Property / Real Estate As An Investment

[cosine]

If your buddy's house costs $1m, it means he is paying annual property taxes on a million dollar home (that's tens of thousands of dollars every year for the same house he owns today) and if he wants to move, he will need over a million dollars to afford a larger home, will probably need to finance the purchase (see above) and will probably owe taxes on the "gain" lol

At least we live in a low-property tax state. Property taxes aren't that bad here.

The only person rising housing prices makes sense for is someone like me who plans on exiting the US and moving to a place where $400,000 can buy you a mansion with a pool and daily chef and maid service. And I'm not happy about the rising prices.

I mean, don't get me wrong, owning a house when prices are rapidly rising is better than just being stuck paying rent, but it's a hedge or a way of coping with a bad situation; it's not a positive thing for anyone except banks and governments.

TL;DR if your friends house is worth a million dollars he is not any wealthier than he is today; probably less so.

Yeah, it's not a "real" win. It does benefit people slightly in the sense that your debt becomes worth less. But ultimately your house is a drain on your finances, it's an expense and not something that provides cashflow.

By contrast it sounds like both you and I are real estate investors; if you have debt becoming worth less on a cash-flowing asset, you are set up to do pretty well.

 

[Thomas More]

I've never understood why people view rising costs as a good thing.

A good or service, *particularly one we MUST have as opposed to just WANT* becoming more expensive, is never a good thing.

Go to a financial calculator and run the numbers on financing a million dollar loan over 30 years.
(I just did it and at a 7% interest rate you are paying over $5.5 million in interest to buy such a house).

It would be one thing if housing were becoming more expensive vis a vis other items. But that's not the case. Housing costs are rising along with car costs and food costs and energy costs and healthcare costs and education costs. No one argues that "the cost of an education is going up at 12% a year, I'm so happy I'm going for a graduate degree".

If your buddy's house costs $1m, it means he is paying annual property taxes on a million dollar home (that's tens of thousands of dollars every year for the same house he owns today) and if he wants to move, he will need over a million dollars to afford a larger home, will probably need to finance the purchase (see above) and will probably owe taxes on the "gain" lol

The only person rising housing prices makes sense for is someone like me who plans on exiting the US and moving to a place where $400,000 can buy you a mansion with a pool and daily chef and maid service. And I'm not happy about the rising prices.

I mean, don't get me wrong, owning a house when prices are rapidly rising is better than just being stuck paying rent, but it's a hedge or a way of coping with a bad situation; it's not a positive thing for anyone except banks and governments.

TL;DR if your friends house is worth a million dollars he is not any wealthier than he is today; probably less so.

I'm seeing $6650/month for a $1m mortgage at 7%, which is $2.4m for 360 months, or $1.4m in interest. That's still a lot, but not $5.5m!

Also, most of those dollars will be worth far less when you pay them in the future, so it's not like $1.4m in today's dollars. A $1m house today will probably be worth considerably more than $2.4m in 30 years. Finally, if interest rates come down anytime in the next 30 years, you can refinance and cut the interest expense.

 

[Rax Moscow]

bankrate dot com calculator gave me a crazy incorrect output I think.. But yes the point is total interest payments grow exponentially with rising prices.

The point about future prices is whatever a house is "worth" in the future doesn't mean you are rich, anymore than our grandparents became rich when houses they bought for $10,000 became "worth" $200,000. Inflation means everything is more expensive, and expensive housing isn't good unless you own surplus houses and can sell them off.

https://brilliantio.com/how-much-was-a-house-in-1950/

If you’ve ever wondered how much a house in the United States cost back in 1950, you might be pretty surprised by the numbers.

To give you a perspective, the median home value at that time was just $7,354. Considering that the median household income was approximately $2,990, buying a home was a different financial equation than it is today.

From census.gov,
Real median household income was $74,580 in 2022,

Applying that same ratio of 2.52 x income, a house today should cost $188,000.
The median housing price in America today is well over that.
So housing costs are even less affordable today than in the past, even taking into account inflation. And on top of that, the higher the figures are pushed, the more taxes one must pay, as you are pushed into higher brackets, and pushed outside of minimum exclusions (like the capital gain on an owner occupied residence).

