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A house as an investment (in the real world, not in the bubble)



March 28, 2010 – Comments (36)

I have never owned a house.  For a variety of reasons ranging from not having had any money with which to purchase one over the vast majority of my life to always sort of thinking I'd leave where I was living sometime soon to fear and loathing at the prospect of having to do my own maintenance and stuff like that.  I love riding lawnmowers and would consider that a huge plus!

I 100% get that a house can be a good investment via being a savings account for people who would live there for many years.  By buying a house -vs- renting an apartment or condo, you gradually build equity from paying down the loan and from appreciation (if any) of the home itself.  This is partially offset by the cash drains of property taxes and maintenance.  Further, in the first few years of a mortgage, the payments on principle are only a small fraction of the overall payments.  A further negative in this is realtor fees.  In my area its about 7% of the sale price of a house to have realtors sell it, and the realtors (while I've never owned a house, I have shopped for them on several occasions) work hard to make sure that "for sale by owner" homes don't sell.  Slandering the quality of the house, its price, and everything else in each of the cases when I've asked them what they thought of one as we drove by, etc.  And last, buying the house and getting a mortgage seems to come with considerable upfront fees as well.  Origination fees on the mortgage, appraisals, and so forth.  

So overall, you start out (in realtor fees to sell, and bank fees for a mortgage) down 10% right out of the gates, meaning you'd have to sell for a fair bit more than you paid to break even, much less turn an actual profit.  

So the fees (realtor and bank) and the fact that the first payments on the mortgage are largely interest and the fact that as we've seen, house prices are volatile, much like stocks.  You buy a share of a big dividend paying blue chip stock and sit on it for 10 years (think JNJ, or T or PFE or whatever) and the odds become extremely high that you'll make money.  Lower, of course, if you grossly overpay for the initial purchase, but very good historically.  Sitting on it for 1 year, historically, is a much bigger crapshoot.

These downsides are offset by the ability to write off interest on the mortgage for taxes.  This gives you quite a reasonable write-off in the first several years.  If the house you bought was 2x your annual household income, this would allow you to write off about 1/8th of your income in the first year of the mortgage.  

But, imagine you lived in that house for 20 years.  You paid off what, then? Perhaps about 60% of the principle.  And over 20 years its likely to at least have held its price, and perhaps shown some appreciation.  If the neighborhood is still "in style" its likely worth more.  Now, assuming that the value of the house was 1-2x your annual household income, you've saved one years pay plus some tax benefits.   And the payments that you made are, in my area at least, lower than the rent for comparably nice living space.

So what I'm trying to get at is that the hyperactively-touted-by-all-realtors investment value of a house never has been that good.  Between taxes and fees on a mortgage and realtor fees, I calculated 3 years ago when I thought about getting a house that I would have to get 15% more than I paid for a property to come out ahead -vs- renting where I was living at the time in 3 years.  Granted, I could have lived in a nicer space.

Its also worth noting that as I've hit up a realtor or 2 here in my town lately to shop for some houses, they have both pushed me to buy their own house, "guaranteeing" i'd make money on it if I bought at the price they were asking.  That implies they can't sell it at that price and are hoping i'm a sucker born last minute.

In my town, from spending an hour or two sundays looking at houses-for-sale int he paper, I would estimate that the best investments are low-cost new houses.  Twinhomes for that $100-120 range, often with unfinished basements, sell for $120-150 quite quickly with finished basements all the time.  Ditto bi-level houses, also often with unfinished basements.  They typically sell for $140-160 new and bring $160-180s with finished basements and sell very quickly.  

The best formula for actually not losing money ona  house you're only in for a few years in my area seems to be that:  new houses with unfinished basements, finish the basements and they sell quickly, consistently, and for prices quite better than you paid.  

Higher end homes in this area can languish on the market for months or even years, and we have, per USA Today, the best housing market in the country through this recession.

I am moving in about 2 months, to a town a bit outside a major metro area that has seen major house price declines over the last 24 months.  Its possible that I could find a distressed property that could be purchased at an actually significant value.  But assuming that I prove to be a house shopper of only average talent (likely), I should assume that if I buy a place there i will lose money on it if I don't stay for several years...  

Anybody agree or disagree with that conclusion?


36 Comments – Post Your Own

#1) On March 28, 2010 at 3:53 PM, dibble905 (< 20) wrote:

When you purchase a residential property with a mortage, you are paying a loan on a home priced at today's value and receive an inflation hedged equity return over the long-term. The main risk is the short-term volatility of your equity due to the financial leverage you are employing to purchase the asset.

Basically, the return/risk (asset relative to equity) is quite high during the first half of the amortization period and gradually decreases near the maturity of the mortgage.

So the argument goes, is this really as "low risk" investment as people make it out to be? I am thinking it is quite the contrary and it is a big misconception.

Better yet, what's the difference between this investment vehicle and going long equity (no leverage) and gradually switching to a TIPS/High-grade bond portfolio over the long-term?

Interesting ideas...

