Buy (and rent) vs buy: a hacker's view on housing(micho.biz)
micho.biz
Buy (and rent) vs buy: a hacker's view on housing
http://micho.biz/buy-vs-rent
16 comments
What’s happen if the market went down and I sold it after 5-10 years for a 25% loss? In that case I’d be more or less breaking even, since the money I spent was spent on an investment (an unfortunate one), but not entirely lost as if I had just rented a place.
Eh? In that scenario a buyer is MUCH worse off than a renter. Depending on the variables (interest rate etc) you'd lose your down-payment, all the payments you made so far and still be five figures in the hole. And in Spain, the bank will go after your other assets to make up for their lost money, unlike in some US states where you can just walk away.
Eh? In that scenario a buyer is MUCH worse off than a renter. Depending on the variables (interest rate etc) you'd lose your down-payment, all the payments you made so far and still be five figures in the hole. And in Spain, the bank will go after your other assets to make up for their lost money, unlike in some US states where you can just walk away.
I'm interested in the rent vs. buy thing too, so here are some of my thoughts:
>What if I hate the place and want to move away from it? Then a high demand for housing would play in my favor.
You'd still have to sell your house, which I've heard is rarely easy. There is time/money cost associated with selling the house (including repairs, real estate agents, etc.).
>What if I move to another city? Then it’d be good if I could rent it out easily, ideally making a profit with it or at least not losing money.
You'd still have to manage the rental property or pay someone to do that. This is another time/money cost.
> What if prices go down dramatically? Then I’d be stuck with the place, since I’d lose money by selling it. So I need to really like the place, or be able to make enough money by renting it to others.
You also have to be able to absorb any catastrophes to your financial situation. If you all-of-a-sudden couldn't afford your mortgage, you're still on the hook for it. If you were renting, you could just move somewhere cheaper (less the costs of the move).
I didn't see maintenance/repairs factored into the cost of buying a home. If the water heater dies, that's going to be a major expense. Same with paint jobs, pipe repairs, acts of god, etc. Might be worth considering what these factors would do to the math.
Finally, there's the opportunity cost. If you put a 60€ (20%) down payment on €300k, that money is now tied up in your house. If you had rented, you could have put that money towards another type of investment that could potentially earn you more money or at least be more liquid.
>What if I hate the place and want to move away from it? Then a high demand for housing would play in my favor.
You'd still have to sell your house, which I've heard is rarely easy. There is time/money cost associated with selling the house (including repairs, real estate agents, etc.).
>What if I move to another city? Then it’d be good if I could rent it out easily, ideally making a profit with it or at least not losing money.
You'd still have to manage the rental property or pay someone to do that. This is another time/money cost.
> What if prices go down dramatically? Then I’d be stuck with the place, since I’d lose money by selling it. So I need to really like the place, or be able to make enough money by renting it to others.
You also have to be able to absorb any catastrophes to your financial situation. If you all-of-a-sudden couldn't afford your mortgage, you're still on the hook for it. If you were renting, you could just move somewhere cheaper (less the costs of the move).
I didn't see maintenance/repairs factored into the cost of buying a home. If the water heater dies, that's going to be a major expense. Same with paint jobs, pipe repairs, acts of god, etc. Might be worth considering what these factors would do to the math.
Finally, there's the opportunity cost. If you put a 60€ (20%) down payment on €300k, that money is now tied up in your house. If you had rented, you could have put that money towards another type of investment that could potentially earn you more money or at least be more liquid.
this is a very simplistic way to look at the rent vs buy, although its more thorough than most. using a mortgage calculator and amoritization table it seems that after 10 years of paying 1200/mo you would have about 45k in equity (+ your downpayment) with the rest going towards interest. this is a far cry from 100k+ in equity that you stated.
if you are working with a vacation property manager or airbnb, expect to give them a hefty cut of the rents you collect and while it may cover your mortgage you still have to rent someplace else to stay.
maintenance costs are also not minimal, and a reasonable estimation is about 2% of your purchase price every year. on an older home, this is going to be more.
those things apply to everybody in the rent vs buy debate, but for hackers specifically we need to think about opportunity cost. with an apt you may have security deposits, etc, but you dont have a massive down payment. that downpayment could be used for giving a startup a longer runway or even just helping give you peace of mind that you would have a cushion if things at your job didnt work out.
buying a house isnt "bad," but it isnt as good as most people like to think (meaning the default play for everybody shouldnt be to buy a house). if you dont know where you will be in a few years, let alone 5-10, then it is almost definitely not the best decision to buy a house unless you have enough money where it just doesnt matter.
in short, most people underestimate the true cost of a house and overestimate their likely returns. buy a house when you can afford to pay for the comfort of home security. dont buy a house as an invesment unless you can prove that it will yield a better return on your money than your other options.
if you are working with a vacation property manager or airbnb, expect to give them a hefty cut of the rents you collect and while it may cover your mortgage you still have to rent someplace else to stay.
maintenance costs are also not minimal, and a reasonable estimation is about 2% of your purchase price every year. on an older home, this is going to be more.
those things apply to everybody in the rent vs buy debate, but for hackers specifically we need to think about opportunity cost. with an apt you may have security deposits, etc, but you dont have a massive down payment. that downpayment could be used for giving a startup a longer runway or even just helping give you peace of mind that you would have a cushion if things at your job didnt work out.
buying a house isnt "bad," but it isnt as good as most people like to think (meaning the default play for everybody shouldnt be to buy a house). if you dont know where you will be in a few years, let alone 5-10, then it is almost definitely not the best decision to buy a house unless you have enough money where it just doesnt matter.
in short, most people underestimate the true cost of a house and overestimate their likely returns. buy a house when you can afford to pay for the comfort of home security. dont buy a house as an invesment unless you can prove that it will yield a better return on your money than your other options.
