On the risk of investing in real estate for the long run

[flying_pan]

- They no longer have big mortgages, or they shouldn't, so they have very low living costs.

So do have other people whose houses haven't appreciated that much.

- Because house prices have gone through the roof, people who bought big multi room houses for peanuts can charge very high rents when they rent out the rooms to other people or students or to travellers eg air bnb, this is while paying very low living costs for the house because you bought it for peanuts.

Do a lot of people really do that? I can imagine it is pretty annoying, especially if you have kids, and you bought your huge mansion to have "your place" in the first place. I am not talking about financially savvy people, who are ready to hustle, rather regular folks.

- Allows you to raise a lot of finance cheaply. This can be used for so many purposes making people wealthier or have a higher more comfortable standard of living and less dependency on actively earned income. The cheap finance could be used for consumption purposes. Or to fund business ventures. Or to invest in investments like equities.
- Allows you to use the equity in your house to buy units or apartments to rent out.
- Allows you to reverse mortgage your house into retirement to turn it into a very generous annuity if you wish.

All these options look like reverse mortgages to me. How else can you raise money? Is it a common thing? Who will give you money for "equity"? Banks?

[flying_pan]

Spare rooms & garages can be rented out for housing and storage. You can use your home as an office instead of acquiring an office. In my rural locale, I can use my property as a retail space and I can even use it for light industrial production. One can also move out of the house, collect from renters occupying the house, and rent yourself some place else to live.

Well, not everybody is comfortable renting part of their house. Some people are fine, some people want these financial benefits, but majority have bought it to have their own place. So I am not sure how popular it is.
I use my home as an office, but it is just one room. Maybe to some people it is critical.
Retail space – depends on your location (nobody will go to the middle of nowhere and local code. Where I live, you can't do any business.

It absolutely is an asset to be included in one's net worth because it can be sold and the gains used to pay a rent or purchase another home. If you don't wish to sell, there are reverse mortgages (not a recommended path, but the option is there). Valuing that asset is tricky, but it most definitely is an asset. THERE ARE MANY OPTIONS FOR HOW YOU USE YOUR ASSET!

I don't argue that it is an asset, but I also disagree that people view houses as pure investments. They become attached to both houses and area (likely there were attached to the area already), and are not very keen to sell it and move somewhere cheaper. So, yes, in case of need you can move and use your asset, but I think many do it reluctantly.

[Mister Imperceptible]

Why The 2008 Housing Crisis Recovery Is Just An Illusion

https://m.youtube.com/watch?v=GFkkN2M3Y3c

[Kylinne]

Spare rooms & garages can be rented out for housing and storage.

This. I have a 4 bedroom house; I have had anywhere from 2-7 people living in it at one time, either paying rent or providing labor or both (cooking, gardening, digging ditches, haircuts, grocery shopping, carpooling to social events, occasional airport runs, emotional support/therapy, etc.) and I have rented out my garage to friends that are moving (or added it into to rental costs for those living here). I have never not had someone living with me in the 8 years I've owned the place, and when it's only been me and my SO it's felt way too empty and like a waste of space, so we've usually had new roommates within a few months when it's empty. I've had friends, strangers, acquaintances, random college kids, friends of friends, random craigslist people. It's been interesting dealing with the social dynamics of a whole variety of people from different backgrounds; it's been even better that they've helped remodel the place (either through their labor or their capital) and cover the housing expenses. Plus, if/when they leave, I often have places to crash wherever they're living now.

[Ego]

The Economist is coming around to the creeping dysfunction....

https://www.economist.com/leaders/2020/ ... cy-mistake

Economies can suffer both sudden crashes and chronic diseases. Housing markets in the rich world have caused both types of problem. A trillion dollars of dud mortgages blew up the financial system in 2007-08. But just as pernicious is the creeping dysfunction that housing has created over decades: vibrant cities without space to grow; ageing homeowners sitting in half-empty homes who are keen to protect their view; and a generation of young people who cannot easily afford to rent or buy and think capitalism has let them down. As our special report this week explains, much of the blame lies with warped housing policies that date back to the second world war and which are intertwined with an infatuation with home ownership. They have caused one of the rich world’s most serious and longest-running economic failures. A fresh architecture is urgently needed.

[unemployable]

I owe the board a followup on this.

Sold in December for $730k, about 9% under original ask and some eight months on the market. Just under 2% annualized nominal return. Likely zero or negative nominal return when adding in property taxes.

[unemployable]

Mom and I were talking about the house she grew up in.

Her dad bought it in "1946 or '47" for $7,000. I'll use 1/1/47 for calculation purposes.

It sold in July 2018 for $336K. A week on the market, went over asking. Pics are still on Zillow. It's been kept up well and tastefully appointed.

Exactly a 48-bagger. Annualized gain of 5.56%.

But wait... this was in Taxachusetts, pretty far out from Boston but on the train line. Property tax was $4800 in 2018, over $5000 this year. Basically 1.5% of the value of the house. So closer to 4% annualized net of that.

Inflation over that time was 3.5%. Seven thousand 1947 dollars is $82,048 July 2018 dollars. Good luck finding a four-bedroom house within an hour of Boston for that much. Northern Maine has them, though, in abundance.

For most of those 71 years, basically returned a savings account that you got to live in and maintain. Her current house is serendipitously worth very close to the same amount, but her property tax bill is less than a grand. Her advice: "Don't buy a house in Massachusetts."

[Sclass]

Exactly a 48-bagger. Annualized gain of 5.56%.

That’s why I never bought a home.

