American Dream For Rent: Investors elbow out individual home buyers

The rebuttal you're probably going to hear about this is how this will inordinately punish the private citizen buying a second home as an investment property. We do ultimately need some amount of rentals and those need to be affordable - if the investment property has the hell taxed out of that's going straight to the renter. I say this in an effort to try to point out it's a complicated issue, I in no way support the current large investor predatory housing market.

That’s not a solution. If you do this then rent will just increase to make up for the tax increases. It’s a big Fuck You to the tenants. Taxes ALWAYS pass on to the consumer.

The best solution would have been to built more euro-style cities that are walkable and with much more dense, but that's almost impossible for most of the US now.

That will be terrible for the rental market.

BTW as a general rule any simple solution to a complex problem is always wrong.

There's a simpler solution: let people build. Relax zoning restrictions. If you don't constrain the housing supply, real estate will cease being a good investment. Houses should depreciate in value in time, just like cars. When this happens investors will not elbow out anyone, because there will be no investors, just like there are no investors in cars.

Does this help provide more housing? Or is it merely a justification to charge higher rents? It seems better for everyone if these houses could be torn down and replaced with multi-family units (apartments, row homes).

These homes are good investments because the area is in need of higher density and the land values will appreciate commensurate with that need. If property taxes are ratcheted up, it might make sense to just demolish the building and hold the land for its appreciation alone. Thus, further reducing housing stock and driving up rents.

If taxes are substantially higher - that will get passed down to the renter.

Should renting be a privilege only for the rich?

What happens when you're <30 and moving around for school & to get your first few years of experience?

What happens when your credit is awful and no one will lend you money for a house even if housing is 3% cheaper because there's less investors elbowing you out?

Most jurisdictions already do this don’t they?

This is just justification to charge higher rent.

I'll go a step further and argue that residential zoned property should be owned by residents, i.e., actual people that live on that property. By allowing the wealthy, and especially investment firms, to buy residential property as an investment... we are hastening a return to feudalism.

Also real estate investment is the basest, dumbest form of investment. It takes little to no intelligence to make money in residential real estate. I personally refuse to touch it on principle.

There are other countries who have laws that corporations cannot own residential property and legal residents are only allowed to own one residential property at a time. I do think there should be some relaxation of this law in the US so that folks can own a city property and a vacation cabin, or something, but I like the notion.

Why are you trying to make renting so unaffordable? Dislike renters in your neighborhood?

(To be clear I am not saying this is right or wrong, I’m asking. I have used renting to increase my flexibility and to live places I couldn’t afford to or wouldn’t want to own for fun / access to jobs. I can see not wanting someone that doesn’t intend to stick around long term in your neighborhood I suppose).

A similarly simple solution would be to ease the regulatory nightmare that has made low-end houses unprofitable to build, and all new housing much more expensive.

Not too many days ago there is an article showing that productivity in home construction has been almost nil for decades because the government inefficiency overpowers any construction gain.

Except it's worse, because no one could otherwise use that cubic kilometer of the sky as a place to live.

Owning residential land that you can't or won't live on, in a country with a significant homelessness problem, is depriving other people of shelter, a basic need.

Individuals can claim depreciation.

You have it completely backwards with respect to taxes. The tax code heavily favors ownership over rentals because owners aren't taxed on the "rent" they would have paid to themselves.

Big rental companies exist despite tax disadvantages, not because of them.

Owner occupied units don’t pay tax on imputed rent, and have untaxed capital gains up to 500k.

Owner occupied units also don’t pay 10% of revenue to a management firm.

It pencils out as a wash, otherwise people would simply buy their home as a corporation and rent it to themselves.

  now that the private equity guys have figured out how to cost effectively manage the properties

Anyone renting from one of this big corporations knows that this game can only go on for so long with this "cost effective" management. Pretty much every apartment I've rented from a big soulless corporation has had insect and rodent problems, dripping ceilings, poor ventilation, mold problems, and a whole lot more. When you build cheaply, maintain lazily, and extract as much profit as possible, you're effectively destroying the rental unit in the long term for short term gains. At some point these buildings will literally collapse due to poor maintenance. I can only hope that the government fights lobbyist attempts to "step in and correct the situation" with massive corporate bailouts.

Living in the Bay Area I’d kill for a $1M starter home, forget $400k. In our area a fairly normal family home on a small lot goes for $3M.

Bay Area salaries look good on paper, but it’s an illusion.

You are overstating the problem:

>This really pisses me off. I want to buy a home. There are millions of people in the USA living on the street

In January 2020 , there were 580,466 people experiencing homelessness on our streets and in shelters in America. Only 226,000 were unsheltered and on the streets. This is nearly an order of magnitude less than the claim above. Homelessness is a big problem, and we need to work on it, but lets do so with a clear-eyed understanding of the problem.

