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"and renting for $3K per month"

I think you make a lot of assumptions, like the one above, which don't fit my admittedly anecdotal experience. I live in one of the hot markets, I bot a place at the peak of the market before the last crash, and found myself nearly $200k in the hole on paper. That was roughly 10 years ago, and here's what happened.

I lived in it for 10 years, and I just sold it for more than I paid for it. Obviously this in isolation wasn't a good investment, but I did nearly the worst thing, bought at a peak before a crash, and still came out net positive 10 years later.

Second, you said "and renting for $3K per month" which is a mistake because it's assuming rent will not go up in any significant way. Where I live, rent goes up a lot. That place I bought 10 years ago, a couple years back we thought about selling and renting (to get into a different school district) and we realized that our mortgage was lower than what we would have to pay in rent to get a similar place in the same area.

Again, these are just anecdotes, but my experience doesn't fit with the assumptions you are making above.

That's with a small correction followed by a new bubble. Property values have dropped over 50% in various corrections around the world EX: Shanghai @ 64%.

The US is easily that inflated relative to historic norms, so what we think of as a huge correction could basally be a minor blip vs what's next. Or even just a 20+ year stagnation in housing prices. Worse real estate transaction fees are are massive.

PS: Same as it ever was. http://www.businessinsider.com/the-economic-crash-repeated-e...

I bought a condo at the peak of the market before the crash, 11 years ago. So far, it's only gone down in value, regardless of what the rest of the market does. Even after refinancing it years ago into a 15 year mortgage, it's STILL worth less than I owe on it.

Hurts

I didn't see where the parent assumed the $3k per month would stay static.

Also recall that selling a place for more than you paid for it doesn't mean you've made money. As I'm sure you know, owning property also involves substantial ongoing costs (beyond the purchase price) that never get recouped: maintenance, property fees, incidental construction / renovation, insurance, mortgage taxes, real estate fees, and so on. Never mind the lost investment potential from the down payment, which is now a sunk cost vs. something that could have earned interest in the markets.

I'm not trying to challenge your anecdote; just to recognize that even with stories like yours the truth is complicated and hard to assess.

For my part, my experience has taught me to be especially wary of "hot markets" - the hype that comes with them IMO artificially inflates real estate prices to a point where the underlying value can easily get lost. I happen to be very lucky in having a rent situation that easily beats purchasing, even over multiple years. But I acknowledge rental arrangements can also get hyped, so a bad rental situation can also cost you.

$1 today is worth .85¢ in 2007. You'd have to sell your place for 21% more than its peak price just to break even (15% inflation + ~6% realtor fees and other costs) and that doesn't include the returns you could have made in, say, an index fund over the last 10 years.

I'm not trying to make any assumptions on your anecdote, but only the very hottest markets have been able to pull off that kind of recovery.

https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1.00&year1=201...

In most cases you have a mortgage so it isn't as simple as that. For example, you didn't pay $1 million (even if that is the cost) - maybe you put down $200,000. If it goes to $1.2 million you sell it and get $400,000 (paying off the $800,000 you borrowed). That is 100% of your $200,000 even though the price only went up 20%.

This is oversimplified for illustrative purposes. You have to pay interest, taxes, get a place to live... but the example shows why you don't need the sales price to go up by inflation to break even or make a profit even in 2007 dollars.

Good point. What you're describing, at core, is leverage. The general principle of leverage is that it exaggerates the market's natural results. When things go up you stand to make a lot of money. But when things go down you stand to lose a lot of money.

One mistake (IMO) many people make about housing is not adequately thinking through the second possibility.

I agree that I don't have all the info to make a true apples to apples comparison, but even your illustrative example is way off:

1.2M - 6% realtor fees is 1.128M. Thats 72K just for realtor fees right off the bat.

not including including costs like city transfer tax, capital gains for short term sales, and countless other seller fees that vary by market temperature.

All this comes off your 200k "profits", which is still great, but homeowners typically take years just to stop being underwater when buying a home.

True.

All I was trying to point out is that the return isn't just the sales price having to beat inflation.

You are completely right that I forgot to mention buying and selling costs (which, as you note, are very high in real estate).

You can achieve the same in the stock market by buying on margin. In both cases, financing the majority of an investment with debt cranks up the risk.

If you put $200k in an investment (say, the stock market, or bonds, or whatever) and it goes down by 10% then you've lost $20k. But if you're leveraged 5x (as in your example: putting in $200k on a $1M investment), then that's a multiplier in the positive and negative direction. A fall in housing prices in your city, area, neighborhood, of 10% will now wipe out 50% of what you put in.

Leverage is considered very risky. Housing is considered fairly safe to begin with, so when you use leverage on it it only becomes moderately risky.

But basically there's no such thing as a free lunch. The reason your $200k can double if housing prices move just a little bit up, is because it can also be wiped out if they move just a little bit down.

There are a lot of things missing though in this analysis for the homeowner if you want to do a true comparison.

