Going to preface by saying that I'm single and currently rent a 1br in a HCOL city substantially below the city's median 1BR cost so I have a good deal and have been offered an opportunity to save a lot each month. I'm lucky. I aggressively invest this excess amount and max out retirement accts, DCA into a traditional account, etc. Something like 40% of my comp gets saved/invested now. I recently gauged my income level and net worth relative to peers in my city and its in the 90+ percentile. I'm a type that believes that housing is a liability, not an asset and primary home ownership isn't always the greatest use of $ net of fees/cost of ownership. By renting what I'm in now, I have extra $, flexibility and freedom. Therefore, I should be feeling good about where I'm at, right?
Instead, I am looking around at housing markets I usually pay attention to (even up to 40 miles away) and it is just insanely discouraging looking at the cost of a split level shit hole in an OK area. It feels like there is never going to be the entry point that I'm waiting for and cost of living will get exponentially more expensive. I don't even want a house but feel like I'm not pacing with these people that are sitting on fat paper gains on their valuations. With expected returns of the US equity market coming back down to the mid/low single digits, is a primary residence (in a rock solid, HCOL market) a better use of capital than it used to be even with higher mtg rates? What is going to cause the RE market to soften up?
The cost of housing topic was discussed on another thread but with this one, I'm trying to see how people are thinking about cost of housing and the rent versus buy proposition. Any insights from those that feel this way or are actively looking at single family houses would be helpful. I realistically won't be owning for the next five years or so but the prospect of buying something where monthly P&I is around 30% of my net income is just not going to happen.
I'll admit, I'm a real estate hater when it comes to tangible investment property. I have my fair share of REITs in my PA. My coworker was ranting how I ain't right since I don't invest in real estate.First, most single family homes are assets at best. They are not investments. Run a time series chart against an equity index fund and you'll see real estate rarely outperforms.That tax deduction of interest is a sham. Whooptie do, you may save a few bucks on your income taxes. Last time I checked, tax implications were the the last, not the first, considerations for an investment strategy (like your life insurance salesman pushing whole life policies!). I'd love to pay $1M a year in taxes for long term realized gains.I am a mobile guy. I like to move here and there at the drop of a hat. I honestly don't have a 'home' when I think of my past. I moved around while growing up and that trend still remains in my elder years now. Buying and selling a home is stressful and expensive compared to renting.You really don't own a home at heart. You’re forever indebted to the government with property taxes and possibly HOA fees.I miss the good ol days of renting cheap, owning little, and living life.
Your personal/family home is a liability at first (unless it's a ranch or farm or something else that also generates revenue as a healthy by-product), but one you want to pay for and take care of since it's meant to be your home. In a lot of cases home ownership really is just a way to run it up the flagpole for net worth for other financial instruments and measures. There's an entire neighborhood of $1.5mm+ townhomes across the street from me that is all owned by Chinese foreign nationals that've never stepped foot in there but own them just to say they own it for the ficticious financial reasons for instance. For the rest, REITs aren't bad specifically if you're talking about multi-family, commercial, educational housing, medical, etc. Again, those are revenue generating assets you don't make your home.
Nice tip-off about the long-term carry on life insurance policies. Don't forget VUL's for those too. For HOA, those can suck. But the flipside is owning this penthouse apartment and only paying HOA dues that includes all the eccentricities like valet and dry cleaning, all utilities covered, etc is well worth the "rent" I essentially pay.
Thanks for this and I do use REITs as well as about 10% of my PA in private RE investments in the sun belt. REITs to me are kinda just income spitting vol dampeners that should be run through an index and in a tax advantaged acct.
The mobility factor is important to me too but every time you move you’re re-entering a lease when rents are likely more than the yr previous. With that being said, I could move to a new city and set up a living space within a week.
Not sure why the layout vanishes once I click edit. I had some nice paragraph breaks that no long exist. Even when I edit again, it doesn't look nice. My bad.
A few things here, although I’m afraid I’ll be a bit “old man yells at cloud.”
I HATE how Robert Kiyosaki has shifted the conversation on real estate to where people call it a liability. Real estate is an asset, the note against it is a liability, and GAAP is GAAP. Just because you aren’t making a slew of investment gains off of everything doesn’t mean it’s not an asset. It’s very tortured logic.
