Yes, i put 20% down. that opportunity cost is actually meaningful. however, the real estate market here also has gone up which takes some of the cost away.
the biggest cost i see is paying condo fees which are quite substantial when you add it up. but i took that into account.
i also feel like a real man owning real estate. but that is to make up for short falls elsewhere. if a hot classy babe ever asks, i can say “yeah i own some property here and there”.
I pay about 50% of what a mortgage payment would cost. If I paid parity to a mortgage payment, then I’d be a little more indifferent.
From what I’ve seen in comparable living areas and standards where I am, renting is not cheaper. Renting cost will basically equal a mortgage payment + taxes + some room for maintenance cost. It nets out basically to nothing.
The only argument one can make is the downpayment. Yes you need to put down 20% to own. So whatever opportunity cost you want to assign to that go ahead.
Of course, you can argue: well I’ll just rent a hole in the wall to save a ton of money. Well sure if you want go ahead. But if we’re comparing the 2, let’s go apples-to-apples right?
So, if you can own and rent it out on a “net no-profit basis”, your renter basically is paying your mortgage+ownership costs. Your risk is that no one rents it, which in that case, you can live there yourself (you got to live somewhere right?). So after years of your renter paying your mortgage and you living there sometimes, you actually own something in the end. It’s really not a bad idea
agreed.
on this issue there will be no debate.
Condo fees = negative NPV
It’s as much as $2500 a year for some, and that doesn’t even include maintenance costs.
The thing that annoys me the most is hearing people say that “renting is a waste of money, buying a house is building equity”
Renting is almost (if not always) cheaper than owning a house. Put the difference in a savings account or build a portfolio and you will build equity even if you are a renter.
People don’t take into account the added cost of ownership (replacing windows, roof etc)
How did building equity work for many people that are underwater?
Real estate, inflation hedge (hardly for people that bought in the last 10 years in US)
Bottom line is that right now might be the time to purchase, but to say that real estate is always a smart investment and that renting is dumb, a waste of money, is hilarious.
I like this florinpop guy.
nobody is saying buying real estate under any circumstances is economical or intelligent…certain classy babes are just not worth the effort…
Agreed. When I hear people say “I’m tired of pissing away money in rent” it is clear they need to do more homework before taking the plunge.
bump. as my lease is coming to renew, I’m now eating crow and thinking of buying.
Hello CFAvsMBA
please look at 'Commercial Real Estate Analysis and Investments" by Geltner, Miller, Clayton, and EIchholtz
2nd edition
It’s the book they currently use for MIT’s Masters of Science in Real Estate Investment and Development.
I recently bought it. The first 120 pages should be useful, if you decide to involve yourself in real estate.
I believe that higher inflation than is being used in rate calculations (due to fed stuff) and current low rates are allowing for a very good real estate time. Now, I do think the market you buy in and the location will be very important in the long run return, but still it’s a good time. Every finance/economics guru should check out the above book. It applies urban and financial economics to real estate investment. I find the textbook interesting… but I like reading textbooks for some reason.
Prospectus quote: “I am not a real estate expert. I haven’t even passed level 1 yo”
^ Does it apply to the Canadian real estate market too?
I have not finished the text, it’s rather large. It’s like your usual economic text: the complex is simplified into a model that allows for a general understanding, and often is applicable in several locations and situations.
So far, yes, the principles are applicable to canada as well. There is a lot of room for cities to grow in both the US and Canada, thusly I’d venture to guess “space markets” probably operate similarly. The book also gives answers applicable to area where outward expansion is limited, such as Europe, which has a longer history and older cities (not looking to argue about indians or natives or shit)
a. it didn’t work well but the market was artificially inflated and people bought in with a mob mentality. People were talking at dinner parties about the free money from just buying a house… and that fed itself. Doesn’t really speak for a normal real estate market… especially one that begins at the current benchmark
b. again, you’re talking about a time of easy money that may never happen again, or at least not until people forget this last one…could be decades… I’m 24 and my generation wont forget… if they see house prices soaring… it’ll be interesting to see reactions of both financial and non-financial people.
