patrick.net

Bellingham Bill says

The Alt section shows the renter at $1,000/mo would have just over $1M in cash. $26,000 less than the owner.

Might be misreading you. Is this a comparison to the $1M home buyer with a $1k/mo renter? Don't know the West coast, but I can't imagine on equal footing that a renter would pay $1k/mo for the same house that the $1M buyer would be getting. How would the numbers look with a renter paying $3k/mo which would be closer to what the $1M buyer would be paying monthly PITI?

All things equal, renter vs. PITI for the buyer, high income and high mortgage owners are far and away going to do better than renters. It's part of the separation of the rich and poor. The system is set up for those that make more to benefit the most. A $100-$200k mortgaged owner, in most cases, likely won't itemize and benefit from the tax benefits at all.

WookieMan says

How would the numbers look with a renter paying $3k/mo which would be closer to what the $1M buyer would be paying monthly PITI?

Giving the renter a $3000/mo rent (with a 2.5% increase every year) and ability to make 8% in the market, a housing market going up 5.4% a year . . .

In the first year (2018) the renter is $76,000 ahead, due to that 10% transaction cost selling the house.

2023, the owner is $40,000 ahead vs renting, he'd take a $13,000 loss on the house but through 2023 the renter has spent more in rent ($230,000) than his market gains ($176,000).

2028, the owner if he sells will see a $140,000 gain, or getting paid $1000/mo to live in the house.
The renter will have spent $450,000 on housing and gained $452,000 in the market.

Hey, I forgot to account for taxes on the investing side, so these aren't after-tax returns, LOL.

Anyhoo, the renter would have $140,000 less on hand in 2028 vs the guy who bought in 2018 and sold 10 years later.

After the loan is paid off in 2047, the owner will have total gain of $1.9M, for a monthly income from owning the house for 30 years of $5,200/mo.

The renter would have $5M in the market and be $600,000 ahead at that point, due to the magic of compounding interest @ 8% (and tax-free investments)

But if he wanted to buy that house, he'd have to pay $4.8M, along with its $50,000/yr property tax, while the owner is only paying $19,000/yr property tax, thanks to Prop 13.

Bellingham Bill says

Hey, I forgot to account for taxes on the investing side, so these aren't after-tax returns, LOL.

I appreciate the calculations. Are the $500k cap gains accounted for too in the tax savings for the home owner? I double checked the spreadsheet and don't believe I saw anything accounting for that though I could have missed it. You're looking at another $75k-100k saving depending on income at the year of gain.

I guess what I'm getting at is if you are going to live somewhere 5+ years, make over $200k W-2 income and have a large mortgage balance (large interest payment upfront/early years due to amortization) then owning in that scenario will almost certainly beat renting a similarly valued rental. If you can live in a $1k/mo rental then that obviously beats owning at this level, IF you religiously invest the difference. But that's not an apples to apples comparison.

It's easy to look back with hindsight and see what one should or should not have done. My personal metric was $/ft. I had been renting for years (and banking the difference) but was ready for more space,my own yard, etc. etc.

Anything much larger was either (1) more than my rent at the time and (2) due to a shortage of 2 bdrm rentals in my area the only other option was renting an entire house at an inflated price (presumably to cover someone's monthly mortgage).So it was sit in a cramped apartment or try and find something in our price range. It took two years before we found something that fit us. I saw a lot of crap in the meantime (and handy I'm not - although I've gotten better).

I'd like to think I was smart - but I flat out to got lucky. Rates were at what ended up begin close to an historic minimum, Rents jumped significantly after that, so staying wouldn't have been much of a bargain in hindsight. We have enough space for the next 30 years and don't plan on moving any time soon. If nothing else all of my research about my area let me recognize a legitimate deal when it presented itself.

Every markets different. Even locally from town to town or neighborhood to neighborhood.

If there are three things I've learned it's

1) stay within your means (not what the bank is willing to lend you)
2) ask the hard questions. If it's such a good deal why is it on the market to begin with? Scrutinize everything.
3) Be patient

Best of luck.

