The best investment I never made(lindventures.com)
lindventures.com
The best investment I never made
http://www.lindventures.com/blog/2012/06/23/the-best-investment-i-never-made/
10 comments
"For example if you can start a new business with $50,000 then sell 20% of it to an investor for $200,000 in 1 or two years, you’ve created $1m worth of value in that time. Do you think if you bought a property for $1m with a 10% deposit, it would be worth $2m in two years or less? No way."
Sorry but I have to point out that this is a very flawed comparison. How much work did you put into that house? - I think the assumption here is none. How much work did you put into your business? - depending on how much you consider your rate to be probably a lot... potentially even more than $200,000.
A more fair comparison would be an actual home builder or developer and there are many that do just this and could cite comparable or even much higher returns.
Sorry but I have to point out that this is a very flawed comparison. How much work did you put into that house? - I think the assumption here is none. How much work did you put into your business? - depending on how much you consider your rate to be probably a lot... potentially even more than $200,000.
A more fair comparison would be an actual home builder or developer and there are many that do just this and could cite comparable or even much higher returns.
What a lot of people miss when comparing the returns of a home to say, the stock market, is that a home also provides a place to live. Of course a home would return less, because if it didn't the price would quickly shoot up because people see the inherent value in having your (lackluster) investment put a roof over your head.
I bought a 300k house for 70k (4.9% Fixed) after the bubble burst (Florida) the house had never been under 100k since it was built in the 80s Now it's value is back up to 150k, rent pays mortgage and maintenance 3x. I understand your point, however property can be a good investment if you make smart choices.
A more accurate description would be that you used available credit at the right time to help create a profitable asset, and it ended up highly profitable with low risk.
(I guess I just have an issue with the concept of "buying a house" and "mortgaging a house" becoming synonymous, when they are two very different things.)
(I guess I just have an issue with the concept of "buying a house" and "mortgaging a house" becoming synonymous, when they are two very different things.)
I hate when people get pedantic over this. The buyer does in fact own the real property -- the mortgage is secured with an encumbrance.
In Australia you wouldn't be able to buy a bus shelter for $70,000.
> however property can be a good investment if you make smart choices.
Sure, looking _back_ at any commodity/stock chart and "making smart choice" is easy to do. You were lucky, but we are not out of the deep blue real estate hole just yet and we need weaker unemployment numbers in order to see a solid bump.
Sure, looking _back_ at any commodity/stock chart and "making smart choice" is easy to do. You were lucky, but we are not out of the deep blue real estate hole just yet and we need weaker unemployment numbers in order to see a solid bump.
Well in 2006 when I started looking, I said to my wife prices are way to high there is no way this is sustainable we need to wait until they come back down. Turned out to be a great decision.
Just a heads up, my anti virus Nod32 says that there is a trojan embedded in this link.
Getting the same warning here, Firefox won't even let me load the page.
Just to clarify - when you refer to buying (or not buying) a property - do you mean actually buying it, or taking out a loan (mortgage) to "buy" the property. I've noticed, especially in north america, people tend to refer to "buying" a house when really they are borrowing it and paying for it for a long time...... just curious.
That's the reality of the situation when you boil it down. But technically, a mortgage holder did completely buy his home form its previous owner, and does now own it himself. It's true he paid for it with money borrowed from the bank (and the bank lent it under certain conditions), but it legally his house, not the bank's.
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The argument seems to be that not buying property was a good decision, because investing that capital into a startup instead produced a better ROI than property investment would have.
But is that the normal case? What are median returns for property investment versus self-funded-startup investment?
But is that the normal case? What are median returns for property investment versus self-funded-startup investment?
For me the part that hit a nerve was this: "Nobody likes to have debt and as soon as you have it, you become restricted in what you can do."
Most of us hear the constant refrain of what a good idea home ownership is, and how it so much better than renting, when you take into account the mortgage interest deductions and appreciation. And that's all true, but what they never really emphasize is that once you take out a mortgage you've got that $1,000 monthly payment (for example) that you've got to meet EVERY month, for the next 30 years or until you sell. And you have insurance, property taxes, maintenance, etc.
Carrying long-term debt and especially owning a home really does impact your thinking. You become more risk-averse. You start thinking that a steady paycheck is a better idea than taking the risk of starting a business. As time goes on, you feel like you have MORE to lose because you've been paying on the debt for a while and you actually have some equity. It's why banks view mortgages with equity as lower risk, and why car insurance is cheaper if you own a home.
As far as buying property as an investment, i.e. renting it out, the "common wisdom" is that you make your money when you buy. You absolutely need to get a really good deal when you buy, because the rent you're able to collect will basically be a break-even on your expenses, so wnen you eventually sell your profit is a function of your purchase price. Unfortunately a lot of people pay too much for houses that they think are in a "hot" rental area, and they never really make any money on them.