 

[cosine]

I've never understood why people view rising costs as a good thing.

A good or service, *particularly one we MUST have as opposed to just WANT* becoming more expensive, is never a good thing.

Go to a financial calculator and run the numbers on financing a million dollar loan over 30 years.
(I just did it and at a 7% interest rate you are paying over $5.5 million in interest to buy such a house).

It would be one thing if housing were becoming more expensive vis a vis other items. But that's not the case. Housing costs are rising along with car costs and food costs and energy costs and healthcare costs and education costs. No one argues that "the cost of an education is going up at 12% a year, I'm so happy I'm going for a graduate degree".

If your buddy's house costs $1m, it means he is paying annual property taxes on a million dollar home (that's tens of thousands of dollars every year for the same house he owns today) and if he wants to move, he will need over a million dollars to afford a larger home, will probably need to finance the purchase (see above) and will probably owe taxes on the "gain" lol

The only person rising housing prices makes sense for is someone like me who plans on exiting the US and moving to a place where $400,000 can buy you a mansion with a pool and daily chef and maid service. And I'm not happy about the rising prices.

I mean, don't get me wrong, owning a house when prices are rapidly rising is better than just being stuck paying rent, but it's a hedge or a way of coping with a bad situation; it's not a positive thing for anyone except banks and governments.

TL;DR if your friends house is worth a million dollars he is not any wealthier than he is today; probably less so.

I thought about this more, and, there's cases where it's great. I bought a house at 5% down, it appreciated 20% in a couple of years, now I have a larger share of the equity. I moved out and am renting it out and it's cash-flowing.

Debtors do well as their debt becomes worth less. That also seems like the possible but unlikely solution for the US gov't to escape the debt trap. They just inflate it to make it less cumbersome.

Also, my grandparents sold their home in the rust belt in the 1950's for $45,000. That same home sold a few years ago, again, for $45,000. Compare that with anywhere in the sunbelt, a coastal city, silicon valley, etc. At least in many of those places, homes went up 10-30x their 1950's prices. The person with a home in the expensive coastal city pays high taxes on their million-plus dollar homes, but they could also move to the midwest and be rich. Conversely, the person from the rust belt simply is unable to move to a high cost of living area.

 

[Rax Moscow]

I thought about this more, and, there's cases where it's great. I bought a house at 5% down, it appreciated 20% in a couple of years, now I have a larger share of the equity. I moved out and am renting it out and it's cash-flowing.

The two best features about real estate investing are:
A) The use of leverage to increase returns
B) The favorable tax treatment of rental and capital gains income

I always put at least 20% down, and often cash deals are best, but in comparing stock returns to real estate, only in real estate can you bring to the table just 1/5 of the money needed to buy. It has its risks (and I've learned the hard way) but conservative use of leverage can greatly increase your returns (while excess use of leverage can lead to losses).

As far as taxation, not only are there a very large amount of "operating expenses" you can deduct from rental income (and a huge opportunity to exaggerate expenses). Just one example, let's say you pay someone to cut the grass and he bills you $120 for both your house and a rental house you own. What amount do you subtract from rents? And how is it documented? Or you buy a nice lawnmower and blower to do the work yourself. Boom, now you have equipment you can use personally that your tenants paid for. There are similar types of questionable cases in almost every category of expense.

But there is also the absurd category of "depreciation" where you can subtract a mathematically calculated percentage of your building value every year, thousands of dollars, offsetting your rental income. And then many times when you sell, you can defer or eliminate taxes on your profits as well.

Real estate is still not a bad investment, it's just nowhere near as good as it used to be. And as these prices continue to rise with inflation, many properties are going to get into the territory where they are taxed more aggressively and many of the comparitive benefits will disappear. On the other hand, fewer and fewer people will be able to afford to own housing, so you will have increasing demand from renters.

Debtors do well as their debt becomes worth less.