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#2) On March 28, 2010 at 4:20 PM, checklist34 (98.65) wrote:

dibble, I like this paragraph:

"Basically, the return/risk (asset relative to equity) is quite high during the first half of the amortization period and gradually decreases near the maturity of the mortgage."

Except I wonder if, honestly, its not more a question of just the risk being quite high.  The initial phase of buying a home may represent an unfavorable risk/return ratio.  As in alot of risk for the potential return.  Fees, as described, consume the first 10% of appreciation in home value.  For a houe to go up 10% in less than a few years means that A) you bought very favorably B) the market in your area took off.  I don't think there are alot of "market taking off" stories around the country right now asthere is still quite an overhang from the last over-building period.

Localized "market taking off" exceptions may of course be found.  Like Williston, ND, where my grandmother lived until she passed away recently.  It shrunk throughout the 80's and 90's after being quite an oil-boom-town in the late 70's into early 80s.  Its an oil boom town once again, and house prices there are said to have basically doubled from 06 to 08.  Her estate got far more for her condo than it was appraised at just a few years earlier.

But excepting that kind of localized boom town effect, I don't think we're in a situation where a house is a safe short term investment for some time.  

The "system" (i.e., realtors and mortgage lenders) is simply stacked considerably against the "investor" (i.e., house buyer) in this case. 

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#3) On March 28, 2010 at 5:10 PM, whereaminow (< 20) wrote:


I've been doing a lot of research on housing prices in the U.S. as well lately.  I know I'm moving back either next year or the year after.  I considered buying a proerty in SoCal now and renting it out, but the value still isn't there.

I recommend Redfin, as the most comprehensive real estate listing site I know.

I've been trying to find buildings built in 2006 & 2007 at the height of the bubble.  There I get the most short sales and foreclosure listings. 

Good luck to you.  I haven't found anything worth buying and I've been looking for about 12 months.  I think as I get closer to moving back to the U.S., I may have to relax my standards ;)

David in Qatar

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#4) On March 28, 2010 at 5:39 PM, ETFsRule (< 20) wrote:

"But assuming that I prove to be a house shopper of only average talent (likely), I should assume that if I buy a place there i will lose money on it if I don't stay for several years...  

Anybody agree or disagree with that conclusion? "

Agree 100%. You will probably lose money if you stay there less than 5 years.

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#5) On March 28, 2010 at 5:56 PM, checklist34 (98.65) wrote:


     Thats the feeling I get too.  I haven't shopped broadly, but I did ask at the front desk of Palms Place what condo's there were selling for -vs- a few years ago and hwile it was less it still didn't seem like anything resembling a fire sale.  

     And in the couple/few regions I've shopped for houses I have noted better deals, but nothing that seems at all like panic fire sale.  And in, say, Minneapolis where I have many friends and so wind up party to some convo's about house prices and things, prices are down but still far up from where they were say 6 years ago. 

     In general, it just doesn't feel like anybody threw in the towel yet.  Or maybe i'm just ignorant about real estate markets and not really able to judge them.

     Ditto stocks.  Of stocks i've followed, in all honesty many were cheap for only weeks or months or even days out of this crisis.  Citigroup was truly cheap relative to todays price for really only about 3 weeks right at the bottom.  BAC for a couple months.  Ditto HIG, it was really only near its bottom for a very brief time.

     And the S&P itself was really near its bottom for only a month, if even.  It had a one-day spike to within 10% of its ultimate bottom on Nov 20, 2008, then it fought and floundered and struggled for quite some time in Jan/feb 2009 at and around the 800 mark, and was within 20% of its bottom (so <800) for only about a month.  

      In that month when the market was near its bottom, there was a clear sense of panic and despair.  The real estate markets don't really have that yet.

      All over the town in which I live are partially rented (and I don't mean 80 or 90% occupancy, I mean 50 or 60%) pieces of commercial real estate, but none are for sale at reasonable prices or even at prices where the rent could cash flow them.  

      Which leads me to believe that alot of the owners are just "waiting it out".  In this area alot of the builders are people who, in lieu of say a stock portfolio, build rental property as investments (business owners, big farmers, etc.).  They are, it seems, just waiting it out.  So no cheap prices, but also no real point in building new CRE around here due to what seems like significant over supply.

       Anyway, I am pretty darn far from an expert on real estate, but it seems to me that it may be that

A)  real estate hasn't bottomed yet or

B)  there won't be a really dramatic bottom ala S&P at 670 a year and 3 weeks ago.  Because so many people just refuse to throw in the towel and sit and sit and sit and sit for years.

If B) is the case, it will be quite some time before anybody can exit the average real estate purchase because the "bottoming" process may well drag on for years in the absence of clear capitulation.  


     I am tempted to buy both sides of an entry-level twinhome and rent one.  Then, if I got married and needed a bigger house or something, rent both sides or sell.  In and around my area these seem to be the best investments.  Big apartment complexes are overbuilt, CRE is overbuilt, the mid/upper to high end home market moves at a snails pace, the older home market seems to move at a snails pace, and those seem to be the properties you can basically 100% get out of.

