Buying a house, looking to find a place for appreciation. (Austin: rental, insurance)

[rickc007]

Originally Posted by achtungpv

Using Steve's example, a $250K house would be sold for $296K 5 years later. After $47K in realtor fees, you net $11K profit. .....

You should be able to find a realtor that takes 5%, not more than 6%

So, you are looking a 14.8k at 5%, or 17.7k at 6% in realtor fees

$47k in realtor fees ???

But I agree with your point, there are costs we don't factor in when
we look at our profit

My last 2 moves, cost $3500 each for the mover (out of state run)
And other misc ....

[LittleCityATX]

Originally Posted by austin-steve

{Sigh}


? 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

Um, in fact the loan interest is critical to the point you were making. You do not get leverage for free, you pay interest in order to get that leverage.

You put 60k down on a 300K house, and take a 240K note at 4.5%. You then make 3.5% on the 300k minus the 4.5% on the 240K note. In the first year, that's +10,500 minus $10,800. The federal write off helps a bit, but you are not making money by getting 3.5% on a 4.5% note. You can leverage that a million to 1 and you're still not making money.

If you could make 10% on a 4.5% note, then sure, leverage helps you, but leverage cuts both ways. Plus 5 to 1 leverage will wipe out your initial cash outlay if housing drops 20%.

[austin-steve]

Again, the interest rate on a loan has absolutely nothing to do with appreciation. You're mixing topics.

Appreciation is the increase in value. The increase in value is independent of debt service. In other words a home owned free and clear next door to an identical home with a 10% interest loan will appreciate at exactly the same rate.

The only thing the interest rate affects is the rate of equity paydown.

The rest of what you said makes no sense to me at all. Sorry.

Steve

[mezman]

Originally Posted by austin-steve

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

Steve you're leaving out that with the stock option you can rent for less than the mortgage payments would be each month and invest the balance. This would lead to a higher return at the 5 year mark.

Also, the floor for any loss is much much lower for the real estate "investment." In the stock option you can only lose 50k whereas in the real estate option you can lose far more and it'd be even more if you have a loss and need to sell within that 5 year period. This is the reality that many people are facing after the real estate bubble crash (though maybe not as much in Austin but it can happen).

[achtungpv]

On a $250K mortgage @ 5% for 30 years...if the house appreciates a steady 3.5% per year for 30 years (which has never and will never happen in TX), it would be valued at $677,969. Assuming you didn't make extra payments and put zero down, your actual mortgage cost over 30 years was $595,639. Invest $50,000 and at 8% which is the historical average return and you would have $546,786 in actual money. So, that $50,000 investment netted you a profit of $496,786. Assuming you can sell your house for exactly its future worth and only have to pay the standard 6% realtor fees, you would net a nice profit of $41,651. Plus, you need to drop another $677K to buy a similar house unless you want to downgrade your lifestyle. Heck of a return after 30 years.

So, using the home you LIVE IN as an investment tool, doesn't make sense, IMHO.

I personally don't see investing in real estate as being as great an investment as the market either once you factor in taxes, maintenance, no cash flow months, etc.

[austin-steve]

Well, if you guys want to head over the the Finance and Investing area of City-Data and start a Real Estate VS. Stocks investing debate thread, I'll be happy to join in and we can pick apart ever aspect of it without hijacking this thread, including financial analysis that includes ALL variables.

For now, I'll just say that RE has worked very well for me and many others I know in Austin. Most of us also own some stocks but have 80%+ of our wealth in Austin real estate. And I'm sure stocks have worked well for others, though I don't personally know anyone who has done as well the past decade in stocks as I have in real estate. But there is no "right" or "better" way because of so many variables, including one's risk tolerance and general lifestyle.

But, back to the topic at hand, it is in fact extremely prudent for an aspiring home owner to think like an investor and ask the question the OP has asked, "in what part of Austin am I more likely to enjoy value appreciation?". No, the home you live in is not an "investment" per se, but for most people, it does in fact become the asset in which most of their net worth resides, especially at retirement. Ignoring that fact doesn't make sense.

Steve

[LittleCityATX]

Originally Posted by austin-steve

Again, the interest rate on a loan has absolutely nothing to do with appreciation. You're mixing topics.

Appreciation is the increase in value. The increase in value is independent of debt service. In other words a home owned free and clear next door to an identical home with a 10% interest loan will appreciate at exactly the same rate.

The only thing the interest rate affects is the rate of equity paydown.

The rest of what you said makes no sense to me at all. Sorry.

Steve

We were talking about housing as an investment, so you have to consider actual return. Yes, both homes would appreciate at the same rate, but the leveraged owner will see negative returns if their loan's interest rate is (sufficiently) higher than the rate of appreciation.

One last example (this topic does get old doesn't it):

--house purchase: 250k @ 4.5% interest, 30yr fixed
--house value after 30 years of 3.5% appreciation: about 700K
--cost of owning the home over those 30 years excluding maintenance (so principal+interest+2.2% prop. tax): 250K + 206K + 284K = 740K

So in this simple case, it cost you 740K (not including maintenance) in order to own a 700K asset which is a negative return on investment. Of course, you had to live somewhere and in some cases buying can save you money over renting, but in this example, clearly, the house is not an 'investment.'

[jobert]

If you consider the cost of servicing the loan (taxes, interest) against the service that the house provides (shelter, comfort, schools, etc.) then it's a great investment.

Buying a house to live in: great investment

Buying multiple houses, or empty lots: Not so much

[LittleCityATX]

In the bigger picture of your life's goals and happiness a house might make sense, but it's not a financial investment. If you want to call it an "investment" <in quotes> in your happiness or whatever, that's cool.

Owning cash producing assets like rentals ARE financial investments (of course they can still go the wrong way on you).

Either way, the rent vs buy question is a wash in my opinion in many parts of Austin since housing is relatively cheap. If I were looking to live in Austin for the long term, I would be a buyer at these levels.

[sliverbox]

For now, I'll just say that RE has worked very well for me and many others I know in Austin. Most of us also own some stocks but have 80%+ of our wealth in Austin real estate. And I'm sure stocks have worked well for others, though I don't personally know anyone who has done as well the past decade in stocks as I have in real estate. But there is no "right" or "better" way because of so many variables, including one's risk tolerance and general lifestyle.

Perhaps it has. If so, then great. Perhaps some people have done better over the past 10 years in real estate than some who in invested in stocks, which isn't exactly proving much since that's a short term time period and as mentioned- the true power in stocks is time and the effects of compounding especially towards the 20-40 year mark. In the end whatever people invest in matters little since the end goal is to have as much retirement savings as possible. Whether it comes from houses or stocks doesn't matter. What matters is what pays more over the long run and how much money is on hand upon reaching retirement.

Do people manage to make money in real estate and in some cases makes lots of it? Sure. But the truth of the matter is that if they had taken the same money they invested in real estate and stuck it in stocks they would likely have an additional 30%-50% in total value. A perfect example is if those same people had taken whatever money they had tied up in real estate and instead invested it in the stock market in February of 2009 when the DOW was at around 7,000 their investments would now be worth about 50% more as of today with the DOW at 12,217 ( as of last check). I've yet to see housing anywhere appreciate 50% in two years even in the housing boom and especially over the last 4-5 years.

In the end people are going to do what makes them feel comfortable with their money which is absolutely fine. Anyway- we have indeed hijacked the crap out of this thread. Apologies to the OP.