Here is an easy way to calculate these things:
Cap Rate + expected appreciation - mortgage rate/opportunity cost. You need nothing else.
e.g. for a typical Orange County home:
Cap rate = 4%
Expected appreciation = 6%
mortgage rate/opportunity cost = 5%
4+6-5=5. If the answer is greater than 0, you should buy. If the answer is less than 0, you should rent.

Patrick says

The message always was and still is: every house has an appropriate price, and it's not whatever anyone would pay.

Patrick, I'm starting to have doubts about this long term assumption of yours. This is not an ideal world, house prices change wildly beyond anybody control, same as stock. If market is somehow efficient (and yes, it's a big if, since house market is not very liquid), you'll get the right return by buying (in average). It's like investing on REITs but with tax advantadges

anonymous says

Total market return 2000~2017 averages 5.3%. If you took the rental savings and invested them, you would have a gain less than $500k before tax. Let's say $325k after tax. That's quite a lot less than if you assume 9% annual gains.

You are right.. but you have to make the calculations over longer and randomized periods of time. Last time I check, average house return was comparable with stock market

If you've been sitting on the sidelines renting fthe past 15-20, and dumping your savings into equities, you're most certainly a millionaire by now.

All that liquid cash opens up many more possibilities

errc says

If you've been sitting on the sidelines renting fthe past 15-20, and dumping your savings into equities, you're most certainly a millionaire by now.

All that liquid cash opens up many more possibilities

I totally agree with this in 95% of the scenarios. But one of the best ways to reduce tax liability for high income earners, in high cost of living areas is to own. If you have to live in an area with $1M homes, you're better off buying one if you can afford it of course. That mortgage interest deduction is a real bonus to the wealthy. You'd be silly not to take advantage of it. Unless you know you're going to be moving for work and won't be in any one place all that long.

This 5% group is likely on their way to be millionaires anyway, so it's kind of a moot point I guess.

Bay Area,

Thanks for sharing that. A friend of mine sold his townhouse in Fremont in 2006 and bought a big house in Mountain House in 2006 with the proceeds and got whacked hard. Same with you, he didn't know anything about real estate at the time until the market crashed. That was how he learned about real estate, became a flipper in 2011, bought some buy and hold and more than made up for his mistake in the earlier decade.

Based on Bill Bellingham calculations, this reminds me of how the numbers work. We bought our first house in 1996 for $200k. Rent at the time was $1,200/mo. Our mortgage was $1,340/mo. I didn't know much about property tax and insurance. LOL! I was a college kid making money selling cosmetics at the flea market on the weekends making about $3-$4k/mo. I didn't realize it was a lot of money back then till I graduated in 1998 and got a $38k job offer for doing Civil Engineering. What a slap in the face.

Say take out $50k for remodels and upkeep through out the years, it has appreciated $600k in the last 20 years. That's equivalent to $2,500/mo in appreciation. Basically, we get paid to live in the house.

The same with the $330k bought in 1999. Say take out $70k for remodels and upkeep in the last 18 years, it has appreciated at $2,750/mo when the rent equivalent was $1,800/mo at the time of purchase. We actually got paid to own houses in the Bay Area. ;)

A $800k-$1M mortgage deduction is worth something in high COLA compared to a $200k mortgage deduction in flyover states. Once you factored this in, it makes sense to own most of the time.

E-man says

Say take out $50k for remodels and upkeep through out the years, it has appreciated $600k in the last 20 years. That's equivalent to $2,500/mo in appreciation. Basically, we get paid to live in the house.

The same with the $330k bought in 1999. Say take out $70k for remodels and upkeep in the last 18 years, it has appreciated at $2,750/mo when the rent equivalent was $1,800/mo at the time of purchase. We actually got paid to own houses in the Bay Area. ;)

This has been the result for every single home I have purchased. You get paid to own houses, and the government is nice enough to give you a tax write off.
It's a dream come true.

