Ethics of Real Estate Investment, NIMYism and the Housing Crisis

Robbie (Forum Supporter) said:

Strizzo said:

In reply to ProDarwin :

Are you saying that a paid off house doesn't count towards net worth? You would count that equity because if I have a paid off house I can sell it and go buy another house of similar value in cash, and have another paid off house. 
 

A paid off house is the return for all the payments that led up to it. What is your return for all the rent payments? I'd say it depends on what value you put on flexibility to leave at the end of your lease term if you want to, offset by the risk of increasing rent. 

Buying or selling a house is 'ideally' a transaction that has zero net to your net worth. 

if I have $2 net worth and buy a $10 house with 2 in cash and 8 in loan, I'm left with 10 in assest and 8 in liabilities which nets to 2 in net worth. I think that is ProD's point. 

No, I buy a $10 house at my 80/20 leverage, pay $2 in principle over a few years so I now owe $6 and have $4 in equity (let's assume the home values are flat to keep it simple). Then I sell my house for $10 and keep my $4 in equity, and buy another house for $10 and put that $4 down and go on making payments  towards being paid off. 
 

the difference is that as I make my payments and chip away at the principle, my net worth increases because my equity in the house is increasing. Earlier this year we refinanced into a 15 year note, so that almost 2/3rd of the payment goes to principle. Let's say that amount to principle comes to 1/2 of the monthly cost to live in the house. In order to "put away" the same amount each month while renting I would need to cut my monthlies in half to be able to invest that cash in another investment. 

In reply to Duke :

When you pay off the $8, you really need to pay back $8+interest. You should only include the "+interest" portion in your study of true living expenses, because paying back the 8 is the net worth neutral part. 

to simplify: if you rent, your living expenses are your rent + any utilities not covered in rent. If you buy, your living expenses are your mortgage interest + property taxes + insurance + utilities + home repairs and upgrades - appreciation of the property

If you buy, the value of the home and the pricipal repayment are only included your living expenses by way of any appreciation of the property.

No?

In reply to Strizzo :

Your net worth is increasing because you are making money. Where do you get the money to make the payments to chip away at your principal? 

If instead of making those payments you just plugged the money into a savings account, you'd have the same net worth as if you made the payments (assuming no late fees or other garbage).

In the example you'd either have savings 0 assets 10 liabilites 6, or you'd have savings 2 assets 10 liabilites 8. Both have a net worth of 4. 

Robbie (Forum Supporter) said:

In reply to Strizzo :

If instead of making those payments you just plugged the money into a savings account, you'd have the same net worth as if you made the payments (assuming no late fees or other garbage).

Except... instead of making those mortgage payments, a renter has to plug that money into rent.  Not a savings account.

Maybe this would be better in person, but I'm really not following what you guys are saying at all.

When you pay off the $8, you really need to pay back $8+interest. You should only include the "+interest" portion in your study of true living expenses, because paying back the 8 is the net worth neutral part.

OK, so I pay $9 for my $8 loan.  But then I'm done paying to have somewhere to live.  I still have to pay property taxes (which are a small fraction of rent - and a renter pays it to the landlord anyway), utilities (which a renter is either paying in rent or to the utility company anyway), and maintenance (which the renter is also paying for in rent, just amortized like an insurance payment).  But my net worth is now increased by the value of my house, PLUS from here on out I have more money I can save because I'm only paying consumables, maintenance, and taxes / insurance.  Principal and interest are now staying in MY pocket, not going into the landlord's.

I'm really not seeing your point.  I see renting as making sense in 2 basic cases:

1)  You really want to avoid being tied to a specific spot, or know your time there will be limited (say, < 5 years).

2) You really just don't want to deal with owning and managing a house / property.

Those are valid reasons, just like there are valid (and similar) reasons to lease a car.  But they are fairly specific.

Robbie (Forum Supporter) said:

In reply to Strizzo :

Your net worth is increasing because you are making money. Where do you get the money to make the payments to chip away at your principal? 

If instead of making those payments you just plugged the money into a savings account, you'd have the same net worth as if you made the payments (assuming no late fees or other garbage).

In the example you'd either have savings 0 assets 10 liabilites 6, or you'd have savings 2 assets 10 liabilites 8. Both have a net worth of 4. 

Where am I living while plugging a house payment into savings? This is why I was saying that I'd have to rent at 1/2 my current monthly expense in order to rent and pay myself enough cash to increase my net worth at the same rate. 

