4 ms·

here's a poser for you: if you live at your mom's house, but earn a good salary, that allows you to quickly build up a nest egg, that you can use as a downpayme

here's a poser for you: if you live at your mom's house, but earn a good salary, that allows you to quickly build up a nest egg, that you can use as a downpayment on your first house. You buy the house with a mortgage, tying up your downpayment and obligating you to make monthly payments on the mortgage (which in the initial period go mostly to covering interest) Before moving in, you realize that you could keep living at mom's house and rent the house you bought out at market rates. Let's say the market rate for your house is $5K a month, money that you can put toward your mortgage or building back up your savings/nest egg. (if you are renting your house out, some other benefits accrue to you, depreciating it, etc, but we'll ignore those, keeping that in mind in case you start thinking it also has some costs associated with it) Now you have the thought... hey, wait a minute, does this mean that if you move into your own house, that act will cut off the $5K per month rental income, which makes it the equivalent of you having to pay the $5K rent yourself? Cuz, you could keep the rental income flowing if you rented another property, but if that one costs $5K too, the cash flow nets out to zero. Could this be true? owning your own house doesn't save you on rent? Because investing in a house entitles you to the rent from the house, so consuming the housing yourself costs you the monthly rent whether or not you are the owner? Yes, that's what it means. Buying a house does not save you money on rent, does not save you money on "housing consumption". We need to give our kids a better financial education, there are so many myths that keep people on hamster wheels they don't know that they are on. This is the reason that housing seems "unaffordable"; why should it be any more affordable than rent?

polishdude20 3y ago
I mean you still need a place to live right? And if you're going to pay for a house, you may as well be paying for it in order to own it later and sell it if you'd like? If you always rent, you never get that money back.
- fsckboy 3y ago
  you completely didn't read what I wrote, you are not following along. you are wrong. read it again, if you reserve a private piece of real estate for yourself, whether by leasing it or buying it, you pay the same rent every month. Buying a house does not save you rent. The rent that you think you are not paying is rent that somebody else would be paying you. Not receiving that is the same as getting it and paying it back out.
  - polishdude20 3y ago
    Yeah I'm lost. Please read these statements and tell me if you agree or disagree: 1) Paying actual rent helps someone else pay off their house and that money is never able to be recouped by you. 2) Buying a house and living in it requires you to pay for it. 3) Buying a house a paying for it eventually ends when the mortgage is paid off. 4) when the mortgage is paid off, you now can choose to sell your house for money. 5) you can now use that money to buy another house in the future and live in that one. 6) you could rent out your house to others in which case they'd be paying down your mortgage. 7) when you rent out your house to others, you yourself need somewhere to live. 8) wherever you live you will need to pay for. Either through renting yourself or buying another property and paying down it's mortgage.
    - andromeduck 3y ago
      Renting is generally just about enough to maintain a mortgage. The premium if any can be though of as option value should you need to move in near ish future, or otherwise from appreciation. A renter who rents the equivalent property and puts their savings into the stock market can generally expect the same or better risk adjusted returns though real estate generally alows you to take on more leverage than with equity bc of lower volatility and there are some tax advantages if you're in a high tax bracket bc interest can be deducted.
vinyl7 3y ago
Well what has happened is that asset price increase go up faster than what a person can save. I lived at home and saved money, then the covid house bubble came and doubled the prices. Now i would have to save for another decade. Nope sorry, I'm out. Everyone who thinks they have decent equity in their house is going to feel pain when no one can afford their million dollar condos in a few years
- fsckboy 3y ago
  all what you're talking about is priced into what I'm talking about. housing prices and rent go up at the same rates, their prices compete in the same market, and if you want to rent a place out, you have to buy the places first. How much rent does it take to pay for the place you bought? It's all linear math, it's proportionate. Stock market investments go toward value creation, housing market purchases do not. Stock market better, it goes up faster.
  - dragonwriter 3y ago
    > housing prices and rent go up at the same rates, Naive expectation is that they should, but in practice they don’t. https://www.sfchronicle.com/bayarea/article/rent-own-housing-real-estate-data-17346873.php https://www.sfchronicle.com/bayarea/article/rent-own-housing...
    - fsckboy 3y ago
      your article says what I said, not what you are saying. It points out: The “rule of thumb ideal” is 15, he said: “It tends to correlate with a mortgage payment that is roughly affordable for most households, and a rental rate that is also roughly affordable for most renters.” That's basically saying that there is a linear relationship as I said. (yes, short term prices can move independently from long term because liquidity, menu prices, etc, it's why economists always say "in the long run") and the article asks "How long can it last?", i.e. they are admitting that the prices will come back into alignment, which wouldn't happen if there was no alignment to be had. The article does not mention "naive expectation" at all, you made that part up. Would it surprise you to meet somebody on HN who knows more about the math of finance than you and the SF Chron put together?
aschearer 3y ago
[flagged]
cts1 3y ago
I agree that you are paying the $5000 rent whether or not you own the house - but with ownership you have also levered your downpayment through the mortgage no? Is it better to use your downpayment to get that leverage or to invest in the stock market with no leverage (assuming some fixed positive return on each asset)? How much higher do stock market returns have to be over real estate for stocks to come out ahead? Has someone modeled this out or written about it? I've been wondering about this for a while and considered trying to model it myself but I don't understand all the other factors so not confident I could do it correctly.
adave 3y ago
You probably own a house or would want one if you could purchase it, disclosing your personal stand tells a lot more than boilerplate advice. Rent's are affordable but are a waste since you have a lot of restrictions and can be kicked out anytime. Housing is long term in general. In most places the numbers worked out few years ago, with low interest rates so people kept buying. Now that money is no longer free flowing folks are realizing what sort of sham they were participating in and both parties are feeling stuck with what they have. As long as prices go up, no one if going to heed advice as rents jump all the time but mortgage remains almost the same and most folks can't see beyond it no matter how much education they get.
theGnuMe 3y ago
So the goal is after 30 years of ownership to sell for more than you paid over the life of the mortgage so that your total cost amortizes to at least zero or a negative number (you made money).

