Buying a house, looking to find a place for appreciation. (Austin: rentals, mover)

[eichlerfan]

Originally Posted by sliverbox

If you're buying a house for appreciation then in my opinion you're doing do for the wrong reasons. Its virtually impossible to say that such and such house or area will appreciate or fall in value. Its no different than the stock market- in that you invest with the full understanding that there are inherent risks. Besides- compared to stocks, real estate has been a lousy investment. Buy a house you like in an area you like with financing that makes you comfortable. If you want a place to stick your money, get yourself a 401k, some mutual funds, and so forth. Live in the house.

I so agree. You should buy a house because you love the house and the area that it's in. As for making money, put it in something more stable than real estate.

[donnaaries]

Originally Posted by kbchitown

Here's my 2 cents...my dad ALWAYS made money on his homes by:
1) Moving into a new development.
2) Never buying the most expensive house in that development.

Yes, he was questioned when he bought "out in the boonies"...but a few years later the area grew and was no longer considered "out there" and became desirable.

If Austin continues to grow as projected...those far-flung suburbs will no longer be considered as such.

In the past this has been very true, as suburban flight was THE path for urbanization. But urbanization pattern is changing. Just ask the folks in southern California who bought in the Inland Empire. You can't sustain endless suburbanization without accessibility to jobs. People need income to afford housing.

[austin-steve]

Look at any chart showing the last 100 years of appreciation in both real estate and stocks and you'll clearly see that over time, stocks have appreciated at around 7%-8% per year versus real estate which has appreciated around 2%-4%. The winner is glaringly apparent.

Silverbox, I think this will be at least the second or third time I've explained this to you.

The appreciation realized on stocks is based on the amount invested. So, $50K returning 8% annually will result in $73,466 at the 5 year point, a gain of $23K.

$50K invested as a 20% downpayment in a $250K house that appreciates at 3.5% annually will result in a house worth $296,921 at the 5 year point, a gain in the owner's net worth of $47K, more than double the stock return.

Of course that ignores purchase costs and maintenance (versus renting), but it also ignores tax benefits and the imputed value of lifestyle benefits, such as not being forced to move as a renter ever year or two.

I'd rather have a 3.5% annual appreciation on an asset worth 5 times my cash outlay than I would an 8% return on just the principle $50K. Either way, stop comparing a stock return to real estate appreciation without acknowledging that the appreciation happens on the full value of the home, not the downpayment.

Steve

[sliverbox]

Silverbox, I think this will be at least the second or third time I've explained this to you.

The appreciation realized on stocks is based on the amount invested. So, $50K returning 8% annually will result in $73,466 at the 5 year point, a gain of $23K.

That is a short-term analysis. Investing in stocks, 401ks, and so forth is meant to be a long-term strategy. This is because at a certain point your stocks will begin to dramatically compound and reach a point of the appreciation curve where their value shoots up dramatically. Again- stocks on average have a annual return of 7-8% over the long term. 3.5% is not > than 8% no matter what math is being used. No explanation needed. Perhaps investing in real estate has worked out for you. But hardly any economist will say that real estate is a better investment over stocks.

$50K invested as a 20% downpayment in a $250K house that appreciates at 3.5% annually will result in a house worth $296,921 at the 5 year point, a gain in the owner's net worth of $47K, more than double the stock return.

Here's the problem that separates real estate from stocks. There is a totally different risk factor involved. If say- I go out and buy a $250,000 house the payments on that house- along with the taxes and whatever upkeep it requires will relentlessly be due at the end of each and every month. The bank does not care if I lose my job, fall on hard times, become disabled, or whatever unforeseen events might unfold that would affect my ability to pay that loan. Thus why a home is more of a financial liability. With stock and other such investments I can stop investing at anytime I please. Thus I in turn have more control of whatever I want to contribute. I can either contribute a lot of money or stop completely at anytime. The same cannot be said about a house unless I decide to sell. If I were forced to sell due to the inability to pay the debt I could be forced to do so in a down market versus with stocks where I can wait until the storm has passed and things start appreciating- as they are now.
Lastly, even if the owner of a house sees significant appreciation that value is all on paper. The owner would need to sell the house to realize that profit. In most cases the seller simply buys a bigger house and takes on even more debt. With stocks I can choose to cash out whenever I choose. That money isn't tied up in a physical asset and the transaction to get to that money is simple and painless.

Of course that ignores purchase costs and maintenance (versus renting), but it also ignores tax benefits and the imputed value of lifestyle benefits, such as not being forced to move as a renter ever year or two.