Most of us hear the constant refrain of what a good idea home ownership is, and how it so much better than renting, when you take into account the mortgage interest deductions and appreciation. And that's all true, but what they never really emphasize is that once you take out a mortgage you've got that $1,000 monthly payment (for example) that you've got to meet EVERY month, for the next 30 years or until you sell. And you have insurance, property taxes, maintenance, etc.
Carrying long-term debt and especially owning a home really does impact your thinking. You become more risk-averse. You start thinking that a steady paycheck is a better idea than taking the risk of starting a business. As time goes on, you feel like you have MORE to lose because you've been paying on the debt for a while and you actually have some equity. It's why banks view mortgages with equity as lower risk, and why car insurance is cheaper if you own a home.
As far as buying property as an investment, i.e. renting it out, the "common wisdom" is that you make your money when you buy. You absolutely need to get a really good deal when you buy, because the rent you're able to collect will basically be a break-even on your expenses, so wnen you eventually sell your profit is a function of your purchase price. Unfortunately a lot of people pay too much for houses that they think are in a "hot" rental area, and they never really make any money on them.
> what they never really emphasize is that once you take out a mortgage you've got that $1,000 monthly payment (for example) that you've got to meet EVERY month, for the next 30 years or until you sell. And you have insurance, property taxes, maintenance, etc.
You've got a similar obligation if you rent. Rent or buy, you're still out on the street if you stop paying.
> Carrying long-term debt and especially owning a home really does impact your thinking. You become more risk-averse.
Meh, student loans, the ultimate long-term financial obligation, didn't make me risk-averse at all. I'm slightly more risk-averse today -- and I do own a home -- but I attribute a great deal of that to getting older. The prospect of starting over from 0 becomes less appealing the older you get.
> As far as buying property as an investment, i.e. renting it out, the "common wisdom" is that you make your money when you [sell]. You absolutely need to get a really good deal when you buy [...]
Yes. If you're considering buying a place that you'll possibly rent out in the future, you need to be serious about it and do your research. When I was scouring the internet for articles and forums about it, I was shocked to see just how serious -- and * unbelievably fiscally conservative* the people are who buy rentals seriously are.
You've got a similar obligation if you rent. Rent or buy, you're still out on the street if you stop paying.
> Carrying long-term debt and especially owning a home really does impact your thinking. You become more risk-averse.
Meh, student loans, the ultimate long-term financial obligation, didn't make me risk-averse at all. I'm slightly more risk-averse today -- and I do own a home -- but I attribute a great deal of that to getting older. The prospect of starting over from 0 becomes less appealing the older you get.
> As far as buying property as an investment, i.e. renting it out, the "common wisdom" is that you make your money when you [sell]. You absolutely need to get a really good deal when you buy [...]
Yes. If you're considering buying a place that you'll possibly rent out in the future, you need to be serious about it and do your research. When I was scouring the internet for articles and forums about it, I was shocked to see just how serious -- and * unbelievably fiscally conservative* the people are who buy rentals seriously are.
> "Rent or buy, you're still out on the street if you stop paying."
Not true at all. Buying means you've committed to a particular lifestyle, city, and income level for a very, very long time. Renting carries none of these commitments and risks.
If I lost my job today I wouldn't be anywhere near screwed - my lifestyle can be downsized a lot in very short order (on the order of 1-2 months to reduce my burn rate by 5x).
This freedom is important to me. Right now I'm in the middle of a relocation - I want to experience a new place, with a different pace and different culture. I wouldn't be able to do this if I had bought property. If I wanted to bootstrap a startup I can easily move into a much, much cheaper place and immediately free up a lot of capital.
Not true at all. Buying means you've committed to a particular lifestyle, city, and income level for a very, very long time. Renting carries none of these commitments and risks.
If I lost my job today I wouldn't be anywhere near screwed - my lifestyle can be downsized a lot in very short order (on the order of 1-2 months to reduce my burn rate by 5x).
This freedom is important to me. Right now I'm in the middle of a relocation - I want to experience a new place, with a different pace and different culture. I wouldn't be able to do this if I had bought property. If I wanted to bootstrap a startup I can easily move into a much, much cheaper place and immediately free up a lot of capital.
> Not true at all.
Well yes, it's true that if you stop paying your rent or mortgage you will be evicted. Although you're safer in a house you bought because the bank has to foreclose first.
> Buying means you've committed to a particular lifestyle, city, and income level for a very, very long time.