Robbie (Forum Supporter) said:

In reply to Duke :

When you pay off the $8, you really need to pay back $8+interest. You should only include the "+interest" portion in your study of true living expenses, because paying back the 8 is the net worth neutral part. 

to simplify: if you rent, your living expenses are your rent + any utilities not covered in rent. If you buy, your living expenses are your mortgage interest + property taxes + insurance + utilities + home repairs and upgrades - appreciation of the property

If you buy, the value of the home and the pricipal repayment are only included your living expenses by way of any appreciation of the property.

No?

I look at it like this: owning a house lets you rent, and pay some of that rent into savings (equity) for yourself, and not pay income tax on the money I spent on property tax and interest. I wouldn't subtract the appreciation from living expenses because it's a non-cash account I.e. you'd have to sell or refinance (create a "liquidity event") to access that value. If you assume home values stay flat or that all homes appreciate at the same rate it simplifies the equation also. 

I'll try one more time since if I can't explain it that's a good sign I don't understand it well enough. It's very hard to separate net worth from cash flow. But it's sorta like distance and speed (they are related but definitely NOT the same). 

Net worth is a snapshot in time of your assets minus your liabilities. If you buy a house in cash, your net worth has zero change, correct (you've just moved $$ from one asset to another)? Your future cash flow did change however. If you buy a house with a loan, the same thing is true. Net worth unchanged, cash flow changed. If you choose to rent a house, the same thing is true again. Net worth unchanged, cash flow changed. If you make a principal-only payment on your house, again, that does not impact your net worth, but it does impact your future cash flow. Is that all still true?

Inversely, if one month after you buy a house you get a paycheck, that DOES change your net worth. Your net worth has gone up by one paycheck. Hopefully your paycheck covers all of the cash flow promises you have made. If you can KEEP some of the paycheck through savings or principal-only payments, that's even better. Some cash flow promises are better at this 'keeping' than others. 

If you agree with all of the above, then I posit that comparing renting to buying with the goal of evaluating which is better for wealth (net worth) you can simplify by removing all transactions that have a zero net worth impact, and instead focus only on which ones do impact your net worth. 

I am in no way trying to imply that renting or buying is better. Every situation is unique and must be evaluated. I am only saying that you can remove the zero net worth impact transactions from the equation because they do not change your net worth. 

Simple explanation. 

Scenario one:  You buy a $10 house with $2 and $8 loan.  You slowly pay off the $8 loan and at payoff date X, you have a $10 asset.

Scenario two:  You rent.  You invest your $2 (which would have been used as a downpayment), as well as the cost difference between renting and home upkeep.  At the same payoff date X, you do NOT own a house, however you have $10 in the bank earned from investments.

Both #1 and #2 have spent exactly the same amount of money.  The net worth is the same in those two scenarios.  #2 could just go pay cash for a $10 house to be in the exact same situation as #1 if 'no mortgage' was an important criteria.

In reply to ProDarwin :

Your example assumes that you are paying low-enough rent that you have the an amount left over after rent and expenses to put away the same amount of money into savings as you'd be paying yourself in equity. 
 

what I've been saying is that while renting and owning have similar monthly costs, over the long term owning is the better route. Once you go past 2-3 years it's almost a lock to own over rent. 

Strizzo said:

In reply to ProDarwin :

Your example assumes that you are paying low-enough rent that you have the an amount left over after rent and expenses to put away the same amount of money into savings as you'd be paying yourself in equity. 
 

what I've been saying is that while renting and owning have similar monthly costs, over the long term owning is the better route. Once you go past 2-3 years it's almost a lock to own over rent. 

Yes, to back up a few pages, that is exactly what I was saying.  There are often cases where owning does not build wealth anymore than renting does.  Owning a house is not a guaranteed ticket to wealth building.

pheller said:

Thing is, in my small town, we've got high housing costs and low wages, and we really struggle with determining if its the chicken or the egg that needs fixing. If housing costs were cheaper, people wouldn't demand as much income. If income were higher, the cost of housing wouldn't be such a big deal. How do you rectify that?

 

Sure, it may boil down to supply and demand and we just need more supply, but if that supply is so expensive that only outsiders can afford it, what good does it do at the local level?

