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I don’t understand your thinking: A rental house is an asset; a house you live in is a liability. Your argument doesn’t make sense to me if you replace “renta

I don’t understand your thinking: A rental house is an asset; a house you live in is a liability. Your argument doesn’t make sense to me if you replace “rental house” with another business: “Why would you put your life savings into gardening equipment to cut other peoples lawns when you don’t have enough savings to also be out of work for months?” If your point is just that you should have 6-12 months of runway before you start any kind of business, that’s lovely advice. That nearly no one can follow and only makes sense to extremely privileged tech workers, who already have stable and high paying employment. If you shouldn’t put your whole savings into a rental property, you definitely shouldn’t put it into a house for yourself.

geofft 6y ago
Businesses have risk. The whole point of employment in someone else's business is they take on the risk and you don't, with the tradeoff that you take less of the reward if it works out. If you are in a position where you cannot deal with the risk, gambling on the reward is irresponsible, no matter how great the reward may be. I do actually agree with that hypothetical you've posed! But the amount of gardening equipment you need to cut other people's lawns is pretty minimal, and you would hopefully be buying the equipment outright. A lawn mower costs a couple of hundred dollars. If your entire life savings are couple of hundred dollars, you should probably hold onto those savings instead of starting a lawn-mowing business. Spend some time working for someone else in a low-risk job and grow your savings. And if your entire life savings are merely the down payment on a lawn mower, it's definitely reckless to get that loan. Also, importantly, the market for lawn care equipment is pretty liquid, the upkeep costs are low, and there are no property taxes. If your lawn-mowing business goes nowhere, you can resell your lawn mower quickly and make back a good amount of the money. So maybe it makes perfect financial sense to try starting a lawn-mowing business if you only have about a week of runway, because if it doesn't work out, you can get mostly back to where you were within a week. Buying a house is expensive, and buying a house with a mortgage is even more expensive even though it involves less immediate cash. Maintaining a house is expensive. Selling a house is a slow and arduous process, all the more so if you have a tenant (even a paying tenant). All of these things mean that you objectively need more money to pull it off. And if you want to get out of the house-renting business, you should expect that it will take you a while and it will come at a significant loss. It may well be true that my advice only makes sense to privileged, rich people - but the invisible hand of the market is not going to take your lack of money, let alone privilege, into account and be nice to you. Rather the opposite: a $500K house will cost you well over $500K if all you can afford right now is a $100K down payment. The rich and privileged person who can make an all-cash offer saves money. I do actually believe tech workers are overpaid relative to society (though underpaid relative to their employer's profits), and I am a fan of absurdly high marginal taxes on my salary level, because I think that's a practical solution to the problem of income inequality, even though it is extremely politically unpopular. Pretending that you can do things that need a lot of money even if you don't have money is not a practical solution, even if it sounds great and is politically popular. (And all of this is leaving aside the qualitative difference that if you evict a non-paying tenant, they become homeless, and if you get rid of a non-paying lawn-mowing customer, their grass gets overgrown. If you want to build a society that's good for people other than extremely privileged tech workers, it seems to be that a great place to start is through policies that ensures that people who cannot afford alternatives from becoming homeless - for instance, by encouraging people who desire to go into business to go into the lawnmowing business instead of the landlord business, unless they're extremely financially secure. In the extreme, as in this case, those policies might make people with alternatives homeless. That's not great, and as I said I don't like it, but it seems the clear right choice between two bad choices, because it gets rid of the moral hazard.)

geofft 6y ago

Businesses have risk. The whole point of employment in someone else's business is they take on the risk and you don't, with the tradeoff that you take less of the reward if it works out. If you are in a position where you cannot deal with the risk, gambling on the reward is irresponsible, no matter how great the reward may be. I do actually agree with that hypothetical you've posed! But the amount of gardening equipment you need to cut other people's lawns is pretty minimal, and you would hopefully be buying the equipment outright. A lawn mower costs a couple of hundred dollars. If your entire life savings are couple of hundred dollars, you should probably hold onto those savings instead of starting a lawn-mowing business. Spend some time working for someone else in a low-risk job and grow your savings. And if your entire life savings are merely the down payment on a lawn mower, it's definitely reckless to get that loan. Also, importantly, the market for lawn care equipment is pretty liquid, the upkeep costs are low, and there are no property taxes. If your lawn-mowing business goes nowhere, you can resell your lawn mower quickly and make back a good amount of the money. So maybe it makes perfect financial sense to try starting a lawn-mowing business if you only have about a week of runway, because if it doesn't work out, you can get mostly back to where you were within a week. Buying a house is expensive, and buying a house with a mortgage is even more expensive even though it involves less immediate cash. Maintaining a house is expensive. Selling a house is a slow and arduous process, all the more so if you have a tenant (even a paying tenant). All of these things mean that you objectively need more money to pull it off. And if you want to get out of the house-renting business, you should expect that it will take you a while and it will come at a significant loss. It may well be true that my advice only makes sense to privileged, rich people - but the invisible hand of the market is not going to take your lack of money, let alone privilege, into account and be nice to you. Rather the opposite: a $500K house will cost you well over $500K if all you can afford right now is a $100K down payment. The rich and privileged person who can make an all-cash offer saves money. I do actually believe tech workers are overpaid relative to society (though underpaid relative to their employer's profits), and I am a fan of absurdly high marginal taxes on my salary level, because I think that's a practical solution to the problem of income inequality, even though it is extremely politically unpopular. Pretending that you can do things that need a lot of money even if you don't have money is not a practical solution, even if it sounds great and is politically popular. (And all of this is leaving aside the qualitative difference that if you evict a non-paying tenant, they become homeless, and if you get rid of a non-paying lawn-mowing customer, their grass gets overgrown. If you want to build a society that's good for people other than extremely privileged tech workers, it seems to be that a great place to start is through policies that ensures that people who cannot afford alternatives from becoming homeless - for instance, by encouraging people who desire to go into business to go into the lawnmowing business instead of the landlord business, unless they're extremely financially secure. In the extreme, as in this case, those policies might make people with alternatives homeless. That's not great, and as I said I don't like it, but it seems the clear right choice between two bad choices, because it gets rid of the moral hazard.)