A house seems like a horrible investment

Jamin is only right right now. Right now buying a house is a bad idea as interest rates are rising, which means real estate prices will crater once the general economy slows down. For every 1% rise in interest rates, housing needs to drop by 12% for people to have the same payment. The prime rate is about 5.5%, which is about 2.5% higher than it was a few years ago. During that time housing continued to rise because of low unemployment. With the drop in the stock market, unemployment will likely follow and we will see a 20%-30% drop in real estate prices in the next year or two. The only thing that would avert this is action by the Fed.

joedirt wrote:

Jamin is only right right now. Right now buying a house is a bad idea as interest rates are rising, which means real estate prices will crater once the general economy slows down. For every 1% rise in interest rates, housing needs to drop by 12% for people to have the same payment. The prime rate is about 5.5%, which is about 2.5% higher than it was a few years ago. During that time housing continued to rise because of low unemployment. With the drop in the stock market, unemployment will likely follow and we will see a 20%-30% drop in real estate prices in the next year or two. The only thing that would avert this is action by the Fed.

Correct

Your examples show how dim a bulb you are. Why do you use a $1M house as an example? Most of the country has very few $1M houses and the ones that we have are not suitable rentals. They are suited for people with inherited money or someone with a $300-400K household income to buy. Use your head.

People who buy investment property usually buy a $200-500K house and it is best if it is a duplex or tri-plex. There are provable reasons for this.

FWIW, I am 48 and I own 4 houses outright, I own 4 others that I owe 40-60% of the purchase price and 25-45% of the market value on. I have don this despite many people telling me that I should never have more than 20% equity in them if I want to maximize my income. I worked on it mathematically several times and could never make that idea work for me.

I enjoy knowing that if I collect $1850 a month in rent, that only $400 will go to expenses that month and the rest is mine.

Jamin, how about your investment of time on Letsrun? Would you say that’s been a good investment?

jamin wrote:

How is my math wrong? A house costs around 4% of its value every year in taxes, maintenance, insurance, etc., multiplied by 10 years is 40% of its value. Any houseowner who bothers who keep tally will tell you that's true. Most don't keep tally, so they'll be like the guy in this thread who thinks "I made $700k because I bought for $100k and 20 years later sold for $800k."

It depends on where you live. In Colorado, I paid 270k for my house in 2003. It's worth double that now. My real estate taxes are 2,800/year and my insurance is 900. That's less than 1 percent of the home's value. Maintenance is nearly 0 most years. In general, your 4 percent number would apply in states with very high property taxes (New Jersey, Illinois). My home was a fixer upper. So I put about 100k into it during the first 5 years. Newer homes shouldn't have much maintenance.

The second part of your argument is ridiculous. You can rent a 1 bedroom apt in Denver suburbs for 900. You can rent a small home (1500 sq. feet) for about 2k/mth. No bank or homeowner is going to rent you a million dollar house for 30k. The bank would rather it sit empty and the homeowner can't cover mortage payments with that piddly amount of rent.

Your stock market assumption is even more ridiculous. 12 percent return is not impossible but it is highly unlikely unless you are in a managed account or hedge fund with a very lucky/skilled money manager. Since you gravitate towards gold bugs like Peter Schiff, your chances of making any money are very low.

But in general, a home is not a great investment. But it is an asset that is a solid store of value with obvious utility.

So I'm curious if someone can explain to me if I made a good or bad investment?

I just bought my house outright for cash $190,000 and put about $30,000 into improvement. It is probably only worth $200k but I'm not planning on selling it.

My property taxes are around $2000. I live in the mountain-west where it is still reasonable and is actually a pretty nice place to live.

I have to live somewhere. I didn't get mortgage this time for fear of the market and I had some cash sitting around.

Leave No Trace, great movie, even greater inspiration to live off the land.

houseinvestt wrote:

So I'm curious if someone can explain to me if I made a good or bad investment?

I just bought my house outright for cash $190,000 and put about $30,000 into improvement. It is probably only worth $200k but I'm not planning on selling it.

My property taxes are around $2000. I live in the mountain-west where it is still reasonable and is actually a pretty nice place to live.

I have to live somewhere. I didn't get mortgage this time for fear of the market and I had some cash sitting around.

If you had that much cash sitting around it makes sense. Prices will not go down. Housing in the west will only go up as more people move out that way. You should have invested in a pot dispensary. Now that is an investment out in the west.

jamin, you have LR analytics since you are a mod, so you know when I post. Please only post during my prime spamming hours so I can spam the first page of your thread and get it deleted. THANKS

jamin wrote:

Just using common sense. A house comes with a carrying cost of 1-2% property taxes and 1-2% maintenance. So if you own your house outright it needs to appreciate 2-4% per year just for you to break even. There are very few zip codes where a house worth $1,000,000 can be rented out for more than $40k/yr. So it is almost impossible to generate income by renting a house that you own outright. And very few people ever own a house outright. If you have an outstanding mortgage then you simply cannot rent a profit.

If you have $1,000,00 you can put it in the stock market and get a return of $120,000/yr. With that income you can rent a million-dollar house for $30k/yr and reinvest the other $90k/yr.

You aren't considering that most homeowners in urban areas live in condos. There is a more standardized maintenance burden in the form of HOA fees, but $10-20,000 annually is a bit high. The only thing not really covered will be appliances which in any given year will not be enough to bump the cost to the 1%-2% range.

