Forever-a-Renter?

[Did]

I do enjoy sclasses posts and this is an old topic, but the maths of course ignores the emotional relief some get from the stability of a home. If you own a bolt hole, and it all turns to shit, you still have somewhere to live.

Property markets also change over time. With populations increasing in certain spots, how can it not. Returns may cover rents where you are happy living now, but not in the future. We all want to be that old person that can move around and negotiate rents here there and everywhere, but the truth is most elderly people would find that very stressful, and also likely find that landlords are less interested in renting to them.

I recall we have spoken of this before.

[Ego]

We all want to be that old person that can move around and negotiate rents here there and everywhere, but the truth is most elderly people would find that very stressful, and also likely find that landlords are less interested in renting to them.

Chicken / egg. We get good at what we practice. Is it possible that the elderly find it stressful to move around and negotiate rents because they stopped moving long ago? They stay put so now they need to stay put. Can you think of anyone who goes against the stereotype?

[Chad]

Agreed on Sclass' post. Buying always seem like a lot of money to tie up in one asset, that in some cases is a liability.

Chicken / egg. We get good at what we practice. Is it possible that the elderly find it stressful to move around and negotiate rents because they stopped moving long ago? They stay put so now they need to stay put. Can you think of anyone who goes against the stereotype?

Surprisingly, my father is going against the stereotype. He has lived in the same house for 41 years, but he wants to sell the farm and move to a 1 bedroom apartment. He doesn't want the upkeep the land, two houses, and a barn requires. Though, he won't do it while my grandmother is still living in the 2nd house.

It will be interesting to see if he ever follows through with the sale, as it is out of character for him. He stayed in this small town and drove 1.5 hours one way everyday for a construction job. I always thought they were crazy for not moving closer to the city.

[JL13]

If you own a bolt hole, and it all turns to shit, you still have somewhere to live.

I understand this argument emotionally, but I'm not sure I agree with it intellectually. What happens when TSHTF? All renters are evicted? Why? I would think that when it turns to shit, rental prices will probably plummet. Owner's don't get to benefit from this.

And if it all turns to shit and you've got no money, you can't pay your property taxes, then the county takes the house from you.

[Sclass]

If you own a bolt hole, and it all turns to shit, you still have somewhere to live.

I understand this argument emotionally, but I'm not sure I agree with it intellectually. What happens when TSHTF? All renters are evicted? Why? I would think that when it turns to shit, rental prices will probably plummet. Owner's don't get to benefit from this.

And if it all turns to shit and you've got no money, you can't pay your property taxes, then the county takes the house from you.

My SO likes to remind me of this. She says homes aren't bought the same way they were in Weimar Germany. Loans, rates, construction will move around in a hyper inflationary environment. Owning a home may not be a guarantee of much. All that from a biologist.

That being said there were years when my landlord was jacking up my rent where I wished I had bought a place earlier. Confusing.

If buying didn't work, how come my penniless 76yo friend can live in a $2M home in Palo Alto, CA when she never earned more than minimum wage? Makes me scratch my head. I guess it worked for her in some ways.

[JL13]

If buying didn't work, how come my penniless 76yo friend can live in a $2M home in Palo Alto, CA when she never earned more than minimum wage? Makes me scratch my head. I guess it worked for her in some ways.

I don't know, but the property taxes alone on that property far far exceed the minimum wage!! There's something we're missing. Trust fund?

[jacob]

@JL13 - Perhaps this? https://en.wikipedia.org/wiki/Californi ... %281978%29

[jennypenny]

Not sure about Cali, but many states cap RE taxes for seniors. In PA, I can lock in my RE tax rate at 65 until I sell/die.

[Sclass]

If buying didn't work, how come my penniless 76yo friend can live in a $2M home in Palo Alto, CA when she never earned more than minimum wage? Makes me scratch my head. I guess it worked for her in some ways.

I don't know, but the property taxes alone on that property far far exceed the minimum wage!! There's something we're missing. Trust fund?

She has prop 13 taxes. I don't think she pays more than $1500 a year. Neighbors may pay $20K tho. Taxes on my mom's place in LA are less than $1000.

The 76yo had a divorce in 91 which was a recession in SV. Husband had to give her 1/2 the house when the market tanked. He was an engineer. So that helped. There were inheritances that helped. So there's a lot I haven't colored in. My point is the same kind of employees cannot buy the same home in these regions. Somehow buying long ago helped economically weaker folks get their foot in the door. Just the niggling fear that today may be my long ago when I'm 76.

[JL13]

I wonder what her actual ROI is though? It would be fun to calculate.

[jennypenny]

Just the niggling fear that today may be my long ago when I'm 76.