Flagstaff had the same issue when I was there in 1989-1995. It's a college town, most have that issue. Even then the housing was cheap compared to other places, locals thought a $200k house in country club estates was crazy money, yet people moving from other places couldn't believe how cheap it was, so your debate has been going for 30 years. 

ProDarwin said:

Scenario two:  You rent.  You invest your $2 (which would have been used as a downpayment), as well as the cost difference between renting and home upkeep.  At the same payoff date X, you do NOT own a house, however you have $10 in the bank earned from investments.

But this is what I'm taking exception with.  I don't buy that math.  I understand the concept but I disagree that the renter would earn $8 from investing the down payment.  I also think the difference between rent and mortgage / upkeep costs is nil or even favors owning in many cases.

Duke said:

ProDarwin said:

Scenario two:  You rent.  You invest your $2 (which would have been used as a downpayment), as well as the cost difference between renting and home upkeep.  At the same payoff date X, you do NOT own a house, however you have $10 in the bank earned from investments.

But this is what I'm taking exception with.  I don't buy that math.  I understand the concept but I disagree that the renter would earn $8 from investing the down payment.  I also think the difference between rent and mortgage / upkeep costs is nil or even favors owning in many cases.

 

Try the math yourself then.  There are many calculators out there that will show where the break even point is.  It does not take much change in monthly cost to swing it dramatically one way vs. the other.

https://smartasset.com/mortgage/rent-vs-buy#uXrqX2XxK8

IMO, the maintenance costs & market rate of return are both set to very low values by default, but overall the calculator is good.

pheller said:

Flynlow (FS) said:

In a free market, this would push rent prices down.   If they let rent prices go down, they cannot finance the same amount.  So they'll push a 15 month lease with 3 free months of rent at the higher $/month they were getting last year.  So the rent hasn't "gone down" on paper. 

There is it again. This notion that not just primary home owners, but big banks and property management companies and investors can somehow hang onto to vacant property and not budge their sale price or rental prices. This is messing with the "corrections" that we should expect to happen. 

Everyone was waiting for the COVID recession to lower housing prices. HA! Never happened. 

 

If the house is empty, then it is NOT the residence of the "primary homeowner". 
 

What's the difference if it's an individual or a business holding vacant property?

Rent vs buying...

There is a LOT of missing math that is being overlooked. 
 

- Tax deductions-  Homeowners can deduct a large percentage of the taxes they pay on their primary residence. You can't deduct rent. And renters DO pay taxes (to their landlord, who pays the government).  (EDIT: THIS IS AN ERROR.  IT SHOULD HAVE BEEN A REFERENCE TO INTEREST PAYMENTS, NOT TAXES)
- Appreciation is probably not equal to earnings on investments. On this point the advocates of renting may win, but they are failing to consider the whole picture. 
- Earnings on investments are taxable when you sell. Earnings on a primary residence (appreciation) are not (up to a limit)

-Rent does not equal mortgage payment. Rents almost always exceed mortgage payments. 
- Mortgages don't have brokerage fees

- We all need a place to live. Renters pay rent. Forever. They never stop paying rent. Owners pay mortgages. Eventually mortgages are paid off, and the house has a value. I don't understand where these "smart" people who are gonna invest instead of buying a house are gonna live. 
- I suppose this could vary by locale, but rents are more than mortgages.  If they were not, this thread wouldn't exist, because there would be no real estate investors because there would be no profits.

- An EXTREMELY SMALL percentage of people will make monthly investments diligently without exception. Almost zero. The alleged "earnings" is fake- if they don't make the deposits into their investment account every single month for 30 years, they will earn nothing. 

- After a few years, equity loans are available to owners which can free their capital if they choose. There is no such thing for renters. 

- Rents are not static. They go up over time. Even in rent controlled spaces. Mortgages are static. They do not go up. Over time as an individual earns more money (raises, etc), a mortgage is a smaller percentage of the gross income. Rents  just keep increasing to keep consuming the same (or more) percentage of gross income. If you lose a job or get a pay cut, the landlord will not lower your rent. He will find another tenant. 
 

I've  owned property for 35 years. I've done well with it. But I wouldn't compare it to an investment account. It's my home. 
 

There are reasons to rent, but making more money is not one of them. 
 

One more thing...

There are some things that are disruptive or culturally shifting that make ownership even more favorable. For example, AirBnB...

