Ethics of Real Estate Investment, NIMYism and the Housing Crisis

BoxheadTim (Forum Supporter) said:

In reply to Streetwiseguy :

A lot of small landlords these days seem to be happy to feed a rental and bank on capital appreciation. And no, I'm not saying this is a good plan.

Fwiw, that is what was happening all over leading up to the gfc in 2009. Cheap debt made values rise faster than normal, so people could get an ARM or interest only loan and the house would appreciate enough during the term to make it easy to refinance when the balance came due. When home values started outrunning people's ability to borrow, the music stopped and, well, the rest is history. 
 

in the rental world in Texas, a lot of capital was flowing from China and California buying up residential rental properties at prices that the rent only really broke even. They just needed the renter to cover the carrying costs while the place went up in value. We bought a one bedroom condo in Austin for 130k in may, and sold it a year later for close to 150k. That's how fast things were rising. 

mtn (Forum Supporter) said: Your problem is ultimately that you want to live in a popular area where a lot of other people want to live. You just don't like the laws of supply and demand. It isn't the flippers, the investors, the landlords that are the problem. It is the people buying and renting from them. 

Yep. There is no perfect place. Everything has some cost/compromise. Living situation/location is a choice. Be as informed as possible and make the choice that returns the most happiness.

IMO the basic problem is that wages have stagnated especially when compared to real estate and education costs.

dropstep said:

I mean E36 M3ty apartments in Hagerstown and Baltimore rent at 2x + what my house payment is to live in small town Ohio.

Rent should be about 2x a house payment (assuming taxes and insurance are included in payment).  Or more.

That's an unrealistic expectation

In reply to pheller :

Vacant homes...

It sounds like you are assuming investors are sitting on them waiting for appreciation. This is rarely the case, as taxes are often more than the appreciation. 
 

During the last big recession, there was a huge quantity of vacant homes in my neighborhood. I was itching to buy one, and had the cash. The problem was they were ALL owned by banks and lenders, who were heavily vested in the neighborhood. (They held mortgages on houses in the entire area). Because the recession had caused such a deep devaluation, none of them wanted to sell their empty inventory (at the lower appraised value), because the low price would create a new benchmark and lower the valuations on the rest of the housing in the neighborhood. Their portfolio of mortgages would have crashed in value, and all their loans would have been upside down. 
 

It was better for them to hold the properties and hope the market turned. NONE of them sold.

So, if vacant houses were taxed enough to make it necessary to sell them, banks would lose money. The only way they could make money would be to lend at higher rates and tighten their lending requirements, which would have made fewer people able to afford.  
 

The net result would have been the houses would still remain empty. 
 

Vacancy is not a bad thing. Good balance in pricing both rents and sales requires a certain amount of vacancy. 

ProDarwin said:

pheller said:

2) so they can start accruing wealth. 

 

Having a house != accruing wealth.  Encouraging people to own houses they dont have the time/energy to maintain, or $ to afford doesn't help anyone unfortunately.  Home ownership = wealth is a myth that is repeated over and over but it isn't true in many situations so we shouldn't view it like this.

 

That said, multi-bedroom rentals at the lower end of the market are insane money makers.  Its something that gives me pause with respect to investing.  You get the best return on the lowest value property and that is at the expense of the person least likely to be able to afford it.

 

To contine my rambling, the mortgage interest tax deduction should absolutely not be a thing.

This is my interpretation as well. As something interesting to note - this was called out as one of the main political ideologies that precipitated the 2008 event in the book I mentioned earlier. The idea that every house builds wealth combined with the 'american dream' that everyone should be able to own a house turned into "we should push lower economic achievers into homeownership so that they start building wealth for themselves". And that political vision (while it sounds good and may not be flawed own it's own) pushed all the decisions made by central banks and politicians and fannie/freddie toward giving easier capital and making it easier for the banks to get govt insurance from the higher risks the banks knew they were taking. 