[sky]

And if you don't do the expensive maintenance required, the value falls rapidly.

[unemployable]

That’s why I never bought a home.

For me it was perpetually being in debt, expenses that never go away, and being tied to a need to furnish the carrying costs of same. Although at this point the Feds have demonstrated they'll socialize the risk whenever a wide-scale disruption occurs.

[7Wannabe5]

You pay for the basket of services and access that amount to property tax whether you rent or own. Whether any realm’s particular basket of services and access is worth that price for you is a different decision than rent or buy. Also, choosing to live alone is likely the biggest differential in overall cost/profit.

[Sclass]

You pay for the basket of services and access that amount to property tax whether you rent or own.

Out here in CA we have property tax control. This is a funny quirk for me. I have been fortunate to rent off older landlords. I chose by looking at the last sale on Zillow which basically tells you if they have derated prop tax for old people. I believe some of this savings was passed on to me in exchange for being a good tenant - like renting for ten year stretches, offering to fix leaky faucets and clogged drains by myself and paying on time. Kind of a subtle game. It has made me think hard about turning my mother’s property into a rental because I’m paying 5% the tax payment of most of my neighbors because at the assessor’s I’m technically 85 years old. It’ll give me a lot of wiggle room in what I charge for rent which if negotiated properly will lead to a better tenant. Wishful thinking on my part.

Being a lot younger than any of my landlords meant I don’t necessarily have to pay the full property tax commensurate with the high present cost of CA real estate. Maybe. If they are willing to pass on some of the savings tome in exchange for headache free landlording.

This became painfully apparent when my next door neighbor divorced and sold her place two years ago. On her sell sheet they put all the monthly costs of owning the home based on a few different loan scenarios. The takeaway was I rent my home for $3000 a month. According to her sell sheet her place would cost $8000 a month with interest, HOA, taxes, Melreuse, et al. That is a huge difference I can allocate towards AMZN stock every month. At a certain point buying a home was unthinkable.

[7Wannabe5]

@Sclass:

Well, in my extended region, I could pay cash for a 3 bedroom house, and maybe rent out rooms to 2 other people, for less than a year’s worth of the $5000 difference in expenses you mentioned

So, you are at least two nesting doll levels of housing above me. For instance, if you had a friend you were cheap renting a room to, I might be his friend who is sleeping in a sleeping bag on the floor of the room.

[Sclass]

You make me want to relocate.

[7Wannabe5]

I was considering buying a 2 bedroom house for $10,000 a few weeks ago, but the neighborhood was just a bit too janky. It would have been sweet to get my housing expenses down to less than $100 plus maintenance and utilities. I couldn’t tolerate paying $1200/month for hotel (especially once I suspected bedbugs),so now I am back with ex-BF paying $350/month* (plus cooking minus groceries) towards his $900/month rent.

*which he says he is putting into account I will inherit if we end up married and he dies first.

[chenda]

@7wannabe5 - Do you still have a rural cabin, or is that only for summer use ?

[7Wannabe5]

@chenda:

The rural cabin at rural permaculture project belongs to ex-BF. I still own my urban permaculture project on paper, but I said I would sell it to ex-partner. When I get vaccinated I might move into anarchist co-operative ($150/month plus gardening chores) or similar.

[chenda]

@7wannabe5 cool, hope it works out

[nomadscientist]

An owner-occupied home is a different asset class to 'real estate' as a whole.

This is based on historical expropriation patterns.

It's a valuable wealth-defense mechanism even if it under-performs less defensible investments in good times (which it should for exactly that reason). It is excellent diversification if your portfolio is large enough that it's diversification and not swamping.

Owner-occupied home should be passively physically defensible, sturdy, able to take in guests, but not look so great on the outside. There are a lot of buildings like this in formerly wealthy parts of the world, e.g. Sicily.

Placement and keeping the walls up matter most.

One risk is your house specifically, or all houses everywhere, will be taken. Another is that the neighborhood it is in will be destroyed.

[white belt]

I agree with the discussions in this thread about differentiating between owning rental properties and owning a single family home to live in.

I will also add that rent vs own can turn into a bit of an apples to oranges comparison because owning a property gives the owner certain privileges under the law that are not afforded to renters. For example, in my state I cannot trap animals on private land unless I am the owner (so squirrels are likely to take a big bite out of my vegetable production this Spring).

Additionally, certain ambitious eco projects like solar panels, grey water harvesting, wood/rocket stove, biointensive vegetable gardening on lawns, and small scale livestock are not possible on rented properties without extensive landlord approval. Therefore, although renting provides some flexibility, it also provides limitations on certain life models. I will have more to say about this over the next year when I will likely be pushing the limits of what is possible with homestead production in a rented property. There are of course ways to live a low carbon footprint sustainable life without owning land (see Rob Greenfield), but these strategies are a further Wheaton step away from "normal" society and some of them require skirting zoning laws.

In Chris Cole's article about the Dragon Portfolio, where he models the performance of every asset class over the last 90 years, he has the following to say about real estate:

Real Estate, defined herein as price appreciation of a single-family home in the United States, is one of the most important investments for the typical American family. The salaryman(woman) that owns a house with a mortgage at a 20% downpayment has replicated a 5x leveraged exposure to the business cycle. While the return to risk is better than Equities (especially after taxes), this investment will still suffer during periods of secular decline, including the periods between 1929-1944 and 2007-2011. Real Estate has the highest return to risk of any single asset we tested over 90 years.

Note that his analysis did not included taxes and transaction fees associated with real estate. Also it is looking at the US as a whole, not a particular market.