One thing that feels like a serious oversight though is that it isn't factoring in taxes. Rental income is taxable income. If you depreciate the property to avoid or reduce your taxable income you'll end up taking a big hit on the eventual sale as it will all be capital gains.
Another issue I'd take with this is that it's a lot smarter to focus on cashflow then gross income because odds are you aren't going to last 30 years to watch your net worth grow if you are losing cash on a monthly basis, even if you are technically building equity.
I'm currently getting out of being a landlord because while it was overall profitable, the margins are alot tighter after factoring in taxes and it's also a massive headache. That income certainly does not feel passive.
Yeah you're totally right about taxes — it does make a big difference. We had to make simplifications somewhere, and taxes are quite country-specific so we didn't want to be too prescriptive. We hoped you could increase "Annual Costs" as a very rough proxy for taxes.
Cashflow is a really good point, and something we hadn't considered much. You can get a rough idea of cashflow in the "Net monthly earnings" section of the output, but it probably deserves more focus for sure.
Operational headache is interesting to account for haha — we'll add these things to the model explanation :)
You should probably default the Annual Costs to something like 5%, and let people bump it back down if they need to.
Anything that draws attention to that field, as 1% doesn’t draw attention.
In my case, taxes are roughly 2.5% alone. Then while a given year maintenance doesn’t feel like 5%, over 30 years you have to peanut butter the big expenses such as roof replacement, or kitchen renovation, and those really do add up.
By and large, all fields should be a bit pessimistic, let people bias them back down, or simply add a “risk” field that can fold in pessimistic outliers into the simulations.
Given you're positioning this app and article as a means to answer the question on buying a home and renting it out, you should disclose these items (liabilities) to the reader and let them figure out the scenario for their local market, rather than hoping for the reader to do something.
Property tax is a large expense, and insurance is also a required expense if you have a mortgage (in the US). Finally, income you generate from the house (Rental Income) is taxed at your effective tax rate, and this will be a Large Liability at the end of each year.
Although there may be deductions you can take to minimize some of the expenses (in the US), you will be required to pay taxes on the income you generate and I suspect that's the case across all countries.
Just fyi, depreciating the property isn't a choice in the US. When you sell, the government assumes you did depreciate on your previous tax returns. If you didn't, you missed out on those deductions and depreciation will be reclaimed regardless.
"Another issue I'd take with this is that it's a lot smarter to focus on cashflow...."
Surely it depends on your aims? If its your pension you may not mind adding money in every month, as long as you get that lump sum/ steady income at the end.
Another subtlety to the taxes and cap gains: the building per se can depreciate while the land value appreciates. This can make a big difference when it comes to selling. Highly recommend talking with an accountant.
For anyone using this model to make a decision: it looks like it doubles your rent input (maybe assuming two units?). Also not taking into account tax on rental income. You can work around these in how you set your parameters.
This compares against the opportunity cost of investing the initial down payment, but does not seem to factor the opportunity cost of ongoing carry costs.
For example, I was able to easily craft a model where my expected monthly income was negative. (Just bump the expected annual costs to 2.0%, which is actually more realistic since 1.0% = tax and 1.0% = maintenance.)
Surely the couple hundred dollars a month could also be continuously invested and producing returns if they weren’t being driven into the real estate asset.
We did kinda assume that the buyer would set the rent to at least cover her ongoing costs. In the UK, for example, you can only get a “buy to let” mortgage if you can prove that you can reasonably charge enough rent to cover your mortgage payments.
You’re totally right about reinvesting the earnings into stocks etc — we excluded this in the model to simplify things and not be too prescriptive. But if I were thinking of doing this, I’d definitely want to take that into account :)
It’s more than just mortgage payments — taxes, maintenance, management fees, empty losses, etc. all make it easy to have negative carrying costs.
There are _lots_ of people owning to rent that don’t cover their actual carrying costs. They just justify it by thinking about the equity growth.
In fact, even the default example has negative carry costs. The initial interest on $480k plus $6k isn’t covered by $2k monthly rent, let alone principle payments and a more realistic maintenance amount.
I plugged in some reasonable numbers for rent & home prices in my area and found that basically all of the net worth was due to home price appreciation. While houses here are appreciating at rates far higher than the 4% of the model, that's because the stock options of the buyers have been going up at ~25% annually.
