The best investment I never made
lindventures.com
lindventures.com
There are probably thousands of examples of people making an outstanding return on investing in property. And the example given in the post is extremely contrived:
"For example if you can start a new business with $50,000 then sell 20% of it to an investor for $200,000 in 1 or two years, you’ve created $1m worth of value in that time. Do you think if you bought a property for $1m with a 10% deposit, it would be worth $2m in two years or less? No way."
How many people can create companies worth $1M in 1-2 years that with certainty? How about compared to how many people can buy property? And what if you had invested in a house in China back in 2007-2008? The value of your home would have doubled by now so that your $1M would have been worth $2M with no extra effort.
Context, timing, skill, and luck play a great role into what makes a good investment. Let's be wary of over-generalizations made from anecdotal examples.
Sorry but I have to point out that this is a very flawed comparison. How much work did you put into that house? - I think the assumption here is none. How much work did you put into your business? - depending on how much you consider your rate to be probably a lot... potentially even more than $200,000.
A more fair comparison would be an actual home builder or developer and there are many that do just this and could cite comparable or even much higher returns.
(I guess I just have an issue with the concept of "buying a house" and "mortgaging a house" becoming synonymous, when they are two very different things.)
Sure, looking _back_ at any commodity/stock chart and "making smart choice" is easy to do. You were lucky, but we are not out of the deep blue real estate hole just yet and we need weaker unemployment numbers in order to see a solid bump.
But is that the normal case? What are median returns for property investment versus self-funded-startup investment?
Most of us hear the constant refrain of what a good idea home ownership is, and how it so much better than renting, when you take into account the mortgage interest deductions and appreciation. And that's all true, but what they never really emphasize is that once you take out a mortgage you've got that $1,000 monthly payment (for example) that you've got to meet EVERY month, for the next 30 years or until you sell. And you have insurance, property taxes, maintenance, etc.
Carrying long-term debt and especially owning a home really does impact your thinking. You become more risk-averse. You start thinking that a steady paycheck is a better idea than taking the risk of starting a business. As time goes on, you feel like you have MORE to lose because you've been paying on the debt for a while and you actually have some equity. It's why banks view mortgages with equity as lower risk, and why car insurance is cheaper if you own a home.
As far as buying property as an investment, i.e. renting it out, the "common wisdom" is that you make your money when you buy. You absolutely need to get a really good deal when you buy, because the rent you're able to collect will basically be a break-even on your expenses, so wnen you eventually sell your profit is a function of your purchase price. Unfortunately a lot of people pay too much for houses that they think are in a "hot" rental area, and they never really make any money on them.
You've got a similar obligation if you rent. Rent or buy, you're still out on the street if you stop paying.
> Carrying long-term debt and especially owning a home really does impact your thinking. You become more risk-averse.
Meh, student loans, the ultimate long-term financial obligation, didn't make me risk-averse at all. I'm slightly more risk-averse today -- and I do own a home -- but I attribute a great deal of that to getting older. The prospect of starting over from 0 becomes less appealing the older you get.
> As far as buying property as an investment, i.e. renting it out, the "common wisdom" is that you make your money when you [sell]. You absolutely need to get a really good deal when you buy [...]
Yes. If you're considering buying a place that you'll possibly rent out in the future, you need to be serious about it and do your research. When I was scouring the internet for articles and forums about it, I was shocked to see just how serious -- and * unbelievably fiscally conservative* the people are who buy rentals seriously are.
Not really because usually you just need to give one months notice to move out. So if you are facing hard times, it would be easy to move to a cheaper place or completely move to another place where there is more work to be found.
A person that "owns" his own house would only move as a completely last resort because the costs associated with it are much, much higher.
Depends on the terms of your lease. [1-3]-year leases are common out here, in which case you'd have a problem on your hands if you gave a month's notice.
> A person that "owns" his own house would only move as a completely last resort because the costs associated with it are much, much higher.
That also depends on the situation. If there's equity, they may make money by selling. It's impossible to compare these situations except to say that if you don't pay your landlord or bank, you're out.
Not true at all. Buying means you've committed to a particular lifestyle, city, and income level for a very, very long time. Renting carries none of these commitments and risks.
If I lost my job today I wouldn't be anywhere near screwed - my lifestyle can be downsized a lot in very short order (on the order of 1-2 months to reduce my burn rate by 5x).
This freedom is important to me. Right now I'm in the middle of a relocation - I want to experience a new place, with a different pace and different culture. I wouldn't be able to do this if I had bought property. If I wanted to bootstrap a startup I can easily move into a much, much cheaper place and immediately free up a lot of capital.
Well yes, it's true that if you stop paying your rent or mortgage you will be evicted. Although you're safer in a house you bought because the bank has to foreclose first.
> Buying means you've committed to a particular lifestyle, city, and income level for a very, very long time.
Depends on your definition of "a very, very long time". 5 years is the accepted minimum threshold for buying a place, and if you did your homework properly you should be able to break even renting it out. There was a time when 5 years seemed like an eternity to me, but not these days :)
> This freedom is important to me.
This is the important bit. There are 1,000s of rent vs. buy arguments all over the internet but IMO it comes down to what you want for yourself. That freedom to move about at will is important to you, so it sounds like you've made the right choice for you. I like where I live and I despise moving, so buying was right for me.
From a pragmatic point of view, the bank owns it, not you, at least not all of it.
Unless you actually bought it.
I wish people would be more clear when talking about strategy if they are talking about BORROWING to buy a house and associated interest payments, or actually buying it outright.
Buying a house with a 30 year mortgage is not really owning a house, couldn't agree more. You might make money off it, you might not, if the market goes down - but if you'er buying it to live there for the next 30 years, adn paying for it for hte next 30 yeras, well, it's not really an asset you can use. might as well pay less, rent, and save up. (worked for me)
> might as well pay less, rent, and save up. (worked for me)
I'm not sure about that advice these days with fixed rates in the 3% zone. In that range, inflation basically pays your interest for you. The tax writeoffs are nice. And there are some major deals to be had -- I bought a place 2x the size of my rental, includes a garage, in a better neighborhood, and pay ~$500/month more than renting. I don't have to worry about moving or neighbors, or if my landlord's going to jack up the rent... feels good, man.
If I had bought a property I would have had to service the gap between
the rent and the interest repayments along with other costs like
maintenance etc. If I could buy a property outright, or if rental
income serviced the debt and made me money, then I’d buy property but
it never does.
Thinking like Warren Buffet ($1 today is not $1, but actually $20 after it compounds many cycles) is technically inaccurate (the correct thing is DCF/DV), but products a more correct result.
The big change in the past year is that private equity and hedge funds have gotten into buying single family homes, using automation, to rent. The thing which terrifies me is that they are more efficient than random individuals as landlords, so they may all exit the market together. I've also heard that they are much more efficient at setting rents, doing so based on income in an area, vs comparables -- if they can take enough inventory out of the market, that ends up making a lot of sense.
The other is that housing in Australia has gone berserk in price. We have the most expensive housing relative to average income in the developed world, except for Hong Kong. That's happened in only the past 10 years. What was a $200k house then is now a $500-600k house, and wages have not grown to match. Buying a house now is not a good investment. Buying a house back then was a good investment, with the benefit of hindsight.
Granted it is a little like Apple shares, as expected high future demand would be built into the prices.
HECS is such a better system that what you read about US student loans that I wonder why they don't have similar. HECS doesn't touch your wage until you earn around 50k and even then only takes a small percentage. No one feels like they are taking a big financial risk here undertaking higher education.