yes, old. well said. renting only makes the landlord wealthy. real estate, when purchased correctly, has created more wealthy people than actively trading the markets.
surfer
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
The Single-Family Home Tax Shelter Myth
- Thread starter Martin Gale
- Start date
yes, old. well said. renting only makes the landlord wealthy. real estate, when purchased correctly, has created more wealthy people than actively trading the markets.
surfer
Quote from OldTrader:
princessa:
"The average, non-savvy, non-financially oriented consumer" frankly has been doing pretty well. See, they were too stupid to know years ago when house prices were too high. They bought just because they felt it was a better place to live than an apartment, and they had heard that houses usually go up. Meanwhile, the savvy, financially oriented traders of ET were pronouncing housing markets dead from the time I first became a member in 2002. I'm not kidding, go back and look at some of the threads.
Now here's the thing, if you had listened to some of those savvy traders, prices simply exploded. In some markets they have doubled or better. It did not matter to those non-savvy consumers out there because they weren't going to sell anyway, they were just living in the house. At this point, houses would be to drop 50% just to get back to where they were then.
Now, it could be that your advice is correct. Houses are too high now, and traders can always do better trading their own account. The only thing is, statistics don't bear you out. Houses have been a continuing source of wealth for the American public since way back when. Meanwhile, 90% or so of traders lose money. Those are some mighty tall odds you're bucking. Many of those guys who were arguing against houses are no longer around. I know a few long term bears who sold their house, convinced it was going down, and then shorted the stock market KNOWING it was going to shoot craps as well. I don't see them around any more either.
It really isn't all that complicated. We all need a place to live. And if you want your own place, you buy a house. Over time, you build equity. You can still trade, it's not one or the other. If it goes up in value as it always has, great. If not, what difference does it make? You're still living in the house.
Nothing wrong with biding your time to buy a house. But those who believe in renting will certainly lose in the long run in my opinion.
OldTrader
i see your point, but...you're assuming one can gauge the housing market. given that assumption (if you really did have a good bead on the housing market), i would say do as you see fit. but in your scenario, the people who were trying to gauge the market were wrong and it went up. you could just as easily have been wrong and had the market go down. i've been in that camp before. bought a home (to live in), lived there for 7 years, and LOST 25k on this "investment".
with regard to the trader theme in your argument, i'm not talking about the 90% of traders who lose money. notice that i said "good traders", meaning those who trade well consistently (not always, but consistently enough to make a living at it). i think these folks may financially be better off utilizing money to trade and not to buy a house.
thirdly, yes, you have to live somewhere. however, in many cases renting would come out better than buying, even if you're looking at the long term. moreover, most people are not planning to be in their house long term, if by long term you mean 10-15 years or more. most people are moving around, taking different jobs for promotions, etc. if you consistently invest your disposable income and don't overspend in renting, you may actually come out better by renting.
Quote from OldTrader:
princessa:
Now, it could be that your advice is correct. Houses are too high now, and traders can always do better trading their own account. The only thing is, statistics don't bear you out. Houses have been a continuing source of wealth for the American public since way back when. Meanwhile, 90% or so of traders lose money. Those are some mighty tall odds you're bucking.
It really isn't all that complicated. We all need a place to live. And if you want your own place, you buy a house. Over time, you build equity. You can still trade, it's not one or the other. If it goes up in value as it always has, great. If not, what difference does it make? You're still living in the house.
Nothing wrong with biding your time to buy a house. But those who believe in renting will certainly lose in the long run in my opinion.
OldTrader
one more point i forgot to mention. a good trader can make 20-30% or more per year on capital invested. a savvy investor can double her money in 3-5 years. on average, home prices do not double in that period of time. a colleague of mine has owned a home for 20 years and his home has just now doubled in price. apart from some "hot" real estate markets where housing explodes, i just don't think you do as well with real estate in general. i don't buy it as an investment. moreover, just as markets can explode, they can also implode. i had another colleague who, years ago, bought in LA. in a few years, she saw her housing price cut in half. when she had to move to take a new job, she was stuck with a semi-worthless piece of property and was faced with the choice of selling at a huge loss or paying a mortgage on a home she could no longer live in. so it's not a forgone conclusion that buying is a better decision financially. it may or may not be and this largely depends on your situation.
overall, i think that most people would rather buy than rent. fine, as a lifestyle choice, but understand that it is just that, a lifestyle choice and not a financial one. that would also argue against buying "the most house you can afford". instead, it would be better to buy the smallest house that fits your needs.
Quote from OldTrader:
Got a 3 story house painted a year ago for about $2K. About to get anther similar sized house painted soon for $2500. Talking about just the exterior. For a small house $6K is alot if you're talking exterior.
OldTrader
yes, just the exterior. and i went with the lowest of the 3 estimates.
wow, where do you live? maybe i could get your painter to do mine?
Quote from marketsurfer:
yes, old. well said. renting only makes the landlord wealthy. real estate, when purchased correctly, has created more wealthy people than actively trading the markets.
surfer
i couldn't disagree more. renting can make YOU wealthy IF you invest the difference and do it well. your argument seems to presuppose that the person in question is an average trader/investor (read: poor) and a savvy real estate purchaser. shows a bias toward real estate and sounds like a realtor's argument, but i've known too many people who got burned thinking that way to buy that argument.
i'll make one more true-life example. a friend and i were both planning to live in a city for 5 years. the realtors say you should live in the house at least 3 years if you're going to buy. she crunched the numbers and felt she'd be better off renting. i, on the other hand, bought the myth that you're always better off buying, so i bought. needless to say, she ended up MUCH better off financially in this particular endeavor. when the time came to move, she simply left with no obligations. i, on the other hand, had to hold onto the house for 2 years more than i wanted to, and still lost 25k on the house. another point: the realtors say "location, location, location" so i bought into that too, bought a single family home, did everything the pundits say to do, and still lost money. after that, i realized that all those realtors have a vested interest in propogating the myth of buying as a better opportunity financially. sure, it can be, if you play it right, but often it isn't.