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#6) On March 28, 2010 at 6:01 PM, checklist34 (98.65) wrote:

This is just mental speculation, but I wonder if, say, gov't interventions and banks scrambling to extend CRE mortgages and first time homebuyer taxes and prices seeming cheap because of people remembering what they were say 3 years ago...

all leading to a flat, extended bottom instead of a sharp brutal one like we had in the equity markets...

I wonder if that actually is worse over a 3-5 year period than a brutal blow-out bottom?  To get back to "fair value", which I estimate is about S&P 1100, took not even a year from the blow-out equity bottom.

I wonder if getting back to S&P 1100 in real estate terms (if that made any sense, yikes) will take alot longer due to the artificial bottom, that will become an extended bottom presumably.  

And if you took the avg level on the S&P from say october 2007 to october 2017 it owuld, average, be higher for having had a blow out capitulation bottom?  

And I wonder where real estate prices are right now.  Are they August 2008, S&P 1200?  Down fairly significantly but not near bottom, or are they S&P 900?

I got nothing.  The real estate market is a tough one to decipher because its so blatantly manipulated.  "asking price" of a share of BAC is, in fact, the price, freely viewable by all the public.  

We never actually see selling prices of homes, do we?  And realtors never really tell you to run for your lives, do they?

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#7) On March 28, 2010 at 6:42 PM, vtBrunson (29.21) wrote:

A side note if you think about your home as an investment

I have to thank my old realtor for getting me to jump off the "positive cash flow rental house" idea...(i.e. renting your house out for more than you are paying on your mortgage)

She was awesome, she owned between 6-10 houses that she rented out over 10+ years, her husband was the mayor, and she had tons of reliable connections (contractors, carpenters, etc.) she dealt with in real estate to help her out...

Her assessment was "renting a home you don't live in is not worth it", she ended up making good money, but she mentioned all of the hassles of having tennants, and the number of late night phone calls, security deposit disputes, etc. etc.   All this while she was driving me around to look at houses (that I was considering using as my cash flow positive rental property). She ended up selling all of them back in 2006/2007.  

From that day I have always considered buying a home as not an investment. In conclusion, I'd say, unless you love it... (and you think your future wife/family will as well) I'd just rent.


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#8) On March 28, 2010 at 7:39 PM, Donnernv (< 20) wrote:

I have owned ten homes since 1963.  Sixty homeowner years in all.  (Two homes for some years).  It's a loser.  Through bad times and good, I've made significant money on one.  The past two years have been terrible.  Fortunately, they were paid off long ago.

If you rent and invest your money in reasonable dividend-paying equities (MMM, KO, PEP, VZ, T, DD, MO, PM, BP, et al) you'll come out far ahead.

Taxes, maintenance and insurance eat away you, year after year.  And when you buy or sell, realtors' commissions chew away.

Get a long (two year) lease with a two year renewal option (or two).  Grant the owner a CPI-based rental and property tax reset at each renewal.  You'll still come out far ahead.

Just my opinion based on 47 years experience.

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#9) On March 28, 2010 at 7:39 PM, Starfirenv (< 20) wrote:

 checklist34- Instead of focusing on price per se, think of it as how much down and how much per month. That is your true cost. Also, rethink your concept of bottom. Let's say you buy a 150k home at 5%. With PITI you are looking at ~750/mo.Now let's assume this house "sheds" 20% in the next two yrs but int. moves to 8%. Now your "price" is 120k (150k-30k) but interest has moved to 8% (possible). That "cheaper house" now costs you ~940/mo. So which was the true bottom? 750/mo or 940/mo. That is the key to understanding price/value/true cost/ bottom. There are other factors- inflation (stable long term or looming but which flavor- hyper or vanilla) and interest rates (stable or hikes looming) and vitality/ sustainability of the area (is the major employer moving shop to Vietnam?). These are the real questions. Price and Bottom are relative but in the above example, I would rather be the guy that "overpaid" but live for 240/mo less than the "smart guy" who waited.
 David- Buying into So Cal would effectively transfer a piece of their indebtedness right to you. As a property owner, you could become responsable for all the "promises" of the past. Want that? If so, I have a beautiful 2000 sq fter in Lake Wildwood- above the Valley fog and below the snow, in a gated golf course community built around a lake.(right across the street from the clubhouse) Let me know. I would take the culture of the Northern over the chaos of the Southern. Yea, there's some really nice spots there, but uh-uh. Sorry if I rambled.
 Hope someone finds this helpful. Regards.

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#10) On March 28, 2010 at 7:39 PM, whereaminow (< 20) wrote:


I think you're right that housing prices never bottomed. It seems like they are stuck in limbo right now, listlessly drifting lower but getting propped up here and there both by bankers searching for a way out and by government interventions.

As for finding selling prices, here is what I do.  I find out the county that the sale took place in and I go to their tax assessment website.  Usually they will have selling prices of homes in their online database.  Works well for large metropolitan areas like NY, DC, Chicago and SoCal.  Don't know about smaller areas.  You could give that a shot.

