Article - Don't view a house as an investment

[calmloki]

I saw this updated The Economist graph over on the "How to Survive a Zombie Economy" thread:

I suspect the recent uptick in US prices is due to that $8k credit that just expired, and that the graph line will turn down once again.

Reasonable assumption, but UK and Oz bumped up in sympathy while Spain moved in concert with Canada?

 

[Texas Proud]

*evil Bender laugh* Renting - it's the only way to go! Home ownership is too onerous, you can't come out ahead owning property, paying someone for the privilege of living in their place is the smartest option as landlords exist just to lose money. Bwaahaha.

Well, I think it does matter WHERE you live... I can tell you that here, renting a house costs a LOT more than owning... it would cost me twice as much to rent my house than what I am paying for all items... other places I can see that renting has advantages... NYC is one..

 

[Birdie Num Nums]

Reasonable assumption, but UK and Oz bumped up in sympathy while Spain moved in concert with Canada?

I don't pretend to be a real estate investment guru, just a novice. Anyway, after doing some googling just now, I found at this Web site this info regarding Australia's recent housing price upturn:

In response to the crisis, the government introduced a huge stimulus package, worth AU$10.4 billion (US$7.24 billion), around 1% of GDP, in October 14, 2008. This included the First Home Owner Boost SchemeFirst Home Owner Grant from AU$7,000 (US$6,419) to AU$14,000 (US$12,838) for existing dwellings, and to AU$21,000 (AU$19,257) for newly constructed homes.

Due to its success, the FHOB scheme was extended from its original September expiry date till end-December 2009, though the grant amounts were reduced.

The FHOB was very successful in stimulating the housing market. By the end of August 2009, the FHOB had helped more than 153,000 Australians buy their first home. By July 2009, first home buyers had risen 73% from the same period last year.​

As for the UK, this site provides this commentary:

While the UK suffered the after-effects of a massive house price bubble, it avoided the triple whammy the US, Ireland and Spain went through. Not only did they allow house prices to rip, but also fostered a massive building boom and widespread fraudulent buying and lending. Now they are left with hundreds of thousands of empty homes that depress prices and rob consumers of the springboard for spending – property wealth. There are obvious long-term benefits with lower house prices, especially for the young, but in the short term the situation only adds to economic woes.
​

Also see HousePriceCrash.UK, for another spin on UK prices, including: "One in four UK first-time-buyers are considering buying property overseas and 70 per cent have abandoned plans to buy UK property due to high prices. Australia topped the list of most popular destinations for first-time-buyers, data from Moneycorp’s third biennial report has shown."

Just food for thought.

 

[tryan]

We have the "blip" upward here (MA) ... speaking to my realtor: lots of "community development" programs are pushing foreclosed houses with rehab costs built in. Also many people are gaming the bailout programs (selling to relatives).

Basically alot of "stimulus" but I am not quite sure what is being stimulated. Pushing on a string IMO.

 

[traineeinvestor]

Reasonable assumption, but UK and Oz bumped up in sympathy while Spain moved in concert with Canada?

Yes, but viewed in isolation that graph could be said to be misleading. In 1995 both the UK and the Australian markets were relatively depressed and only just begining to recover from downturns. I don't know about the other markets, but unless they were in the same position (i.e. relatively depressed) then the comparison is suspect.

Of course, this does not mean that prices are or are not "high" at present or that they may or may not go lower but it does make me wonder how much should be read into the graph.

 

[tryan]

... add the US to the relatively depressed market (1995) ...


Back on the "upward blip" ... forgot to mention the FHA 203k program - where niave first time home buyers are forced to WAY OVER PAY (built into the purchase price) for basic rehab costs. NO fault of the contractor .. they wait MONTHS to get paid and the paper work is ridiculous.

Just more pushing on the string.

 

[kcowan]

...
I definitely won't consider it an investment in the sense of something that will ever earn me a monetary return, however. It will be an "investment" in my quality of life.

