EPTHousing/Rent/Mortgage/Land Ownership Discussion Thread - P…
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JimmiC
Canada22817 Posts
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KwarK
United States43468 Posts
Let's say you own a house valued at $200k, your expected equity growth is 3% and your expected rental income is $6k (3% of asset value) for an asset ROI of 6%. Let's also say you can invest in a stock that yields 5.5%/year on average (and before you bring up leverage, let's say you can leverage the stock investment (that's called margin)). Logically you would keep the house and rent it out because 6% ROI is higher than the next best alternative, 5.5%, and so renting it out is the rational choice. You could make $12k/year from the rental vs $11k/year from the stock. Now let's say that the house goes up to $300k. Your expected long term equity growth is still 3% because that's based on a long term average trend. Before you try to average the two years please remember that that's not how it works. Remember the scratch off lottery ticket example. You cannot use already realized gains in your prospective ROI calculation, just as you cannot include the money you won on the last lottery ticket in the calculation for whether you should buy another. This may seem obvious but I really do have to spell it out because you really did previously try to argue that the money that you already made was relevant. So the expected equity growth in Y2 is $9k (and not $109k/2 years = $54.5k/year as you previously attempted to argue). If your rental income remains $6k then your Y2 expected return on the house is $15k ($9k + $6k). The ROI has dropped from 6% to $15k/$300k = 5%. But the value of the next best alternative, the 5.5% stock, is now $300k * 5.5% = $16.5k. Factoring in opportunity cost the decision to keep the rental is now costing you $1.5k/year compared to the return from the next best alternative. If property prices go up and rents do not then the real ROI for the landlord goes down and renting becomes less appealing. For that reason rents go up with property prices. If you're about to say "but what if I take out a loan against house 1 and buy a 2nd house", yeah, you can do that with stocks too so assume that the stock was also leveraged. Also, as I keep fucking explaining, doubling the numerator and denominator of a fraction doesn't change the fraction. $5k/$100k = $10k/$200k. I know you can't follow this maths so I'm mainly posting it for everyone else reading this topic. | ||
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JimmiC
Canada22817 Posts
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Malinor
Germany4732 Posts
Even this example above is so simplistic it becomes stupid. If person sells his house because he can only get 5% roi instead of 5.5% in the market he loses a shit ton because he has to first find a buyer (renters will start looking for a new place as they don't know if the new owner will keep them increasing your risk that your smaller income stream flips negative), then he has to pay the legal and realtor fees, probably a cost to leave your mortgage early, then he has to pay the fees to purchase the stock. On top of that when he sells he will have realized those capital gains and have to deal with them. Surely you can factor in these costs into your calculation for expected ROI and that is being done in more complex models. Obviously there is always uncertainty involved. Even if ROI is all that matters to you, you will not sell your house when the ROI is 5% for one year and the ROI for stocks is 5,5% - that is the just the baseline from where you start your calculations and I am pretty certain Kwark is aware of this. I would then start factoring in the likelihood of another high percentage value increase of the house within the next few years and if the chance is high enough, you might sit out your lower ROI for some years. You are also probably not increasing rent by 50% in one year because the value increased that much and the the next year lower the rent by 25% because the value dropped for some reason - as rightfully pointed out, probably nobody does this, though you could certainly design a rental agreement that way. Last point, the timelines you are talking about are completely arbitrary, could be a quarter, 1 year, 5 year... and this changes the outcome of your decision making process. But that does not change the math that Kwark has layed out. | ||
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JimmiC
Canada22817 Posts
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KwarK
United States43468 Posts
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Fildun
Netherlands4123 Posts
After all, the landlord only charged 5,7% less rent for a house that was worth $100k less! | ||
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JimmiC
Canada22817 Posts
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JimmiC
Canada22817 Posts
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KwarK
United States43468 Posts
Somewhere xDaunt just burst out laughing without knowing why I think basically all housing should be owned by locally elected and managed soviets with a guarantee of housing to all people. You’re confusing my basic understanding of maths with my political beliefs. | ||
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JimmiC
Canada22817 Posts
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KwarK
United States43468 Posts
If you would like my political opinion, individual home ownership is a failed Thatcherite project to create a nation of small investors that has succeeded only in creating a system of private landlords. Individual home ownership is extremely wasteful, people buy homes that don’t fit their needs and are then chained down by them. They buy homes today big enough for children that may never be born and keep them long after the children leave. They stay in homes that don’t fit their changing circumstances due to contractual obligations and cannot properly adapt. There are more empty houses than homeless people and homelessness is an expensive ongoing crisis. People in economically depressed areas cannot leave and people in booming areas can’t afford houses. New housing meets the needs of the group with the most disposable income, not society, and houses are hoarded as investments against future demand rather than used as the resource they are. The utility of a house, somewhere for a member of society to reside, is somehow not the source of its value. I would like to see a system of renting from an elected local authority that is responsible for providing adequate housing to locals and empowered to do so. If you’re in university and want to rent with some other students, great, you can get a house that meets your need. If you’re young and married with student loans you can get an apartment that meets those needs. If you’re offered a great job across the country then your old home no longer meets your needs so you give it up and switch. Get pregnant, apply for a family apartment. Brother dies and you adopt his two kids, bigger house. Dead brother’s home, reassigned to someone who needs it. Housing is ultimately a period expense that is dictated by highly changeable circumstances. Buying the use of a fixed amount of housing in perpetuity is a very bad way of managing it. The lower the friction in the market the better it works. Private home ownership has created a system in which friction appears to be the point. | ||
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JimmiC
Canada22817 Posts
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LegalLord
