jayeff

People talk about any increase in the value of their homes as if it were profit. But unless you have died or are otherwise leaving the property market, it isn't: you will usually be paying a similar %age increase in the price of your next home. And since most people (prior to retirement) move up the housing ladder, translated into dollars, that percentage increase often more than wipes out any nominal "profit".

The reality is that house purchase sets most people on the credit treadmill more surely that anything else in their lives. Particularly when people see prices rising and are tempted to take the maximum loan they can afford, they can end up with nothing if anything goes wrong. Many suffer less dramatically, but are forced to use other, more expensive forms of credit, to get by.

In Long-Term Perspectives on the Current Boom in Home Prices Robert Shiller of Yale University points out that US house prices - in real terms - were almost unchanged between 1900 and 2000. From that perspective it is almost impossible to see the astonishing leap in prices since 2000 (which seems to have blinded people to that longer term reality), as anything other than a bubble waiting to burst in a very big way.

Owning a home is not only about its investment value (or otherwise). You can, for example, personalize a home you are buying in ways which you may not be allowed to do if you live in a rented home. But there are also practical downsides, such as once you "own" a home, you will likely be less willing to pursue opportunities if they involve a move.

As this article in the Denver Post a couple of days ago suggests, home ownership is becoming a nightmare for many people. "Fed officials heard stories from Denver, Cleveland, Philadelphia and New York, where neighborhoods are deteriorating as borrowers struggle to pay loans or abandon their homes in foreclosure". "Some 1.2 million foreclosures were reported nationwide last year, up 42 percent from 2005, according to Irvine, Calif.-based RealtyTrac".

Quotealex

And what's with the stock = gambling!

Peaches

Yeah, some of us are just too stupid to keep up with that stuff......I know every dime I've spent on maintenance and upgrades. It's not rocket science. Not to mention many upgrades get more than their cost back at resell. IIRC, a kitchen remodel can bring around 20% more in what it cost.

Bottom line - if you think a house is a poor way to spend your money, don't buy one.

Colin - talk to me about gold. Several people have mentioned it to me lately - enough people to get my interest up.

Quotealex

Nah. A poor way of spending your money would be to buy a brand new car Buying a house is better than spending it on things. It just IMO not as good an investment most people portray it to be.

jayeff

Be careful with gold. It is not usually a traditional investment device, but a kind of insurance when people are nervous. About 5 years ago when gold was around $250 an ounce I recall recommending it on a couple of boards and the price is now $650 an ounce or so.

But that advice was predicated (and still is) on doubts about the US economy (and hence about the dollar), which I believe will worsen for another 5 years at least. I think we are in for a rough ride for perhaps the next 15 years and if so, the price of gold should easily go over $1,000.

However, if something unexpected is pulled out of the hat and turns things around sooner, gold prices will decline again. So do be aware of the risk.

Snake Doctor

Yes you should consider what you would have spent in rent.

Rents go up every year to keep pace with inflation (or more)
Once you buy a house and lock in your mortgage rate it's set for the duration. Renters will have to spend more each year for rent (or possible the same percentage of their income on rent) while the person with the mortgage pays the same amount, or a lower percentage of their income each year (making the standard assumption that wages will rise with inflation)
So the person with the mortgage actually has more disposable income, or more money to invest elsewhere than the renter does.

This conversation is so ridiculous I can't believe we're actually having it. People who think renting is a better long term financial decision than buying really need a course in remedial math.

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jayeff

PS: remodelling a kitchen holds its value better than other ways of improving a house prior to resale, but on average it is still not profitable: http://www.remodeling.hw.net/industr...&sectionID=173

The figures for 2005 are rather better - http://www.remodeling.hw.net/content...&sectionID=256 - but probably distorted by rising prices generally.

Peaches

Yeah, I wouldn't put down a huge amount into it - maybe $10K or so. But I know nothing about where to buy. This is a link a friend gave me: https://online.kitco.com/sellprice/completelist.html

Good place or are there others?

Doctor Dre

Putting all your money in a house is a bad move definitly.

But putting your money into a house instead of paying rent every month is definitly better on the long run...

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Peaches

Putting all your money in ANY one thing is a bad move! (unless you want to give it to me )

ADL Colin

Excellent point

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ADL Colin

No doubt about it

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ADL Colin

Oh, I just mentioned it at as a comparison. I have ZERO interest in gold myself. I don't know a damned thing about how to value commodities. I have some Conoco stock. Closest I come.

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ADL Colin

I have some investments that I don't consider great investments. Bonds, for example. It just makes sense to diversify like that.

I think a house is a great thing to spend money on. I just don't consider it a GREAT investment (see thread title). Like Alex, I also like to spend money at strip clubs. I don't consider that an investment but I get great value from it.