polishdude20 3y ago

I mean you still need a place to live right? And if you're going to pay for a house, you may as well be paying for it in order to own it later and sell it if you'd like? If you always rent, you never get that money back.

fsckboy 3y ago
you completely didn't read what I wrote, you are not following along. you are wrong. read it again, if you reserve a private piece of real estate for yourself, whether by leasing it or buying it, you pay the same rent every month. Buying a house does not save you rent. The rent that you think you are not paying is rent that somebody else would be paying you. Not receiving that is the same as getting it and paying it back out.
- polishdude20 3y ago
  Yeah I'm lost. Please read these statements and tell me if you agree or disagree: 1) Paying actual rent helps someone else pay off their house and that money is never able to be recouped by you. 2) Buying a house and living in it requires you to pay for it. 3) Buying a house a paying for it eventually ends when the mortgage is paid off. 4) when the mortgage is paid off, you now can choose to sell your house for money. 5) you can now use that money to buy another house in the future and live in that one. 6) you could rent out your house to others in which case they'd be paying down your mortgage. 7) when you rent out your house to others, you yourself need somewhere to live. 8) wherever you live you will need to pay for. Either through renting yourself or buying another property and paying down it's mortgage.
  - andromeduck 3y ago
    Renting is generally just about enough to maintain a mortgage. The premium if any can be though of as option value should you need to move in near ish future, or otherwise from appreciation. A renter who rents the equivalent property and puts their savings into the stock market can generally expect the same or better risk adjusted returns though real estate generally alows you to take on more leverage than with equity bc of lower volatility and there are some tax advantages if you're in a high tax bracket bc interest can be deducted.

vinyl7 3y ago

Well what has happened is that asset price increase go up faster than what a person can save. I lived at home and saved money, then the covid house bubble came and doubled the prices. Now i would have to save for another decade. Nope sorry, I'm out. Everyone who thinks they have decent equity in their house is going to feel pain when no one can afford their million dollar condos in a few years

fsckboy 3y ago
all what you're talking about is priced into what I'm talking about. housing prices and rent go up at the same rates, their prices compete in the same market, and if you want to rent a place out, you have to buy the places first. How much rent does it take to pay for the place you bought? It's all linear math, it's proportionate. Stock market investments go toward value creation, housing market purchases do not. Stock market better, it goes up faster.
- dragonwriter 3y ago
  > housing prices and rent go up at the same rates, Naive expectation is that they should, but in practice they don’t. https://www.sfchronicle.com/bayarea/article/rent-own-housing-real-estate-data-17346873.php https://www.sfchronicle.com/bayarea/article/rent-own-housing...
  - fsckboy 3y ago
    your article says what I said, not what you are saying. It points out: The “rule of thumb ideal” is 15, he said: “It tends to correlate with a mortgage payment that is roughly affordable for most households, and a rental rate that is also roughly affordable for most renters.” That's basically saying that there is a linear relationship as I said. (yes, short term prices can move independently from long term because liquidity, menu prices, etc, it's why economists always say "in the long run") and the article asks "How long can it last?", i.e. they are admitting that the prices will come back into alignment, which wouldn't happen if there was no alignment to be had. The article does not mention "naive expectation" at all, you made that part up. Would it surprise you to meet somebody on HN who knows more about the math of finance than you and the SF Chron put together?

aschearer 3y ago

[flagged]

cts1 3y ago

I agree that you are paying the $5000 rent whether or not you own the house - but with ownership you have also levered your downpayment through the mortgage no? Is it better to use your downpayment to get that leverage or to invest in the stock market with no leverage (assuming some fixed positive return on each asset)? How much higher do stock market returns have to be over real estate for stocks to come out ahead? Has someone modeled this out or written about it? I've been wondering about this for a while and considered trying to model it myself but I don't understand all the other factors so not confident I could do it correctly.

adave 3y ago

You probably own a house or would want one if you could purchase it, disclosing your personal stand tells a lot more than boilerplate advice. Rent's are affordable but are a waste since you have a lot of restrictions and can be kicked out anytime. Housing is long term in general. In most places the numbers worked out few years ago, with low interest rates so people kept buying. Now that money is no longer free flowing folks are realizing what sort of sham they were participating in and both parties are feeling stuck with what they have. As long as prices go up, no one if going to heed advice as rents jump all the time but mortgage remains almost the same and most folks can't see beyond it no matter how much education they get.

theGnuMe 3y ago

So the goal is after 30 years of ownership to sell for more than you paid over the life of the mortgage so that your total cost amortizes to at least zero or a negative number (you made money).