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

Ask your investment, budget, and other money related questions here
classical_Liberal
Posts: 890
Joined: Sun Mar 20, 2016 6:05 am

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

Post by classical_Liberal » Thu Aug 15, 2019 11:11 pm

Working in travel contracts the past 4 years had the unintended consequence of making me an extremely skilled mover/relocator. I can efficiently move locations with very little cost and effort, yet looking at my home, you'd never noticed a difference vs someone who has lived in the same place for years. Of course renting is a necessity for this lifestyle, but finding quality/cheap rental units is part of this skill.

So how much is this skill worth? Well, my housing cost is about 2.5% of current net income, what's "normal"? I consider my current location ideal for current goals. As in, I literally could not have done better with 5X the cost in my present circumstances.

So yes, moving adds stress to life. However, most people do it so infrequently, they grossly overestimate the hassle/disruption and are extremely unskilled in the process making it worse than it should be. Young people tend to move more often and that equates to greater skill, which intern makes them more resilient.

Seppia
Posts: 1015
Joined: Tue Aug 30, 2016 9:34 am
Location: Italy

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

Post by Seppia » Fri Aug 16, 2019 3:56 am

2.5% is pretty amazing. I will probably end the year around the 10% mark and I thought I was doing awesome :D

IlliniDave
Posts: 2534
Joined: Wed Apr 02, 2014 7:46 pm

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

Post by IlliniDave » Fri Aug 16, 2019 7:38 am

classical_Liberal wrote:
Thu Aug 15, 2019 11:11 pm
So how much is this skill worth? Well, my housing cost is about 2.5% of current net income, what's "normal"? I consider my current location ideal for current goals. As in, I literally could not have done better with 5X the cost in my present circumstances.
Average in the US is 37% per a quick google. Didn't dive into details but I assume it's relative to net after-tax income. The link below gives some data relative to gross income.

I'm an outlier in the sense my mortgage is paid off and my income is probably relatively high for my neighborhood; and I live in a state with moderately low property taxes. This year barring an unexpected large repair or similar, I should come in at something under 3% of net income for my residence. Last year was higher, probably around 8% (including rebuilding/upgrading a large privacy fence). I'm not including utilities in those estimates. One thing about owning versus renting is that expenses are less predictable. Another is that ownership tempts one to make optional improvements/upgrades more so than renting. Of course, the percentages were much higher while I was paying off the mortgage.

http://money.com/money/5647366/housing-costs-by-age/

User avatar
Bankai
Posts: 497
Joined: Fri Jul 25, 2014 5:28 am

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

Post by Bankai » Fri Aug 16, 2019 8:58 am

2.5% is spectacular. My mortgage interest, council tax (local tax, inc. water and waste), energy, maintenance of communal areas and broadband add up to 6.7% (my half of expenses). Including principal, that's 10.7% - still acceptable I think. 30% sound scarry.

Seppia
Posts: 1015
Joined: Tue Aug 30, 2016 9:34 am
Location: Italy

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

Post by Seppia » Fri Aug 16, 2019 11:52 am

In certain situations, you almost don't have any other choice.
My first job was in Paris, I was making 1240€ net per month and a room for rent was 400€ (and I got a great deal).
I imagine many youngsters starting their careers in NYC or San Francisco are in a similar situation (unless they decide/have the ability to live with their parents).

anesde
Posts: 61
Joined: Wed Jan 09, 2019 8:32 am

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

Post by anesde » Sat Aug 17, 2019 3:32 am

Seppia wrote:
Fri Aug 16, 2019 11:52 am
I imagine many youngsters starting their careers in NYC or San Francisco are in a similar situation (unless they decide/have the ability to live with their parents).
Totally agree. I was lucky enough to skirt most housing costs throughout my 20’s. Lived with parents for 2.5 years at the start of my career instead of paying through the nose for an NYC apartment, and then took a series of positions where my company paid for housing. Not everyone is so lucky or willing/wise enough to take advantage.

2.5% is incredible. I’m running at 7% and thought that was good.