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Quotealex

If you look at the the ratio of rent to home price in many market, you'll clearly see the "premium price you need to pay to own a house.

For example, In Boston, you can rent a two bedroom in a nice area for $1,200 per month; to purchase it, it would cost roughly $400,000 with and a monthly expense of roughly $3,000. You feel me now!

Also a currently rents are currently at their lowest price ever compared with home prices...

jayeff

Buying gold is a complex topic, not least because the market is full of crooks. There are also different ways to buy gold (and indeed silver or other precious metals). The options run from physical gold (jewellery, coins, bullion) through gold certificates, to mining shares. But if for example, you decide to buy "real" gold, you have to decide where to store it and if your view of the future is on a par with that of a survivalist, you obviously would not use a bank vault

If you opt for coins, stick with American Gold Eagles, 1oz coins kept in a safe deposit box if you are only afraid of a weak US economy, 1/10oz coins under your mattress if you fear apocalypse and think you may one day need to use them. Gold Eagles are sold at a minimal premium, which is what makes them a better buy. Don't be tempted to buy old or foreign coins: they are strictly for coin collectors despite the number on offer to gold investors.

Generally the easiest and safest way to buy "gold" is to buy shares in gold mines. The biggest, still-producing mines are the safest investments and their share price will generally track the price of gold itself. Although choosing to buy gold is somewhat anti-establishment, if you go this route, you can get the advice and help of any reputable broker, if you don't feel able to do your own research and purchasing through people like TD Ameritrade

seven

Not correct. What you get for $1200 in boston is a half-decent apartment which would cost you about $50,000 to buy therefore $300 per month.

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Quotealex

Where can you get a $50K property in Boston that then could be leased at $1,200 per month?

Even here in Montreal, I'm paying more than $1,800 per month in expenses for something I'm leasing at about $1,300 per month. That's right I'm losing about $500 per month on it.

Peaches

Thanks Jayeff - that's pretty much verbatim the info I've gotten from others - makes me feel better

Axeman

Scotia bank just came out with a study that showed in vancouver the average mortgage right now for a 2 bedroom house costs you $2800 a month but to rent a 2 bedroom house curerntly you will pay on average $1050.

So it really depends on your current market.

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seven

By buying a high rise apartment complex and renting it out. You pay millions initially but by doing that you get each apartment for less than 50k, considering some apartments may stay vacant some months of the years and stuff you average the cost to 50k per apartment. My cous from Boston wanted me to invest in real estate in Boston is how I know that.
If you're paying 1300 for an apartment in montreal you got a very nice apartment in a very nice neighborhood (i'm trying to figure which neighborhood it would be since average apt in montreal cost less than half that amount) and if you're spending 500 on top of your rent you either got a bad habbit of wasting money or you're renting a condo that has security and other levies but either way that's a needlessly and worthlessly expensive living you should look at buying a house with front and backyard and ample of privacy which would cost you less than you 1,800/month

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Axeman

LMAO I want to see these half decent apartments in Boston for $50k

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seven

You got an URL to that study or is that a figment of your imagination?

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Axeman

Ok so your $50k is kinda a false premise based on the fact most people don't have access to millions of dollars to buy a multi unit property and average down the cost per unit.

For the basis of this thread your idea is pretty out of place.

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Axeman

Global News had a story on it two or three nights ago on the nightly news.

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Quotealex

Actually it's a duplex in a working class area where the market rent is not that high; the $1,300 is the sum of both appartments.

Axeman

"Warren measured affordability by comparing mortgage payments to rents, and found that owning a home in Edmonton costs on average $590 more per month.

The gap is $899 in Toronto, $952 in Calgary and $1,794 in Vancouver. On balance, Warren rated Edmonton homes as relatively affordable."

http://www.canada.com/edmontonjourna...93da38&k=66871

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Quotealex

http://www.canada.com/vancouversun/n...14f64f&k=17430
"The Scotiabank Group report released Tuesday said the difference between the typical monthly mortgage payment on an average resale home in Canada and the average rent on a two-bedroom apartment is currently over $800 -- up from about $575 last year and as low as $250 per month in 1997"

the indigo

You know what? There is a way in Quebec to buy a multi-units property (let's say 6 appartment) for $75k each and "convert" them legally into condos.

That means you can then sell these at $100k-$125k easily with basic revamping. Cost: 6x$75k = $450k - Resell @ 6x$110k = $660k one year later for $210k profit on a $112k cashdown investment. (187% profit)

Knowledge is power.

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the indigo

Taxes, Insurance & Interest are pocket change compared to cash made annualy on appreciation. Not in USA though, real estate economic over there is ridiculous. It will crash within 5 years. People will have to sell way lower then their current market value with all the babyboomers retiring.