My takeaway: bubbles rule. As long as you're in a region eating the rest of the world, owning property will let you share in that windfall. As soon as that economic engine sputters, they will be ruined, and so will you. Better watch for that next big thing, and then hop on something else once it's no longer the next big thing.
Also, it seems wrong to assume 4% annual appreciation of an asset whose discounted cash flows are negative. At some point that gets unsustainable, and nobody will bother to buy the asset.
> for rent & home prices in my area and found that basically all of the net worth was due to home price appreciation.
It's not just home appreciation, it's down also the down payment.
Say the housing market increases at 5%/year. If you buy a house in all cash, you will get 5% returns.
However, if you use that same money for a 20% down-payment to take out a loan (say 3% interest) to buy a house that's 5X more expensive, your returns will be 13%/year (=5% * 5X leverage - 3% interest on 4X of the cost). Huge difference.
Of course, these are fake numbers, and fail to account for a variety of other factors (taxes, closing costs, maintenance, etc.). However, the point is that housing market increase is not at all the full story.
So your investment is basically a proxy for stock prices? Why not invest in those stocks directly?
Although if all the net worth was due to house price appreciation, stock options don't seem to be making up much of net worth, or weren't included, either of which seems to undermine your argument?
As others have pointed out this model is oversimplified and doesn’t break out maintenance and taxes. 1% is unreasonably low for both considering that 1% is a low property tax rate first of all and second because rental income itself is taxable.
Another point in actual real estate proformas is expected vacancy and leasing costs. Ie. you will have tenants leave and when you do it isn’t always easy or fast to find good tenants to replace them.
There’s also the significant consideration of transaction costs missing. Conservatively you should budget 8% to sell and 4% to buy.
The asset is also highly illiquid compared to stocks, and also has ups and downs just like the stock market but in slow motion. If you happen to want to cash out your equity during a downturn it can be years before you get back to where you’d be with your “long term expected appreciation.”
And one last bit: since a house isn’t fungible you need to accumulate the entire downpayment all at once, and to liquidate you must sell it all at once, whereas stocks you can accumulate and release incrementally.
TLDR; this model makes it look a lot more attractive than it really is to be a single-property landlord.
I've been looking on Redfin for potential investment properties in SF but I cannot find a single home on the market where rent would remotely cover the mortgage.
Even if you don't rent out your residence (you live there), you're still collecting implicit rent. It's the value you would have been paying to be a renter, society loses because you exclude others from your residence. And every residence has to be owned by someone. You cannot escape rent seeking unless you're homeless or live in a jurisdiction with a "Land Value Tax".
That's an incredibly thin argument (society loses because you don't let someone pay rent to live in your home). You have to deny the existence of second-order intangibles which seed first-order tangible economic value such as community and social cohesion. If you like, ownership-based behavioural incentives. A 'stake in society'.
You misunderstand my argument entirely. The problem isn't that society loses because you don't let someone pay rent in your home. Society loses because you don't let someone else live in your home for free, but you do let yourself do that. This is the value you extract from owning the land, which nobody else can extract.
> No. The literal definition of the economic drag on value creation is "rent seeking".
No, that's not the literal definition of "rent-seeking", not even close. I really wish this term had a different name because I see people on HN misusing it on a daily basis. "rent-seeking" is a specific term in economics that refers to entities colluding with the government to distort the market in their favor. The taxi medallion system is a classic example of rent-seeking. Owning property and leasing it out, whether it's land, vehicles, apartments, or machinery, is NOT rent-seeking.
> Be a part of the solution and build something. Do not be a part of the problem and become a landlord.
Would you prefer a world in which people are not allowed to rent apartments?
> In public choice theory and in economics, rent-seeking involves seeking to increase one's share of existing wealth without creating new wealth [1]
> The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. [1]
So Robert Shiller is not fully versed on the topic, in your opinion?
> The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. [1]
That's not the same thing as building/buying a house and renting it out, in my opinion (and is backed by the introductory paragraph on the URL you cited).
If you dig a canal and charge for passage, that is equivalent to renting a house (and is not "rent seeking" either per economics/public policy discussion).