Real estate can actually still be awesome from a tax perspective. Depreciation hasn’t been mentioned, and would actually shelter a larger percentage of cash flow as cap rates go down, leading to real cash flow and no cash taxes paid. If you or a spouse are a “qualified real estate professional,” these net losses can be offset against your other earned income without having to sell the activity, so if you scale up big enough, you won’t pay taxes on income from your job either. Cost segregation studies can frontload real estate depreciation and increase your NPV and IRR. Conservation easements are in some instances a legitimate way of reducing tax liability, although valuations should be fair and honest. 1031 like-kind exchanges can indefinitely delay recognition of income taxes, which is a treatment equities don’t get. It’s much easier to lever real estate than equities, which means you can get a higher rate of return than equities, and the bank can’t turn you out of your property unless you don’t make a payment, which you always will if you’re sufficiently reserved and cash flowing.
Thank you. I think the asset v liability philosophy can go either way and there are tons of variables per circumstance. The rest of your comments esp around NPV/IRR are helpful.
I think of it this way - Right now, I rent something for 2k a month that would cost me ~6k a month to own when including basic maintenance, HOA, insurance, interest, and taxes. I consider this $4k as money straight to the incinerator that isn't compounding for me. Are you saying to suck it up and pay this difference and hold my breath that my valuation eventually covers all these costs the day I decide to sell? Or should people be looking for rent arb opportunities like this and invest the difference? I don't think there's a right answer.
Yeah but your specific situation sounds like an aberration, not the norm.
Most real estate, or the parts meant for living in, are going to be cheaper to own than to rent (at least until major capex work comes along). This is just common sense. Maybe your landlord has a laughably low basis and is giving you a break, but frankly, it doesn't make any sense that you're paying 1/3 of what it would cost to own and I wouldn't be taking your situation as relevant to this conversation. The big hurdle to owning is a down payment (and the fixed liability of the mortgage), not the annual cost of maintaining the property and servicing the debt.
I'm going to push back a bit and put on my agree to disagree cape here. GAAP is not always GAAP. Why else would you always see companies touting non-GAAP results as "their great results" in their reporting when the true GAAP/FASB results aren't so rosy?
People do non-GAAP because there’s a sucker born every minute and it can often get a higher price for the company. I help people sell companies on Adjusted EBITDA. People will take what they can get credit for as far as adjustments are concerned. Assets are assets. Liabilities are liabilities. Robert Kiyosaki can’t just turn an asset into a liability like he has.
Let’s say you’ve got a house free and clear in an LLC. $400K in equity, costs $4K a month to run for some reason. Do you take the house or not? You’d be stupid not to, seeing as you could get non-recourse debt on that puppy. It’s an asset, plain and clear.
I’m not a real estate person so take my perspective with a grain of salt — I’m sure there are much more advanced tactics to maximizing earnings from RE investments…
I share a lot of the OPs perspective. I don’t like how owning a home is generally viewed as the de facto path to wealth generation. Real estate is a HIGHLY levered bet on the real estate market. Some people put 5% down, which is basically levering 20:1 on their investment. In an environment where prices are rising, ANY highly levered investment is going to create substantial wealth. If I had taken $50k, borrowed $950k, and invested it in the stock market I would probably be better off than buying a home.
I bought a condo in 2017 that i lived in for a few years but currently rent out. The carrying costs are substantial ($2k+/month) and meaningfully eat into the profits. This is on top of the headache associated with being a landlord and my property is in a luxury high rise where there is a 24/7 maintenance staff to handle most issues. I’d much rather have the peace of mind and cash at this point. While I loved living in the place when I owned it, the better move would have been to continue renting rather than owning. Oh well — live and learn.
Despite the above, I do think that real estate has a place in any portfolio and there are strategies to better take advantage of the tax benefits. But if you’re a high earning professional in finance, the juice is not worth the squeeze unless you have a lot of investments and can take advantage of scale (plus know what you’re doing)!
Thank you. I consider you a WSO god so its reassuring you share my sentiment. Interested if the thebrofessor has comments if he's still active on here.