Josh

Yes I consider such purchases as lifestyle investments. Any gains are purely a matter of chance or good fortune.

 

[urright4me]

A house is not an investment, but....

Calmloki, I like your point. My wife and I have owned four homes in the last 15 years. I owned two myself before that. In all but two, we always made some little money. In the other two, we were loss protected as a result of a company transfer. What we noticed though is that even when we made money on a house, all our time and effort on upgrades plus real estate taxes ate away at the gain. Our most recent house we sold about a year ago and again made money on it. It was our dream home, so we had been doubling on the equity and walked away with a considerable sum in equity. What was very interesting is all that money only earned a 6% return which is the interest rate on the note. So you could view it as a lost opportunity to invest in stocks, which I did until.................... the market crashed, and then I was so happy that I had a little more balance in my portfolio than I even knew. All that equity was protected when my 401k, IRA, and other stock investments went down about 40%. Only in the last year have the stocks clawed their way back up to parity. So, I don't think its wise to put all your eggs in one basket. Good luck.

 

[Nick59]

I consider mine is an investment.

Bought in 1993. Paid off mortgage in 1997, just shy of my 48th birthday.*

While the returns may not be great, it's still valued at > 2x what I paid for it in 1993. I plan to be able to sell it at retirement, take half the proceeds, and buy a new house in a new, lower cost location, upon retirement; I'll take the other half (mostly as a tax free gain) and consider it as one big cushion for the future (that is, I'm not considering it in my buildup of funds upon which to generate an income stream in the future).

To me, an investment can do one of two things: generate monetary returns (e.g., CDs, bond funds, etc.) or avoid monetary expenses (e.g., house payment, rental payment).

So, in a nutshell, while I consider it an investment, I don't look to it to generate future income streams.

YMMV.

* I have taken two small equity borrowings subsequent to paying it off: one of <5% of value to help purchase a parent's house which will be repaid when they pass from this world, and very recently, another <5% for a home improvement project which was a cash flow decision -- it's being paid off over 2 years.

 

[Rascal]

I never considered my house an investment, but here I am, house is all paid off, over $400K in equity, even with a 20% drop in housing prices.

I was happy to see the tax valuation drop, my property taxes went down.
Even in the worst situation, I can't see housing values drop to even 3x what I paid.

 

[Birdie Num Nums]

'The Skinny on Real Estate Investing'

 

[calmloki]

Our rental and personal properties have all been great investments. We've loaned money on properties that others are living in or developing or flipping and those have been great investments. Now considering flipping a house ourselves - looks like the risk is less, and the return for outlay is much greater.

That is, we have been loaning out $x purchase price to a flipper for 10% interest per annum and they are making $x + $35%+ on the flip in 4 months. If the flip goes bad it would cost us 6 months + legal costs to reposess. If we buy the flip and contract out the redo we can keep far more cash in the bank, have the property in our names to avoid any risk of need to repo, and get a return comparable to loaning out about three times the money. win win win

Oh - loaning $$ to suits in an offfice with no collateral? Not such a great investment. Investing in stocks and such? Not so good.
tangible assets baby - dat's where it's at!

YMMV

 

[Pete]

The article talks mostly about the losses to individuals. I feel he/she will survive by walking away or taking advantage of low interest loans or one of the many government sponsored bailouts.

More important to me is we found out wealth building for our country was almost completely dependant on rising real estate values. If not real estate...then what?

 

[chinaco]

Our rental and personal properties have all been great investments. We've loaned money on properties that others are living in or developing or flipping and those have been great investments. Now considering flipping a house ourselves - looks like the risk is less, and the return for outlay is much greater.

That is, we have been loaning out $x purchase price to a flipper for 10% interest per annum and they are making $x + $35%+ on the flip in 4 months. If the flip goes bad it would cost us 6 months + legal costs to reposess. If we buy the flip and contract out the redo we can keep far more cash in the bank, have the property in our names to avoid any risk of need to repo, and get a return comparable to loaning out about three times the money. win win win

Oh - loaning $$ to suits in an offfice with no collateral? Not such a great investment. Investing in stocks and such? Not so good.
tangible assets baby - dat's where it's at!

