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You should only ever rent if you intend to live in a property an amount of time so small that the rent you're paying out doesn't cover the exchange cost. And t

by munk-a 6y ago

You should only ever rent if you intend to live in a property an amount of time so small that the rent you're paying out doesn't cover the exchange cost. And that assumes that property prices aren't increasing which they almost always are and generally at a pretty firm pace. Basically - you're trying to avoid the scenario where you live in a place so short that the exchange cost you pay to flip it on the far side exceeds the amount of rent you'd pay to reside in it. Determining the exchange cost isn't always straight forward - the 6% given above may or may not be realistic for you, there are some brokers that will take a 1% cut and those folks are more common in hot markets, and there may also be taxes you need to take into consideration. Also, there is a risk of getting stuck with a lemon - if you purchase a house which seems fine but actually has extensive water damage and mold you could lose a portion of the value, this is a really significant consideration in quiet housing markets (like the midwest) and less important in areas like SF where most of the property's value is likely the land itself - in either case you're taking a big chunk of the value of the structure out of the equation when reselling the property but in the later case the value of the structure is rather minimal while in the former case the land is essentially free. Basically you almost always want to buy if you are able to. The money you're spending on housing when you own a property is accruing as equity instead of being siphoned off by a landlord.

frongpik 6y ago
If it was just about the money, it would be better to invest the downpayment into a margin trading account with 1 to 5 leverage.
- vkou 6y ago
  No, because if you're investing on a 1-5 margin, the market dropping by 20% in two weeks, and then going up by 80% over the next five will leave you flat out broke. Meanwhile, someone not investing on margin will be up 60%.
  - MontyCarloHall 6y ago
    Nitpick, but they’d only be up 44%. 0.8*1.8 = 1.44, not 1.6.
- munk-a 6y ago
  If it's just about money then you should diversify - but owning your own home is a self-securing investment, it means you can't go broke no matter how bad fate treats you - with the exception of going underwater on your property value which is only ever actually a problem since banks can effectively margin-call their mortgaged properties.
  - blaser-waffle 6y ago
    > owning your own home is a self-securing investment, it means you can't go broke no matter how bad fate treats you lol what? Trees fall on houses all the time. Pipes break and water damage can seriously impact structure & foundation. Dumb-ass kids accidently drive their mom's car through the veranda. Houses burn down and kill people. A factory shuts down and now there are no more jobs so everyone leaves, driving your house price down. Assuming a home is a secure investment -- even in a hot market like SF or DC -- is foolish. > More than one-quarter (27%) of reported fires in 2014-2018 occurred in homes. Even worse, more than three-quarters (77%) of civilian fire deaths and almost three-quarters (73%) of all reported injuries were caused by home fires. > During this five-year period, US fire departments responded to an estimated average of 353,100 home structure fires per year. These fires caused an annual average of 2,620 civilian deaths; 11,030 civilian fire injuries; and $7.2 billion in direct property damage. https://www.nfpa.org/News-and-Research/Data-research-and-tools/Building-and-Life-Safety/Home-Structure-Fires https://www.nfpa.org/News-and-Research/Data-research-and-too...
- exclusiv 6y ago
  Home ownership, with a mortgage and down-payment less than 20% is higher leverage than that with more stability. Put 10% down on 1M. Goes up in value to 1.5M in a few years. Boom. 500K gain on 100k. Not that uncommon. Also, if it's your primary, then tax free income up to that 500k if filing jointly when you sell if you lived in it for 2 years. Hard to beat.
  - frongpik 6y ago
    Or just put those 100k into a margin trading account with 1:10 leverage in a "west coast real estate index". No commissions, no agents, no property taxes, no leaking roofs.
    - exclusiv 6y ago
      Still doesn't offer that tax advantage (either in capital gains or the numerous deductions). And if you have to live somewhere like the parent comment, this doesn't help you. You will have a commission in the expense ratio indefinitely. But yes, definitely a decent option if you want to put your money in real estate with less headache.
      - frongpik 6y ago
        The tax advantage is up to comical 250k that will be promptly eaten away by brokerage fees, transfer fees and other god knows what fees, on top of all the house maintanence costs over those years. Those who have a million or two but a house not because it's good for financials, but because they can't stand cranny rentals. Those with bare minimum money jump into a mortgage because for them it's the only efficient financial instrument available (a margin trading account essentially). If they tried to open such an account with a brokerage, they would be told no after looking at their net worth.
        exclusiv 6y ago
        It's 500k of tax free gains for married couples. How is that, or even the 250k individual comical? Also, that's the gain that has no taxes AFTER fees/commissions. It does not get "eaten away". You can also do 1031 exchanges, opportunity zones with real estate, or put it into an LLC. A lot of flexibility and tax strategy available.
- nostromo 6y ago
  Only if there were margin calls on real estate loans (there aren’t) of if there were no margin calls or forced selling on brokerage accounts (there are) this would be good advice.
  - munk-a 6y ago
    There are margin calls on real estate loans - they aren't nearly as capricious but when mortgages are renegotiated banks will usually refuse to offer a new mortgage if the property is underwater - in that case the bank will generally try to foreclose on the property and recoup the lost mortgage balance through debt collection. This happened all over the place in 2006 and led to the housing bubble.
    - vkou 6y ago
      In the United States, very few people are on short-term mortgages, which means that you have the option, but not the requirement to reneg on it. You should generally only reneg if interest rates are dropping - and interest rates dropping causes an upward pressure on home prices.
dragonwriter 6y ago
> The money you're spending on housing when you own a property is accruing as equity instead of being siphoned off by a landlord In principle, the principal payments are doing that (interest payments are being siphoned off by a bank, instead of a landlord), as is any delta in the property value (but if that's negative, that's anti-equity).

