The Renter’s Manifesto
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It's not for everyone, and it's certainly a risk (like all leveraged investments), but it does provide an opportunity that very few other common financial instruments provide.
I think this would be a reasonable bet in cities which have had particularly strong post-bubble deflation but which nonetheless have strong long-term growth prospects. If I had lots of spare money I think I'd be buying up five-figure houses in suburban Sacramento right now.
I'm only picking on Sacramento because I used to live there, there could be much better buying opportunities in cities I don't know so well.
(example: Austin, TX is a great place to live overall, but it remains cheap due to "endless" land).
The real reasons to invest in housing are: a) diversification (so not everything is in bonds or stocks) b) excellent tax treatment c) excellent political protection d) interest rates that are often lower than the monetary inflation rate (by monetary inflation rate I mean growth in M*V - nominal income growth). However, at this point, all the above factors are already capitalized into the price of housing. So at this point there is not much of an economic benefit to buying housing.
On top of that, there are government initiatives to "encourage home ownership" and to protect "homeowners" even if they bet completely wrong or obtained loans they couldn't possibly have qualified for if the lender had any common sense. These will tip the balance in favor of going into the housing market.
Now the question is, if I could see the future back in 2005, would I still buy this house? If all I could see was the housing crash of 2008-2009, then of course not. But if I could see the great times I've had in this house which includes absolute peace and quiet, friendly neighbors who don't change every other month, and the feeling of a little place by the beach to call my own, I would indeed buy this house. Buying a house has a lot more to do with making it a home than just a shelter for cheap.
Nobody knows the future. I could have rented this exact house and instead of benefiting in the long run, I could have ended up losing more money if rent prices skyrocketed. All I know is that for people who can afford to buy and afford to rent, money has very little to do with buying vs. renting.
I want to walk to work and there are no homes for sale in my area. So even if I make 500k / year home ownership would still bring significant negative for my lifestyle. When you consider commuting costs, home ownership is both risky and far more expensive for most young people.
PS: Walking 2+ miles in my area is slower than than driving that far and all I really care about is the time.
> All I know is that for people who can afford to buy and afford to rent, money has very little to do with buying vs. renting.
If I could afford to buy a $600k house and afford to rent a similar house in the same location, whether I buy or not would depend on my personal choice (which is to buy, not rent). If I can't afford to buy, then why even get into a debate. Of course I will rent.
re: "It always seems to me that the author is simply trying to justify the fact that they rent." - this always seems to be the case. The few renters who seem to do well financially would also do well financially as homeowners but for some reason have convinced themselves that the numbers work out better for renting. Maybe it does for those people, maybe it doesn't. I'll come back to that point in the next paragraph. In the meantime, however, the vast majority of renters one might speak to are just pissing away money, are no further in terms of savings than those with mortgages, and have none of the equity built up that those with mortgages have, even those who are pretty new to their mortgages.
Now, back to whether or not those "smart" renters are any better off. First off, I'll readily admit that my single data point is just that, but it bears consideration nonetheless. I bought property in 2005. In a neighbourhood with some growth potential, in an overall market with generally upward movement. Nothing bullish, just generally upward movement. In fact, that movement had been slowing a bit at that point, and continued to slow somewhat more afterwards. We all know what happened next. I sold early this year. I wonder how many smart renters could have done this _well_, even given the shitty few years I happened to own before selling: I paid $500 more per month than what I would have paid to rent the same space (in other words, put me up against a smart renter with $500 to invest each month), for a total of $30,000 "invested" progressively over those five years. I sold for a net profit of $125,000 after all fees, commissions, etc. In a hesitant market still recovering from the nasty troubles we all know too well.
Find me a renter with that kind of ROI on their investments over the last 5 years and I'll congratulate them over a nice lunch which I'll be happy to buy for them.
(crickets)
Yeah, I thought so.
As an aside, am I the only person to notice that every time a renter posts these kinds of articles they always talk about how down the road they'll have enough money to buy a mortgage-payer's home but they never actually bother to mention how their investments have been doing for them in the meantime? I suspect there's an obvious reason for the omission.
So, you're unhappy because other people don't use the same sort of anecdotal evidence that you are so fond of using yourself?