YMMV

Risk aside... Locating, buying (associated expenses), fixing and selling (associated expenses) is a job. If the last two activities are contracted out... it reduces the take. If you do it then it is more work. Just managing the process (as an ongoing activity) is work.

If you run this like a business... you need to subtract your wages and all expenses to determine your return on investment...

 

[Orchidflower]

Houses are always considered a liability and not an asset. This shouldn't be a surprise to anyone I would think...

 

[calmloki]

Risk aside... Locating, buying (associated expenses), fixing and selling (associated expenses) is a job. If the last two activities are contracted out... it reduces the take. If you do it then it is more work. Just managing the process (as an ongoing activity) is work.

If you run this like a business... you need to subtract your wages and all expenses to determine your return on investment...

I've decided that watching out for my money - "Just managing the process (as an ongoing activity)" - is work. Asset allocation, rebalancing, choice of asset classes and their respective ETFs or funds - to say nothing of individual stocks blablabla is work. Closest thing for me to "not work" is our PenFed certificates. And comes Emeritus to cast doubt on the strength of that institution!

Maybe this is heresy here, but if you don't run making money like a business someone else is going to run away with your money. Stocks and mutual funds are about as willfully opaque to me as politicians. Does anyone read the paperback novels sent out on behalf of the different funds? Just got my copy of "Vanguard U.S. Stock Index Funds Large-Capitalization Portfolios Semiannual Report". Stirring stuff. Anyone read that for light entertainment? Everyone think that's all they need to know about the health of largecaps in America today? Everyone make a point of counting a reasonable wage for the time spent reading and researching against their largeCap earnings? For me, houses are easier and the gotchas more evident - right now, the money's better too.

 

[chinaco]

I've decided that watching out for my money - "Just managing the process (as an ongoing activity)" - is work. Asset allocation, rebalancing, choice of asset classes and their respective ETFs or funds - to say nothing of individual stocks blablabla is work. Closest thing for me to "not work" is our PenFed certificates. And comes Emeritus to cast doubt on the strength of that institution!

...

True enough... keeping track of the portfolio takes some effort.

For some more than others, depending on their approach.

 

[NW Landlady]

As a RE Investor, I have to say I am glad to see some sobering of the viewpoint on home ownership. Homes are a Money Pit, even if you buy new construction, and home buyers need to be financially equipped to weather the (financial) storms that will arise, so to speak. Realtors have promoted the image of Landlord as taking/wasting tenants money (like I should grow a hump back, fangs and sharp claws)that could be better invested in purchasing a home. It has been too rosy an image & glad to see reality step in. In our area, homes rent for a lot less than purchasing one would cost, for instance.

Don't take this wrong that I feel Home Ownership is a bad thing. On the contrary, I think it is wonderful. I just feel it is a privilege that should require some financial prerequisites on the part of the Buyer.

 

[youbet]

Houses are always considered a liability and not an asset. This shouldn't be a surprise to anyone I would think...

I'm not sure what you mean by that statement. "Houses are always considered a liability........"

While the bulk of my assets are financial, I do consider tangible holdings such as my home, cars, etc., to be assets, not liabilities.

Are you making your statement using some special meaning of the word "liability"?

 

[Orchidflower]

No, but the costs of keeping that house up is a big liability, so I consider a house a liability always.

 

[haha]

That is, we have been loaning out $x purchase price to a flipper for 10% interest per annum and they are making $x + $35%+ on the flip in 4 months.

Calmloki, let me check if I am understanding you correctly. The average net profit after all-in (puchase price, fix-up costs and costs of sale) is 35% in 4 months, or 105% pa? This is on an outright cash buy, cash fix-up, and after sales commission and other costs? Or is this imore of a bought job? (fix-up labor mostly, staging, and private sale?

Is this in the Willamette Valley? Or do you have to range far afield to find these things?

