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Old 10-10-2014, 10:17 AM   #41
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In my neighborhood, rental rates smell like they are approaching a "bubble" state.

Annually I pay about $400 / month in property taxes. I retired my mortgage after 13 years of servicing that debt.

A comparable home across the street is a rental property.

It was vacant for a few hours while advertised as shelter for $1700 / month.

Renters converged and a bidding war ensued.

It is now rented for north of $2100 / month.

My last mortgage+property tax+home owner insurance payment was about $2250. If I purchased today, with my inflation-adjusted 1998 down payment, it'd be closer to $3500 per month.

The tenants across the street are over 30 years of age. One is a tenured instructor at a local university and the other is a graphic designer. They have a 6 or 7 year old child.

In 2008 the same home was vacant, costing its owner mortgage, insurance, property tax and minimal utility bills, for the better part of two years (or was it three years?).

For me, owning shelter puts me in a better position to FIRE.

For the tenants across the street, renting is the cost of a short commute to work, more quality time with family, the privilege of sending their kid to a good public school and avoiding a heftier monthly shelter fee.


-Jon
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Old 10-10-2014, 11:33 AM   #42
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Originally Posted by mathjak107 View Post
the thing is though markets historically blew away residential real estate by 5 to 6x.

compared to how our house did vs markets over the same time frame i could have subtracted out all the rent we would have payed and the taxes and bought 2 homes today maybe more and we live in queens in nyc...
I think you should check your numbers, as I just looked up VTI and it went to $22,8xx from $10,000 in the last 10 years, thats 2004 - 2014 from the Vanguard site, ( the S&P when to $21,8xx).

https://personal.vanguard.com/us/fun...tExt=INT#tab=1

So in the last 10 yrs the market has roughly gone up 2.2x , which is pretty far from 5x - 6x

I agree that housing in the last 10 yrs has for most folks only come back to where it was, basically flat in the USA.
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Old 10-10-2014, 11:38 AM   #43
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my numbers are fine long term. i bought my house for 169k in 1987. today is worth 525.00

169k in the growth model i followed from fidelity insight in the same year is around 3.2 million. even the s&p is about 2.5 million.

the last decade was very untypical for equities. in fact older money since 2000 has been up less than 2% real return for almost 15 years. however most home prices are still below where they stood.
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Old 10-13-2014, 03:47 AM   #44
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If it's a home you live in, then the first $500,000 of profit is tax free, but if it's an investment, then yes it's a big hit.
I thought it was 250K? Did they raise it to 500K?
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Old 10-13-2014, 06:44 AM   #45
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We close on a property tomorrow. The seller bought it in 1964 for $14k. We got it for $215k. If I'm doing this calculation correctly that's a return rate of 5.62%. Figure inflation has averaged 3%, maintenance 1% and taxes another 1%.
Was the property a good investment for 50 years?
I'm thinking not so much. But you gotta live somewhere.
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Old 10-13-2014, 08:47 AM   #46
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I thought it was 250K? Did they raise it to 500K?
$500K for a couple, $250K for an individual.
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Old 10-13-2014, 09:32 AM   #47
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We close on a property tomorrow. The seller bought it in 1964 for $14k. We got it for $215k. If I'm doing this calculation correctly that's a return rate of 5.62%. Figure inflation has averaged 3%, maintenance 1% and taxes another 1%.
Was the property a good investment for 50 years?
I'm thinking not so much. But you gotta live somewhere.
Based on your numbers, it seems the previous owners did fine if they were able to live there essentially for free (or with a slight profit). Compare that to what rent would have cost them over those 50 years.
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Old 10-13-2014, 09:43 AM   #48
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Based on your numbers, it seems the previous owners did fine if they were able to live there essentially for free (or with a slight profit). Compare that to what rent would have cost them over those 50 years.
Then there are all the other variables omitted from that calculation: real estate sales commissions; non-deductible interest paid on the mortgage; what if some/most of the $ tied up in that home had been invested instead, as mentioned in other posts; personal time spent maintaining and fixing the property that a renter usually does not incur; freedom of a renter to move on a month's notice. I'm sure there are others. Then there are the personal benefits of homeownership. Some, like me, might consider it a wash--financially and personally. It then all comes down to: do I like living where I do, regardless of whether I own or rent the place? It doesn't always come down to the last nickle and dime to figure out whether your home is "worth it" to you personally.
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Old 10-13-2014, 03:00 PM   #49
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Originally Posted by jonc View Post
In my neighborhood, rental rates smell like they are approaching a "bubble" state.

Annually I pay about $400 / month in property taxes. I retired my mortgage after 13 years of servicing that debt.

A comparable home across the street is a rental property.

It was vacant for a few hours while advertised as shelter for $1700 / month.

Renters converged and a bidding war ensued.

It is now rented for north of $2100 / month.

My last mortgage+property tax+home owner insurance payment was about $2250. If I purchased today, with my inflation-adjusted 1998 down payment, it'd be closer to $3500 per month.

