RoR: Forum

Post 20

Sunday, January 7, 2007 - 3:26pm

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On home ownership - a word of caution --- while it is true you own the building when mortgage is paid off, that building, by that time and by most present building qualities of building, is in poor shape, thus leaving one with a building in name of value, but in actuality of questionableness....

Post 21

Sunday, January 7, 2007 - 4:25pm

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Robert,

I don't remember who said it but I remember a quote:

"The truest sign of civilization is maintenance".

I've fixed nearly every problem with my house and property since I bought it. It's in much better shape now. The condition your property is in after you've owned it for 10, 20 or 30 years is purely a matter of personal choice. Like any other investment.

Post 22

Sunday, January 7, 2007 - 5:25pm

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Unless you live in a slum, you will pay for maintenance whether you own or rent. So owning a home still makes more sense if you plan to stay in one place for very long.

Mike Erickson, since you raised the subject of divorce, can you supplement this thread with any thoughts about prenuptial agreements and joint ownership of property? Asset protection definitely becomes a consideration as part of any overall net worth building plan. See my book review of Mark Warda's Complete Guide to Asset Protection Strategies for more on this.

Post 23

Sunday, January 7, 2007 - 6:02pm

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Luke asks:

"..since you raised the subject of divorce, can you supplement this thread with any thoughts about prenuptial agreements and joint ownership of property?"

Well, I'm afraid that I didn't give it much thought. When I got married the first time I didn't have many assets to protect. I paid all of the bills and credit card debt and her half of the equity in the house when she left. My choice, I didn't want any arguments or hard feelings or court battles. I still have a friendly relationship with my step-son which I value. My present wife brought equal assets into our partnership so I didn't give it any thought this time either. Alas, my life has been woefully unplanned.

Post 24

Monday, January 8, 2007 - 6:50am

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No matter what you need somewhere to live so the question is what gives you more bang for your buck? Renting means you pay someone else to pay for a mortgage and build equity. You will never see that money again when you pay a rent check. Owning means you pay your own mortgage and build equity for yourself. I don't think it's all that risky to mortgage a home. Of course what is risky is a matter of perspective. I own an 8 million dollar business, that's far more risky to me than a house mortgage. I'm currently building a house (unfortunately there will be individuals I'm suing as a result of it) but ultimately I will be making a profit off of it. My house will be valued far more than what I paid to have it built.

There's some difference here. Building a house is like buying a new car. Buying a house is like buying a USED car. Most people will agree that buying used is riskier than buying new. But the fact is that when most people do buy a house, they buy it used. Of course, land is always used when you buy it.

Post 25

Monday, January 8, 2007 - 6:55am

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Owning real estate is probably the safest investment you can make.

I disagree emphatically. If I want to sell a stock, I can sell that stock in five minutes or less. I pay $7 to Scottrade, and it's done.

You can put a house on the market, and it can be on the market for months before it's sold. Your property value can go up or down for reasons that are completely out of control and completely out of your awareness.

Keep in mind also, that after the Kelo decision, property rights do not exist in this country anymore. You can also lose your house if some cop plants a bag of cocaine in your house. Have you heard of asset forfeiture?

Post 26

Monday, January 8, 2007 - 6:57am

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One strategy to consider is to rent rooms in your house.

But if you have an extra room to rent, you probably should have considered a smaller (and cheaper) house anyway.

Post 27

Monday, January 8, 2007 - 7:05am

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Like Mike, I am also not stock market savvy. The only thing that I could have done is probably mutual funds. But given the pathetic performance of the stock market in last several years, we probably would lose money anyway. So we decided to paid off the mortgage earlier instead.

That's only because most of the people in the investment world don't know what they are doing. The bright side of the stock market downturn (2000-2002) was that we figured that out. I figure if someone broke even or did better during that time, that person is worth listening to. That isn't very many people.

Any idiot could have made money in the stock market from 1996-1999. Lots of the people who made money during that time were idiots. But a poor investor blames the market. Every day, there is a stock that is going up somewhere. It's not the market's fault if you bought the wrong stock.

It takes time, but you just have to find the right people and be willing to pay them for their knowledge. Get involved with a local investment group. I have had several groups like that. One group was just a bunch of old men who sat around and talked about investing, what stocks they were buying, etc.