I see that quoted a lot and all I can say is I disagree, and when I decided to take the path to eliminate debt, that's when I became wealthy and successful. I just don't believe the above is true. I will say that although financing / borrowing to buy real estate is one of the big benefits I listed above, most of the big players are strictly cash. There are 2 sides to the use of debt.

I've also not once heard of a person who became wealthy off his debt becoming "worth less."

 

[Thomas More]

The two best features about real estate investing are:
A) The use of leverage to increase returns
B) The favorable tax treatment of rental and capital gains income

I always put at least 20% down, and often cash deals are best, but in comparing stock returns to real estate, only in real estate can you bring to the table just 1/5 of the money needed to buy. It has its risks (and I've learned the hard way) but conservative use of leverage can greatly increase your returns (while excess use of leverage can lead to losses).

As far as taxation, not only are there a very large amount of "operating expenses" you can deduct from rental income (and a huge opportunity to exaggerate expenses). Just one example, let's say you pay someone to cut the grass and he bills you $120 for both your house and a rental house you own. What amount do you subtract from rents? And how is it documented? Or you buy a nice lawnmower and blower to do the work yourself. Boom, now you have equipment you can use personally that your tenants paid for. There are similar types of questionable cases in almost every category of expense.

But there is also the absurd category of "depreciation" where you can subtract a mathematically calculated percentage of your building value every year, thousands of dollars, offsetting your rental income. And then many times when you sell, you can defer or eliminate taxes on your profits as well.

Real estate is still not a bad investment, it's just nowhere near as good as it used to be. And as these prices continue to rise with inflation, many properties are going to get into the territory where they are taxed more aggressively and many of the comparitive benefits will disappear. On the other hand, fewer and fewer people will be able to afford to own housing, so you will have increasing demand from renters.



I see that quoted a lot and all I can say is I disagree, and when I decided to take the path to eliminate debt, that's when I became wealthy and successful. I just don't believe the above is true. I will say that although financing / borrowing to buy real estate is one of the big benefits I listed above, most of the big players are strictly cash. There are 2 sides to the use of debt.

I would say the key with debt is to only use it to purchase income producing assets with a positive cash flow and opportunity for the asset to appreciate. That kind of debt usually turns out well. By contrast, unsecured debt taken out to pay for consumer spending is very bad for you.

 

[Rax Moscow]

As a general rule, yes.

But there are always risks to use of debt. This can actually be mathematically calculated, and the reason why 20% down is the standard is because this is mathematically a sweet spot between risk and reward. Debtors have first priority to income; only if there is something left does the owner receive any return.

Example, if you buy a $400,000 apartment with 4 units renting for $1,000 each with debt, things are fine as long as it is fully occupied. Assume it has a $3,000 mortgage and $600 in monthly expenses. Normally you are pocketing $400 every month. Or a $4,800 return (if you only put 5% or $20,000 down to buy it that is a very attractive 24% return!) Looks great, right?

Then someone moves out, and now you are paying $600 every month, or losing $7,200 a year ( a whopping 36% loss!). This is just an example, but a similar thing happened to me on a large property and I was paying several *thousand* dollars a month because I greedily used debt to buy a very large property instead of buying a property 1/5 the size with cash.

In the latter case, my return can never drop below zero, but in the former, often just a small change in your occupancy or a destructive renter can push you into negative returns, and if you don't have the funds to supplement the mortgage payment, boom you just lost the entire property. In the above example, if you pay all cash for a one unit rental instead of borrowing to purchase 4 units, your return is always positive. (You could even charge half price for rent or $500 and you are still making a +4.2% return in this example). It's a balance of risk vs reward. I've both made and lost much more than my job earns me, on real estate, and am wary of the use of debt, though as I said above, it is one of the greatest benefits of real estate.

You won't find many articles or websites talking about debt leverage causing losses, because everything is a product and banks want you to borrow, but they do teach how to calculate this in finance courses at university.

 

[magoo]

I would say the key with debt is to only use it to purchase income producing assets with a positive cash flow and opportunity for the asset to appreciate. That kind of debt usually turns out well. By contrast, unsecured debt taken out to pay for consumer spending is very bad for you.