This is quite a stretch drawing a line between a feudal lord and a land lord.
Most landlords simply purchase, or very often inherit, their property, not unlike feudal lords, and then charge rent to live there. We are drawing some very small lines to separate those two.
I should add that I consider it much different if someone builds a structure and then rents it out. I, and most, would not consider that rend seeking, as they created new value in the creation of the house. Simply purchasing land and then renting it out, creates no new value.
Normal investments, stocks, bonds, etc help to create value in that the things they support need capital to be built. Land itself, will exist with or without capital resources. So the things that make capital markets work, do not apply to land.
How are the second and subsequent owners of a share of stock helping to create value in a way that the second and subsequent owners of a house are not? (Realizing that most people are renting houses/improved land, and very rarely unimproved land.) Both are providing value to the previous owner, which the previous owner considers when deciding to make the original investment.
I'm updating the situation to match the case of an improvement to land being rented (to wit, a house). I agree that a chain across a natural waterway is rent-seeking. A chain across a man-made canal is not (as the creator of that canal is seeking to increase their own wealth while creating additional wealth in total).
I live in a 3 room 90m^2 apartment in central Aarhus in the middle of the university. It’s worth $350,000, but and you can rent out each room for $700-$800 a month, to an endless stream of students.
The guy who was elected head of our ownership organisation/community (might be a danish construct) bought two apartments when he moved in. He did have $150,000 to make both loans not-bank loans (again this might be a Danish thing, but we have special loan institutions that cover 70-80% of personal house loans at really low rates). Anyway, the one he rents out pays for both loans, taxes and added expenses and after 20 years those loans will both be paid out.
It’s really kind of silly how easy life can be if you start out with a little money and use them wisely.
I read it as, but I could be wrong, that if you start out in life with money (parents/inheritance/...) and you decide wisely, like buying a house close to uni and putting in a shitload of students, then you have it easy.
I owned a student home which I bought from partly smart and mostly lucky stock investing (I had savings from strawberry picking (yes, really; that made money faster than coding in those days for me) and I put it on Borland before 2000; they went up big time, I sold at the right time and student me could buy a house suddenly); it was in a city with high student housing prices and it was a really good house for it; it was big and could house 8 (to 16 if pairs) students paying 8*400 euros/mo. It was not easy money though; I lived there too for a while and the constant maintenance drove me up the wall. I am (always was) mostly someone who lives in his head and thinking about code and leaking toilets, pipes, flooding etc really is something I cannot deal with. So I sold it after 4 years of getting stressed.
I definitely wouldn't do real estate again; I like virtual assets and the stock market & starting + selling companies treated me a lot better than real estate ever can do. Without the worries of brick & mortar.
Possibly, I read it as an ultra free market, right wing, if you've had a little money its your fault if you haven't made a success of yourself.
That's more dots than I'm willing to connect from one passing comment from someone whose first language I don't think is English, so I'm asking for clarification.
Oh, I think it’s unfair. I probably could have added a little context, but I was stating a fact, not my opinion on it.
The guy I mentioned is 30, and in 20 years when both apartments are paid out, he’ll be a multimillionaire (in Danish kroner), as well as having a passive monthly income that exceeds most lower class jobs. Just by having some starting capital from his rich parents.
I’m not particularly against having rich parents helping you, but because real estate taxes are so low and prices so high, it’s just extremely hard to catch up if you don’t, and I think that’s unhealthy for society in general.
If you bought an apartment in Denmark a few years ago you got quite a lot of money just because of the appreciation. To be able to even get an apartment you have to have money in the first place otherwise you won't get a loan. So OP is saying that it is expensive to be poor and cheap/easy being rich.
Well I've got some friends who inherited about 300k.
In my country the rental yields are about 6% and interest rates on commercial loans about 3.5%, and you can get commercial loans financed to about 70%.
In other words, with 300k down you can invest $1m. You gain about $60k a year. You pay about 25k.
The remaining $35k you use to maintain and, if you want, pay down the loan.
Average 3% long-term price inflation after 30 years means your asset grew in nominal terms by 2.5x, while your debt didn't inflate. So even if you never paid down debt but only paid the interest, you could still sell the asset for $2.5m and pay back the $700k you borrowed, leaving you with about $1.8m. The present value of that would still be double what you started with.