I think you're approaching the question from the wrong angle. not every decision in life needs to be financially maximized, so if you approach life as an accountant, you'll constantly be mentally masturbating wondering and hoping if you optimized everything. that's an effective way to maximize your ROI but also a good way to increase stress and ultimately die with a fat bank account and a heart attack, no thanks. think like a trader, upside & downside and then move on
a primary residence is a use asset, so here's how I'd decide if I'm going to rent/buy. you must be able to answer YES to a majority of these
if you answer no to more than 1 of those, don't buy
that said, if you do intend on staying in the same place for a while, fixing your housing costs has great benefits. in real terms, my mortgage payment has gone down over time (because it's fixed and my income has risen). at the time, it looked like I was overpaying, but now I'm really glad I bought. I'm confident that one of three things will happen
in other words, think of the future and the potential upsides and downsides, I've tried my best to eliminate all downside, believing that the upside will usually take care of itself (which it usually does). so if you are going to buy (bc you answered yes to multiple of the above) consider the following
but all of that said, I live in a MCOL rapidly growing city with a mortgage that's currently the same as my last apartment before buying, so take what I Say with a grain of salt. if I had to buy in a super HCOL market like NYC, I'd probably go long beach. if I had to buy in a super HCOL market like LA or SF, I'd probably move.
I think what you're missing is that you can't get that kind of leverage to go invest in the stock market. In theory you're correct, but the average American can't borrow 950k against 50k and throw it into the Dow. You only get that kind of leverage when buying a home, which is one reason why it's such a valuable investment opportunity
You bought your condo as a home. The fact that you can't make money renting it out isn't really germane, since you didn't buy it as an investment property. Most people will tell you that buying a home is a bad decision unless you expect to be there for a long time
Sure, and it's important to differentiate between owning an investment property and investing in real estate. Buying a condo and renting it out is going to be a giant pain in the ass. Investing with a professional real estate company will probably yield you better returns.
Also, it is once again worth noting that that fringe benefits of real estate are unmatched by other investment assets. Depreciation especially is very, very valuable.
The stock market is already levered. Most (non-tech) companies carry 40-50% leverage
I don’t understand…should we just rent for life? Am I missing something here? It seems like my generation is totally screwed when it comes to housing.
Most of my same-aged peers still live with their parents and, realistically, have no hope to even afford rent let alone own their own home until at least their 30s.
Is renting not essentially throwing money in the garbage? Owning something is much better, unless the mortgage literally saddles you with debt for life…
I mean, if you can't afford a house, then yes, you rent for life.
And yes, anyone under the age of 40 is totally screwed when it comes to housing. Boomers have pretty well fucked most of this country, in basically every possible way, and in this case it's by underinvesting in housing so their own home values stay high.
It'll be interesting (and terrifying) to see how the next decade unfolds with regards to housing. Boomers aren't dying anytime soon so looks like a lot of us Gen Z will either be renting for life, or inheriting our parents' house(s), if that's even an option.
Regarding rent vs buy decision. We've all heard that rent is "throwing money out the window" because you don't build equity. Fine. I can get on board with that.
So the comparison is, when you buy, how much monthly cost is thrown out the window. You don't get property tax back, you don't get HOA back, you don't get interest back except the tax deduction. You might have other maintenance expenses or insurance that you don't get back.
I add those up, and if the total is anywhere near the rental cost, I rent. Because of course the optionality of renting is worth something too.
If that total is way less than rent, which it was in late '21 (thanks low rates), I consider buying. Which I did at that time.
Haven't run the numbers lately, suspect renting looks better again, but that's how I approach it. Add up the 3-4 items you won't get back, and insist on a large gap vs. renting so that you're compensated for the option value.
This is spot on with the way I think about it. There can be very substantial costs to owning that is the equivalent of ‘throwing money away.’ Even when I had a 2.8% interest rate on my condo and only put 20% down, the HOA + Insurance + RE Tax + Mortgage Interest was pretty much equal to the rental cost of the property. I was essentially breaking even on the monthly costs versus if I had just rented it instead of bought. There is absolutely nothing wrong with renting for your entire life if you’re building wealth in a different way (such as the stock market). That said, to Ozymandia’s point above, there is no alternative where you can essentially get approved for 19:1 leverage on an investment, which is one of the reason’s owning a home is often seen as the best way to build wealth.
