“I’ve been a renter and an owner. Without doubt, from a financial and quality of life point of view, ownership is the correct choice for most people in the long term.”

From comment at the Globe and Mail by Geo Centric 3 Jul 2011 10:11am -
“I’ve been a renter and an owner. Without doubt, from a financial and quality of life point of view, ownership is the correct choice for most people in the long term. How many people, who have been homeowners for 20 years or more, have you heard say “that was mistake – I should have rented”?
We have 60-year old friends that have been renters for 40 years. They have no equity in a home and will be paying ever-increasing rent with nothing to show for the rest of their lives. I have been mortgage free for 10 years and the value of the house has increased by $450K over the 19 years I lived here. If I sold it, I would get my $250K purchase price returned as well [the price appreciation] for a total of $700K – tax free. That’s a tax efficient average annual return of 5.2%.
But wait, there’s more, as Billy Mays would have said. I also get a tax-free dividend each month from my house – the value of what it would cost me to rent it, which is currently about $2,800. Remember, rent is paid with taxed dollars, so to pay your $1,200 apartment rent you might have to earn $1,500 to $2,000 gross, depending on income and tax situation.”

A question for newbies and relative newbies: What is the most important factor that ‘Geo Centric’ is leaving out of their calculations? – vreaa

31 responses to ““I’ve been a renter and an owner. Without doubt, from a financial and quality of life point of view, ownership is the correct choice for most people in the long term.”

  1. pricedoutfornow

    Sure, it’s made sense to own over the past 20 years. But what about the next 20 years?

  2. Barneysvirgin

    do you really want to spend the next 20 years renting with your slim chance of being correct? The idiocy here is sometimes too much to read.

    • You got that backwards. There is a slim chance of being incorrect, as most rational bears admit.

      And may I say, your second sentence was such a refreshingly honest retrospective of the first half of your post!!

    • Barneysvirgin -> “do you really want to spend the next 20 years renting with your slim chance of being correct? The idiocy here is sometimes too much to read.”
      …….
      So you see just a “slim chance” of a crash?
      What do you think the maximum potential price pullback is?

      BTW, people who rent, in worse case scenario, simply have to keep renting; people who overextend and buy are the real gamblers: in worse case scenario they are wiped out, and financially crippled for decades.

      • doesn’t this depend on where you are vreaa? Real estate markets are local. Some areas of BC might see 50% pullback under bear wet dream scenario – not Vancouver however. The worst real estate conditions in 80 years (bank failures, mortgage defaults, government intervention, etc.) produced a 20% correction in Vancouver. I’ll put my money on this pony.

      • Rusty->
        We anticipate all areas wil be effected in the crash… And by the trough, price drops will be pretty much of the same percentage across all areas.
        We expect market darlings to be effected as much as anywhere else… We’ve already cited examples of Westside houses selling for close to $3M that we expect to see selling for ballpark $1M at the bottom.
        This across-area drop occurred in 1980 crash, too.

        The 15%-20% drop in 2009 wasn’t a correction.. It was the beginning of a crash bailed out by unnecessary ‘emergency’ rates… An aborted correction.
        A speculative mania only ends when speculative excess is wrung out of a market… That didn’t even begin to happen in 2009… It’ll only happen at far lower price levels.

  3. How many people, who have been homeowners for 20 years or more, have you heard say “that was mistake – I should have rented”?
    ——————————-
    I have a feeling the 30% of Americans who are underwater on their mortgages right now will be saying that in 10 years…

  4. Indeed. My American friends who have had to relocate for work within the last 2-3 years all say that buying a house was a horrible mistake.

  5. “Geo Centric”‘s rate-of-return calculation totally ignores the interest paid on his mortgage. Is that fair? Based on the dates and numbers he provided, he had to have paid at least $100,000 in mortgage interest (interest rates in the early 1990s were around 11%).

  6. how about property tax, insurance, and upkeep? I guess that’s all free!

    • Agreed. He’s calculated a 5.2% return over 19 years (I calculate 5.6% using XIRR in Excel). Knock off some of that due to property taxes and upkeep that a renter wouldn’t have to worry about. And these “gains” are only on paper. He actually has to sell for that price if he wants to realize those gains If prices drop 20%, his ROR is only 4.3%. I could beat that just by keeping my money in low-risk corporate bonds.