I have rented a room in my primary residence to guests through AirBnB since the day we bought the house 5 years ago. The rents have offset the mortgage. Entirely. I am literally living in a house that other people are paying for. 
 

You absolutely can not do that with a rental. And you can't get someone else to make deposits into your investment account.
 

Having tenants in your house is not for everyone. But it IS an option available to owners which is not available to renters. 

In home AirBNB's increase housing efficiency. 
 

Homes (and land) that sit vacant, whether owned by banks or individuals, are not efficient uses of housing or land. 
 

Im just wondering if absent national/federal or even state changes, if local governments should be given freedom to maximize land efficiency with increased vacancy taxes, vacant land taxes, etc. If such measures would be any less ethical than other types of anti-speculation regulation or taxation.

SVreX (Forum Supporter) said:

 

- Tax deductions-  Homeowners can deduct a large percentage of the taxes they pay on their primary residence. You can't deduct rent. And renters DO pay taxes (to their landlord, who pays the government). 

- Earnings on investments are taxable when you sell. Earnings on a primary residence (appreciation) are not (up to a limit)

- An EXTREMELY SMALL percentage of people will make monthly investments diligently without exception. Almost zero. The alleged "earnings" is fake- if they don't make the deposits into their investment account every single month for 30 years, they will earn nothing. 

 

I agree with just about all of your post, except for the first point in my quoted portion. Not since 2018. That may change when the Tax Act expires in... 2026? I think? But right now, it doesn't make sense for the majority of homeowners to itemize. Especially if you're married. 

Then with the last two.points here... For me, when I bought and stopped renting, the increase for a mortgage (bought a nicer home, so not apples to apples) came out of my IRA/401k contributions. So, me being the small percentage of people who save, not only are/were my earnings real, they were in my 401k/IRA, so tax deferred or tax free growth (Roth).

In reply to mtn (Forum Supporter) :

You're right.  That was a misprint on my part.  I meant interest, not taxes.

Homeowners can deduct virtually all the interest they pay on their primary residence.  Renters can't do that.

On the tax issue, most areas have property tax reductions for primary residences.   Homeowners pay minimized property taxes.  Renters pay the full property tax for an investment property inside their rent payments.  Their landlords get no discount, and neither do they.

I just can't see any possible way a case can be made for the long term financial benefits of renting.

In my case, I get a reduction of my property taxes for a homestead exemption which applies to about 80% of my house.

20% of the house is rented.  That means I get no homestead exemption on that portion, but it's a business expense.  So is 20% of all of the maintenance and repair expenses on the property.

The interest I pay to the bank on the mortgage?  Yeah, that's another Federal deduction.

Good luck to folks who rent.

pheller said:

In home AirBNB's increase housing efficiency. 
 

Homes (and land) that sit vacant, whether owned by banks or individuals, are not efficient uses of housing or land. 
 

Im just wondering if absent national/federal or even state changes, if local governments should be given freedom to maximize land efficiency with increased vacancy taxes, vacant land taxes, etc. If such measures would be any less ethical than other types of anti-speculation regulation or taxation.

Without getting into the political, that's a pretty socialist view, taking property from people who the state seems to "have too much of it" to give to people the state deems to "have too little" sounds an awful lot like "from each according to his means, to each according to his need."

In reply to pheller :

What's the deal with "housing efficiency"? What does it matter how "efficiently" any property is being used?

That just sounds rather dystopian to me.

Of course my dream is 1,000 fenced in acres with no neighbors as far as the eye can see, so I've always had trouble wrapping my head around urban and suburban living and "ideals".

Ok, one point at a time:

- Tax deductions-  Homeowners can deduct a large percentage of the taxes they pay on their primary residence. You can't deduct rent. And renters DO pay taxes (to their landlord, who pays the government).  (EDIT: THIS IS AN ERROR.  IT SHOULD HAVE BEEN A REFERENCE TO INTEREST PAYMENTS, NOT TAXES)

You need to have a lot of deductions to reach this point with the current tax code.  The standard deduction is $24k so you would have to have one hell of a mortgage or a lot of other deductions to meet that mark.  First time home buyers are rarely going to be able to take advantage of this.  FWIW, I have never been able to deduct enough to get over the standard deduction, even before the change.

-Rent does not equal mortgage payment. Rents almost always exceed mortgage payments. 

Yes.  Of course they do.

- Mortgages don't have brokerage fees

I'm not sure what the point is here.