Of course, the $60k annual rent inflates, too. After 30 years it's about $145k. And of course, your interest of $25k doesn't inflate.
In other words, suppose you inherit this like my friends at age 20. You make an investment. By the time you're 50 years old, you've got a $2m retirement fund that cashflows >$100k a year. Yes, in nominal terms, but it's still a pretty sweet deal.
And don't forget, that is without ever paying down debt. Over the course of the 30 years, you cashflow $1-2m. If you actually use that to pay down debt and keep reinvesting the money, you'll end up quite rich.
To put the initial investment in perspective, if you get a 6% rental yield, a modest 3% appreciation, you get 9% total gross returns on $1m. You pay about 1% in costs on the $1m, and 3.5% in interest on the $0.7m, or about 3.5%. In short, you net about 5.5% on the $1m, or $55k, but you only invested $300k. So you're looking at a leveraged return of about 18% on your cash.
Suppose instead you have more modest assumptions, say 15%. If you take $300k for 30 years at that rate, you're looking at $20m, and a multi-million dollar income.
Hell even if you put it in the stock market, inflation-adjusted, at 7%, you're still looking at >2m by age 50, at which point you're looking at a >150k income, inflation-adjusted. Just from inheritance.
In other words, this person never has to save. He can spend every dime he earns, and still retire decades before most Americans. Or he could take that money and enjoy a far greater lifestyle, doubling a normal person's salary for the rest of his life and spend that, too.
And $300k isn't even an amount where you'd say 'damn, his parents were filthy rich'. It's the kind of money that a lot of upper-middle class people will inherit, when their parents pass away and leave them and their sibling a $500k paid off house, some stocks and some cash.
I've got a lot of my friends who go through life on such an easy-mode, while others literally have $300 in the bank, go into lots of college debt, and are struggling their way through life. The difference is pretty huge.
Inheriting a bunch of money and making basic smart decisions with it, is like a super generous form of welfare. Like playing the Sims with a $2k a month bonus-salary cheat, which grows into a $4k a month cheat and eventually a -20 year retirement cheat.
And I know because I grew up poor and got such a small cheat a little later in life myself, approaching 30 years old. I was already doing well and 'getting there', but the cheat made everything so much easier. It's kind of sad because as much as I respect the idea of building something, and passing it on to your children (inheritance)... it generates a society that's the opposite of a meritocracy and is dictated to a very large (inordinate) degree according to a socioeconomic birth lottery if you ask me.
How is $150000 a little money? Even if you somehow save $50000 a year it still will take you three years of continuous saving to get there. Life is already easy if you already have a lot of money.
Owning a property is work - sudden repairs at an otherwise busy time in your life. Phone calls and customer service for tenants. New tenants. Paperwork. It's partly the time actually worked, but also the unpredictability and out-of-hours nature of the work.
Looking at the model I guess the nearest factor is Annual Costs (maintenance). But it doesn't feel properly measured.
I note that for someone on Hacker News, it needs charging at the day rate for a programmer. Or even as an opportunity cost - charging with a risk-based possibility of the reward of starting a successful technology startup. Or of spending more time with family or in sunlight, amongst trees. At peace.
Exactly! Own shares instead, they're the same thing but require none of this ongoing work.
Historically house prices have risen enormously and a whole lot of people have made money, so everyone believes this will continue forever despite a huge political movement behind building more houses and other (good) policies that will reduce prices. On the linked page I typed in "-20%" into the annual appreciation field and lost $717,000.
"Historically..... so everyone believes this will continue forever"
You know the same thing applies to stocks and shares. And in fact stocks and shares have risen more historically [1]
Shares also have liquidity, you can easily sell them in part or whole. You can diversify. One incident could easily destroy a house, if it destroys your well diversified stock investments you've probably got other problems.
So agreed the stock market is the better investment, but as we can't see the future, both are based on past performance. Yes there are headwinds, there always are, I can think of many many reasons why stocks could fall, that doesn't really change what has happened historically though.