by munk-a 6y ago

frongpik 6y ago

If it was just about the money, it would be better to invest the downpayment into a margin trading account with 1 to 5 leverage.

vkou 6y ago
No, because if you're investing on a 1-5 margin, the market dropping by 20% in two weeks, and then going up by 80% over the next five will leave you flat out broke. Meanwhile, someone not investing on margin will be up 60%.
- MontyCarloHall 6y ago
  Nitpick, but they’d only be up 44%. 0.8*1.8 = 1.44, not 1.6.
munk-a 6y ago
If it's just about money then you should diversify - but owning your own home is a self-securing investment, it means you can't go broke no matter how bad fate treats you - with the exception of going underwater on your property value which is only ever actually a problem since banks can effectively margin-call their mortgaged properties.
- blaser-waffle 6y ago
  > owning your own home is a self-securing investment, it means you can't go broke no matter how bad fate treats you lol what? Trees fall on houses all the time. Pipes break and water damage can seriously impact structure & foundation. Dumb-ass kids accidently drive their mom's car through the veranda. Houses burn down and kill people. A factory shuts down and now there are no more jobs so everyone leaves, driving your house price down. Assuming a home is a secure investment -- even in a hot market like SF or DC -- is foolish. > More than one-quarter (27%) of reported fires in 2014-2018 occurred in homes. Even worse, more than three-quarters (77%) of civilian fire deaths and almost three-quarters (73%) of all reported injuries were caused by home fires. > During this five-year period, US fire departments responded to an estimated average of 353,100 home structure fires per year. These fires caused an annual average of 2,620 civilian deaths; 11,030 civilian fire injuries; and $7.2 billion in direct property damage. https://www.nfpa.org/News-and-Research/Data-research-and-tools/Building-and-Life-Safety/Home-Structure-Fires https://www.nfpa.org/News-and-Research/Data-research-and-too...
exclusiv 6y ago
Home ownership, with a mortgage and down-payment less than 20% is higher leverage than that with more stability. Put 10% down on 1M. Goes up in value to 1.5M in a few years. Boom. 500K gain on 100k. Not that uncommon. Also, if it's your primary, then tax free income up to that 500k if filing jointly when you sell if you lived in it for 2 years. Hard to beat.
- frongpik 6y ago
  Or just put those 100k into a margin trading account with 1:10 leverage in a "west coast real estate index". No commissions, no agents, no property taxes, no leaking roofs.
  - exclusiv 6y ago
    Still doesn't offer that tax advantage (either in capital gains or the numerous deductions). And if you have to live somewhere like the parent comment, this doesn't help you. You will have a commission in the expense ratio indefinitely. But yes, definitely a decent option if you want to put your money in real estate with less headache.
    - frongpik 6y ago
      The tax advantage is up to comical 250k that will be promptly eaten away by brokerage fees, transfer fees and other god knows what fees, on top of all the house maintanence costs over those years. Those who have a million or two but a house not because it's good for financials, but because they can't stand cranny rentals. Those with bare minimum money jump into a mortgage because for them it's the only efficient financial instrument available (a margin trading account essentially). If they tried to open such an account with a brokerage, they would be told no after looking at their net worth.
      - exclusiv 6y ago
        It's 500k of tax free gains for married couples. How is that, or even the 250k individual comical? Also, that's the gain that has no taxes AFTER fees/commissions. It does not get "eaten away". You can also do 1031 exchanges, opportunity zones with real estate, or put it into an LLC. A lot of flexibility and tax strategy available.
nostromo 6y ago
Only if there were margin calls on real estate loans (there aren’t) of if there were no margin calls or forced selling on brokerage accounts (there are) this would be good advice.
- munk-a 6y ago
  There are margin calls on real estate loans - they aren't nearly as capricious but when mortgages are renegotiated banks will usually refuse to offer a new mortgage if the property is underwater - in that case the bank will generally try to foreclose on the property and recoup the lost mortgage balance through debt collection. This happened all over the place in 2006 and led to the housing bubble.
  - vkou 6y ago
    In the United States, very few people are on short-term mortgages, which means that you have the option, but not the requirement to reneg on it. You should generally only reneg if interest rates are dropping - and interest rates dropping causes an upward pressure on home prices.

dragonwriter 6y ago

> The money you're spending on housing when you own a property is accruing as equity instead of being siphoned off by a landlord In principle, the principal payments are doing that (interest payments are being siphoned off by a bank, instead of a landlord), as is any delta in the property value (but if that's negative, that's anti-equity).