Nice, a topic I actually know something about. I really think it helps to look at the whole macro trend. 20 years ago (when most of us were growing up) if you could have spotted the trend for the yuppification of urban areas post 1987 in certain cities then you could have made some serious bank. Late 80’s new york was a crack den, now its a petting zoo.
You also could have invested in areas that would experience massive housing booms in raw land. Arizona, Nevada, Silicon Valley etc.
Conversely, there were plenty of lousy real estate investments done in this time. One of the worst ones I can come up with was a city like Hartford, Connecticut where I grew up. No gentrification of the city, no hipsters, just more gangs, drugs, and immigrants.
I think the mcmansion era is over. I also think there will be a massive oversupply of suburban housing coming on the market as baby boomers begin to retire as they are just now doing. I really don’t see that many people our age trying to buy their homes from them. How many of us can afford them? Get the financing? Want them? Will there be jobs in these suburban areas that will enable us to afford them? All of this is questionable. Will fuel prices make it possible to commute from these areas to work everyday?
What we are looking at is high end housing for the 1 percent and damn near communal living for the rest of Americans. I’m talking dormitory living. You might have heard bloomberg talking about an iniative to create the smallest most efficient style apartments possible. Well, there you go.
I have two things to add. I made sure to purchase and renew a home warranty, which covers certain things that break in your house. Also, if you are looking at a condo request the minutes and check how it’s managed. Some HOA fees are used very well by associations – they constantly redo the property, keeping it up and keeping it looking new. Some other HOAs charge the fee every month and then when a project comes up, votes on an extra assessment to impose on everyone. And you can back out the things you’d have to buy that may be included in your HOA, since some HOA fees include: electricity, garbage, water, and pest control.
its a simple calculation if you deciding between buying or renting…i don’t know what all the fuss is about…
The calculation is actually surprisingly complex, because there are a ton of assumptions you have to make, and the tax effects feed back in nonlinear ways. You think you have an answer, then you make one small change in your assumptions, and bam, you get a (sometimes very) different answer.
it always surprises me, because it does seem like it should be a simple calculation, but it isn’t.
I’m surprised that nobody has mentioned how market specific the rent/own debate can be. When I worked in Newport Beach, I never even considered buying. Rent was expensive, but my equivalent mortgage payment wouldn’t buy anything within 30 miles.
Here in central Austin, buying is VERY tempting. Housing prices didn’t really bubble and burst like other markets, but our rental rates have gone up more than 10% per year since 2009. There is a massive inflow of renters of all income levels. The high end stuff will have turnover, but the lower end stuff doesn’t - the hipsters and musicians can afford the rent payment, but sadly they can never save enough for the down payment. Combine that with 30,000 students looking for off campus housing and techies getting relocated from CA and you have a good market.
I can buy a 1960’s 2000sqft house for around 250-300k. Right now a 225k mortgage costs you a $1000/month payment, plus around $600 in escrows. Add $200 per month for repairs. So all in, you’re at 21k per year in cash outflows.
Then you rent out a room to a buddy or random craigslister for $600 per month easy. After your interest savings, your outflow is already down to 11k. If you assume that over the long term you will get your principal back and about half of your repair expenses go towards property value, your expense is down to $5,700, or around $475 per month.
Living in a house here with a roommate is probably $800 per person. Living by yourself somewhere is tough to find for under $1000.
If you’re liquid enough, you could potentially rent out the entire thing and make it cash flow. If you buy it as a partnership you might pay a little more in interest, but you can depreciate it $7k per year, and take a tax loss. I’m not in a bracket to fully take advantage of that, but houses are a good way to build wealth over time if you don’t overextend yourself.
In 2006 a few of my buddies wanted to go in on a house or two together. I knew something was wrong when the 3-4 of us were seriously considering it simply because everyone else was making easy money doing it. Ultimately we decided against it since none of us knew what we were doing. That would have really sucked.
There will come a time when it would be a good move though. In some markets buying a rental, or even flipping, may be a good strategy. I’m not sold yet, but maybe in the next couple years.