Riggerjack
Posts: 2638
Joined: Thu Jul 14, 2011 3:09 am

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

Post by Riggerjack » Sat Aug 17, 2019 11:55 am

Most young people don't seem to experience much anxiety about that type of thing. Are they ignorant of the consequences? Have they not yet matured into fully responsible, stable adults? Or are they simply more resilient and they know it?
I wonder if this is an introvert/extrovert difference.

Most introverts I know are very interested in their homes, and making their space exactly the way they want, budget permitting. They want more control over their environment, often including wanting a yard, if for no other reason than to not share walls.

Whereas many extroverts I know, treat their home as the place they go to change after work before going out to do whatever they want to do. They may bring someone back to that space, so appearance is of importance, but the more extreme personalization is a far lesser priority.

I expect this is related to how much time is spent alone (or as a couple) in the house.

jacob
Site Admin
Posts: 11159
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

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

Post by jacob » Sat Aug 17, 2019 12:31 pm

I think age proxies for the latent variable of location-specific obligations. On average, older means more accumulated obligations, responsibilities, connections, and stuff. To stay "young" in those terms would require an active effort in cleaning out existing such obligations which most simply do not do continuously but rather delay until they're forced to by a move.

It would be easy to test this by looking at the difference between location-tenure and stress rather than age and stress. Young people tend not to have much location-tenure by virtue of being young. In particular, if we're talking <25yo, many obligations were likely handled or assisted by their parents.

User avatar
Ego
Posts: 4169
Joined: Wed Nov 23, 2011 12:42 am

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

Post by Ego » Sat Aug 17, 2019 2:07 pm

@jacob, I agree that it is more difficult for people with lots of obligations, responsibilities and stuff to swing from vine to vine because all that weight makes it harder to reach for the next vine and let go of the last. Consequently, those people stagnate. That once worked out okay because the world didn't require a whole lot of change after the age of about 25 or 30.

Harari talks about how we used to live in a world that was split in two main phases, the learning phase and the doing phase. We are witnessing the end of that era. Knowledge is obsolete not long after the learning phase ends. As he says, the key skill of the 21st century will be suppleness, fluidity, and resilience to keep changing, learning and redefining oneself throughout life.

https://youtu.be/JJ1yS9JIJKs?t=4289

A thirty year fixed rate doesn't fit well in the new world.

jacob
Site Admin
Posts: 11159
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

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

Post by jacob » Sat Aug 17, 2019 2:55 pm

I disagree that stagnation is an inevitable outcome. A good example would be a business where the clients are location-specific, for example, a plumber. In such a case, moving around often means resetting the customer base to zero for every move. One will get better and better at rebuilding one from scratch, but on the other hand, one will never get the experience of building on top of an existing base.

In non-customer terms, consider our two neighbors both of whom have lived here for 20+ years. They know everybody---large number of connections---and vice versa. Their social capital is immense. (This is the first time I've observed the awesome power of that level of capital.) Connections also serve as a source of opportunities ("I know a 'guy'") and a safety net. I think the latter is what keeps many staying in rural America and stagnating as seen from a career lens.

In terms of gardening, it also takes a few years to build up good soil. Moving constantly makes good gardening nearly impossible.

To put it in more general terms: You can have either two junior positions in two different fields or a junior followed by a senior position in one field. You can go wide or deep. Of course there are benefits in trying to do both (where ERE comes in)... but there are still trade-offs which is why ERE is more complex and therefore harder to figure out. Also see, viewtopic.php?f=7&t=10819

User avatar
Ego
Posts: 4169
Joined: Wed Nov 23, 2011 12:42 am

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

Post by Ego » Sat Aug 17, 2019 4:15 pm

Well, we are in the midst of the change. A twentysomething plumber is living in a different world than a sixtysomething plumber. One lives by yelp reviews, the other by word of mouth.

Social capital and connections are important. Critical in fact. Being good at building them and maintaining them are skills that are increasingly critical in a world where we are atomized and closed off from one another. But we've also got to be flexible enough to disconnect when friendships stagnate and be free to relocate when the previous place is no longer ideal. Holding on to friendships or homes for no other reason than the fact that they been there for many years is the definition of stagnant.

To put it in terms of gardening, growth certainly demands good soil, seed and water. It also demands pruning, weeding and sometimes transplanting.