Last, do you or have you been selling to people who will occupy the house, in a normal bank-financed transaction, or you do wind up with long term paper?

I certainly agree with you that as you describe it, this beats most anything except selling dope. Beats pay-day loan business, which is no easy task.

No, but the costs of keeping that house up is a big liability, so I consider a house a liability always.

OK Orchid, you are certainly within your rights to call a house whatever you choose, but I guess you realize that it is non-standard nomenclature.

According to your classification, one buys a house and gets a mortgage. So she adds two liabilities to her balance sheet. What are the assets concomitantly added to the other side?

Ha

 

[calmloki]

Calmloki, let me check if I am understanding you correctly. The average net profit after all-in (puchase price, fix-up costs and costs of sale) is 35% in 4 months, or 140% pa? This is on an outright cash buy, cash fix-up, and after sales commission and other costs? Or is this imore of a bought job? (fix-up labor mostly, staging, and private sale?

Is this in the Willamette Valley? Or do you have to range far afield to find these things? And how can you sell in 4 months, let alone fix-up and sell in 4 months? In Seattle, properties which are I suppose de facto overpriced but I would not have considered them so, sit, and sit, and sit.

Last, do you or have you been selling to people who will occupy the house, in a normal bank-financed transaction, or you do wind up with a lot of long term paper and credit risk?

I certainly agree with you that as you have painted it, this beats most anything except selling dope. Beats pay-day loan business, which is no easy task.

Ha

Ha, an example or two:

The group we've made 3 loans to bought a doublewide manufactured home on about 1.5 acres between Salem and Turner. Up on a hillside, nice location. They bought it at auction for $74k - the title company screwed up and registered a $17k second before the much larger first mortgage. Come the auction, there were only 2 people bidding on the $17k lien on the property, the bank didn't even have a rep on hand to bid up to the limit of their interest. Property went for $74k, the bank's much larger interest was extinguished as their lien was filed AFTER what should have been the second. Suspect the bank's lawyer and the title company's insurance had a discussion. After the sale, the residents were given a couple hundred $ if they could be out by that weekend - the norm might be a thousand. By the following Tuesday, the flippers had about 8 guys on site - it got new interior paint, a modest update with kitchen passthrough, new counter tilework, new carpet, new lights, new doorhandles, a quick and modest landscaping (weedwhacker, mow, thin coat of barkdust).

They do a minor but effective staging including light draped mesh curtains and pictures on the wall. They paid 3% commission to the company that found the deal and are selling the place, maybe $15-20K (guessing) on the redo, and 10%/annum to us, plus $400 as a spiff for going in to the title company and doing loan docs and having funding fast. We loaned on 7/16. They have earnest money for a $148k purchase price right now; we'll see if the deal goes through. THAT was a smoking deal - the potential buyer is also getting a great deal on a nicely shined up home.


On 6/4 we loaned on a Salem duplex. Was by yesterday and the crew was doing some repairs for the new buyer's financing bank - can't imagine that they will have $20k in expenses and repairs/improvements and it looks about ready to be a done deal. I figure they will net $20k. A bonus for them is that one side of the duplex remained rented throughout, which made their interest payments to us! Since they are using mostly our money for the purchase it looks to me like they put out 20 and take in 40 - in maybe 4 months.

Normal lending cost to investors is 12% + 2,3,or 4% points depending on how fast the property is flipped - 4% if it takes a full 6 months. This investment group is happy to pay us 10% and no points. We are impressed by the effort they go to to dig up the best deals; paying as little as possible at auction or direct to lenders; the speed with which they have decent contractors on site; the tastefull and price appropriate way they do the rehabs and staging; and the aggressive pricing they do. People aren't likely to find a better deal. They do business well.

 

[haha]

Thnx, Calmloki. They obviously don't let any moss grow, like you say a squared away group.

Ha

 

[Birdie Num Nums]

'What That First Home Really Costs'

''What That First Home Really Costs"

 

[HFWR]

''What That First Home Really Costs"

Don't ask me how I know this...