Quote from princessa:
yes, just the exterior. and i went with the lowest of the 3 estimates.
wow, where do you live? maybe i could get your painter to do mine?
I'm in the Midwest. That $2K job I did a year ago I had bids from $1K to $3K. I picked one of the middle bids.
From the Home Repair and Remodel Guide by Marshall and Swift, I'd say you could get the exterior painted for $1 per square foot. And that would be high.
OldTrader
Quote from princessa:
i had another colleague who, years ago, bought in LA. in a few years, she saw her housing price cut in half. when she had to move to take a new job, she was stuck with a semi-worthless piece of property and was faced with the choice of selling at a huge loss or paying a mortgage on a home she could no longer live in. so it's not a forgone conclusion that buying is a better decision financially.
The LA market peaked in 1989. When it hit bottom a few years later it was down about 33%, not half. The houses are now up big from the peak, let alone the bottom.
It's all just a question of how long you hold and how well you bought it to start with.
OldTrader
Quote from danoXP:
Help me with my math please:
1. 400k loan
2. assume 6% interest rate (ball park)
3. 400k*6% = 24k annual interest
4. assume Property Taxes of 2% ??
5. 400k *2% = 8k annual prop tax
6. 40k - 24k - 8k = 8k annual after mortgage payment cash flow
I believe he is in the 10% tax bracket after deductions.
Can one who makes 40k really qualify for a 400k loan no money down?
This is exactly what the problem is. brokers will qualify you for a low introductory payment which is about $1400 for 400K house. and property Tax is 1.25% = 5K
40k-(1400*12)-5=18k annual after mortgage payment cash flow.
What is going to happen when introductory rate will expire? and interest rate higher. They will not be able to refinance because they will not qualify for new payment.
A lot of households will adjust in 2007.
I do not care if market goes up or down, I like my house and I am not buying nor I am selling.
Quote from Sparohok:
<i>The truth is, you can create a model to support both positions.</i>
Not in the San Francisco Bay Area.
You show me a financial model that would justify buying a house for over $800k instead of renting it for $2300/month, and I'll show you the flaws in your model.
<i>One other comment, do you know anyone who actually saves more on renting vs buying that is actually investing that difference in the market?</i>
Yes, me.
<i>It would be great to see someone on here who supports the renting philosophy start a journal and keep it going for 30 years so we can monitor their progress and see them actually execute their RENT vs OWN plan. Any takers?</i>
No. Renting is not a philosophy, and it's not something you make a lifelong committment to. It's an investment decision based on market conditions. The moment that buying a house is an attractive investment financially, I'll do it in a heartbeat, most likely with cash.
Martin
Of course, this is ET, the home of excess returns and above average performance on your investments.
As I have said, a model can be created that would support both positions, both RENT and BUY. Will there be individual exceptions? Of course there will. Because everyone's situation is a little bit different. However, there is no doubt, buying is a very powerful wealth builder because you are able to build equity without paying taxes. I wonder, have you factored taxes into your decision to rent? Since you live in CA, you have a really tough burden to bear. It is going to be tough to make your 10% return on your investments while paying out 40% in federal and state taxes.
Whatever you want to call it is fine with me, it is a philosphy, and it is an investment decision. I am looking forward to seeing someone actually take the savings and invest the difference and end up better 15 or 30 years down the road because of choosing to rent now vs buy. Since you implied you are already on this path, would you care to start a thread and update it on a monthly basis?
Good Luck! I hope both of our plans workout better than expected.
Quote from princessa:
one more point i forgot to mention. a good trader can make 20-30% or more per year on capital invested. a savvy investor can double her money in 3-5 years. on average, home prices do not double in that period of time. a colleague of mine has owned a home for 20 years and his home has just now doubled in price. apart from some "hot" real estate markets where housing explodes, i just don't think you do as well with real estate in general. i don't buy it as an investment. moreover, just as markets can explode, they can also implode. i had another colleague who, years ago, bought in LA. in a few years, she saw her housing price cut in half. when she had to move to take a new job, she was stuck with a semi-worthless piece of property and was faced with the choice of selling at a huge loss or paying a mortgage on a home she could no longer live in. so it's not a forgone conclusion that buying is a better decision financially. it may or may not be and this largely depends on your situation.
overall, i think that most people would rather buy than rent. fine, as a lifestyle choice, but understand that it is just that, a lifestyle choice and not a financial one. that would also argue against buying "the most house you can afford". instead, it would be better to buy the smallest house that fits your needs.
First, more people have made fortunes in Real Estate than in anything else. Second, money in realestate is made by sitting.....not be selling. Your friend sold the low, that's a poor investment decision. Third, most don't get 20% returns in the market, most don't even get match the market rate of return. If you are getting those now, congratulations, will you be getting them 5 or 10 years from now? Choosing to buy a house is a major financial decision. For many, a home is there single largest investment, and the single greatest accumulator of wealth over their lifetime.