Who needs anecdotes when you have data? Here's a typical chart of median home prices since 1971, adjusted for inflation:
http://www.newfinancialwisdom.com/median-home-prices-inflati...
And here's a chart of the inflation-adjusted S&P500 since 1950 (skip down a few charts):
http://www.simplestockinvesting.com/SP500-historical-real-to...
What we see here is that, aside from some interesting but minor fluctuations and a scary but temporary blip representing last decade's bubble, housing prices are almost flat in real terms: The increase in median house price is almost equal to the inflation rate. Meanwhile, stock market investment values fluctuate a lot -- the last decade was not especially kind to investors -- but over the 1950-2008 time period the market averaged nearly 7% over inflation if you reinvest all dividends.
Now, you can get lucky. Or you can leverage insider knowledge: If you figure out that land in a certain area is systematically underpriced relative to future demand, you can make a killing without relying solely on luck. But the averages show that for every person who makes a killing in residential real estate, there's someone else who takes the equivalent bath. And note that the argument that "land in NYC/Northern California/Desirable Area X will keep growing in value because everyone wants to live there" presumes that the rest of the market hasn't already figured out that such land is more desirable and set prices accordingly.
You can get lucky. Or you can leverage insider knowledge. Or you can do some personal learning and invest wisely. All of these are equally applicable to investing in real estate or to investing in other things while being a renter. For some reason, however, those who profit from real estate are chalked up as lucky and those who profit from other things while renting seem to get to talk as if their success involved any less luck or any more informed investing. Why is this? In my case, I invested in a physical market in a particular region I had been watching for many years and which has generally steady indicators. I exited for entirely personal reasons (to live with my girlfriend, just to put it out there), not to "time" the market as claimed by one commenter who also claimed I got lucky. I was subsequently called out as unhappy by another - you. Again, why is this?
Any argument that can be made for or against success by an owner can be made equally well for or against success by a renter investing elsewhere, yet luck only gets cast towards the former, wisdom only towards the latter, and all the while the latter never seem to publish any of their investment success numbers to match their claims of benefit down the road. Again, why the disparity?
Whether in real estate or elsewhere, it's the same $500 per month during the same five years. Whether sourced from luck and/or expertise, why are one class of returns immediately disparaged while another goes entirely unstated yet entirely uncontested? I've never taken it as an offense personally, but do admit that it does seem to be a common pattern and not a particularly fair pattern, at that.
Where does that "value" come from? The entire real estate market is built on the premise of property valuation continuously raising - causing and eventually surpassing inflation. This is without even accounting for the actual exploitation/gaming of the system.
Everyone has already forgotten, or chosen not to think about it in favour of short-term gain.
While it's true that there are wins to be made in real estate (and I congratulate you on your successful outcome), there are also losses. Not only did you pay $500 more a month, you took a risk (the degree of which depends on your circumstances) that the home would rise in value. Had it not done so, you'd be stuck paying $500 more a month in addition to other potentially large losses.
Renting is (generally) lower cost, lower risk, lower potential ROI. Buying is (generally) higher cost, higher risk, higher potential ROI.
If you want to make major improvements or tweak your home, then home ownership beats renting. If you don't plan to live somewhere for more than five years (and transactional costs in buying and selling are harsh, as in South Australia), then renting could be your best option. If you lack financial discipline, then buying can beat a combination of renting and investing in shares.
Of course, you can always buy one place, rent it out and then rent another place yourself.
http://blogs.reuters.com/felix-salmon/2010/04/06/the-nationa...
And yet the US has a higher per-capita GDP than Germany, right?
Besides, homes have to be owned by somebody. If homes aren't tying up the wealth of Joe Workingclass they'll be tying up the wealth of John Richbastard instead.
How much of the low rate of home ownership in Europe can be attributed to property title? If the only housing units available are blocks of apartments on a single deed then you'd expect a low rate of ownership, whereas if the entire country was split into individual-title houses then you'd expect a much higher rate.
EDIT: Wait, I forgot to mention the screwiest thing about the long-term prospects of Germany: it has a birth rate of 1.4 per couple, way below replacement rate. I'm guessing that this could have a lot to do with the housing supply being concentrated towards small apartments and away from large houses.
As for birth rates, well... that's a pretty wild speculation. Demographers have a decent handle, as far as I know, on the causes of low birth rates. Do note that America has a declining population ex immigration, and that the birth rate for white people is below replacement rate and has been for 30 years.
