"Starter homes?"

[vi edit]

Originally posted by: Special K

Originally posted by: preslove

Originally posted by: dullard



I am looking at all of history of homes and stocks in the US. Over history, housing has typically returned nearly 3% on the investment while stocks have typically returned nearly 10%. And that 3% number doesn't include the massive maintenance required for a home vs minimal overhead costs for many stocks.

A home is a good investment if you live in it or if you rent it out. If you live in it, you don't have to pay rent & build equity. If you rent it, someone else builds your equity. You're right, though, that just buying real estate for the appreciation is a bad investment.

But what good is $500k of equity stuck in a house? You can't realize any of it unless you sell, but then you still have to find another place to live, which would involve lowering you standard of living and/or moving to a new location with lower housing prices.

The "investment" part really comes down to parity vs. renting and local appreciation.

If you can get a mortgage for around the same price as you are renting, you are at least paying down a principal that you can cash out at a later time. If you are renting there is no cash out. There are no tax savings. There is nothing.

Assume this:

Loan amount: $100,000
Interest 6%
Terms: 30 years

After 10 years you would have a principal balance of $83,685.
Assuming even modest appreciation lets say it's worth $115,000 after 10 years.

You have over $30,000 in equity to roll into another home less realtor fees on the sale of the existing one. If you had rented at a similar dollar amount you would have no equity/savings.

Where I am at, the parity between a $100,000 home and a 3br 2 bath apartment is pretty close.

 

[Special K]

Originally posted by: sactoking

Originally posted by: Special K

Originally posted by: preslove

Originally posted by: dullard



I am looking at all of history of homes and stocks in the US. Over history, housing has typically returned nearly 3% on the investment while stocks have typically returned nearly 10%. And that 3% number doesn't include the massive maintenance required for a home vs minimal overhead costs for many stocks.

A home is a good investment if you live in it or if you rent it out. If you live in it, you don't have to pay rent & build equity. If you rent it, someone else builds your equity. You're right, though, that just buying real estate for the appreciation is a bad investment.

But what good is $500k of equity stuck in a house? You can't realize any of it unless you sell, but then you still have to find another place to live, which would involve lowering you standard of living and/or moving to a new location with lower housing prices.

But what good is $500k of cash stuck in a bank? You can't realize any of it unless you go the an ATM but then you still have to replace it with more cash, which would involve spending less and/or getting a job at Taco Bell.

I don't understand your point here. If I have $500k equity in a house, I cannot do anything with it unless I sell the house or take out a HEL or HELOC. If I sell the house, then I would likely have to either lower my standards of living and/or move to another area to realize any profit. You have to have a place to live.

On the other hand, if I were to have invested that $500k in the stock market, I could take it out at any time and use it for any purpose. I don't *have* to replace it.

Stocks are far more liquid than real estate. Your analogy doesn't make sense.

 

[Special K]

Originally posted by: vi edit


The "investment" part really comes down to parity vs. renting and local appreciation.

If you can get a mortgage for around the same price as you are renting, you are at least paying down a principal that you can cash out at a later time. If you are renting there is no cash out. There are no tax savings. There is nothing.

Assume this:

Loan amount: $100,000
Interest 6%
Terms: 30 years

After 10 years you would have a principal balance of $83,685.
Assuming even modest appreciation lets say it's worth $115,000 after 10 years.

You have over $30,000 in equity to roll into another home less realtor fees on the sale of the existing one. If you had rented at a similar dollar amount you would have no equity/savings.

Where I am at, the parity between a $100,000 home and a 3br 2 bath apartment is pretty close.

I still think one needs to consider the total cost of homeownership to make a fair comparison. It should be (rent + renter's insurance) vs. (mortgage + increased utilities + homeowner's insurance + property taxes + maintenance), not just rent vs. mortgage payment.

If you really want to get technical, include the tax deduction on the mortgage interest, but also assume that if you rent, you will invest the difference in the costs above in the stock market.

Actually, that NYT calculator I linked above allows you to take all of this into account. It's a pretty neat tool I think.

Another factor to consider is whether or not you have a family. A single person can live in a 1 BR apartment, but they don't make 1 BR houses (well maybe they do, but I haven't seen one yet), so he/she would be forced to pay for rooms they don't necessarily need. A family on the other hand needs more than one bedroom and bathroom, so a house would be a more attractive option for them than for a single guy, because they would be comparing the price of a house to the price of a 3BR apartment, rather than a 1 BR.

 

[dullard]

Originally posted by: vi edit
Loan amount: $100,000
Interest 6%
Terms: 30 years

If you had rented at a similar dollar amount you would have no equity/savings.

Ok, lets do that math. Pretty graph results. Special K's link does this all for you, but I had fun using typical numbers with your starting condition.