      The thing that housing market bulls never remember to mention is that paper gains are not really gains at all until you have cash in your pocket. Depending on what market Geo Centric is living in, he might be looking at sitting on his house for more than a year at current months of inventory in many markets. If he had to make a quick sale, those gains are going to go up in smoke. He’ll be luck to beat inflation if the market drops in any significant way.

      Relying on the financially illiterate masses buying preferences for 20 years to realize any investment gains is too high risk for me. I’ll put my money elsewhere for now, thank you.

  7. Joe/Bob -> all true… But the main flaw is estimating that the next 20 yrs will be like the last.

  8. I’m starting to see that the fundamental flaw in the argument that you can treat your primary residence as an investment is that people seem to buy real estate as an investment but they don’t sell real estate as an investment. This guy bought his house and now has the “potential” to pull out $700k tax free. But he gives no indication that he intends to realize that gain. Even the most conservative analysts are pointing out that valuations of this investment have far oustripped the underlying fundamentals of the market and a 15-25% pullback are likely. “Less credible” pundits are calling for 50-60% pullbacks. If this was a tech stock that had realized this kind of return with analysts pointing out a disconnect from the company’s fundamental earnings and predicting a 15-25% pull back, he would be nuts not to at least pull some of that capital gain out. But he won’t, because he’s painted himself into this corner where he can’t accept renting a home as an option. He doesn’t want to move his family, he doesn’t want the aggravation of packing up his stuff, he doesn’t want the stigma of being a renter. So he may have thought he was buying like an investment, but now that the smart money says to cash out, he can’t sell it like an investment. And therefore the whole speculative component of home ownership breaks down to apples and oranges when compared to other types of investments.

    • nobody you know

      ” people seem to buy real estate as an investment but they don’t sell real estate as an investment”

      The whole “Best investment you’ll ever make!” sales pitch falls apart when owners realize they’ll have to either move to a smaller home, distant suburb or back into a rental. I can’t tell you how many people have informed me of their imagined real estate profits in the past few years, but I can tell you none, and I mean not a single one of them has actually sold anything and taken those profits… but they’ve sure as hell spent them thanks to 2nd mortgages. Ain’t that a bitch.

    • Yes. Though he *does* enjoy the “yield” of not having to pay rent. So he’s bought, at considerable cost, a bond or dividend paying stock he can’t (or won’t) sell. If we take him at his word, this yield is $33600 tax free a year. This “bond” cost him 250K + interest costs + property taxes + maintenance + any major capital expenditures (new kitchen? porch? appliances?). Let’s say another 250K. So 500K buys ~30K annual income or 6%. Not bad, in this environment.

      But none of this helps today’s buyer. Who spends 750K to get the 30K imputed income — 2.5%, which I wouldn’t brag about on the internet, but I suppose people settle for less in so-called “high interest” savings accounts.

    • “Buy and hold.” It seems to work until everyone tries it…

  9. It’s possible to realize the capital gains if one doesn’t get too attached to the idea of ownership, and are willing to consider rental. My parents moved several times as the family situation changed, e.g. moving into bigger houses closer as the family grew (six kids!), moving to different parts of town to be close to certain schools we attended, and then downsizing as the kids left home. Usually they sold and bought, but at least on one occasion when they felt the market was unusually high and it was time to downsize anyhow, they sold at a tidy profit and rented for a few years while the market came down. Nobody knew or cared that we were renters instead of owners.

  10. “We’ve already cited examples of Westside houses selling for close to $3M that we expect to see selling for ballpark $1M at the bottom”

    would you care to make a wager on these predictions? Looks like
    you’re saying 66% off for westside – and I think you’re on record as saying
    50%+ for eastside. Any stake you’re comfortable with – as high as you want to go…I think I can cover it lol

    • Firstly, I think most of us are already ‘wagering’ substantially by virtue of the positions we have taken, so no need to actually waste time trying to arrange a mucky anonymous Internet bet, no matter what size. We will all watch the markets play out, and then play “I told you so” (if you hang around long enough, that is..).

      Secondly, we note your remarkable (and rather obscene, if truth be told) ‘lol’ arrogance.
      Is it completely impossible for you to imagine that bearish observers may be wealthier than you?

      Thirdly: Yeah, 50%-66% off, across the board, sounds about right.
      Given the frenzy of the last year, that is what we’re expecting by the eventual bottom.