E-man says

Bay Area,

Thanks for sharing that. A friend of mine sold his townhouse in Fremont in 2006 and bought a big house in Mountain House in 2006 with the proceeds and got whacked hard. Same with you, he didn't know anything about real estate at the time until the market crashed. That was how he learned about real estate, became a flipper in 2011, bought some buy and hold and more than made up for his mistake in the earlier decade.

Based on Bill Bellingham calculations, this reminds me of how the numbers work. We bought our first house in 1996 for $200k. Rent at the time was $1,200/mo. Our mortgage was $1,340/mo. I didn't know much about property tax and insurance. LOL! I was a college kid making money selling cosmetics at the flea market on the weekends making about $3-$4k/mo. I didn't realize it was a lot of money back then till I graduated in 1998 and got a $38k job offer for doing Civil Engineering. What a slap in the face.

Say take out $50k for remodels and upkeep th...

E-MAN! Are you still retired?

mell says

E-man says

Bay Area,

Thanks for sharing that. A friend of mine sold his townhouse in Fremont in 2006 and bought a big house in Mountain House in 2006 with the proceeds and got whacked hard. Same with you, he didn't know anything about real estate at the time until the market crashed. That was how he learned about real estate, became a flipper in 2011, bought some buy and hold and more than made up for his mistake in the earlier decade.

Based on Bill Bellingham calculations, this reminds me of how the numbers work. We bought our first house in 1996 for $200k. Rent at the time was $1,200/mo. Our mortgage was $1,340/mo. I didn't know much about property tax and insurance. LOL! I was a college kid making money selling cosmetics at the flea market on the weekends making about $3-$4k/mo. I didn't realize it was a lot of money back then till I graduated in 1998 and got a $38k job offer for doing Civil Engine...

Mell,

Fortunately yes. House is free and clear. Bought wife a new MDX a couple of months ago all cash. Picking up my new Tesla Model S next week. Financing it at 0.99% with Chase. Life is good.

zesta says

You were spot on in 2007, but do you have any regrets about not buying in 1999?

I get it, rents were cheaper than PITI in 1999 so it was a tough choice to buy, but on the flip side if you would have taken out a 15 year mortgage you'd be a couple years short of paying it off. Or you could have refinanced a 30 year today, and I'm guessing you'd be paying substantially less in PITI than your current rent.

Patrick is an intelligent individual.

However with the CRA, there was sincere criticism of this, and even the left:

http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html?mcubz=1
"In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Remember, the CRA had nothing to do with the Housing Bubble:

"Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites."

WookieMan says

If you can, avoid any and all HOA's at ALL cost. I don't give a shit what they do for me, that is one cost I don't want to have to itemize. I can mow my own lawn.

Absolutely 100% true.

Case and Point: Twice in less than a three year period I had to go out of pocket to pay for "emergency assessments". Once for a roof that failed prematurely and once for outdated sprinklers which were a safety hazard. According to the HOA company, there were not enough funds to cover these assessments and the owners had to go out of pocket. I had absolutely no recourse. Those two assessments cost me $10,000, not kidding.

This doesn't even get into their annoying BS rules which limit your freedom and usually end up costing you money.

And of course the annual HOA dues increases. In the state of CA, the max annual increase is 20%. And yes, my HOA company did increase YoY HOA dues by 20% on more than one occasion.

Stay away from HOA!

BayArea says

Stay away from HOA!

I find HOA's to be convenient with rental properties. You don't have to worry about the exterior upkeep, and the HOA ends up keeping an eye on your property, by sending you notices if rules are broken.
Virtually all new developments have HOA's now.

Strategist says

I find HOA's to be convenient with rental properties. You don't have to worry about the exterior upkeep, and the HOA ends up keeping an eye on your property, by sending you notices if rules are broken.
Virtually all new developments have HOA's now.

Have fun with it. You're likely just lucky so far. HOA's are basically a miniaturized government with your old high school student council in charge. Most of them don't know the difference between their ass and a 2x4. Let alone how to manage a lick of anything. On the surface they make sense. In practice they generally fail at what their main objective is.