United States13779 Posts
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Sermokala
United States14075 Posts
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LegalLord
United States13779 Posts
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Hawk2
United States229 Posts
On August 05 2021 03:13 KwarK wrote: I didn’t offer a political judgement on optimization of returns for the rent seeking investor within a capitalist system, I only pointed out the obvious financial implications. A more expensive asset commands higher rent. If you require use of an asset within a capitalist system you must pay for it from the current owner. It doesn’t make a difference whether you buy the use of the asset for perpetuity (purchase it outright) or simply for a period (rent it), both are dictated by the value of the asset because in both cases you are paying the current owner for the rights to use the asset. Explaining the maths that govern how the system works is not an endorsement of the system. If you would like my political opinion, individual home ownership is a failed Thatcherite project to create a nation of small investors that has succeeded only in creating a system of private landlords. Individual home ownership is extremely wasteful, people buy homes that don’t fit their needs and are then chained down by them. They buy homes today big enough for children that may never be born and keep them long after the children leave. They stay in homes that don’t fit their changing circumstances due to contractual obligations and cannot properly adapt. There are more empty houses than homeless people and homelessness is an expensive ongoing crisis. People in economically depressed areas cannot leave and people in booming areas can’t afford houses. New housing meets the needs of the group with the most disposable income, not society, and houses are hoarded as investments against future demand rather than used as the resource they are. The utility of a house, somewhere for a member of society to reside, is somehow not the source of its value. I would like to see a system of renting from an elected local authority that is responsible for providing adequate housing to locals and empowered to do so. If you’re in university and want to rent with some other students, great, you can get a house that meets your need. If you’re young and married with student loans you can get an apartment that meets those needs. If you’re offered a great job across the country then your old home no longer meets your needs so you give it up and switch. Get pregnant, apply for a family apartment. Brother dies and you adopt his two kids, bigger house. Dead brother’s home, reassigned to someone who needs it. Housing is ultimately a period expense that is dictated by highly changeable circumstances. Buying the use of a fixed amount of housing in perpetuity is a very bad way of managing it. The lower the friction in the market the better it works. Private home ownership has created a system in which friction appears to be the point. Decent identification of the problem, but poor solution proposal. Home ownership is good on a societal level, renting is not. Owning a home aligns incentives. Home maintenance, upkeep, and improvements are useful when you own a home, but not so much if you're renting. Sure, landlords can do those things, but it's going to be renters who are living in the properties. Simpler solution is to juice the fuck out of the housing construction and innovative housing technologies. At the very least, remove the regulatory burdens that make it difficult to build new houses. Housing hasn't yet benefitted from the technological innovations which have reduced the cost of most other goods. Sure, there are some legitimate reasons for this, housing construction is inherently unique due to the land on which it is placed. Moreover, houses are currently built on-site and built by hand. Though, technological innovations can solve these problems with the proper funding. As an example, Boxabl is a promising company which constructs homes in a factory, then transports them via truck. Side benefit to this simpler solution is that delusional property speculators who wrongly believe that housing is an investment will get blasted, as they should. Housing is a non-value generating commodity. The price increase in housing over the past few decades have been politically derived, speculative, and rent-seeking. | ||
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Belisarius
Australia6233 Posts
There's a lot of people in the market who really aren't thinking about whether their ROI is optimal. Random people invested in property are often tying up the majority of their networth in one asset and have all sorts of emotional baggage attached to the location, their family memories in their old house, their dreams of retirement at the beach etc etc. Plus, there's all the friction you're talking about. Real estate is obviously pretty illiquid with high transaction costs and large overheads if you go to market but don't find a buyer. It's also quite hard to value in a lot of cases. All these things contribute to people not wanting to sell even when it's strictly better for them to do so. Grandpa doesn't even know his networth to the 100k, he's not thinking about +/- 0.5% yoy. He really is quite happy to just sit there collecting unrealised gains as long as the rent is higher than the repayments. I'm not trying to argue that you're wrong or that ROI doesn't matter. Some people will be doing their maths, some people will be doing the opposite and trying to charge more for a place because they personally value it, and over time, even grandpa will become aware that his neightbour's is listed for $100/week more and raise the rent. There is absolutely no doubt that rising prises put upward pressure on rents, but there are a lot of other factors. I think they're often only loosely correlated. Right now really looks like a perfect storm. House prices are exploding, but at the same time a bunch of stock is tied up with tenants who can't pay, so the few leases that do go to market see insanely inflated demand. All the tenants look at this and bend over for giant increases, without realising that if they all bailed at once, those numbers could fall rapidly. It's a total mess. | ||
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hiro protagonist
1294 Posts
On August 05 2021 08:45 Belisarius wrote: Right now really looks like a perfect storm. House prices are exploding, but at the same time a bunch of stock is tied up with tenants who can't pay, so the few leases that do go to market see insanely inflated demand. All the tenants look at this and bend over for giant increases, without realising that if they all bailed at once, those numbers could fall rapidly. It's a total mess. Only true in areas were demand is lower the potential supply being realized with evictions. In places where its even halfway desirable to live, it won’t change anything, much less prices. Classic real estate truism hasn’t changed: location location location | ||
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KwarK
United States43468 Posts
On August 05 2021 09:06 hiro protagonist wrote: Only true in areas were demand is lower the potential supply being realized with evictions. In places where its even halfway desirable to live, it won’t change anything, much less prices. Classic real estate truism hasn’t changed: location location location The alternative to renting is buying. If the price to buy goes up the demand to rent goes up. | ||
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