The tenants across the street are over 30 years of age. One is a tenured instructor at a local university and the other is a graphic designer. They have a 6 or 7 year old child.

In 2008 the same home was vacant, costing its owner mortgage, insurance, property tax and minimal utility bills, for the better part of two years (or was it three years?).

For me, owning shelter puts me in a better position to FIRE.

For the tenants across the street, renting is the cost of a short commute to work, more quality time with family, the privilege of sending their kid to a good public school and avoiding a heftier monthly shelter fee.


-Jon
It takes leverage to produce a bubble. Rental payments are not leveraged, so it is impossible to have a true bubble in rents. When debt is used to finance an asset, that is when bubbles occur. Clearly there are cycles. I am not sure where your neighborhood is, but central Seattle is likely due for a slowdown. There are cranes everywhere and have been for >2 years. Often rent increases will flatten out when there is enough building to push up vacancy rates a bit. If this coincides with or is followed by a business slowdown, rents can fall as in 2008-2009. Then projects will be abandoned, holes in the ground can stay holes in the ground for a while/. But if industry in an area is fundamentally strong and growing, this will not last longer than a few years.

Rental rates are somewhat like the price of tomatoes. Supply and demand always in tension.

Ha
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Old 10-13-2014, 07:02 PM   #50
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Originally Posted by zedd View Post
We close on a property tomorrow. The seller bought it in 1964 for $14k. We got it for $215k. If I'm doing this calculation correctly that's a return rate of 5.62%. Figure inflation has averaged 3%, maintenance 1% and taxes another 1%.
Was the property a good investment for 50 years?
I'm thinking not so much. But you gotta live somewhere.
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Originally Posted by Lakedog View Post
Based on your numbers, it seems the previous owners did fine if they were able to live there essentially for free (or with a slight profit). Compare that to what rent would have cost them over those 50 years.
According to cFIREsim, $14K invested in 1964, in a 70/30 portfolio, would be worth $989K in 2014. That difference (vs $215K home value) would have paid all the rent and then some. No monthly payment does not equal "free."
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Old 10-14-2014, 07:39 AM   #51
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According to cFIREsim, $14K invested in 1964, in a 70/30 portfolio, would be worth $989K in 2014. That difference (vs $215K home value) would have paid all the rent and then some. No monthly payment does not equal "free."
That's a lot of assumptions (aggressive portfolio, that all funds would be invested for 50 years, etc). You can look back and pick scenarios that would show either course (renting or owning) might have come out ahead. Rent cost over 50 years is not a small sum and could have even been more than $989k depending on location.

This topic is similar to the often discussed "whether to have a mortgage or not" and depends on ones specific situation. I owned for years and now plan to rent for a few years to be more mobile so in my view both renting and owning are viable options (based on your priorities).
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Old 10-14-2014, 11:55 AM   #52
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...Rent cost over 50 years is not a small sum and could have even been more than $989k depending on location...
In 1965, my parents bought a house for $13K, which is very similar to the scenario mentioned by zedd. We had been renting a nearly-identical house in the same town for $100/mo. My brother still owns the house and he rents it today for $1300/mo. That rent increase averages 5.3% per year, which is very similar to the home value numbers quoted by zedd. Assuming a constant 5.3% increase per year, gross rent over 50 years would have been $289K. AND, that figure includes 50 years worth of property tax, maintenance, and insurance, which would have been on top of the $989K (opportunity cost of capital). I highly doubt that any house worth $14K in 1964 and $215K today would have demanded $1M in gross rent.

I agree that rent vs buy is complicated and very situation-specific. We certainly do not know enough facts in the case zedd mentioned to reach a conclusion. And often, it's the non-financial factors that weigh heavier in the decision. I just wanted to point out that owning a house outright with no payment is not "free."
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Old 10-14-2014, 12:18 PM   #53
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Well, they did get something of value or they wouldn't have done it. They had the freedom to move anytime they wanted. They had the freedom to not have to think about setting aside cash for maintenance expenses on the house or worrying if the next roof would cost $8k or $18k. They didn't have to think about property values or property taxes.

While I have always owned a house as soon as I could, not having rented an apartment since 1979, there are valid reasons to rent instead of own. It's just that so far none of them has applied to me.
Seems like a renter is just paying someone to do all that stuff for them, and take the risk, and pay for a perpetual mortgage. DIY as an owner should be a little more thrifty, all other things being equal. Of course the rental market may deliver bargains (or not) also. And either may be somewhat limited in choosing a location.
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Old 10-14-2014, 03:50 PM   #54
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There is also another group to consider.

These are the folks who will never be in this forum. People who don't really save a lot for whatever reason. But if they buy a house and pay it off in 30 years - and resist the temptation to refinance to tap into their equity - these folks will end up with a tidy nest egg that they very well wouldn't have otherwise.

I know my in-laws fall into this category. They have a very modest savings (strictly in a bank account as they are children of the depression), no "investments", and an OK pension that gets them by in retirement (no jackpot, but reasonable).

But they have a paid off house.
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