1) inflation rates (higher inflation is much better)
2) tax changes (e.g. the passage of prop 13 in California helped investment property owners greatly)
Also, you lose 6% total from real estate commissions; consequently, it is much harder to move between owned homes and rented ones.
In some other markets, like Texas, it's possible to own rental real estate that cash flows.
So this is the strange position I'm in where I own houses to rent but rent the place I live.
http://www.nytimes.com/interactive/business/buy-rent-calcula...
Takes into account variables such as monthly rent, house price, down payment, property taxes.... and it has a sweet graph that shows over time where you are financially better off renting or buying. Pretty cool.
Great for anyone who is between two minds about what to do, or is considering investing into a depressed market.
Its not uncommmon to pay ~2x the principal in interest. So I couldn't say for sure, but I don't see it having a huge impact.
Paying straight cash for a house, or buying a house on a small fixed interest and a short term already baked into the mortgage, can gain you something. Paying off an existing mortgage early gains you time and the psychological benefits of not worrying about making the mortgage next month. If you're about to die, it lets your descendants take their time selling the house if they can't afford to make the payments.
Think of it in this way: as an investment, I'm making a secured loan to you from which I am expecting a given return over the next 30 years. If you're excited to pay me off in 5 years instead of 30, maybe we can make a deal (quite often there's refinancing involved in that arrangement) but I got into this deal expecting 30 years, not 5 years, of interest at that rate, and you agreed to that, too.
It's a simple calculation really, how many customers will actually pay off their mortgages early vs how many customers you will attract by offering the option to do so.
Any additional amount I send in on mine is credited as "additional principal payment" and reduces the amount owed (and hence the interest). If I had <mumble> thousand dollars in hand, I could pay my mortgage off Monday without any penalty, just five MONTHS into my refinance.
I have seen no-refinance-before-such-date mortgages, and while it's possible that a mortgage with a prepayment of additional principal penalty or barring exists, it's certainly not common in the US.
While a mortgage won't be structured this way, evidently an equity loan can, and this I do know from personal experience.
In the early years of a mortgage, the buyer is gaining the leverage of a large amount of the bank's money, so a huge percentage of his payment goes to interest on the loan. In the later years, when the remaining principal is smaller, he pays less interest. The buyer's total payment is the same amount over the term of the loan, but the portion allocated to principal vs interest varies linearly over time, til remaining principal == 0.
At any time, the buyer can pay off the note by delivering the currently-remaining principal to the lender.
The schedule you describe would effectively prevent anyone from ever moving before their mortgage was mostly-completely satisfied. If you bought a $200K house and sold it a day later, you would have to send the bank a check for about $600K. I'm pretty sure this never happens.
Furthermore, the lender is always making his margins (modulo interest rate variability, and ignoring loan quality), because any payments sent to the lender by the borrower will get re-loaned to someone else. I guess you could write a contract so that the borrower would be penalized if he paid off early, but I'm not sure it wouldn't be usury.
Note that if you double a mortgage payment, you should be explicit that you want the excess applied to your remaining principal. Otherwise, the bank can choose to apply it as "the next payment" and therefore split at your current ratio. Regardless, you still have to pay next month's bill too. :)
Investors need to be losing money for negative gearing to do them any good, and it won't magically turn that investment into something profitable.
It is helpful if they're speculating on a big capital gain. In fact that's one of the recurring criticisms of negative gearing - that it encourages speculation and inflates property prices, neither of which are good things for renters.
People have, inevitably, used it to engage in various tax-reduction schemes, with varying degrees of succes (see the 2004 Australian High Court case of Hart v Commissioner of Taxation for an example of that _not_ working out). This is not a good thing for renters either.
From http://www.sftu.org/rentcontrol.html:
San Francisco's rent control law covers most rental property in San Francisco. If you live in San Francisco, you are covered by rent control unless you fall into one of these major exceptions
1. You live in a building constructed after June of 1979. This "new construction exemption" is the biggest exemption in SF
2. You live in subsidized housing, such as HUD housing projects.
3. You live in a dormitory, monastery, nunnery, etc.
4. You live in a residential hotel and have less than 28 days of continuous tenancy.