In Chicago's best neighborhoods, the going rate for a luxurious 2bd for (roughly ~600k to buy) will be $3200/mo, some going for as high as $3800. Doing the math, that will pretty easily pay the mortgage. I have a few older friends that have purchased larger renovated homes in "hot" areas, rented out 2-3 bedrooms to younger co-workers at below market rate, and paid mortgages solely from the rent income. The American Dream is alive and well here in Chicago.

A mortgage is cheap debt. As a borrower, you have significant power in that you can choose how much you pay back. To lenders, this is known as prepayment risk. Your stocks are returning outsized returns? Throw a little extra money in and pay the minimum on your mortgage. Not happy with market performance or changing rates? Pay more of your mortgage.

A house is a source of wealth that many fail to utilize properly. The truth is that in owning a house, even if you end up in a shitty neighborhood, will guarantee you a certain place in life. You can use the equity to pay off unexpected medical bills, invest, or pay for college. Playing the rent-rent-rent game will leave those in the middle class and especially the lower middle class with greatly diminished buying power. Not saying it's always a win, but it's not nearly as often a bad deal.

Here is a crazy thought....how about put down some roots and buy a “forever home”? Remember that old concept? You buy a house and keep it through the end. Is that now not a thing? My grandparents lived in the same house for well over 50yrs.

Alan

Tbone2 wrote:

You aren't considering that most homeowners in urban areas live in condos. There is a more standardized maintenance burden in the form of HOA fees, but $10-20,000 annually is a bit high. The only thing not really covered will be appliances which in any given year will not be enough to bump the cost to the 1%-2% range.

I thought HOA feeds went towards the building, to cover costs such as replacing an elevator? You're saying that they also go towards remodeling units?

jamin wrote:

How is my math wrong? A house costs around 4% of its value every year in taxes, maintenance, insurance, etc., multiplied by 10 years is 40% of its value. Any houseowner who bothers who keep tally will tell you that's true. Most don't keep tally, so they'll be like the guy in this thread who thinks "I made $700k because I bought for $100k and 20 years later sold for $800k."

Your math is wrong because:

1) in high value markets, maintenance is not nearly that expensive. The same house requires the same maintenance whether is it in Springfield, Missouri and worth 150k or in San Francisco and worth 2 million. So using 4% to sum up all those costs can be very wrong. The 4% figure is valid in the low value markets. High value markets and you're looking at half that much.

2) nobody makes 12% without very serious risk. You could very well lose half your money at any moment at those kinds of returns. With the Trump economy we have right now, it is a great example of when you are losing your money.

3) your 200k over 20 years estimate of rent is likely grossly underestimated unless you are talking about a low value market.

So basically your advice is good in a flyover state, but ironically it makes no sense where you live.

No one I know (especially couples with kids) buys a house as an investment unless they bought a wreck to remodel and flip. When you have kids, renting an apartment for four or more people is either uncomfortable, nearly as expensive as owning a home, or just plain depressing.

As a homeowner, I agree that it frequently doesn’t make economic sense to buy a home and if I were a single guy, I would probably rent not just for economic reasons but for convenience. But as a father of three, I can’t imagine living in an apartment unless it was all I could afford.

buy in a down market, sell at top, timing is key.

Wife and I own 2 houses, no loans. Good income.

I own 25 houses. They seem like a decent investment to me.

whateverdude11 wrote:

Twenty years ago I bought my house for 119,000. Today it is worth 800,000. Horrible investment

+1. Awesome post and response to a silly OP thread.

Bullet_Proof wrote:

whateverdude11 wrote:

Twenty years ago I bought my house for 119,000. Today it is worth 800,000. Horrible investment

+1. Awesome post and response to a silly OP thread.

In 2004 I bought my 1700 sq ft house in the best neighborhood I could afford. I could have bought a much larger house (2800 sq ft) in a crappier area. Just so happens that many of the not so nice neighborhoods gentrified and increased in value quit a bit. So the value of my house in a very desirable area basically flatlined and the larger house in the crappy area doubled in value.

I should have bought the biggest stupidest house I could afford in the crappiest area.

I read the first page of this crapfest and couldn't read more. Too much stupid here. So if someone brought this point up on pages 2, 3, etc I didn't read them

On what planet do you think stocks return 12% per year reliably? The general model, if you are at all realistic, is either 7% nominal, or even better a 5% real rate of return. Yes, you can do better than this but in no way can you plug in 12% like it is realistic to attain this consistently. If the market were to average a 12% return for just the next 6 years, President Trump would be elected to a THIRD term (yes I know the Constitution would need to be changed).

Then, when you started saying what you would do with the $120,000 you would make on your $1 million investment, you forgot to tax the $120,000 at capital gains tax rate which would have eaten 15 - 20% off. So, no, you would not make $120k on $1 million. More like $50k in constant dollars, minus $10k for taxes = $40k, 4% return. Lots of arrogant people will respond to this, about how they crush that percentage in the market all the time. Yeah, get back to me in 30 years.

Truth is, stocks are a relatively poor investment. Houses are not great either, but you need somewhere to live so you might as well pay yourself. If you want to make real money investing, you have to start a business, and that business has to succeed.