I think the whole argument that buying a house increases the quality of life and provides a lifestyle benefit is overstated. Truth be known I've been renting the same 4 bedroom house in a safe, quite, and comfortable neighborhood near the beach for almost 8 years. My rent is approximately 1/3rd the cost of buying the same home in the area. We have a nice yard, a garage, and great neighbors. In the meantime I'd say about 30% of those that have bought houses in our area have done so within the last 4-5 years and in some cases have moved out in that same time period. Buying doesn't automatically mean that you are somehow now permanently anchored to one location forever and are now suddenly stable. Look at a forum like this: Half of the people asking where to buy probably came from NYC via Chicago, Atlanta, and perhaps a few others thrown in. We are living in a time where people move and buy houses more often than they buy a pair of new shoes. To me it sort of brings to question the whole notion of buying a home if you're going to move in a few years anyway.

I guess I'm really old-fashioned. I plan on buying our home for cash, stay in it, and buy the cheapest smallest home that fits our needs and does what a home is supposed to do: A place to live in.

[ROY DUBOSE]

come on over and drive the 'hood -- get a feel for it -- the busiest streets (woodrow and grover) run north n south -- it's pretty easy to get around

[LittleCityATX]

austin-steve also isn't considering that the leverage he's talking about comes with a price: interest on the loan! So making 3.5% on a 4.5% loan is actually a negative return. (Don't take this the wrong way austin-steve, I like hearing your opinions on housing.)

If you pay cash for a house, it keeps up with inflation IF you put in the maintenance needed to keep it up so it's really inflation minus maintenance (including periodic expensive remodeling).

There are some scenarios where being leveraged and in debt can be a good thing, but it's complex.

[austin-steve]

Originally Posted by silverbox

Again- stocks on average have a annual return of 7-8% over the long term. 3.5% is not > than 8% no matter what math is being used. No explanation needed. Perhaps investing in real estate has worked out for you. But hardly any economist will say that real estate is a better investment over stocks.

{Sigh}

Originally Posted by LittleCityATX

austin-steve also isn't considering that the leverage he's talking about comes with a price: interest on the loan! So making 3.5% on a 4.5% loan is actually a negative return. (Don't take this the wrong way austin-steve, I like hearing your opinions on housing.)...

? Uh, good grief. I'll let someone else try to explain it to you guys. The loan interest has absolutely nothing at all to do with the point I was making.

Steve

[sliverbox]

Again- stocks on average have a annual return of 7-8% over the long term. 3.5% is not > than 8% no matter what math is being used. No explanation needed. Perhaps investing in real estate has worked out for you. But hardly any economist will say that real estate is a better investment over stocks.

{Sigh}

Not sure what's so hard to understand about this. Let's take the things that we're investing in out of the argument for a second. Simple as this: If you give me $100 and I give you 2 options to invest with one investment paying 3.5% versus 8%... which would you choose? Anyway, again- everything that I mentioned above is plain econ 101.

Either way- we obviously agree to disagree, which is fine. But my advice for anyone buying a home is that you should first and foremost buy because you "like" the home, you like the area it is in, and its something that you can not only afford, but do so under the chance that you lose a job or experience some other unforeseen circumstance.

[jobert]

To compound matters, there are a lot of bad real estate investments in Austin right now that are relying too heavily on the ignorance of new relocatees to keep them solvent.

I would stick with stocks personally. The Ford Motor stock I bought at $2.04/share a couple of years ago has beaten anything I could have found on the RE market (even in SoCal even during the bubble).

[achtungpv]

Originally Posted by austin-steve

I'd rather have a 3.5% annual appreciation on an asset worth 5 times my cash outlay than I would an 8% return on just the principle $50K. Either way, stop comparing a stock return to real estate appreciation without acknowledging that the appreciation happens on the full value of the home, not the downpayment.

Steve

The issue with that is that real estate profit is theoretical on paper. It doesn't translate to reality until the day you sell your house for that price minus your realtor fees. You can sell your stocks in a few minutes and in 3 days when it settles you have your cash.

Once you sell that house and take that profit, you now have to spend a significant portion of your profits to pay more to buy the same house. You'll now most likely have a higher monthly payment and higher taxes.

Using Steve's example, a $250K house would be sold for $296K 5 years later. After $47K in realtor fees, you net $11K profit. Assuming you mortgaged that entire $250K originally, you now have to put up that $11K profit plus another $36K for a down payment just to keep your mortgage the same as before. Otherwise, you just increased your monthly expenses for the long term. That profit ends up costing you a lot money.