From a very macro level, buying a house is like making a highly illiquid, incredibly non-diversified investment. The returns can be strong, but it's definitely a higher risk play than other investment vehicles.
Personally, I'd only do it for a place I really wanted to live in, and a place I could afford without worrying about rental income or appreciation. Then, you have a longer time horizon to recoup your investment, and at minimum you are buying cost certainty, which is something that you won't get in most rent situations.
Personally, I'd only do it for a place I really wanted to live in, and a place I could afford without worrying about rental income or appreciation. Then, you have a longer time horizon to recoup your investment, and at minimum you are buying cost certainty, which is something that you won't get in most rent situations.
Be careful that you're not falling for the "honeymoon" part in the culture shock curve: http://en.wikipedia.org/wiki/Culture_shock
I've known quite a few people who moved somewhere, made big commitments, only to find out that they just couldn't deal with the new place after a year.
IME, it's best to first live there (rent!) for a year, figure out if it's right for you still, and then go for it (-:
I've known quite a few people who moved somewhere, made big commitments, only to find out that they just couldn't deal with the new place after a year.
IME, it's best to first live there (rent!) for a year, figure out if it's right for you still, and then go for it (-:
An alternative (more feasible in suburbia): buy a duplex or multi-unit dwelling, live in one and rent out the other(s).
That's what we did, and though a bunch of our savings lost it's liquidity (now encased in real-estate as a down payment), our equivalent rent is about half of what paid before (esp. including tax deductions)... it's like an investment with a great return, even assuming 0 or mildly negative house price appreciation.
That's what we did, and though a bunch of our savings lost it's liquidity (now encased in real-estate as a down payment), our equivalent rent is about half of what paid before (esp. including tax deductions)... it's like an investment with a great return, even assuming 0 or mildly negative house price appreciation.
For the interested, Khan Academy has an excellent series analysing renting vs buying at http://www.khanacademy.org/video/renting-vs--buying-a-home?p...
Here's a couple of reasons not to buy a home: http://www.jamesaltucher.com/2011/03/why-i-am-never-going-to...
There is also the possibility that the mortgages rates will hike. This seems unlikely right now but if you take a 30 years mortgage... it's longer than the average marriage these days so anything can happen
IMO, this would definitely be a poor time to get into an ARM. I expect severe inflation coming down the pike over the next few years. If you decide to buy, it should be fixed rate all the way. :-)
Your number for SF is a bit outdated, add an extra $1k.
Last time I visited it was a homeswap :) I'll edit that, thanks!
The parent is wrong. $2-$3k is still quite reasonable as a rent number in SF.
I've spent the past 4 months obsessively browsing craigslist. This summer I moved out of an apartment (non rent-controlled) because my rent was increased from $2850 to $4,150. http://sfbay.craigslist.org/search/apa/sfc?query=&srchTy... is a search of 2br apartments in the city of san francisco, all neighborhoods. It returns 253 listings. Raising that to 3000 -> 4000 gives you 265 listings.
If I exclude the neighborhoods where I wouldn't live due to distance, safety, or a dislike of feeling like I'm in the burbs (bayview, excelsior, ingleside, north beach (fuck tourists), portola, richmond/seacliff, sunset, tenderloin) treasure island) then those searches (http://sfbay.craigslist.org/search/apa/sfc?query=&srchTy...) drop down to 106 and 184 apartments, respectively.
The competition for apartments is fierce right now due to a combination lack of credit keeping people leasing rather than owning, and the current tech bubble having imported 10s of thousands of new dot-commies happy to spend 50% of their salaries on housing, because they're young and stupid.
If you make under $150k, are fiscally conservative and don't want to live with roommates, then you're priced out of San Francisco.
If I exclude the neighborhoods where I wouldn't live due to distance, safety, or a dislike of feeling like I'm in the burbs (bayview, excelsior, ingleside, north beach (fuck tourists), portola, richmond/seacliff, sunset, tenderloin) treasure island) then those searches (http://sfbay.craigslist.org/search/apa/sfc?query=&srchTy...) drop down to 106 and 184 apartments, respectively.
The competition for apartments is fierce right now due to a combination lack of credit keeping people leasing rather than owning, and the current tech bubble having imported 10s of thousands of new dot-commies happy to spend 50% of their salaries on housing, because they're young and stupid.
If you make under $150k, are fiscally conservative and don't want to live with roommates, then you're priced out of San Francisco.
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Real estate as an investment provides quite fantastic leverage (no-one's going to lend you 80%+ of your capital to buy stocks) and is a great way to build long term wealth, but make sure you have enough cash around to avoid getting into trouble if something major breaks or to pay the mortgage if your property is vacant for months at a time (especially if you're doing vacation rentals). Take what you estimate you'll need as a cash buffer, and triple it.
Don't underestimate the hassle involved with absentee landlording, even with a property management company. The property management industry, especially at the lower end (single unit residential or vacation rental) is largely unregulated and there are plenty of horror stories about corrupt managers who skim rent, take kickbacks, etc - or just collect rent for several months and disappear.
Highly recommend anything by John T Reed (johntreed.com) or William Nickerson (out of print) to learn about real estate as an investment. The field is full of scammers and smoke-blowers (even moreso than tech...). Those two stand out as offering pragmatic, actionable advice.
I really like the slow-paced, long term wealth building approach of real estate combined with the fast-paced, high cashflow, low equity field of tech consulting. It's early days for me, but the combination seems to work well together.