Show HN: Should you buy a house and rent it out?

You know the same thing applies to stocks and shares. And in fact stocks and shares have risen more historically [1]

Shares also have liquidity, you can easily sell them in part or whole. You can diversify. One incident could easily destroy a house, if it destroys your well diversified stock investments you've probably got other problems.

So agreed the stock market is the better investment, but as we can't see the future, both are based on past performance. Yes there are headwinds, there always are, I can think of many many reasons why stocks could fall, that doesn't really change what has happened historically though.

Of course the beauty of investing is that if you disagree you can put your money where your mouth is :)

[1] https://www.investopedia.com/ask/answers/052015/which-has-pe...

Also it's not only about work, but cost of maintenance.

If having to fix a clogged toilet at midnight once a year is the sacrifice I have to make to retire early, so be it.

Anyway, point being, this is like any other investment, you have to do the work up front to ensure the risk and payout are balanced. In their case, it was a no-brainer to keep the house when they moved into something larger. Almost zero chance of the home being unoccupied, better than average chance at a good tenant, etc. But, they're also financial well-off and could afford to keep a relatively expensive house in a nice area - obviously not an option for many in the middle-class.

Anything that draws attention to that field, as 1% doesn’t draw attention.

In my case, taxes are roughly 2.5% alone. Then while a given year maintenance doesn’t feel like 5%, over 30 years you have to peanut butter the big expenses such as roof replacement, or kitchen renovation, and those really do add up.

By and large, all fields should be a bit pessimistic, let people bias them back down, or simply add a “risk” field that can fold in pessimistic outliers into the simulations.

Given you're positioning this app and article as a means to answer the question on buying a home and renting it out, you should disclose these items (liabilities) to the reader and let them figure out the scenario for their local market, rather than hoping for the reader to do something.

Property tax is a large expense, and insurance is also a required expense if you have a mortgage (in the US). Finally, income you generate from the house (Rental Income) is taxed at your effective tax rate, and this will be a Large Liability at the end of each year.

Although there may be deductions you can take to minimize some of the expenses (in the US), you will be required to pay taxes on the income you generate and I suspect that's the case across all countries.

That said, I agree with your point in this case that the leverage is the main component of the return, and greatly increases "risk", for some definition of that word. In a non-recourse state where you can default on the mortgage without losing other assets, the risk calculation must also take that into account.

I owned a student home which I bought from partly smart and mostly lucky stock investing (I had savings from strawberry picking (yes, really; that made money faster than coding in those days for me) and I put it on Borland before 2000; they went up big time, I sold at the right time and student me could buy a house suddenly); it was in a city with high student housing prices and it was a really good house for it; it was big and could house 8 (to 16 if pairs) students paying 8*400 euros/mo. It was not easy money though; I lived there too for a while and the constant maintenance drove me up the wall. I am (always was) mostly someone who lives in his head and thinking about code and leaking toilets, pipes, flooding etc really is something I cannot deal with. So I sold it after 4 years of getting stressed.

I definitely wouldn't do real estate again; I like virtual assets and the stock market & starting + selling companies treated me a lot better than real estate ever can do. Without the worries of brick & mortar.

There are great opportunities to set yourself up for life, but many of those require a chunk of money to begin with.

In my country the rental yields are about 6% and interest rates on commercial loans about 3.5%, and you can get commercial loans financed to about 70%.

In other words, with 300k down you can invest $1m. You gain about $60k a year. You pay about 25k.

The remaining $35k you use to maintain and, if you want, pay down the loan.

Average 3% long-term price inflation after 30 years means your asset grew in nominal terms by 2.5x, while your debt didn't inflate. So even if you never paid down debt but only paid the interest, you could still sell the asset for $2.5m and pay back the $700k you borrowed, leaving you with about $1.8m. The present value of that would still be double what you started with.

Of course, the $60k annual rent inflates, too. After 30 years it's about $145k. And of course, your interest of $25k doesn't inflate.

In other words, suppose you inherit this like my friends at age 20. You make an investment. By the time you're 50 years old, you've got a $2m retirement fund that cashflows >$100k a year. Yes, in nominal terms, but it's still a pretty sweet deal.

And don't forget, that is without ever paying down debt. Over the course of the 30 years, you cashflow $1-2m. If you actually use that to pay down debt and keep reinvesting the money, you'll end up quite rich.

To put the initial investment in perspective, if you get a 6% rental yield, a modest 3% appreciation, you get 9% total gross returns on $1m. You pay about 1% in costs on the $1m, and 3.5% in interest on the $0.7m, or about 3.5%. In short, you net about 5.5% on the $1m, or $55k, but you only invested $300k. So you're looking at a leveraged return of about 18% on your cash.

Suppose instead you have more modest assumptions, say 15%. If you take $300k for 30 years at that rate, you're looking at $20m, and a multi-million dollar income.

Hell even if you put it in the stock market, inflation-adjusted, at 7%, you're still looking at >2m by age 50, at which point you're looking at a >150k income, inflation-adjusted. Just from inheritance.

In other words, this person never has to save. He can spend every dime he earns, and still retire decades before most Americans. Or he could take that money and enjoy a far greater lifestyle, doubling a normal person's salary for the rest of his life and spend that, too.