David in Qatar

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#11) On March 28, 2010 at 8:45 PM, Teacherman1 (< 20) wrote:


Since you mentioned basements, I can safely assume you do not live in my area. I have owned many homes over the years, both to live in, and as investments (mostly in the late 80's when a lot of REIT's went bankrupt and my partner and I could get them for as little as $.20 on the $1.00) and I have always managed to sell for more than I paid. I guess the area, the price, and what you plan to do over time has a lot to do with whether it is worth it or not. I found that just like in buying stocks, timing and the purchase price have the most to do with the outcome.

The house we currently live in (6 years so far), would be worth $250,000 to $300,000 in Southern California today, and $400,000 to $500,000 when we bought. Of course we paid no where near that for ours. While the value is down some from the peak of the market, we still have reasonable equity in it and will likely sell in the next 4-5 years and build our "last home".

I did not really view it as an investment when we bought it, but rather a place to comfortably live our lifes.

I guess what I am saying is that there is no "one size fits all" formula, but would have to be "tweaked" by location, needs, life style, age, future plans, opportunities, etc.

This is probably not of much help, but I think you pretty much already know what you want to do anyway.

One last thought, why not get a "nice" house, but one that is less than you can afford, then put it on a 15 year mortgage. They payments are not as much more as many think. You can also pay extra on the principal periodically, and have a lot of equity in a fairly short time.

I would say new, or in last 5-6 years. Otherwise you start running into a lot of expensive upkeep since things today are not really built to last.

Have a good evening. 

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#12) On March 28, 2010 at 10:39 PM, checklist34 (98.65) wrote:

ETFs, thanks for the input.

Brunson, ...  I think the gent that commented that "real estate is a great investment, you just have to treat it like a business and not like an investment you pay only slight attention to" or something like that had it pretty well dead-on.  and residential is probably more problematic than commercial from a tennant-issues standpoint.  

anyway, thanks for the input.

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#13) On March 28, 2010 at 10:47 PM, checklist34 (98.65) wrote:


     Thats alot of homes and a very interesting post. 

     So you are saying that a guy would come out ahead renting -vs- buying.  Thats kind of the conclusion that I have always come to, or at least I've concluded that it'd be tough to make any money owning when I've crunched some#s.

    I appreciate the input.


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#14) On March 28, 2010 at 10:56 PM, checklist34 (98.65) wrote:

Starfire thats a very interesting post.  If people are paying up today but ultimately gaining lower payments for themselves... I think you raise an extremely interesting point here:

The "house prices going up" phenomenon of the last few decades has been helped by a 30 year stretch of ever-falling interest rates combined with wage increases.  You bought a house in 1988 you probably paid 8 or 9%.  You bought in 2004 youp aid 5%, ...  its highly likely that the house sold for more than it was built for 16 years earlier.  

But if we reserve the rate situation we create a circumstance where there will be a long-term pressure on home prices.  Rates realistically can't go down from here.  

Remember, we have had a 30 year bear market in interest rates (rising rates) in the past.  From the early 50's to the early 80s.  And nown we have had a 30 year bull market in interest rates (falling rates).  

Maybe rates move in 30 year cycles...?  That would make this a good time to buy if you intended to live there a long time, as you could lock in unusually low payments, but otherwise it would generally make this an unfavorable time to get into real estate as steadily rising rates will constantly put pressure on the prices buyers are willing to pay.  


This has occured to me when considering commercial real estate as an investment.  Its overwhelmingly likely that we won't have rates this low in 5-10 years, or so it seems to me anyway.  That would create a situation where "flipping" properties would be potentially not very attractive.  

Great time to buy (to lock in low rates) if you intend to live with a property over the long term.  Not so sure otherwise.

Good post, good thought.

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#15) On March 28, 2010 at 11:00 PM, checklist34 (98.65) wrote:


    Good idea, I'll give it a shot...  

    I stand by my impression that no screaming deals exist in the world around me.  I have heard some 50 cent on the dollar deals exist in Miami, lol, I've little interest in living in Miami, and that, frankly, still may not represent a bottom of any significance.

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#16) On March 28, 2010 at 11:41 PM, vtBrunson (29.21) wrote:

Ohh, some things I forgot to emphasize on my post:

My "mentor" some advantages that I was not privy to ...

1) It was easy for her to get lowball deals, because they found her (she owned her own real estate agency, if she saw an opportunity to buy from one of her clients (especially in estate sales) she could take advantage of it. 

2) She was a realtor, so she didn't have to pay for alot of the buying/selling fees Donner is talking about.

3) Her husband was Mayor, and to say she knew the area was an understatement...She would know what areas were "up and coming" (where new roads and malls were going to be, etc.) and which areas to avoid 

I consider these things huge advantages to her situation, and she still determined buying and renting out wasn't worth it...