A good, LEGITIMATE management company can help. But most of them are looking to just skim off a percentage of the dues and don't care about the owners. It ultimately is a bad setup. I'm actually surprised you haven't been burned yet with a special assessment yet or some silly ass violation of the rules. I wish you continued luck.

WookieMan says

Strategist says

I find HOA's to be convenient with rental properties. You don't have to worry about the exterior upkeep, and the HOA ends up keeping an eye on your property, by sending you notices if rules are broken.
Virtually all new developments have HOA's now.

Have fun with it. You're likely just lucky so far. HOA's are basically a miniaturized government with your old high school student council in charge. Most of them don't know the difference between their ass and a 2x4. Let alone how to manage a lick of anything. On the surface they make sense. In practice they generally fail at what their main objective is.

A good, LEGITIMATE management company can help. But most of them are looking to just skim off a percentage of the dues and don't care about the owners. It ultimately is a bad setup. I'm actually surprised you haven't been burned yet with a special assessment yet ...

The first home I purchased 31 years ago while i was almost finished with my education has an HOA. It's now a rental and never had problems. Most of my rental condos are in Ladera Ranch, Ca. They have 2 associations, where the total dues are well over $400.00 per month. Excellent management and never had a serious problem. They had a lot of problems with the water pipes that leaked. They sued the builders and professionally fixed everything. There was no special assessment. Most of the homes there are around 12 years old.

Strategist says

The first home I purchased 31 years ago while i was almost finished with my education has an HOA. It's now a rental and never had problems. Most of my rental condos are in Ladera Ranch, Ca. They have 2 associations, where the total dues are well over $400.00 per month. Excellent management and never had a serious problem. They had a lot of problems with the water pipes that leaked. They sued the builders and professionally fixed everything. There was no special assessment. Most of the homes there are around 12 years old.

I'll say it again, you're lucky. Seriously enjoy it. HOA's are no different then your local government. Some neighborhoods/towns/cities are phenomenal and others are a shit show. Most of the time when there's a 3rd party managing something and then a group of know nothings running a community, it goes south quickly. Can it work? Absolutely. I personally wouldn't invest in a condo/property with an HOA. Am I probably missing out on some lucrative investments? Sure. Unless you're actively involved, how do you know things haven't been mismanaged and you're about to get hit with a $10k special assessment?

A lot of people are doing their own calculations / spreadsheets in this thread. Why? Do you feel your own calcs are better than the popular established ones like Patrick linked?

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

goat says

A lot of people are doing their own calculations / spreadsheets in this thread. Why? Do you feel your own calcs are better than the popular established ones like Patrick linked?

The NY Times calculator is pretty good. Like all such calculators they are only as good as the assumptions you put in. The results can easily lead you astray for one of the most important financial decisions you will be making.

goat says

A lot of people are doing their own calculations / spreadsheets in this thread. Why?

the NYT calculator and my spreadsheet return similar results -- for my situation it's saying if rent is more than $650/mo I should buy, while my model says ~$800.

I just like being able to twiddle the variables directly, the NYT's GUI doesn't do much for me.

Bellingham Bill says

I just like being able to twiddle the variables directly,

Well, I can definitely understand that. I cant count the number of calculators I've coded over the years.

With that said, I do think the NYT calc is superb, for what it does do.

Throw the calculators out the trash can. It's called the ghetto calculator because the results are obvious.

Buy buy buy, - in the ghetto.

Avoid, no buy - in prime areas.

Which is the opposite of reality. Price appreciates the most in places people covet.

I don't even need a calculator to know someone like Patrick made multi-million dollar mistake.

Based on his discipline. He would have the home and even more stocks. You know, when you have a fixed mortgage which depreciate over the year. Savings rate. go through the roof eventually. Patrick would have had a peanut size mortgage had he bought the Berkeley place and saving like a mxfx all the same.

You know what's it like to have no mortgage and own a home in the sfba prime. Rich ass mxfx.

SFace says

Price appreciates the most in places people covet.

And where they covet now, is where they will always covet. It's as simple as that.

I said this since 2009.

Location location location will be location location location location location.