  11. …”ownership is the correct choice for most people in the long term.”…

    Except, perhaps, for the previous owners of foreclosed homes whose properties are now the ‘meat’ in the sandwich of Viacoms latest ‘reality’ tv offering, “FlipMen!”…. [I can hardly wait. /sarc off]

    “Spike’s new show, “Flip Men,” follows its two hosts, Doug Clark and Mike Baird, as they attend auctions of foreclosed houses and buy up the properties—often sight unseen—and hope they get lucky. Mr. Clark and Mr. Baird have bought houses where the interior is covered in mold and feces, infested by rats and, in some cases, still inhabited by angry—and sometimes violent—occupants. They also have purchased homes that vagrants have moved into and turned into methamphetamine labs, as well as houses that gangs have overtaken. In order to recoup their costs, they must fix up the homes as quickly as possible—and then attempt to resell them. “These programs are like the ultimate game show because you don’t know what’s behind that door before you buy the house,” said David Broome, executive producer of Spike’s “Flip Men.”

    [WSJ] – TV Home Shows Flip Scripts: Amid Real-Estate Bust, Reality Programs Turn Attention to Foreclosure Deals.

    http://tinyurl.com/3j4oagd

    PS – in other, unrelated news, the People’s Liberation Army of China was Shocked, simply Shocked! upon discovering their latest intake would require extensive remedial toilet training prior to deployment…

    http://tinyurl.com/3jds76d

  12. “I think most of us are already ‘wagering’ substantially by virtue of the positions we have taken…”

    not the same VREAA. I want you to put the cash in my hand – so I can grin at you like a cheshire cat. Come on, man up and put your money where your very ample sized mouth is. If you truly believe in what you speak you’ll have no problem backing it with some substance

    • You’re already grinning like a Cheshire cat.
      I’m not going to create a bet with you. There really is no point; we’ve each made our positions clear.
      My one request would simply be that you hang around and that you are man enough to admit you were wrong if/when the crash occurs.

  13. VREAA,
    you’re not exactly displaying the courage of your convictions by ignoring my challenge. In fact, it’s akin to running away with your tail b/w your legs.

  14. the point of a bet is to determine how confident you are in your crash predictions – so I gather you don’t actually believe what you spew

    • You are a lying, deceitful, duplicitous troll. You would not have the stones to actually pay up when you eventually lose, but would be here bragging should the horseshoes up your ass (fighting for space with your head) cause you to win. There is no upside vreaa. He is wise not to engage.

  15. The way that I roughly calculate it, you and I and many other players are already making personal ‘bets’ well into the hundreds of thousands of dollars on the future trajectory of the Vancouver RE market.
    Your posturing about trivial personal bets in the face of that is pathetic bravado, and we won’t rise to that.

  16. ‘I also get a tax-free dividend each month from my house – the value of what it would cost me to rent it, which is currently about $2,800.’

    I did not get what the above was in reference to – can anyone explain?

  17. “That’s a tax efficient average annual return of 5.2%.”
    I don’t want to be too hard on this poster, since he seems to have put an earnest effort into logically making his case. But I find it absurd and a little sad that he automatically accepts a 5.2% CAGR on an investment with a 20-year time horizon as a good rate of return.

  18. Owning previously and renting now to live out the rest of your years is not a bad idea. I know people who have owned for over 30 years and made a killing when they sold. Unfortunately people like me who have yet to purchase will be price out for now but let’s not fear because the storm is coming, the economic men in Ottawa are just doing what they can to advert it but they cannot control the debt people incur and the bad decisions people make. All they can do is pass legislation to limit it. Where there’s a will there’s a way and pretty soon prices will be back to normal or what they actually should be. In the long run though, renting and saving money will be the best formula, put away in a ziplock bag what it would cost to pay for repairs, maintenance, property taxes, city fees and taxes, and you’ll see how many of those big ziplock bags you’ll have in the next 20 years…. Most realtors will disagree, and so will most “classic” attitudes, but hey it’s gambling, but instead of a slim chance of losing it all you don’t lose at all, you’ll just need someone to help you carry those ziplock bags…

  19. I love it when Rusty posts. I actually find myself looking for anecdotes where Rusty posts a comment … I find his posts intriguing and insightful… I am truly a fan.

    Keep it up Rusty! Don’t let any bears bully you around. You give me hope in humanity, knowing that such finance savvy people such as yourself are confidently invested/ing in the Vancouver RE market.

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