Source: https://endhomelessness.org/homelessness-in-america/homeless...

House prices and rents have also skyrocketed across the Northeast. This is especially crazy (to me) in rural areas and small towns, where I'm starting to see one bedrooms skyrocket above 2k/mo. Whole houses with even a single bathroom rarely drop below 3k/mo. When the average wage in your town is 40-60k, that's clearly unsustainable. These prices aren't that different from what I used to see in the outer boroughs of NYC in 2019!

I'm pessimistic for the same reason as you -- Big Money got a heavy hand. But in the longer term... I don't know, if half the country can't afford rent, at some point you'll see a legitimate revolution. Considering how dangerous those are for the average citizen I would rather the government fixed the situation before it spirals out of control.

Residents prefer to stick it to the greedy builders.

We know that monetary factors (like the federal reserve) can't be the main casual factor because rents are increasing at very low vacancy rates at the same (if not higher) rate as the price of housing.

If the fed was the primary factor we would see a divergence between housing prices and rent since the fed has minimal direct effects on rent.

Looking at the data, the primary driver is simply that more people are competing to live in urban centers as we have banned the construction of additional housing in most cities.

Also, nobody would build economy cars as long as there’s unfilled demand for higher price luxury cars.

your mortgage will be 5k/month in 10 years, that rent will increase

outside of property taxes homeownership better stability of expenses

It mostly sublimated sometime around 2008

If you rented out that house, what would you charge? Would you charge 3k, and lose 2k / month?

That doesn't make sense; so how are landlords surviving in your market then?

It's about location, location, location but you're right, a lot of people should not mess with it. How will cost of repairs look like if inflation keeps up and demographics keep worsening?

Home ownership is a forced saving mechanism. Your peers with 3k rentals are blowing their extra cash (on average).

Most of your 5K “expenses” are not really expenses, you’re buying equity in your home, which is worth money. When you die or move, somebody will sell your house and get a bunch of cash

When the renter moves or dies, they’ll cross their fingers they get their security deposit back

Big difference

>> I bought a 4br house last year. My monthly costs are $5k. Renting a comparable home is about $3k/mo.

1. Your rents will not be $3k/mo in 10yrs and almost definitely wont be in 20yrs. Your mortgage, assuming fixed rate, will be locked for 30yrs. After that, you'll still have property taxes, but no mortgage at all.

2. You'll be forced to save each month. Post interest, you are "building equity" though that is highly variable in the short term.

3. You'll get tax benefits on the mortgage payment that you do not get for rents

4. You'll get tax benefits on your property taxes (tenuous given SALT changes) that you would not get on renting

5. You're forced to form bonds locally since it isnt easy to move as a homeowner (txn costs eat thru a lot of $). You'll invest in your community, relationships, schools, Parent Teacher Organization, etc.

None of this is universal of course. If you own a house with huge issues that becomes a money pit, the equation turns against you.

You bought at the current peak. (and even still, very likely, though not 100% guaranteed, you'll be ahead in 5-10 years) Real estate is a long term play to come out on top. If you bought a house 20 years ago, you're sitting on a hefty profit right now. Maybe not generational wealth, but def 3-4X your original investment. And if you had the funds to purchase multiple properties between 2009-2011, you could very easily be sitting on enough wealth to comfortably retire and never work a day in your life again. Which is what was happening around that time. I remember trying to buy my first starter home and getting outbid for over a year straight by investors and all-cash buyers.

I'm now solidly in team 'buy' after spending a decade on team 'rent', but one has to recognize that there are certain markets in high priced cities where it makes a lot more sense to rent and invest in the stock market than it does to buy.

Housing usually keeps up with inflation. We seem to have forgotten that in the last decade or so, but eventually gravity will pull the housing market back down to earth. It's not an investment, it's a place to live.

I used to think like you but there are quite a few things that justify this

* Out of the 5K some fraction, say 2K, is going towards the principal (i.e. it is building your wealth). So now we are down to the same 3K you were paying for rent

* The government encourages home ownership with tax breaks. Out of the 3K left some part becomes tax deductible (mortgage interest and property taxes) until a cap. Say this is ~800 per month. So now you are already down below 3K

* The amount you pay is fairly fixed over long periods (10, 15, 30 years) based on your mortgage while the rent keeps going up.

* Finally, you get to pass this on to your heirs without paying any taxes on the gains (hence building generational wealth)

It’s because every dollar you pay off your mortgage is a dollar you get back when you sell the house. All of that 3K you paid renting is lost every month, but a sizeable chunk of the 5K you’re paying is effectively going into a high-yield investment account which you will “withdraw” by liquidating the asset (ideally). Even if the home value doesn’t grow incredibly, so long as it doesn’t lose value you’re still saving a ton of money over a long-term horizon.