Anyways, kinda off topic I know, but I gotta believe that (in the next few years) it's gonna be tough for an "outsider" to get any "screamin deals" in the real estate market, the insiders (realtors, and folks who are in real estate for a living) have "information asymmetry" (Freakonomics reference) on their side.  But best of luck to you. 


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#17) On March 29, 2010 at 12:01 AM, checklist34 (98.65) wrote:


     good input, its appreciated.  So your take is that quite like stocks timing and purchase price have great deal to do with it.  ...  And as mentioned above, like stocks, the ultimate outcome varies with time and the longer  you can wait for the right time to sell or buy the better the chances of you making money.  

     But unlike stocks, which trade every day and which exist sort of aside from your day to day existence, a house you really can't control when you buy.

     For example, I'm moving in a couple of months.  I've thought about buying a place here before I move as, having lived here for nearly 15 years, I know people and all, etc.  And I've thought about buying a place hwere I'm moving to, but I don't consider it likely that i'll live there for a very long time and if I bought a nice, lifestyle kind of place, I strongly suspect that I'd wind up taking a bath on it.  

      I already have one money losing hobby, thats my car-nut status (I have almost never met a car I didn't like, except things with no passion in the design at all, like toyotas or hondas or hyundais or whatever).  

     Basically, ... if I get a house i should get it for the experience, the odds of getting out in 1-2-3-4 years without taking a financial bath are minimal.  

     Ultimately we have a non-income generating asset that comes with enormous selling costs, considerable carrying costs, and a largely illiquid market.  These facts are offset by the rent you have to pay to live somewhere and the personal satisfaction of having "your own" place.   Which, over very long periods of time, can be a savings account of sorts or potentially an investment, but over my likely timeframe is probably a cash trap.  

      Which is maybe ok.  Can I get out of a house with no more loss than buying a car and owning it for a couple years and selling it?  That wouldn't be so bad.  

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#18) On March 29, 2010 at 12:05 AM, checklist34 (98.65) wrote:


     yes, ...  an insiders game.  Where its massively profitable to the realtors, (sometimes) bankers, (sometimes, but sure as heck not always) builders, and where everybody else more or less gets the shank...

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#19) On March 29, 2010 at 12:07 AM, checklist34 (98.65) wrote:

I wonder if a guy walked into a bank and announced that he wanted to buy some shadow inventory how that would go? 

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#20) On March 29, 2010 at 12:26 AM, Starfirenv (< 20) wrote:

I  #19-t's called REO (real estate owned) and it's don e all the time.

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#21) On March 29, 2010 at 12:29 AM, tonylogan1 (27.72) wrote:

david -

do not buy in socal. you will regret it for longer than a vote for Darlington Hoopes.

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#22) On March 29, 2010 at 1:08 AM, HarryCaraysGhost (71.54) wrote:

Contrarian investing - Wikipedia, the free encyclopedia

Yes this may be an excellant time to buy. Depending on your time frame.



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#23) On March 29, 2010 at 1:21 AM, checklist34 (98.65) wrote:

msftgev, somewhere...  but I am not sure that where I live or am moving to has discounted house prices from  3 years ago.  A nearby metro area does...  but I don't know how much.  Are used homes there for sale at under construction cost?  Don't know.

ps:  the 1 and only book i've ever read on investing was David Dremans "contrarian investment strategies" from 1997 or so.  Has served me well.

People - and I mean several - in my area have bought (at times sight unseen) houses on auctions in california and phoenix.  

I rent a condo that has a 2-car garage.  I have a truckload of cars so I also rent an industrial bay (actually the bay where I started into business!) and use it as a garage.  

I was sitting in the landlords (unique, interesting guy) place and several of his chums were there.  They were buying houses in cali and arizona.  One guy said he bought two, both sight unseen as he hadn't the time to get down there.  One was new in the wrapper (plastic still on appliances, never lived in).  One was a foreclosure that had had the pipes torn out and was completely destroyed by an angry evictee.  

They talked about friends buying houses and discussed plans to buy a place in Vegas for when they go gambling.

None of these guys own one share of any stock.  I asked.  They shunned the idea of stocks as gambling. 

I'm not convinced that we've seen a capitulation and bottom in real estate.   If people from 1000's of miles away are snatching up houses speculatively in southern cali, vegas, and arizona... 

Frankly, I wonder if thats what supporting the market right now.  Speculators buying houses as investments.  

And I wonder if those kind of activities will delay a true bottom or result in an extended trough in house prices as some give up and sell for small profits or breakeven, or a loss, and eventually, gradually, the market drifts back towards a natural state where houses are bought by people who intend to live in them or vacation to them or whatever, and not by speculators and "investors".  

Alot more love for houses as investments in my area than stocks. ...

Gun to my head:  American Equities remain the most unloved (hence contrarian) investment out there.  Besides treasuries, perhaps, which probably have a market being supported largely by banks borrowing from the fed and buying treasuries, getting a silent bailout on the interest spreads.  

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#24) On March 29, 2010 at 12:39 PM, anchak (99.91) wrote:

Checklist .....good post as usual.