In the event that everything goes wrong, it's important to evaluate. To comprehend the potential loss, I would check the property prices and rents for 2008-2010. And compare them.

Once I bought a house with 100% financing. After 4/5 years, I sold it for twice the price. It's amazing how you can earn money without any effort. With the exception of signing some papers. The amount of taxes is significantly lower.

Currently, I am not interested in investing in real estate. Or any other assets. Those who buy now will suffer. I've been repeating this since 2018 however. I don´t have any debt.

Anyone who claims that this time will be different is mistaken. Assets will decrease in value. People will experience pain. Rich individuals will make a killing. The one positive thing about recessions is that they stop stupidity.

 

[Rax Moscow]

I should add a #3: Investment Real Estate is a hedge against inflation.

While an increase in the cost of housing is not good for homeowners, who must buy a home immediately after selling one, or they become homeless, it is good for real estate investors because you can sell without re-buying at high prices.

Ex: Buy a rental house for $100,000. Live in it, then rent it for 10 years, then sell it for $300k. The average cost of housing might have risen from $100k to $300k so a *homeowner* will see zero real income in that scenario, but an investor can just pocket / spend / invest the $300k and that is real wealth to him.

 

[cosine]

I've also not once heard of a person who became wealthy off his debt becoming "worth less."

I should add a #3: Investment Real Estate is a hedge against inflation.

While an increase in the cost of housing is not good for homeowners, who must buy a home immediately after selling one, or they become homeless, it is good for real estate investors because you can sell without re-buying at high prices.

Ex: Buy a rental house for $100,000. Live in it, then rent it for 10 years, then sell it for $300k. The average cost of housing might have risen from $100k to $300k so a *homeowner* will see zero real income in that scenario, but an investor can just pocket / spend / invest the $300k and that is real wealth to him.

Yes, the investment method is what I've used to do well for myself. I agree that "homeownership" is not half as profitable as real estate investing. Straight out of Rich Dad, Poor Dad, your house is a liability and not an asset. Living in an expensive home just means you sit on a pile of money, but you still have expenses and it doesn't make any usable money unless you sell and move into a cheaper place. Real downsizing hardly happens.

 

[Joost]

I'm keeping cash in a money market account yielding 5.2% and selling options (naked puts) from an REIT. If the price of the REIT comes down and I'm forced to buy the stocks, the yield of that particular stock would be 6.8%. Naked Puts is a way to make some money out of a stock you want to buy but feel like it's a little overpriced.

Now I'm making around 7% yield on my cash. Buying a property (no mortgage) will give you 3% (net income) these days. So half the profit and double the stress.

Real Estate keeps up with inflation but now I rather save a ton of money. And there are so many properties available for rent that you can find a lot of nice ones.

 

[bubs]

I looked at my house value on Zillow in February and again just yesterday (May 1) It’s gone up another 5% in less than 3 months. It’s up 100% since I bought it 18 years ago even with the 2008 crash knocking the value back 20%+. For my net worth calculation, I don’t base home equity asset on current value but I take 30% less to be conservative, knowing it’s way overvalued currently.

 

[cosine]

I looked at my house value on Zillow in February and again just yesterday (May 1) It’s gone up another 5% in less than 3 months. It’s up 100% since I bought it 18 years ago even with the 2008 crash knocking the value back 20%+. For my net worth calculation, I don’t base home equity asset on current value but I take 30% less to be conservative, knowing it’s way overvalued currently.

Zillow isn't perfect, but it's rarely more than 10-15% off for any "normal" neighborhood.

Also it is worthwhile to subtract something like 6-8% of the estimate for agent fees and closing fees.

With the new NAR lawsuit, I think sellers will start paying for their listing agent fees only, and buyers will pay for their buyer's agent fees directly. I think both sides will come down from the "3% each" (which is collusion), and drop moreso on the buyer's agent side.

 

[Joost]

I looked at my house value on Zillow in February and again just yesterday (May 1) It’s gone up another 5% in less than 3 months. It’s up 100% since I bought it 18 years ago even with the 2008 crash knocking the value back 20%+. For my net worth calculation, I don’t base home equity asset on current value but I take 30% less to be conservative, knowing it’s way overvalued currently.