Of course the beauty of investing is that if you disagree you can put your money where your mouth is :)
Just make sure you only invest using money you can spare. If you are saving use funds (many different stock to spread the risk) . If you invest in a single house , stock or boat, there's always a chance it will sink and you lose it all.
buying a house to live is not an investment, and i should think that people ought not to treat it as such. Buying a house gives you stability and security for shelter. It's quite possible that renting is cheaper, but you also can't do certain things while renting - such as small renovations (some places don't even let you nail a painting on to the wall).
Investments in real estate is a different ballgame to buying your home.
I thought we were talking about rental properties?
That said, buying a house is basically buying an index linked annuity that covers your rent on a property you have to maintain. So it is an investment, albeit one tied up with a lot of other baggage.
I bought my house for $263K in 2002. It is currently worth around $330K. In that time I have spent about $40K on repairs (not true upgrades) for 2 new HVAC units, new roof, carpet, water damage, broken appliances, wood rot, lawn seed/fertilizer.
I'm happier living in a house than an apartment but my house is a place to live, and an item of value, but not an investment I expect to make profit from.
Sure you can. If you were renting it out instead of living in it, all those costs would have to be paid on behalf of the tennents. It's part of the cost of doing business. So whether you rent or buy for yourself, it's all part of the investment calculation.
The big difference (or it is in the UK) is rental properties are heavily leveraged, often on interest only loans. Many of these landlords don't have enough cash to invest in the stock market but they can borrow against a rental property.
I'm fairly sure that ordinary investors can't borrow for investment in the UK, or at least if they can it's not as easy as getting a mortgage. Getting a mortgage is a mountain of paperwork but for most people it isn't difficult even with the new rules.
Interestingly though 30% of people buying houses now in the UK are not getting mortgages (in some areas much more than that [1]) and I assume most of these will be the types of investors who are looking to buy a second home to rent out.
Mortgage rates are substantially lower than margin lending rates though.
Borrowing to buy a house at 4.5% you might think, "Not much risk, will likely appreciate faster." Borrowing to buy stocks at 10% and you're almost certainly not going to come out ahead.
(Maybe my broker has terrible rates, others could be more reasonable.)
Wow, I'll have to consider changing. I'd probably borrow to invest at those rates, after running a model to figure out how much risk to take.
Though maybe LEAPS (and for indexes, futures) are a still cheaper way to get leverage.
Edit: goodness, the rates on some of those currencies is less than the dividend yield of those countries' indexes... If I don't expect New Zealand to sink into the sea, is it stupid not to borrow NZD and invest in the NZ top 50?
I’d guess from the 4.5%, you are in the USA? Just asking to check we share the same context here, no need to answer..
My subjetive experience in the USA (Seattle and NYC) is that you can get 4-5% with a steady job and 20% down for primary residence. Anything out of ordinary, like 2nd mortgage (since we are talking about real state as investment), the interest rate goes up (6-7% last time I applied for one).
Also, while the margin rates can be higher, there is more liquidity, smaller transaction costs, and much smaller fees.
Transaction costs are a big one. In some countries there's stamp duty, in the US there are unusually high closing costs (6%?). That said, the bigger the investment the longer I want to hold it, and those transaction fees aren't as steep when amortised over the home-onwership term.
One thing that keeps me confident (even worried) about house prices: We have now got used to not demolishing old houses. This is a BIG problem. Look at London. Yes it has a mud base layer, but we can manage nowadays. Yet the whole city is still mostly 2 storied houses. And it's growing out like crazy. I don't see how this trend will revert, in any "beautiful" European city. The only way prices would go down is if we had a popultion decrease. Immigration will not let that happen.
Usually it puts you under breaking even, esp if you just bought the place. Usually 8-12% according to google. Good for a property with a below market mortgage you don’t want to worry about but don’t want to sell.
Nearer 10-15% in the UK. If you manage to find a good one they're definitely worth it, but the problem is, at least in my experience, the majority aren't.
There are two kinds of contracts with property managers - one kind that only find tenants, and another that manages everything (e.g. if the boiler breaks they get a plumber).
Which kind are you talking about? I'd be surprised if the discrepancy between countries was as large as 6% to 15% for the same contract.
The 6-8% is for the ongoing maintenance and routine inspections. Usually leasing the property is 1 week's rent, however sometimes that is included in the management fee as well.
Anecdotally we make ~ $500/mo after property management costs, but it isn't 100% hands-off. They are a middleman which means they bother us instead of the tenant.