Subscribe to Hulbert Financial Digest. Go to www.marketwatch.com. It's a newsletter which tracks many investment newsletters. From there, you can decide what investment newsletters you want to buy.

Post 28

Monday, January 8, 2007 - 7:22am

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Chris observed:

But if you have an extra room to rent, you probably should have considered a smaller (and cheaper) house anyway.

This depends upon your long range goals and your exit strategy for unloading the house. Several good reasons exist to buy a larger house and then rent one or two bedrooms to, say, mature college students:

1. You plan eventually to marry and raise a family but are currently single with no prospects and dislike moving.
2. You want to leverage rental income into equity without the hassles of traditional landlording.
3. You enjoy the close company of others without the obligations of a traditional family.
4. You know that a larger house actually sells more quickly and at a higher profit than a smaller house because most home owners have families.

I could list more, but I think these offer compelling reasons to consider the strategy.

That said, I can think of several good reasons to own a smaller home or even a one bedroom condominium. Thankfully, the free market has enough room for all these possible living spaces.

Post 29

Monday, January 8, 2007 - 8:04am

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1. You plan eventually to marry and raise a family but are currently single with no prospects and dislike moving.

If you are currently single, how do you know you are going to get married? How do you know your partner is going to like the house?

2. You want to leverage rental income into equity without the hassles of traditional landlording.

What are the "hassles of traditional landlording"? And what about the hassles of having a roommate?

Post 30

Monday, January 8, 2007 - 8:20am

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Chris, Chris, Chris,

I have no interest in arguing these benefits and detriments with you. To each his own in the free market of value judgments!

Post 31

Monday, January 8, 2007 - 9:11pm

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No matter what you need somewhere to live so the question is what gives you more bang for your buck? Renting means you pay someone else to pay for a mortgage and build equity. You will never see that money again when you pay a rent check. Owning means you pay your own mortgage and build equity for yourself. I don't think it's all that risky to mortgage a home. Of course what is risky is a matter of perspective. I own an 8 million dollar business, that's far more risky to me than a house mortgage. I'm currently building a house (unfortunately there will be individuals I'm suing as a result of it) but ultimately I will be making a profit off of it. My house will be valued far more than what I paid to have it built.
There's some difference here. Building a house is like buying a new car. Buying a house is like buying a USED car. Most people will agree that buying used is riskier than buying new. But the fact is that when most people do buy a house, they buy it used. Of course, land is always used when you buy it.

Except it's nothing like buying a car. Cars depreciate in value. Houses generally appreciate in value. Way way way way different.

Post 32

Monday, January 8, 2007 - 10:47pm

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There is another option. Luke mentioned renting out rooms in a house you are buying. You can rent rooms in a house your are renting if you can make a deal with the owner. You can achieve practically zero rent with a minimum of work and still have control over your own environment. When I was in my twenties [in the '70's] I had rented a "mother-in-law" studio apartment attached to a three bedroom house. I sublet and paid rent to the renters than lived in the house. When they left I made a deal with the landlord to manage the house and pay him rent for the whole place. I rented out the three bedrooms, collected rent from three tenants and just about broke even every month for a couple of hours work. Every few months somebody would move out, I would renovate their room including patching any holes in the walls, repainting etc. That took about four hours. I would arrange for interviews for new tenants and included everyone in the house in the interviews. Everyone always got along fine. It worked for me for over five years until I moved to S. Cal.

Post 33

Tuesday, January 9, 2007 - 6:51am

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Houses generally appreciate in value.

The appreciation or depreciation of a house depends on a lot of things. But most importantly, any house requires a certain amount of maintenance. If you don't put any money into the house, it will depreciate.

Having never been a homeowner, I do not know what such costs are. But obviously things like furnances and water heaters eventually wear out. Toilets and plumbing need to be fixed. Electrical wiring needs to be maintained, as do windows. Carpet doesn't last forever, and neither does paint.

These are costs that I usually have not dealt with as a tenant.

Post 34

Tuesday, January 9, 2007 - 7:23am

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Chris wrote:

These are costs that I usually have not dealt with as a tenant.

Yes, you have. Your landlord simply hid the costs in your rent.