Just ballparking the value of the house at around $1.5mil (you said last year, which I'm averaging out an interest rate of 4.5% and then rounding down. Assuming a 30 year mortgage) then in 30 years time, you'll have an asset with a value likely to be greater than $1.5 million.

Assuming you eventually have children, they may inherit this asset. That is wealth, and that wealth will transcend your generation.

That covers the literal definition.

On the other hand, the people who are lifetime renters will have spent (assuming rates stay static, which is unlikely) just over a million for which they have received no assets.

Your assumption is that they're pocketing $500k, and are ahead, but even if we ignore that their rents are likely to rise, while your mortgage is likely to stay the same, and the most likely outcome is that rental rates increase over time. Likely double. At which time they'll have spent the same, or more, or maybe slightly less, but still have nothing.

Meanwhile you'll likely make improvements, perhaps refinance if and when rates are lower, and the value of your home will almost certainly increase as well.

No doubt that it'll fluctuate in the meantime, and for sure there are plenty of maladies that can occur between now and 30 years from now, but at the end of the day, comparatively you are building wealth and stability for someone to inherit (or for you to capitalize into dollars, which is also inheritable) while lifelong renters are not. Assuming no meaningful changes (a big assumption) you will likely end up $3 million ahead of the renters on this timescale.

How much of that 5k is you paying amortization though? If you're just patiently waiting for your mortgage to naturally end itself after 20+ years instead of actively making extra payments to reduce how much money you'll pay to the bank in the long run then yeah, it's just renting with extra steps.

(Note: This might differ greatly depend on where you live. I'm in the EU, not sure how this scenario works in the US.)

You pay $5k monthly in mortgage and other expenses, I assume you include home maintenance in this. 30 years later the mortgage part no longer factors in, and you only pay a much smaller portion of that (just the tax and maintenance). I don't know what the proportion of it is typically but principal and interest payments are usually the majority of the mortgage, so at that point your payments should shrink.

So there's wealth in a few areas. One, once your mortgage rate is locked in it's usually not going to randomly go up, while with rent you can be sure the rent will always go up over time. Two, after your mortgage is paid off you have significantly lowered your living expenses, and any inheritor who continues to live on the same property will receive that benefit as long as they live there. Three, if/when you or your inheritor no longer want to live there, you have a house you can sell to someone else for a large chunk of cash. Owning a high value asset that's easy to sell is basically the definition of building wealth.

If the difference between home buying and renting is as big as you describe, then maybe it doesn't make sense. But it isn't always such a big difference; usually rent is more like 0.8x-0.9x the mortgage payment.

>The people before me 3x their money over 20 years, but they also did 2 renovations, including adding extra rooms. Where is this generational wealth I’m supposedly building by paying $2k extra per mo than if I rented?

With the numbers given, over 20 years the renters will have saved $480k compared to the buyers. But they also don't own anything by the end of it. So if your house you bought is worth more than $480k at the end then you effectively made money by buying the house. Then for every year after that, the deal only gets better for you, as your payments plummet and the rent only continues to climb. This is simplifying things a lot of course, the renters could invest the money they saved, their rent will go up over time, your house could go up in value or it could burn in a disaster, etc. But it's a good starting point for evaluating where it becomes worth it.

In your case, it won't. You would be better off renting and investing the extra $2k in assets that are productive rather than speculative. This should be obvious, but the West as a whole has bought into the housing as a form of wealth and can't let the music stop now without ruining millions of lives.

Housing as a form of generational wealth is a trick that works for the population as a whole for a generation or two. The majority of rentals come from regular people who bought long before you and have significantly lower mortgages or no mortgages at all, or large firms who have access to lower rates and more accounting tricks like depreciation. In either case, what they can afford to accept as rents is a lot less than what you can afford to accept as rent. The best you can hope for is significant appreciation or significant rent increases in the face of stagnant wages. High demand markets like NYC and SF can sustain ever increasing prices for a long time, but most markets cannot.

Why not both? Building fewer houses artificially constrains the supply, driving prices up. Investors prey on the market opportunity. We should definitely build more (IMO "missing middle" walkable mixed-use housing), but we also have to deal with the strong, moneyed, vested interest in keeping housing costs artificially inflated. This literal rent-seeking behaviour is so lucrative they won't just let us fix the problem without a fight. And even if we started to build dramatically more housing today, it would take years to catch up to market demands. So it might be a good idea to get the investors out of the game sooner to take some pressure off the market faster. And not just investors: individuals hoarding vacation homes and short term rentals should be disincentivized, too.