I don't want to belittle the $500, but if we had good tenants and dealt with them directly we'd be getting double that.
Now is an extra grand a month worth the hassle with GOOD tenants? Maybe. But all it takes is one bad one to be in the hole and full of stress.
Sounds like a great investment, I'm paying several hundred a month unfortunately cause my market got cold. Might sell the property for a small profit if it keeps burning a hole in my pocket.
I went looking for a property manager when I was trying to rent out a flat, but it wasn't worth it. They charge 8%+ but the real problem is that doesn't include costs (eg. they won't do repairs) and most seemed as if they were just an expensive middleman who would simply pass on tenant requests to you.
The middle class people I know who invested in real estate (say, buying one flat to rent it out) would counter your argument with the following two points (not implying that I'm in favor of investing in real estate):
1 - It does not imply that much work. Not even close. For instance, my uncle and aunt rented a flat for 6 years to the same family, and in that time my uncle had to go there about 1-2 times for minor problems, and I don't think it's an exception. There is a bit of work at the time of finding new tenants, but in the case of the people I know, it's like an average of 4 hours of work a year at the very, very most.
2 - (and most importantly): middle class people who invest in real estate are keen on having a rent. Stocks don't necessarily give you that. They see buying a house and renting it out as a way of having a monthly recurrent source of income.
In the UK the average tenancy is about 20 months. This is possibly because English law gives much stronger protection to people in the first 6 or 12 months of the tenancy, or maybe because of the student market. Tenancies are getting a bit longer, and this is possibly because moving home can be one route from the legacy benefits onto Universal Credit (which is usually catestrophic for the claimant.)
Yeah, so what has happened is institutional investors now dominate the SFR rental market. They ask for 5% rent increases every year and therefore have relatively high turn ratios. It makes it easier for mom and pop investors to hold long term tenants.
1 - It depends a lot on type of occupation (is it for a family? for a single person? House, Appt, Condo? Older buildings also might require more maintenance).
Also it's not only about work, but cost of maintenance.
That's right, but it's like buying stocks/funds. It's not the same investing in S&P500 Vanguard index fund than investing in an active index fund with high commissions and bad performance. You have to find the right house to invest in (eg. a relatively new flat will probably not give many problems).
This 1000x. I reflexively said (out loud) “god no!” in answer to the title question.
The only people who ask this question are people who haven’t been landlords. Every single one of my friends who has, can commiserate with me as a former landlord.
Maybe buy a vacation home to rent, or an apartment complex. And of course being a part- or full-time landlord is a perfectly reasonable job.
But if you think that being a landlord just means having someone else pay your mortgage, I guarantee you will think differently after a year with even exemplary tenants. And most tenants are far from exemplary.
It really depends on where you are. In many european countries it's traditional for the tenant to fix the problems. Washing machine broke? Get a replacement yourself. Pipes clogged? Call a plumber.
Most people can't afford to buy. Buying a house/apartment generally requires a 20% down payment, inspections, lawyer fees, realtor fees, and a shit ton of paperwork, and that's assuming a bank will even loan you money at a reasonable rate.
Plus, home ownership also reduces your mobility. With rent I have a lease I can typically sublet or end. If not, I'm at most liable for the remainder of the lease. If you ever want or need to move, you have the liability of selling your home, managing a mortgage plus rent, etc. on-top of finding a new position, moving, and everything surrounding the act.
The obvious downside is you'll never get any ROI beyond having a place to live like you may with property ownership. Homes are great when you have financial stability and freedom but can become a big shackle if you don't.
I recommend thinking about this probabilistically:
X% of tenants are reasonable and handle the repairs they are contractually required to handle smoothly.
(1-X)% of tenants are a massive headache, and call the landlord for every lightbulb that needs changing, threaten to sue you all the time, smash your property to pieces etc etc.
Compute the expected value, and compare with other forms of investment. In my experience, renting out a single property is not worth the expected reward, vis-a-vis other forms of investment. This changes if you can reap economies of scale from renting out multiple properties. (Cut-off point depends on ambient legal system, tax, your own background (e.g. if you are a lawyer, you can handle legal disputes yourself) etc.)