Depends on your definition of "a very, very long time". 5 years is the accepted minimum threshold for buying a place, and if you did your homework properly you should be able to break even renting it out. There was a time when 5 years seemed like an eternity to me, but not these days :)
> This freedom is important to me.
This is the important bit. There are 1,000s of rent vs. buy arguments all over the internet but IMO it comes down to what you want for yourself. That freedom to move about at will is important to you, so it sounds like you've made the right choice for you. I like where I live and I despise moving, so buying was right for me.
Well yes, it's true that if you stop paying your rent or mortgage you will be evicted. Although you're safer in a house you bought because the bank has to foreclose first.
> Buying means you've committed to a particular lifestyle, city, and income level for a very, very long time.
Depends on your definition of "a very, very long time". 5 years is the accepted minimum threshold for buying a place, and if you did your homework properly you should be able to break even renting it out. There was a time when 5 years seemed like an eternity to me, but not these days :)
> This freedom is important to me.
This is the important bit. There are 1,000s of rent vs. buy arguments all over the internet but IMO it comes down to what you want for yourself. That freedom to move about at will is important to you, so it sounds like you've made the right choice for you. I like where I live and I despise moving, so buying was right for me.
> You've got a similar obligation if you rent. Rent or buy, you're still out on the street if you stop paying
Not really because usually you just need to give one months notice to move out. So if you are facing hard times, it would be easy to move to a cheaper place or completely move to another place where there is more work to be found.
A person that "owns" his own house would only move as a completely last resort because the costs associated with it are much, much higher.
Not really because usually you just need to give one months notice to move out. So if you are facing hard times, it would be easy to move to a cheaper place or completely move to another place where there is more work to be found.
A person that "owns" his own house would only move as a completely last resort because the costs associated with it are much, much higher.
> Not really because usually you just need to give one months notice to move out.
Depends on the terms of your lease. [1-3]-year leases are common out here, in which case you'd have a problem on your hands if you gave a month's notice.
> A person that "owns" his own house would only move as a completely last resort because the costs associated with it are much, much higher.
That also depends on the situation. If there's equity, they may make money by selling. It's impossible to compare these situations except to say that if you don't pay your landlord or bank, you're out.
Depends on the terms of your lease. [1-3]-year leases are common out here, in which case you'd have a problem on your hands if you gave a month's notice.
> A person that "owns" his own house would only move as a completely last resort because the costs associated with it are much, much higher.
That also depends on the situation. If there's equity, they may make money by selling. It's impossible to compare these situations except to say that if you don't pay your landlord or bank, you're out.
I don't get how people rationalize calling it "owning" a house when they've only paid a few percent of it and they owe the bank the rest, plus interest. Legally they may "own" it, but the bank "owns" it too if they stop paying.
From a pragmatic point of view, the bank owns it, not you, at least not all of it.
Unless you actually bought it.
I wish people would be more clear when talking about strategy if they are talking about BORROWING to buy a house and associated interest payments, or actually buying it outright.
Buying a house with a 30 year mortgage is not really owning a house, couldn't agree more. You might make money off it, you might not, if the market goes down - but if you'er buying it to live there for the next 30 years, adn paying for it for hte next 30 yeras, well, it's not really an asset you can use. might as well pay less, rent, and save up. (worked for me)
From a pragmatic point of view, the bank owns it, not you, at least not all of it.
Unless you actually bought it.
I wish people would be more clear when talking about strategy if they are talking about BORROWING to buy a house and associated interest payments, or actually buying it outright.
Buying a house with a 30 year mortgage is not really owning a house, couldn't agree more. You might make money off it, you might not, if the market goes down - but if you'er buying it to live there for the next 30 years, adn paying for it for hte next 30 yeras, well, it's not really an asset you can use. might as well pay less, rent, and save up. (worked for me)
This is a timeline question most of all -- they're not making any new land, so property prices are (virtually) guaranteed to rise over a significantly long time frame. If you need to cash out in 3 years, property probably isn't for you.
> might as well pay less, rent, and save up. (worked for me)
I'm not sure about that advice these days with fixed rates in the 3% zone. In that range, inflation basically pays your interest for you. The tax writeoffs are nice. And there are some major deals to be had -- I bought a place 2x the size of my rental, includes a garage, in a better neighborhood, and pay ~$500/month more than renting. I don't have to worry about moving or neighbors, or if my landlord's going to jack up the rent... feels good, man.
> might as well pay less, rent, and save up. (worked for me)
I'm not sure about that advice these days with fixed rates in the 3% zone. In that range, inflation basically pays your interest for you. The tax writeoffs are nice. And there are some major deals to be had -- I bought a place 2x the size of my rental, includes a garage, in a better neighborhood, and pay ~$500/month more than renting. I don't have to worry about moving or neighbors, or if my landlord's going to jack up the rent... feels good, man.