^^This. We're considering downsizing this year. We'd have a lot more cash to work with, but I'm not sure whether that's the better play.

I suppose it depends on where the house is. My in-laws bought their house down the shore in 1976. It was a duplex and they paid $76K for the top floor and $80K for the bottom floor. They put @$100K into it (raising it and turning it into a single). The house next door, which is almost exactly the same, sold for $1.2M (post-Sandy).

[JL13]

$80,000 + $76,000 + $100,000 = $256,000 investment. Today's value is $1,200,000, 40 years later. That's a 3.94% nominal return, and the CPI increased by almost exactly that same figure. They treaded water, essentially.

[JL13]

I'm not sure how much more or less it would have cost over the years to rent a place compared to their insurance + property taxes + maintenance + repairs. If rent was more than these figures, then their returns were a bit higher, but if it was less than those numbers, then their returns were even lower.

For comparison, $256,000 in a savings account would have grown to $1.6M today. 1-year treasuries would have grown to $4.8M, the S&P 500 $16M.

[Sclass]

I wonder what her actual ROI is though? It would be fun to calculate.

I was tapping on my HP12c when I started thinking about all of this. I like to use my 76 yo Palo Alto friend's numbers just to see what I'm missing. There are a lot of variables that I don't know like interest rates w.r.t. refinances. Remodeling? I come up with a range of 5-10%. It is really just a guesstimate but those are my bounds for my friend's ROI. This is just using different combinations of buying in 1991 for about $400k and selling in 2016 for $2,000,000. Various fudge factors for tax, mortgage insurance, property insurance added in or taken out.

This is an odd case because it is in a sought after neighborhood. Block from Steve Jobs place.

It's amazing what 5% can do in 25 years.

[Sclass]

$80,000 + $76,000 + $100,000 = $256,000 investment. Today's value is $1,200,000, 40 years later. That's a 3.94% nominal return, and the CPI increased by almost exactly that same figure. They treaded water, essentially.

Good first cut JL. But you have to remember they aren't putting all that capital in up front. It's going in as little payments over time. This will add a couple of percentage points to the ROI.

Edit- or maybe one point.

[JL13]

We're getting more nuanced that we have enough information for, but I was assuming a cash purchase. Leverage cuts both ways, and if your interest rate exceeds your rate of return then it decreases your returns. I think financing actually means we need to subtract a point because they were borrowing at higher than 3.94%?

[jennypenny]

I'd also add
--If the money were sitting in a savings or brokerage account, would they have left it untouched? Would they have had the fortitude to leave it invested through all of the downturns during that time? Sometimes the illiquidity of an investment like real estate is a good thing and keeps people from making rash decisions.
--It was much harder for an individual to buy "the S & P" during those early years if it was outside of a retirement plan. Fees were high and index investing was in its infancy.

I'm not necessarily disagreeing with you JL. Just pointing out other considerations.

[BRUTE]

SV is also kind of a special case, brute would argue. essentially, buying back then was a huge gamble, and it did pay off for early buyers in SV. but not everywhere, and not as much, brute would think.

brute was paying $2,000/mo rent (with 2 roommates) in SF, and found out that the landlord had bought the entire building (with 6 such units) for $50,000 in the 70s. so this dude was making ~$35,000/mo on a building he bought for $50,000.

but it wasn't clear back then that computers would become a big thing and SF/SV would be at the center of it. and back then, he had to collect the rent with a shotgun because the neighborhood (near wood st) was full of junkies and what not.

so brute really thinks it's hard to compare "successfully speculated on the tech boom"-housing with anything of a less risky/speculative nature.

what if the 76yo Palo Alto friend instead had invested all that money into Apple or MS stock? sure, great returns. but could humans today reproduce it? maybe, but certainly it wouldn't be trivial.

[JL13]

@JP

True. While not mathematically optimal, given the average person's temperament, keeping pace with inflation is a really great result. Lots of people just destroy their capital. Forced savings combined with an emotional anchor ("we'll always have a place to live") is truly a great bargain for many.

For those of us who like to shoot much higher than average, I like to point out to people that a $100,000 house than turns to $1,000,000 isn't really impressive.

[jennypenny]

@JL--It also depends on what you consider a good return. I shoot higher than average with some of our money, but I like the rest tucked away where I don't have to worry about it overmuch. When expenses are low, you don't need big returns on everything and don't need to beat inflation if you aren't consuming much.

As an aside, assets like real estate are counted differently than liquid assets for things like higher education, medicare, etc. ACA too now, right? It can be a great place to 'hide' a ton of cash in certain situations. It might also come in handy if they institute a means test for SSI, since I doubt they would include homes, at least at first.