In Eastern Europe it's often the case. Worth mentioning however that plumbing services are much cheaper then in States, and there are usually no legal/insurance nuances which reapairing may bring in the US. So it's simply easier to call a plumber and have trouble solved then include a landlord into equation. Broken washing machine, or expensive furniture in most cases are on landlord, though.
Germany, for sure - tenants usually own their own washing machines and most of the time, their own kitchens, including all appliances, cabinets and the proverbial kitchen sink. Tenants are essentially paying for the right to occupy the dwelling, and that’s about it.
Therefore rental price to purchase price ratios have historically been lower, as well as home ownership rates. Rents in desirable cities are going up faster than they had been, though, and Berlin has quickly gone from being one of the cheapest cities in the country to one of the most expensive.
I agree with you on this more than the original response. From my time renting — houses and apartments — the former has always been more of an “as-is” type rental. In a house rental, the landlords tend to usually only be responsible for the big ticket items (hot water tank, septic tank, foundation/exterior issues, etc.) while you were left to deal with moderate homeowner fixes. Apartments on the other hand, especially a complex, we’re held responsible for every repair. Pilot light out? Maintenance. Broken window? call the office. Your water pressure suddenly got cut off at 3:30am? Hello, 24/7 maintenance line.
I would say that it depends. Regular maintenance of course is on the tenant, if the washing machine is not mine and it brakes down I would not repair it without first discussing it with the landlord. If it broke down because of my misuse I'm fine paying, but it is just regular wear why should I ? I'm paying a premium for a furnished house after all.
Of course the best is to make it clear at the moment you rent, not when the issue arise.
Edit: I find it insane that most people in the US don’t see the advantages of renting. When you rent here, your housing cost is fixed for at least a year. Anything breaks, you call the landlord or leasing office and it gets fixed at zero cost to you.
I really miss renting. Now that I own a condo, I keep having to deal with unexpected expenses - fridge breaks, something comes off the drywall, microwave breaks, plumbing issues, etc. Plus, I don’t have the option anymore of moving closer to my kid’s school when she transitions to middle and high school (and those are quite far compared to her elementary school). I mean, I do, but selling a place and buying a new one is a monumental hassle compared to switching apartment leases.
This -1000x. Get a property manager. Mine takes 8% and does everything. I enjoy a monthly direct deposit. Every once in a while something breaks (just got a new oven), I send them a check, they do everything.
It depends on the property manager. The one I had let the tenants stay 3 weeks beyond their lease end date rent free, pre-dated the move-out inspection and didn't even bother itemizing the damage the caused to the unit (which was well beyond their security deposit). They didn't get a forwarding address from them and there's no way to collect additional damages.
Sounds like a terrible property manager. Thankfully it is usually very easy to fire them and get a new one. At least where I am, there are a lot of them and competition is strong, so it's not hard to find a good one.
Yes! This seems to be the turd in the punch bowl. If you can find a good property manager and a good tenant, it’s not bad. Bad either can get ugly quickly (in CA).
While I agree with this direction, it does make me begin to question why I don't just abstract the entire thing away with a REIT or other similar investment vehicle.
8% off the top depending on your particular scenario could get you pretty close to the same net returns at the end of the day. If you went with a few REITs, management would take maybe a few hours a month even for a massive portfolio. This also has the benefit of being much more diversified than a single investor directly owning various properties could possibly manage.
Granted, using REITs is a tradeoff in granularity of asset allocation and potential upside, so there is always that zone of opportunity to exploit. It just takes a delicate evaluation of the value of your time vs the opportunity itself relative to other competing strategies.
> why I don't just abstract the entire thing away with a REIT or other similar investment vehicle
Because REITs don't allow you to invest in one house via improvements at your discretion.
At least in the Bay Area, buying a somewhat run-down / older property, renting it out for a number of years, then renovating/upgrading it right before you sell has been a very profitable strategy for homeowners who have some project management skill.
In the Bay Area, buying whatever property, doing nothing with it, and selling after a few years has been a very profitable strategy. Will it continue to be so from now on?
I thought it would tank in 2001, then again in 2008, and yet again in the current bubble. It seems like the environs get hit, but SF and SV itself seem to be immune.