Post 35

Tuesday, January 9, 2007 - 11:34am

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As a child I once mumbled something to myself while in severe physical pain. I�m not sure why it came out of me as it did, but I was crazy in pain and must have hoped I could command reality to provide relief. It stuck with me, I reinterpret and reuse it often and recall it when I need strength or discipline. I had mumbled: �I will not be the one to pay.�

I bought my house fifteen years ago when I was twenty-two, after one year of saving. It is worth six times what I paid. Even adding back every sheet of drywall and a reasonable assumption for the value of my time, it is worth four times what I paid. People asked me why I was willing to pay anything for a one hundred year old shit box in such a crappy neighborhood. I forget if it was Mike or Luke who mentioned the desirability of identifying a structurally sound and aesthetically challenged home.

In the fifties my house got an addition and was made into three separate apartments. When I bought it I moved into one of them. As the other two moved I renovated the spaces and now we live in the whole thing. And thanks to other real estate investments (now liquidated), the home mortgage is paid off.

No doubt I was lucky in having started when I did, in having the best decade for growth in real estate values in a long time.

I saved over the year following college by living in a hole in a crack neighborhood. I paid $235/mo for a furnished one-bedroom. Gunshots were a regular nightly event. Right now I am in my fifth year driving a 1993 Ford Aerostar. I bought it outright, but the monthly payment equivalent recently cracked under $60. I do the maintenance and it hasn�t been in a shop in 40,000 miles. It wouldn�t matter if I lost it to theft (who would steal it?) or collision, so I carry only liability and pay almost nothing. I could push it off a cliff tonight and the sole financial consequence will be having spent under $60/mo for auto costs for the last five years.

Post 36

Tuesday, January 9, 2007 - 12:46pm

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I've made about 10 moves in the last ten years. I've never really been willing to forgo new choices for a "stable" lifestyle until now. Now I've got a job I love, a 35 hour workweek, a pub a couple blocks away with Irish folk music and my Objectivist club is about 5 minutes away. Now, I finally might be ready to buy a house if my wife wants to stay put here for a reasonable period of time :-). I think the rent\buy decision has more to do with lifestyle than anything else.

Jim

Post 37

Tuesday, January 9, 2007 - 1:25pm

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Chris wrote:

These are costs that I usually have not dealt with as a tenant.

Yes, you have. Your landlord simply hid the costs in your rent.

Exactly my thoughts. Chris, do you think your landlord operates at a loss?

Post 38

Tuesday, January 9, 2007 - 2:36pm

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Having never been a homeowner, I do not know what such costs are. But obviously things like furnances and water heaters eventually wear out. Toilets and plumbing need to be fixed. Electrical wiring needs to be maintained, as do windows. Carpet doesn't last forever, and neither does paint.

If you pay $900 a month in rent, you could purchase a comparable home for about $150k (don't remember exact figures, plus depends on your credit). Let's say you rent this hypothetical apartment for three years. That's $32,400 down the drain. You won't see it again. And I would have to agree with Luke and John, you're rent includes the cost of maintenance. Plus, if you've ever moved out of a rental property, you know you will soon be receiving a bill for the repairs your landlord had to make to the property you "damaged" (ie, new paint, carpets, etc.) Plus, any decent realtor will insist on a thorough home inspection before closing. Furnaces and water heaters should last at least 15 years, probably more. And if they do go, a furnace might run a couple thousand, but you could probably finance it with managable payments. A water heater is what, $1,000? And most places offer free installation. Toilets are not complex machines, anyone with a toolbox can replace one. And, coming from an electrician, the "wiring" will never need to be replaced, more likely it is light bulbs, receptacles and switches that will need replacing, which is inexpensive. The best thing to do is find an electrician who will do that work on the side, so you can avoid paying his companies overhead and profit. And paint is cheap, and any moron with a brush can paint.

Now let's say you buy the hypothetical house, and live in it for three years. Now let's say you're ready to sell and the house drops in value by $10,000. So if you sell the house that you bought for $150k for $140k then you are out $10k. Reason not to buy a house? Not really when you think that you would have had to spend $32,400 on rent if you hadn't bought a house. So in essence you only paid $278 a month to live in the house. And of course, most houses don't depreciate, they appreciate. So I don't really see how you could argue against buying. To me the risks that Chris mentioned are just that. Risks. I'd say it's worth the risk.

Post 39

Tuesday, January 9, 2007 - 2:50pm

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The only thing I think that can make homeowning not worth it if you plan to stay somewhere over the long haul is property taxes. In an overvalued market, property taxes can definitely convince an owner to sell.

Jim

Housing Market & Renting