Your property tax went up 100% too. If you sell, you won't be able to buy 2 houses.

I think it's great to own a home but as an investment, not so much.

 

[bubs]

Your property tax went up 100% too. If you sell, you won't be able to buy 2 houses.

I think it's great to own a home but as an investment, not so much.

Good points, yes like everyone, property taxes and home owners insurance is going thru the roof. I was pretty discouraged today, when I crunched the numbers and realized that when I get my mortgage paid off in a few years (highest monthly expense like most people), my monthly expense will still be like $600 per month to pay taxes and insurance on it. I was hoping I could stop working such a high stress w/ long hours position to something more mundane for less money, stress and hours but, I really can only take a minor pay cut like 10% to maintain the same lifestyle and investment and retirement savings. Ugh, I was hoping a 40-50% pay drop was doable but it’s not.

 

[Thomas More]

I think a 100% increase in 18 years is not surprising. This doesn't sound like a bubble. In many places, I think houses have gone up 5x in 18 years. Those house prices may be due to come back to Earth. However, if the price has only gone up 2x, I think it would be less at risk of a big correction.

 

[Laner]

Good points, yes like everyone, property taxes and home owners insurance is going thru the roof. I was pretty discouraged today, when I crunched the numbers and realized that when I get my mortgage paid off in a few years (highest monthly expense like most people), my monthly expense will still be like $600 per month to pay taxes and insurance on it. I was hoping I could stop working such a high stress w/ long hours position to something more mundane for less money, stress and hours but, I really can only take a minor pay cut like 10% to maintain the same lifestyle and investment and retirement savings. Ugh, I was hoping a 40-50% pay drop was doable but it’s not.

Even with our mortgage paid off, we will still be paying over $1000/month in other costs associated with our home. I think that might be a factor as to why so many people tend to retire to the countryside where taxes are almost nothing and they can often get by on very little expenditures.

 

[Pointy Elbows]

^ Commercial RE often uses NNN leases to attend to this. These leases pass on insurance, maintenance, and tax increases/burdens to the tenant. Tax bill - tenant. Plumbing repair - tenant. Insurance bill - tenant (owner listed as an "also insured" per contract). If you are looking for a RE investment as a second source of income, this is a way to protect yourself from cost increases. Small industrial and contractor yards are hot now, at least in my area. Some are already occupied (and past due for rent increases). It is cost prohibitive in big cities, but smaller markets can still be affordable for second property cash flowing RE.

 

[Laner]

^ Commercial RE often uses NNN leases to attend to this. These leases pass on insurance, maintenance, and tax increases/burdens to the tenant. Tax bill - tenant. Plumbing repair - tenant. Insurance bill - tenant (owner listed as an "also insured" per contract). If you are looking for a RE investment as a second source of income, this is a way to protect yourself from cost increases. Small industrial and contractor yards are hot now, at least in my area. Some are already occupied (and past due for rent increases). It is cost prohibitive in big cities, but smaller markets can still be affordable for second property cash flowing RE.

Yeah I have been tempted to buy a light industrial strata unit. They are not much more than my condo. They are cash flow positive with a decent down payment, are NNN and, like your market, are pretty in demand here.

 

[bubs]

Even with our mortgage paid off, we will still be paying over $1000/month in other costs associated with our home. I think that might be a factor as to why so many people tend to retire to the countryside where taxes are almost nothing and they can often get by on very little expenditures.

Not sure where you live but the countryside where I live is mostly comprised of farmettes and multi-million dollar homesteads, that’s where the wealthy go to live to escape the city not retirees trying to be frugal unless they can find an old small home built 50+ years ago where a boomer or silent gen recently passed and no one in family to inherit the property. Taxes are very high to live rural as most of the $1M homestead neighbors property value will jack up your real estate taxes even if you by a modest older fixer upper home on an acre or so of land. And property repairs and maintenance are very expensive. Also for retirees, there is a lot of time involved to maintain a rural home and yard, and physically demanding that not a lot of retirees can continue to do for the long term.