The key operative word here is "Investment". That basically takes away the emotionality off of the topic.

If so - then why wouldn't you - as you have done here - look it at from a pure P&L perspective.

It gets tricky from the very first line itself - of course that's true for "Non-dividend paying stocks " too - no steady stream of revenue.

Basically - RE being a captial asset - has the outlook of having/beating long term Inflation expectations by about 3-4% historically. And given the current dislocation and hopefully reversion to mean - maybe - it adds on about a 10% additional kicker - you know - like a bonus!

Now take a look at your cost.

If you need 100% financing .....getting an ARM - is completely nutz....because Interest Rates keep pace with inflation - so you need to keep your credit servicing cost fixed. That is actually a plus at this juncture - given the low rate cycle.

Still - depending on which end you buy ( I am guessing non-conforming for you) - you will still pay possibly about 100-150 bps over Freddie - ie around 6-7%

That is the mind-boggling math really -

Return stream: 4% + Inflation (assuming 2%)=6%
Credit Servicing Stream : 6.5% !

Your starting spread itself is negative 50 bps!!! Moreoever - the return stream is a future discounted thing - based on a 1 timer transaction risk.

If you include real-estate taxes - depending on your AMT status and area - maybe the saved deductions - approximately cover. However - their maintenance  and taxes etc- if you assume that's about 2-3% per annum ( of total value).....that put on another maybe 20 bps cost.

So now you are down 70 bps.

Thus ultimately it boils down to the following points

(i) TRANSACTION TIMING: ie Return on Leverage/Equity.
(ii) Transaction costs: Closing cost, Realtor Fees etc. That puts in a minimum return hurdle.

So if you think about it ...given its a long duration play - the phase that you overcome your costs and go net positive spread - is when you have 100% and no credit costs.

The problem is the more time - that takes you - your return hurdle just keeps increasing and increasing - due to the negative carry. Moreover- since holding or staying in the same house - is not possible for most people - in order for you to maintain investible status - you need to roll your capital - and pay the transaction costs any time - which is also fixed overhead - and index linked! ( ie after 10yrs you move -all things being equal - and steady rate scenario - ) - you'll pay possibly 10% of your old house's new value  and the similarly appreciated value of the same dominion in a different place/city -

AND - take on an INDEXED Difference Rate risk at THAT time.Assuming it could still be a FRM and not ARM.

Net net - you make money in RE- IF AND ONLY IF - there's a bubble....and you KEEP YOUR LEVERAGE - ie early part of the cycle - and just juice your returns thru it.

I do wonder - how many people - actually keep track of their cost basis on their house - I sure don't.  At least the govt covers a part of it - by allowing the dedn on the mortgage interest - much like paying margin interest to your broker!!!

BTW : I dutifully bought into a house - right at the peak - while knowing I was going into a dreadful transaction - hoping given my locality - which historically has had 2% Home price growth - was not too volatile. Well hope is a good thing - reality is different!!!!

The family element does come in - we LIVE in the house. My transaction was not investment oriented - YET my exit cost - as we try to sell the house - WILL BE

Duration risk - is one of the very few things - people understand well - I sure don't







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#25) On March 29, 2010 at 1:08 PM, ETFsRule (< 20) wrote:

If you're looking for selling prices, you can probably find them on Just type in the address of the house and go to "details" - it should be there. It will also show selling prices of any nearby homes that were recently sold.

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#26) On March 29, 2010 at 1:26 PM, outoffocus (23.90) wrote:

I have a problem with the use of the terms "build wealth" and "equity" when it comes to residential housing.  I think those 2 terms are partially the reason why the market is so screwed up right now. 

People think that they are "building wealth" when they buy a house as if they are getting richer.  I disagree with that notion.  Whenever you pay down a loan you are building wealth because you are reducing your liabilities (Assets - Liabilities = Net Worth). Not just when you pay down your mortgage. Yet we treat this phenomenon as if its mutually exclusive.  Also, I believe this notion of "equity" in a house that you live in horribly flawed.  I have a hard time believing that any equity that you can only "withdraw" by taking on another loan is true "equity".  Houses are places to live, unless you rent it out. Period

If we treated mortgages as what they are, loans, I think we would be better off as a country.  Ultimately, the majority of people in this country cannot afford to pay cash for a house.  So we must borrow.  Therefore when buying a house your goals should be:

1. Negotiate the best bargain price possible. - The lower the principle, the less interest paid.

2. Find the lowest interest rate.

3. Borrow as little as possible by giving a bigger down payment.  The less you borrow, the less you pay in interest.

4. Use common sense when determining how much home you can afford.  Another reason why housing prices have gone up so much is with both spouses working, people tend to buy homes that they can afford on 2 incomes instead of one.  This however is faulty logic.  If they only way a couple can afford to stay in the house is by having both spouses working at their current salaries, they put themselves at a huge risk of losing their home because all it takes is for one person lose their job, get sick, or get demoted and loan goes into default. Ultimately, when buying home, the mortgage payment should probably be no more than 1/3rd of take home pay. At least if something happens the homeowner can better weather the situation financially.