No, the argument is that he could comfortably experiment with starting his own business because his financial obligations are minimal.
If I had bought a property I would have had to service the gap between
the rent and the interest repayments along with other costs like
maintenance etc. If I could buy a property outright, or if rental
income serviced the debt and made me money, then I’d buy property but
it never does.
I think the argument is not as much, that it was a better ROI, but rather the opportunity costs of buying property would have been more expensive.
There are markets where the monthly cash cost of owning a home is lower than renting. It sort of looks like that could be the case in parts of the Peninsula right now -- but mainly because there just isn't much inventory either way.
Thinking like Warren Buffet ($1 today is not $1, but actually $20 after it compounds many cycles) is technically inaccurate (the correct thing is DCF/DV), but products a more correct result.
Thinking like Warren Buffet ($1 today is not $1, but actually $20 after it compounds many cycles) is technically inaccurate (the correct thing is DCF/DV), but products a more correct result.
Trulia/Movity did a visualization on this http://trulia.movity.com/rentvsbuy/
Wow, that is awesome.
The big change in the past year is that private equity and hedge funds have gotten into buying single family homes, using automation, to rent. The thing which terrifies me is that they are more efficient than random individuals as landlords, so they may all exit the market together. I've also heard that they are much more efficient at setting rents, doing so based on income in an area, vs comparables -- if they can take enough inventory out of the market, that ends up making a lot of sense.
The big change in the past year is that private equity and hedge funds have gotten into buying single family homes, using automation, to rent. The thing which terrifies me is that they are more efficient than random individuals as landlords, so they may all exit the market together. I've also heard that they are much more efficient at setting rents, doing so based on income in an area, vs comparables -- if they can take enough inventory out of the market, that ends up making a lot of sense.
That sounds like a really interesting market, is this first-hand information or have you read about it? I'd love to read a good article on this if you know of any.
The overall principles (being free of debt = good) in this post apply anywhere, but I think some context might help. AU hasn't had a housing bubble pop in a long time. It's currently not possible to find a reasonable place to live for less than $500k.
A couple of things for perspective. Here in Australia HELP (it used to be HECS) is a government student loan that you pay back as you earn later in life. You can pay your course fees upfront instead if you like, but either way the amount is not onerous for a basic degree, and it's basically a few percent extra on your income tax until it's paid off (if your wage exceeds $X)
The other is that housing in Australia has gone berserk in price. We have the most expensive housing relative to average income in the developed world, except for Hong Kong. That's happened in only the past 10 years. What was a $200k house then is now a $500-600k house, and wages have not grown to match. Buying a house now is not a good investment. Buying a house back then was a good investment, with the benefit of hindsight.
The other is that housing in Australia has gone berserk in price. We have the most expensive housing relative to average income in the developed world, except for Hong Kong. That's happened in only the past 10 years. What was a $200k house then is now a $500-600k house, and wages have not grown to match. Buying a house now is not a good investment. Buying a house back then was a good investment, with the benefit of hindsight.
Depends on location, there is probably still money to be made in property. Melbourne of instance probably now has very little undeveloped land within 10km of the CBD, even 20kms is mostly filled in. The population is still rising quickly and lots want to live inner city. So I don't see those prices crashing any time soon.
Granted it is a little like Apple shares, as expected high future demand would be built into the prices.
HECS is such a better system that what you read about US student loans that I wonder why they don't have similar. HECS doesn't touch your wage until you earn around 50k and even then only takes a small percentage. No one feels like they are taking a big financial risk here undertaking higher education.
Granted it is a little like Apple shares, as expected high future demand would be built into the prices.
HECS is such a better system that what you read about US student loans that I wonder why they don't have similar. HECS doesn't touch your wage until you earn around 50k and even then only takes a small percentage. No one feels like they are taking a big financial risk here undertaking higher education.
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There are probably thousands of examples of people making an outstanding return on investing in property. And the example given in the post is extremely contrived:
"For example if you can start a new business with $50,000 then sell 20% of it to an investor for $200,000 in 1 or two years, you’ve created $1m worth of value in that time. Do you think if you bought a property for $1m with a 10% deposit, it would be worth $2m in two years or less? No way."
How many people can create companies worth $1M in 1-2 years that with certainty? How about compared to how many people can buy property? And what if you had invested in a house in China back in 2007-2008? The value of your home would have doubled by now so that your $1M would have been worth $2M with no extra effort.
Context, timing, skill, and luck play a great role into what makes a good investment. Let's be wary of over-generalizations made from anecdotal examples.