 - We all need a place to live. Renters pay rent. Forever. They never stop paying rent. Owners pay mortgages. Eventually mortgages are paid off, and the house has a value. I don't understand where these "smart" people who are gonna invest instead of buying a house are gonna live. 

This is covered in the calculations I did, the calculator I suggested, and the numbers I showed earlier in this thread.

 An EXTREMELY SMALL percentage of people will make monthly investments diligently without exception. Almost zero. The alleged "earnings" is fake- if they don't make the deposits into their investment account every single month for 30 years, they will earn nothing. 

There is some truth to this, but it is sad.  Presumably if you are trying to build wealth, you have some auto-invest account in place.  401k, IRA, Roth, etc.  If your living expenses, you dial up the invest to compensate.  But this raises another point which is:  be open about how to build wealth.  My whole issue with this is how home ownership is perceived as a ticket to wealth, when in fact there are other ways that are just as effective and in some cases more effective.  That message should be communicated as well.  If we (society) want to give younger people the opportunity to build wealth, we should educate them on all of the options.

As mtn pointed out, one big math thing not taken into account here, is extra money that is invested can also be tax sheltered meaning its effectively worth more, via Roth, 401k, etc.  or even double-tax sheltered via a HSA.

- After a few years, equity loans are available to owners which can free their capital if they choose. There is no such thing for renters. 

This is actually an advantage for renters in this case.  Renters don't need to remove equity from their residence, because they can invest that wealth how they choose and tap into as needed.  With obvious limitations for 401k, HSA, IRA, etc. 

- Rents are not static. They go up over time. Even in rent controlled spaces. Mortgages are static. They do not go up. Over time as an individual earns more money (raises, etc), a mortgage is a smaller percentage of the gross income. Rents  just keep increasing to keep consuming the same (or more) percentage of gross income. If you lose a job or get a pay cut, the landlord will not lower your rent. He will find another tenant. 

Agreed, and this is one reason a mortgage usually wins over the long long term.  But you have to do the math.

Here are some other things to consider (that are not factored into any math I've shown)

• First time home buyers often buy way more than they need.  Its easy to rent an 800-1000 sq ft 1-2br place.  Its not easy to buy one.
• With more space comes more utilities, and more STUFF.  The cost of furnishing the extra space in a home can be quite significant.
• Most home buyers do not seem to value their time.  The average SFH requires a lot of time in general chores that an apt or other rental does.
• Owning a house opens the door to remodeling things, which comes at a great expense 

There are many times when renting can be a financial win over buying.  I shared an example, and I've given a link to calculators where you can test others.  I'm not going to continue this particular discussion beyond this post.  We are way off topic.  The original point was just that Home Ownership is not a guaranteed ticket to wealth building and should not be advertised as such.

Oh, a real thought!!

When I was still living in California, I did a LOT of land shopping, and kept seeing INSANE prices on random parcels. It was explained to me that as long as you put land on the market, you didn't have to pay the taxes on it. So farmers or whoever would put there 10-20 acre parcel up for sale for $STUPID as a way to keep the land and save on the taxes.

Only place I've ever heard of it, but I wonder how it would tie into the rest of this conversation.

RevRico said:

In reply to pheller :

What's the deal with "housing efficiency"? What does it matter how "efficiently" any property is being used?

That just sounds rather dystopian to me.

Of course my dream is 1,000 fenced in acres with no neighbors as far as the eye can see, so I've always had trouble wrapping my head around urban and suburban living and "ideals".

Easy/quick access to amenities like entertainment, shopping, and medical care, along with well paying jobs. I realize your retort will be along the lines of "I don't care about that stuff" which is fine, but many people do. 

About a month ago, I ended up in the ER 3 separate times over the course of 10 days because I was having allergic reactions to.........................we didn't know, as I've never been allergic to food/medicine/pets/etc, before. Outside of grass and tree pollen, seasonal allergies if you will, that many people deal with. When your lips, tongue, and throat start swelling for no known reason........benadryl doesn't come close to working fast enough. It's a terrifying feeling. Had I been 90 minutes away from an ER as opposed to 5 minutes, who knows what would have happened. 

As it turns out, a bunch of bloodwork and allergy tests later, I've developed a rather strong allergy to our animals. But one Zyrtec a day is enough to keep it at bay and I haven't had any issues in a few weeks.