And $300k isn't even an amount where you'd say 'damn, his parents were filthy rich'. It's the kind of money that a lot of upper-middle class people will inherit, when their parents pass away and leave them and their sibling a $500k paid off house, some stocks and some cash.

I've got a lot of my friends who go through life on such an easy-mode, while others literally have $300 in the bank, go into lots of college debt, and are struggling their way through life. The difference is pretty huge.

Inheriting a bunch of money and making basic smart decisions with it, is like a super generous form of welfare. Like playing the Sims with a $2k a month bonus-salary cheat, which grows into a $4k a month cheat and eventually a -20 year retirement cheat.

And I know because I grew up poor and got such a small cheat a little later in life myself, approaching 30 years old. I was already doing well and 'getting there', but the cheat made everything so much easier. It's kind of sad because as much as I respect the idea of building something, and passing it on to your children (inheritance)... it generates a society that's the opposite of a meritocracy and is dictated to a very large (inordinate) degree according to a socioeconomic birth lottery if you ask me.

Excuse the rant!

You’re totally right that these aren’t the best examples to show the real value of the approach. We wanted to keep things super simple to start getting feedback, but are working on a more involved example now. DCF valuations and options pricing sound like great ideas – will look into them!

What do you mean re: citations? Validating Causal models using forecasts from other means?

Most of the "advantage" of home buying comes from the ability to borrow money at (e.g.) 4% and hope the home appreciates at (e.g.) 5%. Small taxes and write offs can double or negate profitability.

(The down payment part of the investment might also be good diversification, but it is unlikely to appreciate as fast as the same cash would in stocks.)

> The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. [1]

https://en.wikipedia.org/wiki/Rent-seeking

I find this mis-use of the term a useful and unambiguous signal that the commenter is not fully versed on the topic. (cf. https://news.ycombinator.com/item?id=19707924 )

There are _lots_ of people owning to rent that don’t cover their actual carrying costs. They just justify it by thinking about the equity growth.

In fact, even the default example has negative carry costs. The initial interest on $480k plus $6k isn’t covered by $2k monthly rent, let alone principle payments and a more realistic maintenance amount.

It's not just home appreciation, it's down also the down payment.

Say the housing market increases at 5%/year. If you buy a house in all cash, you will get 5% returns.

However, if you use that same money for a 20% down-payment to take out a loan (say 3% interest) to buy a house that's 5X more expensive, your returns will be 13%/year (=5% * 5X leverage - 3% interest on 4X of the cost). Huge difference.

Of course, these are fake numbers, and fail to account for a variety of other factors (taxes, closing costs, maintenance, etc.). However, the point is that housing market increase is not at all the full story.

Although if all the net worth was due to house price appreciation, stock options don't seem to be making up much of net worth, or weren't included, either of which seems to undermine your argument?

Are you sure it is not the other way round: increasing attractiveness of the city (change of character) has lead to increased housing costs?

You usually need a deposit for a loan. Poor people generally don't have huge amounts of savings.

In the UK a mortgage is generally cheaper than rent.

You "choose" to rent when you have no other choice.

The output, e.g. after 21 years. You'll write something like property value is X +/- Y. The problem is that the distribution isn't symmetric. In particular, being at X - Y is far likelier than X + Y, at least if I interpret X as a mean. In addition, the median is less than the mean, which is X?

> I believe we are just taking the sum of historical earnings! What suggests otherwise?

As I scroll over years, the net rental earnings are clearly not linearly proportionate to the year.

But in general I agree with your point. Buying a place is about stability and control. Especially no one can kick you out as long as you make your payments. I don't think it's a better investment option out there but it's safer for most people than investing in things they don't understand. And if you happen to buy a place in an area that is booming in the next few years then it can really be worth it. But that's the same like buying early a stock of a company that makes it big.

That is never a valid inference. At the risk of sounding harsh, you cannot simply throw up your hands and say 'the simulation said so!' without understanding what is actually being simulated, or else you will get nonsense results.

> what gave you the impression that the appreciation maths was off

The 'probability cone' is clearly the wrong shape.

> so didn't want to add volatility there

Many fields the calculator, such as appreciation, have distributions attached to them. The way returns in real life get a distribution is via volatility, so it's highly misleading to both have a distribution width and say that you don't want to add volatility.

This is what your simulation is actually doing:

1. Pick a single normally distributed number

2. Pretend that is the return of your investment, linearly applied over many years. E.g. if the number I drew in step 1 is 4%, then I assume I got 4% return every single year until year N.

3. Repeat a number of times and graph the boundaries

By contrast, this is the norm in finance and financial economics:

1. Actually simulate a financial return process over a number of years. E.g. in year one, I returned between 0-6%, repeat for year 2 ... N, and keep track of the entire history

2. Repeat many times

3. Draw the distribution

Note that the 'correct' simulation procedure draws paths that go up and down, just like asset prices do in real life, while your simulation procedure only ever creates asset price paths that grow or shrink at a constant rate.

I strongly recommend either you give up on simulating returns entirely and make it a single point estimate, or do the simulation properly, otherwise your results are badly misleading. Here's a (very simplified) simulation approach:

https://www.investopedia.com/articles/07/montecarlo.asp