Quote from pitz:
Smart Money, part of the (major) problem with your analysis is that you haven't included the maintenance costs on the house, that you appropriately should be subtracting from the net rent yield. These costs are borne by the homeowner or the landlord, but are included as part of the gross rent paid by the renter.
I didn't include the tax advantage either. They wash.
Also, rents rising at 3.5% is a bit on the overly optimistic side unless you have made, and continue to make significant improvements to the property (again, more $$$). Case and Shiller found that houses, properly maintained to original specifications, only appreciate at the rate of inflation, the implication of which implies that, in the long run, rents only rise at the rate of inflation.
What rate of inflation are you using? I'm only counting on doubling ever 20 years. And again, this is about a personal residence, which you could maintain with your tax advantage.
Based on historical relationships between prices and rent, or price to 'earnings' (earnings being rents net of operating costs, natural depreciation, etc.), houses are apt to drop a lot more than just 20 or 30%, or alternatively, those rent increases you are counting on just won't materialize as housing stock, on the whole, has been overbuilt, leading to excess supply relative to demand.
I wish I had your crystal ball. Unless new supply is going to be created, I can't see an additional 20 to 30% drop. We'll have to disagree on that. I can see the point on the rent, somewhat, but if people aren't buying houses, and they aren't renting, then where are they living? Generally, its one or the other, and sometimes both in a "normal" market. Rents are climbing nicely right now.
Further, while you are willing to step out and leverage a house 15X (good luck doing that nowadays for a favourable interest rate), you seem to be unwilling to leverage stock investments, which really is unfortunate because its not comparing apples to apples.
Perhaps, but I think its a lot more risky to buy stocks on margin than to buy a house. You can lose everything fast. And the average Joe is more likely to make money by purchasing the house than stock picking. For that reason, I have a hard time endorsing the strategy. I thought a 12% return year after year for stocks was generous. Note that if I did leverage the stocks, I'd have to take out the cost of capital on the loan.
I agree that traditionally owning has been a better deal overall, and in the long run, should be less expensive than the alternatives, because landlords (rationally) will always demand some sort of return on their labour and risk. But there is a time and place for that, just like there have been good times to own tech stocks, and bad times.
That I can agree with. I'm a contrarian. I like to buy when people are afraid to buy. Sell when people are euphoric. Right now prices just dipped and rates are still low. I say buy on the dip.
SM