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the indigo

This is where you step in, and make money on other's people lack of interest and knowledge of the real estate market.

You are in the same bandwagon, just the opposite.

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seven

Not quite. It's based on the fact how much the apartment you're renting is really worth vs how much you're paying (he said a similar apartment would worth 400k to buy which is not right). The brand new condos (much better living quality) which a regular person would buy to rent out would be worth about 250k with monthly expense about 1500 (for rental properties thou one should pay cash or make a big down payment) would rent for 16-1800. You'll rent that condo only if you want something nicer than regular apartments. He'll really make a profit (unless he paid cash or big down) however when he sells the condo few years later and not while renting is why individual condos don't make too hot rental properties you're better off buying an old house for dirtcheap, renovating yourself if you got the skills and renting it out.

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seven

not as easy as you make it sound but a good idea nevertheless.

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Quotealex

It's no longer as easy as it used to be due to people abusing it. I know in Montreal, there is a by-law making it very hard to convert a multiplex into condos; and the basic revamping and titles will cost you a minimum $25,000 per units, thus I doubt you would make a 187% profit margin from such a conversion. I think a more reasonable profit margin as a promoter would be at around 30% or so.

the indigo

Problem is that people see Real Estate as very long term investment.

Most of the time, it's not.

You can make 100-300% in 2-3 years on one project and move on.

If this thread is all about buying a "standard" home in a "standard" location at a given "standard" timing, spending thousands on worthless in-home stuff to impress your friends, you won't make any profit in the long run.

I live in a condo... I bought it because it was in pre-construction (low-price / high 1st year appreciation), very unique waterfront location (long term appreciation) and it's located in a region where all babyboomers will want to retire in the next 5-10 years, near to all services. I bought for these reasons. Not based on my feelings. It is an investment to me.

Bottomline is: don't pretend that your home is an investment if you did not bought based on economic reasons, but only from your feelings.

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seven

Yea just read that.. but the fact remains if you wanna totally waste 1000/month in rent or if you'd pay 1200 in mortgage+expenses=1500 towards owning something. If you can't afford to buy a home then the above url would be your consolation

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the indigo

Don't buy in high class markets...

You can get a $800/month rent from a $80,000 appartment. The monthly rental rate should be around 1% of the unit value. It will cover all expenses (mortgage, taxes and inflation...)

If you can get better than 1%, it's even better.

Owner of that $400,000 unit is renting at only $1,200/month because it's a high class market. At 0,3% per month he better did not consider that unit as an investment at first....

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the indigo

I'm posting too muhc

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Axeman

Again depends on the market. Your saying there is only a $200 gap up for the mortgage over rent where as the articles we provided show its closer to min of $800 and in the case of a city like Vancouver the gap is $1700 a month before the extra expenses of owning like prop taxes and insurance.

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GigoloMason

Rather funny considering that real-estate is essentially an IOU as well. You do realise that you don't actaully 'own' real estate in most countries right?

All this talk regarding appriciation differentials is rather silly anyway. The real boom in real estate is fairly recent (last 30-40 years) prior to that it tended to appreciate in line with inflation (which was for all intents and purposes non-existant on the kenshin\gold standards).

All people keep doing in this thread is using ancedotal evidence to support their opinion. Yes you CAN make money in real estate yes you CAN make money in stocks. As an overall investment stocks TEND to average out to a better overall return over MOST timelines in which you own them.

That said you have to live somewhere, and you'll either end up owning or renting. There's actually an index out there that tells you given the region in which you live which is a better fiscal investment once you figure in taxes, upkeep, average rental prices, cost of aquiring capital etc.


FIN.

PS: People really need to figure out how ammortization schedules work. You realize how long it takes for you to start paying any significant $ into your home on a 30-year? Most people never 'build euity' they're just paying interest.

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seven

Yo dude! I pay property taxes, ins and all that too and I know very well about the expenses in Vancouver (which isn't really the largest or most expensive city in Canada anyways in contradiction to a popular belief of BC people.. quite a few close friends I have in this biz are from there) let me tell you the gap wouldn't be anywhere close to $1700.. $500 to $800 is more like it on average home vs average apartment. Besides scotia bank isn't the biggest bank in Canada probably for reasons Either way, buying a house ain't no poor man's game who's hardly getting by, it's for people who can afford it and afford it well. When you say investment you should mean investment ie. you got the money to invest not that you barely have an equivalent of rent money to invest

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GigoloMason

More accuratly you need a course in remedial finance

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Axeman

Your an absolute idiot but that is besides the point. Vancouver and Toronto are very similar in their cost of living. Nobody is arguing that fact anyway. I've pointed out the market you are in determines the value of renting vs buying. And in a city like Vancouver where the average "HOUSE" is now $540k and a mortgage of $2800 a month and the rent for a house of similar size (location can vary) is renting for $1050 average.