The mortgage interest deduction is ANOTHER way that govt shovels money toward banks. I can't buy many things with pre-tax money. But I sure can get a bigger home loan with it. (that's another idea right there I guess - maybe I should be maximizing my mortgage loan size and therefore interest but use it to buy things other than my house. Then I'd get to use pre-tax money to buy race car parts. #Winning.)

Finally, those 'insane money makers' are also high risk, and a lot of work. 

Robbie (Forum Supporter) said

Finally, those 'insane money makers' are also high risk, and a lot of work, if you give a E36 M3.

Fixed it for you. 
 

If you don't care about the condition of your property, don't care about how you make people live, don't care about legal battles or enforcement agencies, and don't mind throwing people out of your house in the middle of the night for non-payment of rent, you really don't have to do much except be an shiny happy person and collect rent. 

Robbie (Forum Supporter) said:

ProDarwin said:

pheller said:

2) so they can start accruing wealth. 

 

Having a house != accruing wealth.  Encouraging people to own houses they dont have the time/energy to maintain, or $ to afford doesn't help anyone unfortunately.  Home ownership = wealth is a myth that is repeated over and over but it isn't true in many situations so we shouldn't view it like this.

 

That said, multi-bedroom rentals at the lower end of the market are insane money makers.  Its something that gives me pause with respect to investing.  You get the best return on the lowest value property and that is at the expense of the person least likely to be able to afford it.

 

To contine my rambling, the mortgage interest tax deduction should absolutely not be a thing.

This is my interpretation as well. As something interesting to note - this was called out as one of the main political ideologies that precipitated the 2008 event in the book I mentioned earlier. The idea that every house builds wealth combined with the 'american dream' that everyone should be able to own a house turned into "we should push lower economic achievers into homeownership so that they start building wealth for themselves". And that political vision (while it sounds good and may not be flawed own it's own) pushed all the decisions made by central banks and politicians and fannie/freddie toward giving easier capital and making it easier for the banks to get govt insurance from the higher risks the banks knew they were taking. 

The mortgage interest deduction is ANOTHER way that govt shovels money toward banks. I can't buy many things with pre-tax money. But I sure can get a bigger home loan with it. (that's another idea right there I guess - maybe I should be maximizing my mortgage loan size and therefore interest but use it to buy things other than my house. Then I'd get to use pre-tax money to buy race car parts. #Winning.)

Finally, those 'insane money makers' are also high risk, and a lot of work. 

 

Yep.

"Look our house appreciated $50k in the last 10 years!"

While completely ignoring the payments, interest, insurance, upgrades, and maintenance they spent during those 10 years. 

Outside of a few markets, owning doesn't build much wealth vs investing. And it dramatically limits your mobility to change jobs/cities. I was approached about a very interesting job last year, but wasn't going to be in a position to sell my house and move. If I had been renting at the time, it's very likely I would no longer live in Oklahoma.

In reply to z31maniac :

Right. 
 

But it's really hard to live in a stock certificate. 
 

You're gonna pay the maintenance, taxes, insurance and upgrades no matter WHERE you live, regardless of whether you rent or own. 
 

In reply to SVreX (Forum Supporter) :

Ownership vs renting is an age-old question.  We've debated it here a number of times and while ownership is the general preference, there are some vehement supporters of renting.

Between 2009 and 2017 I didn't have a car payment, but I had 2 decent cars.  It was kind of nice driving around for just the cost of consumables, maintenance, and insurance.

I just spent $10,000 putting a new roof on part of my house.  It's the first real money I've spent on the house in 10 years.  It's money I won't have to spend again in my lifetime, probably.  That was equivalent to 5 mortgage payments... which I haven't had since 2016.   But I could sell it this week and buy somewhere else, or live in it for the rest of my life for just consumables, maintenance, and insurance.

Home ownership isn't for everybody.  There are specific factors that make renting a home advantageous, just like there are specific factors that make leasing a car advantageous.