My assumptions (all fairly typical numbers):
* House
* 2.5% closing costs
* 20% down payment
* $100,000 loan amount (ie $125,000 home)
* 1% yearly cost to maintain home
* 2% yearly cost for property tax
* 0.5% yearly cost for insurance
* 3% yearly home valuation increase
* Ignore extra utilites/furnature, etc. from the home (ie I'm making the case for the home as good as possible)
* 6% mortgage rate (historically pretty low and even today you'd have a hard time getting it)
* Assume 6% cost to sell the house
* Mortgages that low generally do NOT give you much if any of tax deduction. Also, note, if you do get a tax deduction, it drops yearly since you pay less interest yearly, but I won't assume it drops. At the very most, you can start at a $50/month savings that quickly drops to $0. So, if you wish adjust the renting numbers below by that amount.
* Net monthly cost (excluding realtor fee to sell): $810 and increasing by about 1% per year.
* The equity is shown in the blue dotted curve.

* Rent
* The down payment and closing costs are invested ($28,125)
* 8% return on investment
* I compare the case where rent + renters insurance = $810 and growing ~1% as above. Result: renting is better at under 52 months or over 329 months. This is shown in the red curve. Buying is better in the between months. But, either way, there isn't much difference. Note: this may not be realistic to start with high rent that slowly increases.
* I compare different rent prices where rent/insurance increases at 4% yearly.
* If rent+insurance starts at $710/month (+ 4% yearly growth) then it is all a wash. If it is under $710/month (or under 4% yearly rent growth) then renting is a better investment. If it is over $710/month (or over 4% yearly rent growth) then buying is a better investment with these assumptions.

Now, clearly, in many locations you can't possibly get under $700 rent. But then, of course, you couldn't find a decent $125k home either. So it all depends, in your town can you get rent for under $700/month? Around here (Lincoln, NE), you can buy a crummy $125k house or you can get good $500 apartments. Sure, you can get $300 apartments and make it even better, but $500 will be quite adequate. $700 apartments are very elaborate.

 

[CasioTech]

Originally posted by: Patt
Definitely an investment ... I bought my shack 4 years ago for $100,000, and have it listed, with several interested parties (no offers yet though) at $275,000. We probably put in about $30,000 into the place, but that is still a pretty great return!

you'd be lucky to get $180k today.

 

[vi edit]

Originally posted by: dullard

Originally posted by: vi edit
Loan amount: $100,000
Interest 6%
Terms: 30 years

If you had rented at a similar dollar amount you would have no equity/savings.

Ok, lets do that math. Pretty graph results. Special K's link does this all for you, but I had fun using typical numbers with your starting condition.

My assumptions (all fairly typical numbers):
* House
* 2.5% closing costs
* 20% down payment
* $100,000 loan amount (ie $125,000 home)
* 1% yearly cost to maintain home
* 2% yearly cost for property tax
* 0.5% yearly cost for insurance
* 3% yearly home valuation increase
* Ignore extra utilites/furnature, etc. from the home (ie I'm making the case for the home as good as possible)
* 6% mortgage rate (historically pretty low and even today you'd have a hard time getting it)
* Assume 6% cost to sell the house

Run it with a $100,000 home, an FHA 3% downpayment of $3000 and $1000 in closing costs. Plus a 1.5% property tax tab and compare it to a $650 month apartment, because that's what my local real estate looks like. Oh, and I think that 8% interest is very loftly of a goal given the recent economy. You could very well lose your ass if you were in an investment vehicle that could yield you 8%.

But we're all just pissing in the wind because everything comes down to location and what makes the most sense given our individual situations.

 

[dullard]

Originally posted by: vi edit
Run it with a $100,000 home, an FHA 3% downpayment of $3000 and $1000 in closing costs. Plus a 1.5% property tax tab and compare it to a $650 month apartment, because that's what my local real estate looks like. Oh, and I think that 8% interest is very loftly of a goal given the recent economy. You could very well lose your ass if you were in an investment vehicle that could yield you 8%.

But we're all just pissing in the wind because everything comes down to location and what makes the most sense given our individual situations.

Results. You clearly live in an area with very low house prices, good loans, and crappy rent prices. Thus, in most cases, for you buying is better. You'd need ~$575 (+4%/year) rent to be at the break even point.

That said, the home still isn't really an investment. It is a home. You probably won't sell and uproot your family/friends/job just because the home value is at a good selling point (like you would do with an investment). Treat it as a home and you'll have a much better life. If it skyrockets in value, then that is a bonus.

 

[alkemyst]

to get an honest picture you should just look up a rent vs buy calculator.

Right now the market is fucked up. Easy to find great rentals. I have a few friends renting at $1500 or so and living in brand new homes that have mortgages on them for double that. It's investors trying to stem the blood flow without going to foreclosure/bankruptcy.