But If we are honest we've got to acknowledge that gardening, once a very important element of life, is today little more than a marginally useful albeit pleasant way to pass the time. For many homeowners, good soil is the curse that causes weeds to pop up between the drought resistant rock gardens in their back yards.

daylen
Posts: 1048
Joined: Wed Dec 16, 2015 4:17 am

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

Post by daylen » Sat Aug 17, 2019 5:13 pm

@Ego I cannot quite pin it down, but for some reason your posts always trigger me. You are like my arch-nemesis personality wise.

I think it has something to do with how you use the idea of "change" and "adaptation" in such a universal way. Your frame respects the differences in people while simultaneously assuming everyone has a similar utility function.

Then again, we all have to deal with such inconsistencies. Like why should I even pointing this out when I actually enjoy the diversity of frames (especially those that would trigger me). :D

Sclass
Posts: 1619
Joined: Tue Jul 10, 2012 5:15 pm
Location: Orange County, CA

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

Post by Sclass » Sat Aug 17, 2019 5:33 pm

Yeah good points all around. Everyone (well almost everyone) seems to chase this state or permanence.

After hitting estate sales this morning I can tell you it’s a fool’s errand. Yet people want it and idealize it.

I’ll have to watch the video. Sounds like an interesting thought about learning then doing. That does sound pretty archaic in today’s world. A lot of the strife I see around me has its origins in an unwillingness to change. You know, like ex- steel workers and their families shooting fentanyl in Erie instead of becoming welders in the Permian Basin. It’s a dangerous game sticking around.

bigato
Posts: 2065
Joined: Sat Mar 05, 2011 12:43 pm

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

Post by bigato » Sat Aug 17, 2019 6:01 pm

daylen: Ego sounds to me like a twin, and you on the other side triggers me. Funny, huh?

daylen
Posts: 1048
Joined: Wed Dec 16, 2015 4:17 am

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

Post by daylen » Sat Aug 17, 2019 6:32 pm

Perhaps this is what keeps this place running. Taleb said something along the lines of .. "if everyone either agrees or disagrees with you, then you are probably doing something wrong."

thrifty++
Posts: 856
Joined: Sat May 23, 2015 3:46 pm

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

Post by thrifty++ » Sat Aug 17, 2019 10:38 pm

The real estate issue is a tricky one. A lot of baby boomers in NZ have gotten VERY rich from property and everyone else has gotten VERY poor as a result.
Your example is a stark contrast to that of my parents who bought a house for $250k in 1996 and its now worth about $1.8 million. And because they are so negligent with finances their mortgage is now $350k!! Substantially more than the house cost them 24 years ago. They are very lucky as with their habits they would be in serious financial dire straights if they didn't strike it lucky in buying here. In fairness they did do some renovations in the early 2000s, but still.

User avatar
Ego
Posts: 4169
Joined: Wed Nov 23, 2011 12:42 am

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

Post by Ego » Sun Aug 18, 2019 3:32 am

daylen wrote:
Sat Aug 17, 2019 5:13 pm
I think it has something to do with how you use the idea of "change" and "adaptation" in such a universal way. Your frame respects the differences in people while simultaneously assuming everyone has a similar utility function.
This is a fair criticism.

I can see how it may seem that I believe everyone has the same preferences beyond money for certain things like homes, security and stability. They don't and I know it. I do not make much of an effort acknowledging that fact because, well, we are fish and the quest for stability is the water we swim in.

My interest is less in what people want today and more in how one develops their particular utility for these things and how that preference changes over time. So I guess it is a good question to ask. How does a person develop their preferences for these things?

daylen
Posts: 1048
Joined: Wed Dec 16, 2015 4:17 am

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

Post by daylen » Sun Aug 18, 2019 10:42 am

I get your approach and respect it. The reason it triggers me is because it is Te heavy.

Being Ti heavy, my tendency is to go deeper into the conditionality tree for a particular situation. Te counteracts Ti by signaling that few conditions are relevant for many situations. Te is a generalist strategy, and Ti is a specialist strategy. So my preference would be for everyone to "figure it out themselves", but obviously I know that this is just as crazy as giving everyone a "one-size-fits-all model".

If that makes sense.

Post Reply