The Single-Family Home Tax Shelter Myth

[Martin Gale]

Now -- the big debate -- renting vs owning:

Rent U.S. Apt. vs Buy U.S. Condo: $745,534
Rent U.S. Apt. vs Buy U.S. House: $399,046 (apples-oranges)
Rent U.S. House vs Buy U.S. House: -$115,033
Rent SF Apt. vs Buy SF Condo: $1,607,761
Rent SF Apt. vs Buy SF House: $2,727,272 (apples-oranges)

Same assumptions as above.

Methodology:
The above numbers are computed by taking the difference in buying vs renting and investing the difference in the DJI stocks, which have historically produced an AVG return of 7.8%. Results assume compunding of profits over 30 years.

Comparing apples to apples: Renting is more profitable than buying for a condo, but not for a house.

Comparing apples to oranges: Renting an apt is even more profitable than owning either a condo or a house.

Spreadsheet attached with detailed calculations.

 

[winter]

Quote from traderdragon:

Yes home values can increase at a different rate than rent. Look at the historical numbers. This has already happened.
Rent is tied more to salaries/inflation.

Well since rent is a significant component of the CPI its hard to argue that it isnt tied to inflation, but I think you have the causation backwards.

Anyway I think you are missing my point. Rental property is a business and as such can be measured in terms of ROI. For real-estate appreciation to continue to outpace rent increases means that those who choose to own real-estate for rental purposes would see a diminishing ROI. Eventually it would reach a point where these people would simply sell the property and use the capital elsewhere where it could generate better returns then they are getting renting.

The price-rent ratio cannot simply skew in one direction forever. It can either revert by real-estate prices falling (or not growing as fast) or rent increasing.

To create a long-term (30 year) model assuming that real-estate would consistently outpace rent increases by 2%/year is faulty IMO - that simply can't continue forever.

This article makes for interesting reading: http://www.frbsf.org/publications/economics/letter/2004/el2004-27.html

 

[OldTrader]

Quote from Martin Gale:


(And, no, being a landlord in some particular part of the country doesn't constitute expertise on the national median.)

Tell you what...why don't you post your own expertise. So far all we know is what your Dad did, and that a friend thought it was reasonable. Sheesh.

OldTrader

 

[ElCubano]

Quote from Martin Gale:

$30k for 3 $10k paint jobs in 30 years. Too low or too high?

this better be a huge house...I painted my own house for $750 and can get 4 spics to probably paint it for less than that...and i used the best benjamin moore exterior paint they offer.... ;o)

 

[traderdragon]

I agree to a point you must also take into consideration that markets tend to sorta max out. Beach property in La Jolla for example has a pretty shitty return compared to inland property that has boomed.

Rents hit a cap based on salaries in the area, and home prices in the priciest areas tend to do the same thing while cheaper inland areas keep going up until they reach the point that salaries cant support them. Everything keeps getting pushed inland more and more until its just too far away to commute from.

Home prices and rent pull and push each other around to a degree.
But just because homes go through the roof does not mean that renters who live pay check to pay check can afford to pay any more rent without salary increases. Thats the key point I think.

In any case, if anyone expects great returns in my area going forward, I think they are nuts. I see prices dipping and homes on the market for , 50, 100, 150 days even. Prices have a reached a level where there simply arent any more people who can afford the prices and interest rates are clicking up.

At this point in time, crunching the numbers and expecting prices to be flat or down over the next decade, id say renting is far smarter, especially if you can get any kind of decent return on other investments.

I will more than likely crack 40% return this year, im up 25% so far, so im quite confident renting a very nice apartment, right where I want it, without the commute associated with the equivalent home. I also have no maintenance to worry about and effectively a free gym/pool membership which easily runs $100 in my area a month. Its a no brainer for me.

But again, I would still recommend people buy a home, because 99% dont have the discipline to save the difference. I do.

Quote from winter:

Well since rent is a significant component of the CPI its hard to argue that it isnt tied to inflation, but I think you have the causation backwards.

Anyway I think you are missing my point. Rental property is a business and as such can be measured in terms of ROI. For real-estate appreciation to continue to outpace rent increases means that those who choose to own real-estate for rental purposes would see a diminishing ROI. Eventually it would reach a point where these people would simply sell the property and use the capital elsewhere where it could generate better returns then they are getting renting.

The price-rent ratio cannot simply skew in one direction forever. It can either revert by real-estate prices falling (or not growing as fast) or rent increasing.

To create a long-term (30 year) model assuming that real-estate would consistently outpace rent increases by 2%/year is faulty IMO - that simply can't continue forever.

This article makes for interesting reading: http://www.frbsf.org/publications/economics/letter/2004/el2004-27.html

 

[ElCubano]

Quote from OldTrader:

Tell you what...why don't you post your own expertise. So far all we know is what your Dad did, and that a friend thought it was reasonable. Sheesh.

OldTrader

Like Triple AAA says...when this guy talks you should very well damn litsen. It doesnt matter wether he is right or wrong either..You cant learn experience

 

[Martin Gale]

Quote from OldTrader:

Tell you what...why don't you post your own expertise. So far all we know is what your Dad did, and that a friend thought it was reasonable. Sheesh.

OldTrader

And we know you live somewhere in the Midwest where prices may be higher or lower than the median depending on whether you mean, say, Chicago or Pierre. I'm delighted to defer to the experts -- when I encounter them.

 

[ElCubano]

.

 

[ElCubano]

Quote from OldTrader:

princessa:

". 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.


OldTrader

I wonder which ones here didnt buy a TECH stock back in 98- 99 because the PE didnt warrant a buy...

 

[OldTrader]

Quote from Martin Gale:

And we know you live somewhere in the Midwest where prices may be higher or lower than the median depending on whether you mean, say, Chicago or Pierre. I'm delighted to defer to the experts -- when I encounter them.

Let's face it, you're delighted to defer to anyone who supports your argument....like your Dad or your friend.

OldTrader