You keep trying to compare houses to apartments. Are apartments going to be a lower gap than houses? Of course. But some families needs houses and not apartments. Some singles or couples don't need space and like apartments over houses.

But you percieved reality over hard facts from a major lending bank in Canada says it all. The average gap for a 2 bedroom home "IS" $1700 a month over renting in Vancouver right now. Whether you choose to believe it or not.

But if you want to buy in Windsor, Ontario you are paying even if not a bit cheaper to buy a house or a condo over renting there. All depends on the area you want to live and if you want to do renovations are not. In that market you are better off buying since there is no gap.

Again its all moot if you dont use that difference in rent vs mortgage payments to invest in other things.

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Snake Doctor

Ok I did some research on this and basically it depends on what housing market you live in.
With the overheated housing market of last few years, the cost of buying versus renting has inverted substantially.

Basically home prices jumped through the roof, and people being the sheep they are flocked to buy these homes at outrageous prices.
With low interest mortgage and lax lending requirements this has created a shortage of renters in these markets which means landlords aren't able to hike rents.

So in some areas it may temporarily be true that renting is better than buying I don't see that being the case long term.
Eventually alot of the idiots who took adjustable rate mortgages will get foreclosed, which will simultaneously put reasonably priced homes back on the market and flood the rental market with prospective tenants.
This should put rents vs mortgages back into proper balance.

Long term however, owning your own home is still the way to go for financial security. Depending on what housing market you live in, this may not be the best time to buy though.

Obviously if you're renting a place for $1000 a month, and buying the same place would cost you $2000 a month, then renting is the way to go. In most markets that isn't the case though, which is why this whole topic is making most of us shake our heads in disbelief.

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Axeman

Yep as long as you take what you would have put in for a down payment and then also use that extra $1000 a month to invest elsewhere, you are probably better off doing so than buying a house.

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GigoloMason

The thing you seem to be missing is the ONLY thing working in joe blows favor when 'owning' a home is that he gets the opportunity to take advantage of leveraging and everything that comes with it.

He's taking making (simple numbers) a 100k investment when he doesn't actually HAVE 100k. That's great if the house appreciates ahead of his additional expenses as he generates a return on money he 'doesn't have', but you seem to be ignoring the downside. Only difference is a bank will give you a loan to buy a house, but is far less likely to issue that same loan against a stock cert for the average person.

Problem with leveraging is that it can cut both ways, if the house depreciates you can get stuck with a loan you can't buy yourself out of because you can no longer sell the house untill you can service the lien.

Leveraging IN ITSELF isn't good or bad, it's just a powerful tool. You can use a chainsaw to cut down a tree or to cut off your arm depending how you apply it. Homes in my opinion are actually far riskier for the average person because in essence they're investing money they don't have and crossing their fingers, even if most choose not to look at it that way.

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GigoloMason

You're also failing to take into account liquidity and the discounting that you SHOULD be doing to your cash flows in your equasions.

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Jimmer

I bought a new house and made $40K in two years. I read this thread because I thought you figured a better way to invest this money.

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Snake Doctor

The thing that you seem to be missing is that even if real estate never appreciated...let's say prices and wages were frozen today and would never change again for the rest of our lives....you're still better off buying because when you retire you can live rent free, because your house is paid for.
Having a paid for house is the only reason most people are even able to quit working when they're old. A renter will always have that expense.

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the indigo

It all comes down to the cashdown/leverage.
We don't have 12-18% interest rates anymore...

Maybe it applys with a 10% cashdown, but otherwise it's not a valid argument. The only personal amount you need to consider is the cashdown. Everything else is backed up by the bank. It's not even your money.

Let's say you buy a $200k unit with 25% deposit. (I always put 30-35%)

Investment = $50k
Mortgage = $150k
Unit Value = $200k

Mortgage is 6% per year.
Inflation is 2% per year.
Appreciation is 8% per year.

First year, you pay 6% + 2% inflation interests on the $150k = $12k
First year, appreciation is 8% on the $200k = $16k

There you have a $4k profit before other expenses. That is $4k on the initial $50k (8%). You should be able to break even after paying taxes, insurance, etc.

That is great for the first year. No win, no loss.

In 10 years, the mortgage will be lower and the unit value will be higher. The same 6% - 8% rates will apply but in the profit zone.

Mortgage = $120k
Unit Value = $420k

11th Year, you pay 6% + 2% inflation interests on the $120k = $9.6k
11th Year, appreciation is 8% on the $420k = $33.6k

$24k profit before other expenses.

And the taxman won't charge you anything on profit when you sell.

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