Zillow Advice: Rent vs. Buy - "The Real Estate Bubble Won't Re-Inflate"

Chutta,I dont argue the risk ...

Sat, 23 May 2009 03:12:00 GMT

Chutta,

I dont argue the risk aspect. You are right.

But when it comes to the importance of the vacancy, it will only change the numbers modestly, as the revenue goes down on both sides, but the cost stays the same on both sides also. The advantage that the borrowed money has is that it has less initial investment.

Perhaps we are looking at it from different perspectives. It seems that you are saying that it will be difficult for the owner, because they will have to pull out of pocket. If that is your perspective, that is fine. But look at it this way. If there are two investors who both have 175k, and one buys the house cash, while the other only puts 35k down, the one with the 35k has bigger reserves to cover the difficult times. Or someone who only has 40k can invest in an asset by borrowing that he otherwise couldnt.

Also, i ran the numbers again with 10% vacancy rate, and what I got was consistent with my assumtions. On the borrowed monney, the annualized return droped a whopping 0.4 % from 19.25 to 18.85
On the cash purchase, only .3%. from 5.55 to 5.25.

yes Rob, I was comparing ...

Sat, 23 May 2009 02:52:00 GMT

yes Rob,

I was comparing it in reply to randys post-

I can prove, quantitatively, that buying a house as an inflation hedge only truly works for _most_ people if you buy outright, using no borrowed money.

I find this post wrong, and was stating so by backing up with facts. It definitely has more risk. Honestly, I dont think it is fair to compare it. Why would you risk more of your money for the return when you can risk the banks and a meager rate. Especially when inflation will soon be at a rate, in my opinion, similar to the late 70's and early 80's. Having a fixed rate loan on an asset that is inflation adjusted is great.

In regards to buying, there is currently conflicting evidence. On one hand, you have shadow inventory, a huge wave of foreclosures, and a huge wave of resets. On the other, in some areas, rents are more expensive than buying, even with 3.5% down, there is practically NO supply available currently, and the govt. has meddled in the system to the point that we cant know what to expect. There are those who defaulted just to get a loan mod, but fully intend and have the capacity to make the payments, who are fudging the default numbers higher(who knows if this is even a significant amount?). Along with loan mods, which can strech this out longer, instead of a short, quick drop, to a long flat line that will allow inflation to catch up instead of falling any further.
With so many variables that cant be predicted (who knows if the banks will dump the shadow inventory, or let it out slowly, etc.) I have now decided that I am lost in this prediction.
However, I at least want to wait 6 months to see if the foreclosures are allowed to hit the market, and the 8k to go away. Credit might even tighten further, causing less mortgage money to push prices down further. I definitely think waiting for this winter wont be a bad idea.(especially since with winter months being a better buying season anyway)

titan: I agree, over the ...

Fri, 22 May 2009 22:03:00 GMT

titan:

I agree, over the longterm,with any inflation, leveraged particularly with government manipulated low loan rates will win hands down; I intend to moderately gear my money about 3 to 1. (500K invested, 1.5 million in rental property)

HOWEVER, it is riskier. It is simply unfair to compare a riskier investment to a much less risky one, and declare one better due to higher return.

So, thats my point. ALSO, whichever method you choose, I still argue it makes sense to wait, the crisis has not run its course yet; both investments do much better if you actually buy the assets cheaper.

vacancy is deducted from ...

Fri, 22 May 2009 21:50:00 GMT

vacancy is deducted from profits of All Cash, but All Cash doesn't have to pay the note every month.

The All Cash Buyer has far less risk because he/she is protected from the Have to Sell moment which cannot be projected out and does not necessarily happen when the market is up.

yes there is vacancy, but ...

Fri, 22 May 2009 21:13:00 GMT

yes there is vacancy, but it is deducted from the profits of the all cash buyer as well.

A declining market goes against the all cash buyer as well, if either sell. If I sell 15 years out, what is the relavance of the value at year 3?The cash buyer can weather a larger storm, but even he will still have costs, and in the end, when the market returns, the leveraged buyer will have less at risk, with more to show for it.

As I said in my email. ...

Fri, 22 May 2009 20:45:00 GMT

As I said in my email. On paper leverage looks great, but then reality gets in the way. There are a multitude of factors that work against it which, for one I believe is a market that continues to decline.

As for the paying your note with rental income. That is why I said you have to consider a vacany factor when running your numbers. If you are counting on that monthly rental then you have to factor in that the unit would be vacant for a period of time.

your

Fri, 22 May 2009 20:16:00 GMT

your

If you keep your money and ...

Fri, 22 May 2009 20:16:00 GMT

If you keep your money and pay a 5% note, but only return 3% on the money you kept then you are losing.

Yes, but yor tenant is paying your 5% note, and it is not compunding, while the 3% is compounding.

chaz, i cant figure it out, ...

Fri, 22 May 2009 20:12:00 GMT

chaz, i cant figure it out, but I can email to you if you want to post it.Chutta,

Those numbers arent saying buy, they are just to show the advantage of leveraging. A noi of 5% is not the point. If you want me to show you an actual example, I will. A house near me that is 175k would return about 1800 a month in rent, not 1000. if I were looking at a house that had a rent of 1000 a month, it would cost about 90-95k. This would significantly increase your noi, but once again, this isnt about noi, it is about leveraging vs not leveraging. Your numbers, although Im not exactly sure how there is such a discrepancy in our outcomes (did you add back in payed down principle when financed?) still point out that leverage produces a higher return.

It seems as though you are not claiming otherwise though.

I have to agree with titan......I ...

Fri, 22 May 2009 20:09:00 GMT

I have to agree with titan......I can afford the hit to my 401K cause I have 40 years until retirement, whereas my mom can't afford the current hit to her retirement since she has no years to recover from the losses and they won't be coming back during her retirement years. If your young you can perhaps recover from a dip in housing prices if you are an owner, you just have to stay in the home for the next few decades.......many retirees were banking on selling the family home to move to a retirement life somewhere......an entire cycle is being broken right now......should be interesting to see how this all plays out.