In reply to z31maniac :

I would argue though that renting builds negative wealth.

My house payment every month, before any extra we send in is $889. That's taxes, insurance, blah blah blah. 

That same $889/month might get me a one bedroom apartment around here. Maybe, if I can meet wait list criteria, don't mind junkies hanging around, and still want to pay for materials for any maintenance that needs done.

If I wanted a 2 bedroom, a nicer area, or a townhouse, start multiplying that monthly figure. 

But the biggest difference I see is that in 5, 10, 20 years, I'll have equity in the house I can borrow against or use as leverage, where as renting? Absolutely NOTHING for that money that had been paid out for so long. 

Maybe it's just because I'm not a finance guy, but I don't understand how renting leads to wealth creation. Not when you're giving up such huge chunks of your monthly income and having absolutely nothing to show for it after any period of time.

I thought we'd had this discussion before....so I went looking. 

https://grassrootsmotorsports.com/forum/off-topic-discussion/what-is-going-on-with-rental-prices/141696/page5/

I stand by what I said in 2018, particularly the bullet points:

Flynlow said:

It does seem to be going mildly pear-shaped lately (aka 2007-ish).  I am relocating for work in the next year, and selling my current home next spring.  I pay ~$1300/month for PITI (principle, interest, taxes, insurance).  I cannot find anything to replace it with, and am slightly concerned...I only bought the house 4 years ago.  Homes (and rents) seem overvalued to me.  I will likely rent for a year or two and see what the market does.  I might pay a short-term penalty in lost equity/rent, but the mobility and ease of changing my living situation and location have their own non-monetary value and are worth it for the short-term.   

While there is the concern it will keep going up, the people that try to use that as a reason to jump in rashly seem to forget something: the market always corrects eventually.  Home prices and rents can only go up so far, unless there is an increase in salary to go along with it.  The median US household income is just under $60,000/year https://www.deptofnumbers.com/income/us/.  Multiply that by .75 (taxes) and divide by 12, and most people have ~$3750/month to play with, not including important stuff like saving to their 401k, or you know...feeding themselves.  And that has to cover everything: food, shelter, transportation, medical, entertainment, etc.  Real estate can't go much over 50% of take-home pay for very long, or there is literally nothing left over.  And even 50% of take home is usually considered unsustainable...stay at that level too long, and the torches and pitchforks come out (or government regulation, or massive shifts in behavior etc.).  So something has to shift, it could take many forms:

• Home prices could drop, ala 2007-2009, to more affordable levels
• Incomes could increase, and home values are returned to an affordable level via inflation
• Corporations and REITs end up owning everything and squeezing us for every nickel, until the population revolts

Hopefully not the last one, but my point is, an imbalance in affordability for most of the population CAN'T continue long term.  The pendulum might swing one way or the other for a few years, but it always goes back the other way.

The thing about banks "holding on to vacant homes".

My research shows a few reasons.  1. They are having a hard time establishing a proper paper trail to get a good title search.  (because of crazy loan sales years ago)   2.  They have much more invested in the property than it is actually worth.  So when they take an offer to their board, the board votes it down hoping for a better offer.

Many of those vacant houses, when I do the numbers, just will not provide a ROI.  Sad truth.

Another truth.  Most folks won't buy a house built to 1960s standards.  We have come to expect laundry rooms, dishwashers, garbage disposals, microwave ovens, video cables, air conditioning, nice flooring, large refrigerators, insulated windows, walk-in closets, yadda, yadda, yadda.

RevRico said:

In reply to z31maniac :

I would argue though that renting builds negative wealth.

My house payment every month, before any extra we send in is $889. That's taxes, insurance, blah blah blah. 

That same $889/month might get me a one bedroom apartment around here. Maybe, if I can meet wait list criteria, don't mind junkies hanging around, and still want to pay for materials for any maintenance that needs done.

If I wanted a 2 bedroom, a nicer area, or a townhouse, start multiplying that monthly figure. 