If we get these crazy terms out of our heads and just focus on the overall goal of increasing our assets and reducing our debts, the middle class would be stronger as a whole and we would have to always answer to our bank and insurance company overlords (tongue in cheek).

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#27) On March 29, 2010 at 1:48 PM, Melaschasm (71.39) wrote:

Personally I do not recommend buying a house/rental property unless you plan to own it for 10+ years.  These transactions are not in liquid markets, there are also significant tax issues.  Short term real estate deals are much more risky than many people think.

For a rental property, I recommend that you keep the monthly payment (mortgage + property taxes) at 50% or less than the monthly rent you can charge.  At a typical 75% occupancy rate, that only leaves you with 25% for maintenence and repairs.  When you are first starting you will likely have a small number of places to rent out, making it likely that you will suffer through years of 50% occupancy as well as enjoy years with 100%. 

If you have expertise that will give you an advantage, such as working in home construction, then you can be much more aggressive in the business, otherwise the above statements are a good starting point.

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#28) On March 29, 2010 at 7:45 PM, checklist34 (98.65) wrote:

Well here's what I have number crunched today:

for some background:  I honestly don't know if I could get a mortgage.  From 2002ish to 2005 my longtime business partner and I funded our ongoing failures and eventual successful startup by rolling credit card debt from one card to another.  I have a stack of 61 cards (many from Citibank alone) that at one point or another we had maxed out.   I can't imagine that I have good credit.  They have all been paid off since 2006. 

I can, however, pay cash for a house OR pay for a house with a margin loan from my brokerage which is at an insanely low interest rate of 30 day libor + 1.5% currently.  This is a credit line and not an amortizing loan.  By using the margin oan this way I would forgo some capacity to short stocks (which i rarely do anyway so thats no big deal) or sell naked puts (which I constantly do so that is kind of a big deal).  

So I crunched some #'s for each scenario and here is what I have:  


-house is $1000, for easy figuring

-interest rate on a mortgage is 5% for a 15 year mortgage

-interest rate on the margin loan averages 3% over 3 years

-taxes are 2.5% (which is pretty typical if not low for my area) per year for a new house (taxes + specials)

-maintenance and insurance is 1.5% (new house may not need a maintenance budget, but man most homeowners I know put some $$$ into their houses constantly)

-appreciation of the house value is 3%/year.  I haven't replied to the last few posts yet, but I read them.  Anchak offers inflation + a few percent, I always thought that real estate was inflation + more like 1 or 2%, but thats picking nits.  

- I live there for 3 years

Case 1:  pay cash.  I pay $1,000, I can sell (this is a risky assumption obviously) for $1,093 in 3 years.  Those 3 years cost me $75 in taxes and $45 in insurance/maintenance.  Selling costs me $77 in realtor fees and such.  I pay no fees to a bank to originate a mortgage.  

In this case I come out behind by $104.  Or a 10% loss in 3 years.  I'd break even at about 6%/year appreciation.  Then the house would be worth about $1,190 in 3 yeras.  Realtor fees would now be about $84, $75 in taxes, $45 in insurance/maintenance.  So I would be just slightly underwater.

HOWEVER, I would have to pay rent if I didn't live in the house.  Lets say that rent over that time would be about $4 per month.  So I would pay $144 in rent.  When viewed from this light, my breakeven point becomes about 2-3%/year of appreciation in the house or, roughly, 7% overall in the 3 years.  

So from a purely financial point of view the houe would have to appreciate by a little over 2%/year for me to break even on a cash basis.  However, that isn't entirely realistic because cash itself has some value.  In a bank CD or government bond for that time it would have perhaps 2-3%.  In a money market maybe 1%, in AT&T stock probably 10%.  

So clearly saving the cash pile to invest in something more productive and certain than house appreciation (the $1000) and paying rent will make me richer... 

I clearly lose in this case, there is no way that the economically sensible thing to do is buy.  I get the emotional benefit of owning and/or having a nicer place to live than is available to rent.


Case 2:  margin loan!  Here I don't pay anything, but I owe $1000 to my broker for the margin loan and I have to produce $30 of interest per year.  

If the house appreciates by 3% I can sell it for $1093 again.  I will have paid $90 in interest to my broker.  I will have paid $75 in taxes, and $45 in insurance/maintenance.  I will have saved $144 in rent.  I will owe a realtor $77.  In this case I'm down $143 after rent savings.  Or 14%.

But I have consumed no cash (I have consumed some margin.  My return in 2009 on margin was close to 20%, but that was a rare situation where I went hog-wild selling puts into the crash towards the march bottom).  

The cash I didn't consume is worth, lets say, 5% (pretty conservative considering that AT&T pays 6.4% and has 2 or 3 dividend raises in that time).  I am now ahead by $20.