1) The difference between the mortgage payment and equivalent rent for an equivalent place

2) Tax write offs (mortgage interest deductions)

3) Principal pay down

4) Property Maintenance costs

5) Property purchase fees (transfer tax, loan origination fees, etc)

And then for the stock holder you missed...

6) Taxes paid on cashing out stocks

> with $1K+ per month maintenance fees.

wow! How are these itemized? Or is it just referred to as a single line-item "$1,000.00 Maintenance fee" ?

In NYC, most property ownership is through coops or condos. and in both, you'll pay a monthly maintenance fee - which includes things like common charges, landscaping for the complex/building, building mortgage, coop mgmt, real estate taxes, etc.

I pay ~$900/month in fees for my 1 bedroom (charged based on the 113 shares i own) - and then I pay another 20-30 for electricity, which is billed on the same ticket. Then, come tax time, I get to deduct around ~35% of those maintenance fees as real estate tax.

it varies from building to building and borough to borough.

Brownstone neighborhoods stress these numbers even further (e.g. much of "hot" Brooklyn).

These consist largely of 19th century buildings. And even the "modern" apartment buildings are 1920s, 1930s, etc. These are also precisely the neighborhoods that zone-limit modern construction to avoid compromising their character.

So you have a bunch of old buildings that need serious maintenance, sometimes by firms with specialized and otherwise outdated skill sets (e.g. stoop rebuilding and iron fence work).

Many of these neighborhoods are also in historic districts, meaning they're landmark-protected to preserve traditional architectural character.

Brooklyn Heights is a prime example. Essentially the whole neighborhood is one big historic district. The housing stock is ancient. And it's a highly desirable neighborhood. Maintenance fees can easily waver between $1,000 and $2,000. There are very few modern condos (which basically avoid these problems). So their very scarcity inflates their purchase prices. All in all you get a very difficult place to live in and own property.

Buildings will have an association fee, similar to an HOA. I've never looked into NY condos, but I've seen buildings in Northern NJ with fees at 500/mo. I would guess there is literally a $1k association fee to pay.

It will be divided into operating expenses and the reserve fund. The detailed financials should be mailed out at least yearly. So you can see where all the money is going. The operating expenses will cover the hot water, garbage, exterior building insurance, snow removal, sewer, common area maintenance like landscaping and floor cleaning. The reserve fund covers the long term maintenance, painting the exterior, roofing, replacing water heaters, carpeting replacement in common areas. High cost areas like that probably have a pool or a front desk person too.

NYC was minimally affected by the real estate crash because of the ubiquity of co-ops, whose boards were not going to approve an onslaught of people with wealth that was only on paper or that were speculating on them as investments rather than using the dwellings as their primary residences. Prices dropped some, a little more so in the outer boroughs, but where did you see "10 - 20%"?

The real problem with buying an apartment (as I see it) is that you don't really have most of the benefits of "ownership" aside from cost and location stability, and even that is somewhat in flux due to association/management fees, and if you have a co-op., mortgage rates. But, it's worthwhile for some, and IIRC, the return was better than the S&P 500 from 2000 through about 2013.

And if that's not a wild enough ride, try land leases.

I can't for the life of me figure out any way to be truly comfortable with a land lease.

NYC real estate is a really weird world.

Buying is almost always a good idea except in the hottest of real estate markets.

If done properly (buy, then rent out when you move, managed by prop management company), you'll come out far ahead versus just renting. You should of corse still be investing in equities for diversification.

It's an even better idea in hot markets. That is, unless you get in at the end of a cycle and need liquidity now.

Depends if it is going to be your primary home.

You need a roof on your head. You might as well pay the rent 10-30 years and own the place, rather than have nothing.

Is renting out really that low risk even with a property management company?

You are also now exposed to the vagaries of rental pricing and demand.

I think people misunderstand low risk. On average it easily nets out positively depending on location. The problem is the "on average" part. If due to bad luck you aren't the average, is it catastrophic for your finances, or is it just painful. I wouldn't take the risk if I were in the first category.

Real estate has a long negative tail if e.g. the renters stop paying and trash your place when evicted.

That's what reserves, insurance, and a real estate attorney are for.

When my wife did the math before purchasing in our market, you'd have to have frequent or catastrophic repairs, have crazy vacancy (>50%), or be taking in well below market rate for comparable units (or some combination there-of).

It seems the kind of property management it takes to sink the rent-vs-buy gap is beyond abysmal and made us really confident that we could afford to purchase despite not being sure if we're staying in the place long-term.

It depends on the market segment. It's not that difficult to pick markets where the 1% rule (rent should be ~1% of the value of the home) applies and maintenance and vacancy are minimized. That's going to be primarily middle class and upper-middle-class markets in areas that don't have absurd "values" for homes.

It's like anything else. Buy low, sell high.

Capital is cheaper than ever and prices are insane right now. If your goal is to make money, this is pretty clearly not a time to buy in many markets.

Renting always has very significant downsides. You have no control, sacrifice flexibility, and are always exposed to any market price changes in the market at lease renewal.

The rent vs buy calculators focus too much on asset value vs. cash flow.