Nobody seems to understand that in California a lot of people cannot afford to make payments for a year that is why they take out NEGAMs and OPTION ARMs. Now we will see how 1 to 10 works when price is going down for 1, 2 or 3 years.
Is that really all that different from If you buy an ETF and you hold it for 12 years and get 7% on average, you will have doubled your money. No need to make payments. No repairs. Everyones situation is different. I see no need to buy even though I could afford it.
Its very different. You just illustrated my point of people not understanding. In a simple example, if I put 10% down on a $100,000 house, I've invested $10,000 (not $100,000). Yet in 12 years, I will have $100,000 in equity. Until lately, you could fairly easily finance $1 million in rental property by pyramiding up, and make $1 million in equity in 12 years and spend little of your own money. SM
With a house, you can sometimes buy with no money down or very little down, unlike stocks where you have to put at least 50% down. And if you rent it out for at least the mortgage amount, put very little to no money down, hold it for at least 2 years, get the first $500k in capitals gains tax free, you made out like a bandit and it cost you almost nothing. You even get to deduct the interest and property taxes.
That was the successful operative strategy about 5 years ago, but I think the days of low and no money down are over for a while now.... Renting it out for at least the mortgage payment requires rational pricing, not bubble-priced markets. Unless you are living in the midwest somewhere that is not likely to happen currently. What is ignored in these kinds of arguments is that housing COSTS money to maintain, a lot of times major money if you live there more than 5-10 years - all it takes is one roof replacement, foundation issue, or air conditioner replacement and you are out $5-10K in no time. Yards and landscaping are expensive to maintain - sometimes you are restricted from watering as much as needed to keep them looking good - then you have to spend more money to recover to the original condition. Utility bills are way higher in homes than apartments. New homes are not built to the same quality as in the past many times, real estate tax rates and homeowner's insurance go up from year to year. If you have to move suddenly due to work transfers, or job market changes you have an illiquid asset to sell which means you will be forced to concede a lot of any "paper gains" or even take a loss just to get a quick sale. In about 5 years, due to demographic changes many baby boomers will be downsizing and/or moving to retirement areas, thus eliminating a lot of demand for housing. To be sure, it is worthwhile for lifestyle reasons to buy a house, but don't confuse the fact that you bought a house with making an investment - it is not really the same. With a house in the current environment, you would be lucky to get more than 3% real growth after accounting for inflation and maintenance - in some areas you could even lose money. The days of buying and getting huge 50-100% gains in a few years are over now.
The 500K tax exclusion applies to married filing jointly, those filing single status have a 250K exclusion, and the exclusion only applies to your primary residence, not rental property or 2nd homes... if receiving an income, i.e. rent/lease then your expenses can not be deducted, but are depreciated from your basis, which only defers capital gains tax until the property is sold. Long term capital gains taxes will be revisited in 2008. The leverage aspect is a valid point. However, in your 2-year time horizon you have not taken into consideration the cost of sales. (3-6%). With a short term time horizon, and the possibility of a flat housing market for the next few years. Rent can be the more logical solution. Real estate is an excellent long term investment and part on any well diversified portfolio. There are many good reasons to own over renting, however, it is important to evaluate your time horizon, tax structure and individual financial situation. Exposure to Real Estate can be achieved through various REITS and are much more liquid... 30-minutes with a qualified CPA is probably the most prudent investment you could make...
The guy Jack Hugh is an idiot. Having a roof of your own is a fundamental need, investing is not. Real Estate appreciates over time and not to mention all those tax deductions that Congress has signed on. Your salary is cut in half in taxes if you don't own a home. There is no comparison. The guy is an idiot and there are many of these have nots, writing these ill informed articles these days.
"Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former." -Jack Hugh Anyone who says that is a financial moron. Congress has passed laws to encourage homeowner and gives tax breaks that lower your taxable income. No one has got rich by paying rent. In the US, typically a renters networth is around $4300 while a homeowner networth is181,000 according to many estimates. I dont know who these ill informed jack asses are and how they become writers for Smartmoney, which in itself isn't that smart at all as it seems.
Two years is indeed too short of a time horizon. But, if the house is getting 3% real growth, and you're leveraged in it at 10 to 1, then you're really getting 30%. Between that kind of equity gain, and the fact that you're not seeing payment increases averaging 3 to 4% a year (vs. rent), you can handle that periodic re-roofing or air conditioner bill easily. My father in law lives in the Orlando area. His house is worth about $350K. His payment is a few hundred dollars a month. He's got over $300K equity in it, and will own it free and clear soon. If he'd have rented a house all these years, he'd be paying more than $2000 a month for something comparable, and he'd have no equity. His net worth would be $300,000 less. That $300,000 acts like an insurance policy...he can pass it to his heirs, so it is not just about cash flow for him only. To be in my father in law's situation, you need time under your belt. Don't spend that precious time debating whether to rent or not. In the long run, buying is always best. SM
glad i didn't follow that advice. i bought my home for $550k in 2001 with 22% down, it's now worth $1.2m give or take. i also bought another property 2003 that's done well too. had i put the money into the s&p500, i'd be hundreds of thousands of dollars poorer and my quality of life wouldn't have been as good the last 6 years. i plan to buy another residence in '08 or '09. i havent decided what to do with my current home, but one thing's for sure: i won't sell and put it all into equities.