So this works out a bit better than paying cash.  I simply lose whatever the return on that component of my margin would be.  Presumably I'd still have vastly plenty of margin left anyway, and would never use 100% of it anyway, so that opportunity cost is hard to estimate...  


Scenario 3:  no money down and I get a mortgage at 5% by collateralizing the hosue with a car, thereby securing the low interest rates that I would have had by puttint 20% down.  My payment now is about $96 a year.  About 48 bucks of that is interest, which I can write off.  

I still owe $75 in taxes + $45 in maintenance/insurance, I also now owe about $30 bucks to the bank in various BS annoying fees for giving me a mortgage.  House is worth $1093 when I sell it and the realtor gets $77.  I save $144 on rent.

My total costs are $288 payments + $150 (taxes bank fees insurance maintenance) + $77 (realtor fees) = $515.  HOLY CRAP, THATS HALF THE VALUE OF THE HOSUE. 

I save $144 in rent and having paid $144 in interest I can write off 40-odd percent of that so about 60 bucks.  So I've saved $204.  And I paid off about $144 in principle. 

My net cost is then $160. 

Now I have not used any margin or any cash, I just provided a car to collateralize the down payment on the house.  I have an excessive supply of cars and I'm pretty sure I could make this work if my credit score isn't 400. 

So I can still use all my margin and all my cash.  ...  Probably I come out ahead this way over the other scenarios, but ...  and this is a bit but...  that requires that I use my margin.  If I wouldn't have used that bit of my margin anyway, I'd be better off to margin loan it.  


OK, so overall over 3 years I could expect the house to cost me about 15% of the value of the house and possibly some loss of margin. 

So if we're talking a $300,000 house, that'd be about $45 grand, or about the same as buying a really nice car and having it for 3 years.  

Thats liveable, provided I enjoy having the house, its horrible if I disenjoy the responsibilities of owning it.  

But clearly it is highly unlikely that I will enrich myself for buying it over a 3 year period.  We'd be talking total appreciation of 15% or mroe, minimum, before I actually come out ahead.  

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#29) On March 29, 2010 at 7:50 PM, checklist34 (98.65) wrote:

Anchak, good post and good input, I appreciate it. 

It is, as you hint at, no small task to sit down and really calculate the cost of owning a home and profit/loss related to it.  There are details buried in the details and also a variety of unknowns...  

The one variable I can't testify to or contemplate is the satisfaction of owning it.  Plain and simple, I just haven't any idea if I'd like it or not.

Maybe i'll give it a try just to see.  It can't possibly be anywhere near as fun as a car...  can it?

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#30) On March 29, 2010 at 7:56 PM, checklist34 (98.65) wrote:

ETFs, thanks again.

Outfocus, another really good post with alot of good thoughts and points.  This thread is the bee's knee's.  

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#31) On March 29, 2010 at 8:00 PM, checklist34 (98.65) wrote:

Melaschasm, I got some financials from a rental property that was for sale here in town today and it was SHOCKING how high the maintenance costs were.  carpet replacements, walls, this, that.

The place was priced at about 2x what price it would have cash flowed itself, per those financials.

I can only hope this was a case of someone cooking the books...

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#32) On March 30, 2010 at 12:28 PM, devoish (70.95) wrote:

I strongly recommend having a look at Dwot's "six degrees of leverage" posts from Dec 2007. I don't think most of you guys were around then and you will find them relevant to some of your questions.

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#33) On March 30, 2010 at 12:45 PM, lemoneater (56.79) wrote:

Have you considered "rent with the option to buy" so that way you can see how you like living in the house before you substantially tie up your money?

A friend of mine would always visit any neighborhood she wanted to settle in at 11pm to see how noisy it was. Price is easy to measure but whether a neighborhood is good can be harder to determine on just a realtor visit or a paragraph in a paper. I should have taken this advice myself.

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#34) On March 30, 2010 at 1:10 PM, nottheSEC (80.70) wrote:

+1 rec. IMHO buying a home is saying I like the community and I want to stay for 10 + years.You should but at least a 2 bedroom for appreciation and also if you have or someday want a family. I include this Census medium/average new home and seemigly over any 10-12 years period you cannot lose by an appreciation factor of at least 30-40%

Also there is much to ask rental versus ownership; Is my mortgage /RE tax larger than my standard deduction; Why a co-op is lamost never a good idea; etc etc.

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#35) On March 30, 2010 at 1:11 PM, nottheSEC (80.70) wrote:

A friend of mine would always visit any neighborhood she wanted to settle in at 11pm to see how noisy it was.

Great idea Lemoneater and I will add to see if there are people "hanging on the corner."

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#36) On March 30, 2010 at 1:44 PM, BMFPitt (90.58) wrote:

If there is even a chance you may be forced to move in the next 5-10 years, don't think about buying.

Have you considered "rent with the option to buy" so that way you can see how you like living in the house before you substantially tie up your money?

So lock in the current price in a declining market, with interest rates on the verge of a massive upswing, and paying above-market rent for the privelage?  What a brilliant idea.  How about I sell you some call options on GM.

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