Quote from Smart Money:
Are you serious? Two years ago, I purchased a townhouse for $10,000 down plus closing costs of $4000. It is now worth $35,000 more than when I bought it (not including the downpayment). So you're saying that I'm unfortunate because I wasn't getting a return on my $14,000? My home equity WAS the $14,000 (technically only $10,000 in the beginning). I almost tripled my investment and quadrupled my equity in two years. I woudn't have made that gain if I didn't make that initial investment in the first place...holding equity was the only way I could make that gain short of an option to buy. And even if we pretend that somehow the $14,000 isn't related to the $35,000, I'd still rather be the guy with $35,000 equity that magically appears for doing very little work, even if the $14000 went no-where. Hey, three years ago I also put $14,000 down on a townhouse that now has increased in value by $55,000. Woe is me?
SM
Your situation is certainly nice, and now you probably have $50k in equity. You show the power of leverage. When I made my statement, I was really considering people who have more equity in their home than this - ie 20-50%. They are losing a bit more than you on lost dividends.
A few years ago this was a non issue, as short term money payed next to nothing in yield. Now with it very easy to procure 5%+ yield with relatively no long term committment, the picture and psychology of the market is changing. And perhaps that unrealized gain of $35k may be pressured downward.
So even in your great situation of an upsurge in price, your leveraged involvement posts a possible downside going forward.
Lets fast forward another year or two, where short term rates might possibly be above or around 6-7%. Would you be comfortable holding on to that home in a likely downward trending market (thus wiping out your unrealized gains), as well as risk lost income in tied up (decreasing) equity during that time?
'Soft landing' is terminology derived by those whose interests it serves best: the Bush administration, the national association of realtors, the entire mortgage industry, etc. Just because its a term thrown around, doesn't mean it will happen. Watch liquidity dry up, and it will be very difficult (especially after transaction costs, maintenance, etc.) to keep your 35% gain. I won't even go into details of how townhouse/condo prices are more volatile than single family homes, perhaps due to their downsides (HOA fees, limited space, neighbors on top of each other, etc).
So evaluate the investment not solely from your entry point, but if you had to make the same move (buy your condo) today. Is it a good move to buy the townhouse you own at today's market prices? If you still think so, then hold. If not, then it might be time to move on and take your easy money. That is, unless you would rather rent it out for life. A relatively easy to find 6% bond is double that.
I ran a little spread sheet for you. You can adjust it, depending on your rents. I assume you're breaking even at least on your rent (which is a more profitable situation than many is the most overinflated markets). Regardless, I set home values in my estimates to be flat for the next 6 years, and then figured they'd appreciate 2.5% annually after that. I also showed how 0.06 yield compounding annually on $40k you'd cash out with would compare, assuming you had the discipline to leave it alone.
Remember, as a property landlord, you're also exposed to weaknesses in local job markets, headaches from tenants, periods where the property doesn't get rented out, etc...
At the end of the day, you make out a little more in the long term owning property, and at least you're inflation hedged - ie if rents escalate very much you'll do extremely well.
But with everything you get what you pay for. My parents bought they're small house in a suburb of Ohio for $44k in 1979. Now 27 years later, its worth around $110k. And they've probably put as much into it over the years (new roof, central air, carpets, new kitchen, etc. etc.). So the point: there is nothing perfect, and property ownership and landlordship definitely has its downsides.
Thats a different story from southern california. But of course, the earlier spreadsheets show the downside of that, and how a flat or declining market possibly kills any reason to enter the market during a period like that, for investment reasons at least.
And in my spreadsheet, modify your current property values for the first few years to actually decline, and I'm sure 6% monthly will actually beat the housing - with not a single headache.
And if we're lucky, with that perspective, perhaps we'll hit an oil shock just like the late 70s, and eventually get our long term bonds in the 16% range.
I'd lock in every single penny I have, and just in case we're worried about the solvency of our government, buy some credit default swaps while we're at it (i'll take a small hit in premium to get those rates on an annual basis for 30 yrs - guaranteed).
Let me know how your numbers compare to my shot in the dark analytics. I gave you the benefit of the doubt on your rents being high. I'd like to see what sort of deal you're in.
Here in southern california, there are no 160k (decent) condos. I dream of those.
