Riggerjack wrote: ↑
Mon Aug 12, 2019 8:56 am
But what I really wanted to address was shemp's assumptions. As a landlord, getting out of the business, I agree with all he said, with one huge objection.
All of his assumptions are based on the appreciation caused by relatively stable demand that urban markets continue to enjoy.
Actually, my chief assumption is that overpriced real estate remaining overpriced for a very long time. Same as the stock market is still a better investment than bonds even at current very high PEs, provided those PEs remain high. That is a questionable assumption, because long time means like 60 years for real-estate and stocks at current low cap rates and high PEs. Duration increases as real interest rate (inverse of PE) decreases.
As for the local economy issue, that is true, of course, but not too worrisome. Yes, Silicon Valley could turn into Detroit, but unlikely. If this does happen, you have the option of walking away in California (non recourse on first mortgages for owner occupied properties). Which is a great reason for buying the biggest house possible, as I'll discuss more below. Anyway, economic upheavals affect other investments as badly as real estate, including investment in your career.
The consistent mistake I see by too many posters is to treat owner occupied real estate as other than a business, thus ignoring income (imputed income for owner occupants). Significant appreciation/depreciation should never be assumed, just as you should never assume expansion of PE multiples. Real estate is not a perfectly efficient market, but it is efficient enough that people will not sell if they think prices will soon appreciate. And if they do have to sell, then arbitragers (flippers) will step in. Either way, market prices soon reflect expectations for appreciation/depreciation. Buy real estate for income (imputed income for owner occupants) and/or opportunity to renovate (a business in itself).
Buying a small house is fine if you can't tolerate the idea of being a landlord, but it is not the best idea right now in Silicon Valley (among other places). The best idea is buy the biggest house possible, using as much leverage as possible, then rent out rooms. As owner occupant sharing common areas (kitchen), you have tremendous legal rights a regular landlord doesn't have. In particular, you can evict easily, discriminate much more in tenant selection, be very stringent with rules. Plus you get more tax advantages than a regular landlord. If local industry shuts down and rents and housing prices collapse, just walk away and lose only your down payment.
Just about every financial blog comes to the same conclusion: real estate is a far better way to get rich than stocks, assuming you are willing to treat it like a business and have skills to be a part-time landlord: skill at selecting and managing tenants, skill at crunching financial numbers, skill at hiring and managing repairmen, lawyers, and other professionals to do jobs you can't or don't want to do yourself.
I never invested in real estate myself because I was frequently moving while employed. Transaction costs are indeed a killer with real estate. But I have frequently recommended it to younger relatives who are location stable, especially the idea of roommates. OP's example is unnecessarily pessimistic about big houses because he entirely rules out roommates, though that is precisely the direction ERE people should be going.