But the biggest difference I see is that in 5, 10, 20 years, I'll have equity in the house I can borrow against or use as leverage, where as renting? Absolutely NOTHING for that money that had been paid out for so long. 

Maybe it's just because I'm not a finance guy, but I don't understand how renting leads to wealth creation. Not when you're giving up such huge chunks of your monthly income and having absolutely nothing to show for it after any period of time.

In general, if you buy at the right price (meaning not overinflated, not 2008) and you stay long enough to cover the closing costs, buying works out to be a better financial decision in the long run. But many, if not most, do not actually put numbers down to that equation. Between the closing costs, interest, taxes, repairs and maintenance, it isn't as cut and dry as it seems on the surface. 

For instance, I've lived in my home for 4 years now. So far we're at about $5k invested into it that we won't get back, just in appliances and repairs. If we're renting, that cost goes to the landlord. Ostensibly it should be paid for by the renter through the rent payment, but it requires a long term committent to a home to make it worth it to buy (in general, not every case, etc.).

Another problem that is sort of new in our society:  Houses actually depreciate in value now.  The land may not depreciate, but older homes have less attraction to many new buyers.   For decades we thought the house could only appreciate.  In many cases now that is not true.

I live in an area where the dirt may actually cost more than the 2400 sq. ft. home I build on it.  

My downpayment alone would've made me $47k in the past 7 years if invested where the rest of my money is.  The money I have put into repairs probably would've made me another $30k.

So that's $77k.  My house (which has increased in value approx 33%) equity minus 6% fees when I sell is ~$88k.  And that's with me doing a lot of the labor myself as well as dealing with the stress of homeownership.  It does not factor in that home utilities are usually quite a bit more expensive than an apt.  Those alone could make up for a lot of the difference.

If your house appreciates slower than that you can easily be losing money.

Rough math shows I spent around $100k on house stuff to walk away with 88k.  I would have spent around $76k in rent to walk away with $77k

One interesting thing to point out in terms of buying v renting.

It seems to me that it partially reflects the work and benefits you get.

50 years ago, retirement benefits were super amazing. So it paid off to stay with one company for 30+ years, as your retirement life will be quite nice.  So that means one does not have to really worry about being flexible to move to follow the job market.

30 years ago, when I started- it was largely the same- not quite as good as previous, but still quite strong.  I never actually thought I would change jobs, as the retirement I will get is worth staying.  So I bought a home within a year of starting work.  I own it outright, as we worked hard to pay it off, minimizing the amount of interest we paid as best we could- which also included a few major home improvements to make it much more comfortable.

~20 years ago, retirement went mostly to personal 401K based.  Which really meant that there was not much holding a person to stay a long time at a given company.  Maybe a given industry, making the math of owning a lot easier.  But there has been a shift in that, too- many jump industries as the need for workers fluctuates around the country.  That REALLY makes the math of owning a home tough- as it really takes a long time to become net positive in owning a home.

And this just covers the higher end white collar job market.  It's very different as one moves down in economic benefits- some unions make it worth it to stay a long time, others don't, and many others have no retirement benefits at all.  

This also does not take into account any red-lining issues that have some serious long term effects that are still being felt over 50 years from when that was made illegal.

Anyway, that math to own or rent has changed a lot over the last 30 years.

ProDarwin said:

My downpayment alone would've made me $47k in the past 7 years if invested where the rest of my money is.  The money I have put into repairs probably would've made me another $30k.

So that's $77k.  My house (which has increased in value approx 33%) equity minus 6% fees when I sell is ~$88k.  And that's with me doing a lot of the labor myself as well as dealing with the stress of homeownership.  It does not factor in that home utilities are usually quite a bit more expensive than an apt.  Those alone could make up for a lot of the difference.

If your house appreciates slower than that you can easily be losing money.

 

Rough math shows I spent around $100k on house stuff to walk away with 88k.  I would have spent around $76k in rent to walk away with $77k

Are you selling now? 

