "equivalent" newly constructed house. It should depreciate through wear and year like any other capital asset. That it appreciates (in real dollars, inflation adjusted) instead is confusing.
  - usaar333 7y ago
    I'm not even sure how they calculate capital gain. If I do maintenance on my house, are the authors viewing that as raising the basis?
    - zemo 7y ago
      it's the change in price at time of sale. The price of the asset is only known at the time of sale. At all other times, the assumed price is speculative. The capital gain is just the difference between the price you sell it at and the price you bought it at. That's all it is.
      - dwaltrip 7y ago
        I would imagine that money spent modifying the asset comes into the calculation somehow. Is that not the case? No adjustments to capital gains tax for renovation costs, etc.? Edit: I did a quick Google. It looks like qualifying home improvements can be added to the cost basis. However, maintenance expenses cannot.
        zemo 7y ago
        you're making this way too complicated in your head. Capital gains aren't paid on an ongoing basis. Gains are only realized at the time of sale. It's literally just the difference between price at which you sell an asset and the price at which you purchased the asset. Property taxes are paid on an ongoing basis. Property tax rates are a function of the value of the property. Tax for a property is periodically recalculated by recalculating the fair market value for the property. The fair market value is speculative; it's an essentially a statement of expectation about the market. There's no obligation that a sale be for that price. But again, that's property tax, not capital gains. If you buy a house at fair market value in a market with absolutely no change in housing values, and the house has a crummy kitchen and then you reno the kitchen, you have a reasonable expectation that you'll sell the house at a gain. So yes, improvements "come into the calculation somehow" inasmuch as they help you sell the property at a higher price. But that's not regulated or guaranteed in any way; the gains are just what you can get someone to pay you for the property. You could do lots of work on your house and then a sinkhole opens up in the street in front of your house and you no longer have a road in front of your house and the value will go down. You could make a house -worse- and still realize a gain if there are other factors that would make people willing to pay more for it. You can't just view the intrinsic value of the house as an object to understand its price. The price is not its intrinsic value, it's what people are willing to pay for it. The gains are how much the sale price changed over time; they're not a function of the change in the intrinsic value of the object itself.

turk73 7y ago

Were it only that simple! There are property taxes and maintenance. It's maintenance that kills you on most rental deals. I think unless you own and manage a fairly decent portfolio of properties, being a landlord is more of a break-even to loss type of situation. Where are all these $100K properties, btw?

christophilus 7y ago
Avoid the US north-east and west coast, and you can find pretty decent values. I know a guy in his 30s who is "retired". He actually works about 2hrs per week. He has 10 rental properties. He pays 0 taxes due to depreciation exceeding his rent + costs. He makes around $90K / yr take home pay which is enough for his standard of living. So the answer is, yes. Being a land lord can work, if you get the parameters right as he seems to have done.
zemo 7y ago
it literally IS that simple, it's an economic model. The example I gave is, of course, incredibly stripped down and incredibly simplified; it's simplified for the purposes of discussing what a "rate of return" is. The rates are adjusted for maintenance cost in the paper. The example I gave is a simpler model than what is presented in the paper: > These net rental yields use rental income net of maintenance costs, ground rent, and other irrecoverable expenditure. These adjustments are discussed exhaustively in the next section. We use net rather than gross yields to improve comparability with other asset classes. did you try opening the paper and searching "maintenance" before you posted? > Where are all these $100K properties, btw? For one thing, it's a thought experiment. We're using our imagination to define our words. Stop looking at everything so unbearably literally. And for real, that is a ridiculous question even when taken literally. Finding houses under $100k is really not confusing so long as you look in places with low costs of living. Randomly picking Tulsa, Oklahoma, for example: https://www.redfin.com/city/35765/OK/Tulsa/filter/property-type=house,max-price=100k https://www.redfin.com/city/35765/OK/Tulsa/filter/property-t...