As for Gen Z being screwed, I don’t think that’s the case at all. Even middle class people with average wages can build a very meaningful 401(k) throughout their career which will afford them a reasonable retirement. And yes, inheriting your parents’ house is definitely an option.
Focus on perfecting your craft. The income needed will come after.
You will be surprised by how fast your income compounds in a few years.
Not sure where the OP is located. I am based in Toronto, Canada and the residential market has always been shit. The supply crunch has been a pain in the ass to deal with and the government is not doing anything material to resolve it. With that being said, the salary and job opportunities that the city offers can no longer support newer generations to purchase homes on their own. New immigrants have robust pipeline of foreign capital to scoop up house with all cash or little debt and there's not much local people can do to compete with that during a bidding war. You'd be lucky to find an investment property in GTA that barely yield ~4% cap rate. At this point, I might as well dump all my money in GIC and get that risk-free 5% return.
With the current interest rate situated between 5.5% to 6% range, default rate starts to accelerate.
To be honest, if it is not because I am married and my wife wants a home for our family. I'd never buy a real estate in Toronto. It's just so unnecessarily expensive that the mortgage payments can really make a dent out of my standard of living.
Not going to get in the weeds with technicals. I'm older than most on this forum (58) so can provide some long term perspective.
1. The build equity conversation: Yes renting means you're building someone else's equity. But equity isn't limited to owning a home. You can rent and build equity in other places (like the markets).
2. Cash flow situation is much better if you no longer have payments. Especially in retirement. So own vs. rent wins that bullet. Think about it. If owning is out of reach, then renting will ultimately increase accordingly. When you retire, do you want to be spending $x per month on rent? Of course you could have built a huge nest egg in the markets and pay for it that way but there's a lot of risk in that. Paying off a note is guaranteed.
3. Lifestyle - I've lived in many markets and dollar for dollar, the same monthly expense buys you far more in owning then renting. As an example, my current mortgage buys me a very nice house in an upscale community. That same monthly expense would rent me a much smaller house in this community or similar house in a lessor community. Lifestyle is important.
4. For pure investing purposes, RE has more leverage. Rental income is like a dividend paying stock, but you'll find it to be much higher dividends. This can turn in to a very predictable long term income play. Have a buddy who owns about 10 properties and his passive income is 6 figures (net). Could easily walk away from his job tomorrow.
5. As an FA, I work with all types. I find people are really in to RE or they're not. My buddy, as an example, is never a good candidate for longer term market plays because I know he'll just want to access funds to buy another property. I own some commercial RE. Liquidity is a real issue. Trying to sell some and it takes a lot longer than you think, even in good markets. Commercial is different as buyers need to do feasibility studies that take many months.
6. Owning a home is about owning a home. It's more than a financial situation. Been in the same home for 20 yrs now. Raised my kids here. Had all their parties and our holiday cookouts here. Was able to comfortably fit 20 people for Thanksgiving here and fry turkeys out back. That's what owning a home is about. Yeah eventually you have a lot of equity and you can downsize and put a chunk in your pocket. If I sold today, I could buy a smaller house and put 500k in my pocket. I probably could have figured out another way to make that kind of money, or more, but hard to replace the memories of all the neighborhood kids playing football in my backyard. That's really what it's about.
Say goodbye to owning a house, things won't ever be the same. In today's world, RE is only going to benefit you from a personal finance standpoint of cash flowing/investing in REITs. Buying a home is only worth it in LCOL areas in the middle of fucking nowhere where you can actually have space and afford the monthly payment. And this might even get worse for real assets as we get closer to 2030.
Agree with you!
The market has been getting worse and worse over the years. Really upsetting to see as I have been hopeful about someday owning my own property. It sounds like you're in a better position than many (atleast those around you). Good luck.
Tempora ea qui explicabo aliquid. Omnis in voluptatem mollitia modi suscipit maxime ratione. Voluptates accusamus enim asperiores exercitationem. Eos eum laudantium illum sapiente. Ex dolores eveniet odit quis nobis. Quas laboriosam quas ipsa ducimus.
Odit eum rerum deserunt magni ut. Quod harum et natus voluptatem ipsa. Maiores delectus corporis et tempora et mollitia iste.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Ratione in quis ullam voluptas voluptatibus. Labore vel at consectetur ut excepturi. Animi magnam officia laborum quis.