And this is a great post. The big thing though, is the question, are you going to actually invest that money in the market/wherever your other investments are (or pay off debt), or are you going to buy a Tesla and new iPhone and vacations every year with it if you rented instead of bought?

Renting is great if you have a very fixed cash flow need. For example, if you can afford $1k/month but cannot take the risk of needing to replace the roof at $10/20/30k all at once. 

Renting is a higher monthly price, but it is much more predictable price. Just like insurance, and a whole plethora of finance solutions for business supply chains, there are people who are willing to pay more for more predictability (less risk). And there are people who are willing to take on the risk for a profit. Choosing to take the risk for a profit means you must have access to capital. This is true whether you are a landlord or a bank or anything else. 

And of course, there are people who are outliers who take the risk and get lucky. (like never paying for insurance and never needing it either). 

mtn (Forum Supporter) said:

ProDarwin said:

My downpayment alone would've made me $47k in the past 7 years if invested where the rest of my money is.  The money I have put into repairs probably would've made me another $30k.

So that's $77k.  My house (which has increased in value approx 33%) equity minus 6% fees when I sell is ~$88k.  And that's with me doing a lot of the labor myself as well as dealing with the stress of homeownership.  It does not factor in that home utilities are usually quite a bit more expensive than an apt.  Those alone could make up for a lot of the difference.

If your house appreciates slower than that you can easily be losing money.

 

Rough math shows I spent around $100k on house stuff to walk away with 88k.  I would have spent around $76k in rent to walk away with $77k

 

Are you selling now? 

And this is a great post. The big thing though, is the question, are you going to actually invest that money in the market/wherever your other investments are (or pay off debt), or are you going to buy a Tesla and new iPhone and vacations every year with it if you rented instead of bought?

1)  I was planning on it earlier this year.  When COVID hit I reduced risk though.  I am still thinking about doing so in 2021 or 2022

2)  I think you know the answer to that :P.  Its probably different than what most people would answer though.  And that is one area where a house can be an advantage - forced savings.

Robbie (Forum Supporter) said:

Renting is great if you have a very fixed cash flow need. For example, if you can afford $1k/month but cannot take the risk of needing to replace the roof at $10/20/30k all at once. 

Renting is a higher monthly price, but it is much more predictable price. Just like insurance, and a whole plethora of finance solutions for business supply chains, there are people who are willing to pay more for more predictability (less risk). And there are people who are willing to take on the risk for a profit. Choosing to take the risk for a profit means you must have access to capital. This is true whether you are a landlord or a bank or anything else. 

And of course, there are people who are outliers who take the risk and get lucky. (like never paying for insurance and never needing it either). 

I think one of the concerns is that rent is a lot less fixed than it used to be in many areas. It's rising a LOT faster than incomes. There is a monetary risk factor to buying, but there is also a monetary risk factor to renting. 

ProDarwin said:

Rough math shows I spent around $100k on house stuff to walk away with 88k.  I would have spent around $76k in rent to walk away with $77k

Except that sooner or later a mortgage would be paid off.  Rent is never paid off.

Agreed, buying doesn't make as much sense in the short to mid-short term.  But long term, it can and often does.

In reply to Duke :

I wonder what percentage of people are ever mortgage/rent free? 

Duke said:

ProDarwin said:

Rough math shows I spent around $100k on house stuff to walk away with 88k.  I would have spent around $76k in rent to walk away with $77k

Except that sooner or later a mortgage would be paid off.  Rent is never paid off.

I don't see how that factors into this?  A mortgage is paid off the second I sell the house and walk away with the equity.  Both sides are calculated assuming you choose that point to walk away.

You can keep extrapolating and generally home ownership does make sense the longer you own, but even then sometimes it does not make sense.

Again, not saying its dumb, just saying it shouldn't be advertised as some magical wealth building technique.  You can accomplish the same thing by simply investing extra income.