Los Angeles (where we were) is a bit more volatile (ie it actually goes down now and then). If I had bought property in the Bay Area in, say, 1999-2000, I’m quite certain I’d be more willing to put up with tenant bullshit in exchange for nearly endless appreciation.
Have you sold any of the managed properties? That seems to be where problems arise. A fellow landlord friend ended up having to dump his property manager and bring in a REA who whipped the place into shape for sale.
8% is not bad if the goal is income properties. However I would invest in a multi unit property if I were going to be a landlord again. Less concern about one bad tenant potentially leading to foreclosure if you get crunched from all sides. (Which seems to be how it usually happens)
I don't understand this viewpoint at all. I own multiple properties and the only "work" I do is stuff that I like (minor repairs and renovations). I hire someone else to do all the stuff I don't like or don't have the skillset to do myself. I don't chase tenants down for missing checks because I only buy B class properties and I require all tenants to pass a background check, credit check, and to pay their rent via recurring direct deposit.
If having to fix a clogged toilet at midnight once a year is the sacrifice I have to make to retire early, so be it.
I think it's easy to understand that even though you enjoy responding to calls about fixing a leak at 10pm on a Tuesday that not everyone would. And for many it would be a significant drawback to owning property.
Over the course of 20 years, you will have modest years that seem pretty reasonable, and you will have ridiculous years that tip the whole balance negative.
My partner had been renting her house out for about 5 years with the usual annoyances, when the newest tenants left a cabinet on a cord that after a few months started an electrical fire that torched the place. No one was injured and it was (mostly) covered by insurance, but it was still 6+ months of dealing with all the claims and repairs and getting it back into shape. And to top it off, the tenants took her to small claims court for the security deposit! (They lost.)
I have a total of four rental units. In the past year, I've been called out to fix something three times. Each issue took about 15 minutes to resolve. I could have hired a handyman for these jobs but it was cheaper and quicker to do it myself.
Most people are afraid of rental properties because it's out of their comfort zone.
Working a W2 job, socking money away in a 401k, and retiring at 65 = normal, safe, responsible, respectable.
Working a W2 job, slowing accumulating rental properties, fixing a toilet once in a while, and retiring at 45 or younger = deviant, risky, naughty.
Here is the way I do it and it takes all the workload out of it.
I buy Home Warranty, not just for the purpose of reducing the cost, but the convenience, once something break, I don't have to find a proper contractor and do all the work. I just go their website, fill a form and put my tenant number in there. nothing else for me to do.
I haven't been to my property in 2 years(probably not the greatest idea though)
Tried that. Unless you have a lot of properties or can get one who is also an REA, they aren’t nearly as motivated as your more “proactive” tenants will demand.
And forget about evicting an unwieldy tenant on any reasonable schedule in California. I have friends who’ve been foreclosed upon while trying to get unpaid tenants evicted.
If you’re willing to do this as a second job, go for it! Personally I would (with the benefit of hindsight) invest in a multi-unit income property or a vacation home with rental potential if I were going to buy investment properties, but that’s just me.
I'll counter with a family anecdote. My sister and her husband own a rental home in the DC suburbs. It's within easy commute of the Pentagon and another army base. They've been able to rent exclusively to officers or senior enlisted. Price-wise, the army housing allowance is at the top of the market of the size/style of home (mid-sized 3-bed townhome). The tenants are mostly price insensitive - as long as the house is priced within their allowance and meets their needs. Their theory is a career military tenant more likely to be a good tenant than some random person. So far it's held true, but small sample size (10 years of rentals, 4 or 5 tenants).
Anyway, point being, this is like any other investment, you have to do the work up front to ensure the risk and payout are balanced. In their case, it was a no-brainer to keep the house when they moved into something larger. Almost zero chance of the home being unoccupied, better than average chance at a good tenant, etc. But, they're also financial well-off and could afford to keep a relatively expensive house in a nice area - obviously not an option for many in the middle-class.
A better way to estimate annual costs that includes the value of your time would be to look at the cost of hiring property managers. This gets you an apples to apples comparison with stocks/bonds.
You can also buy REITs on the stock market. More diversification, obligations for them to pay you dividend of 90% of net income, and 0 maintenance cost for you.
We’re big fans of Guesstimate, and chatted to those guys a fair bit about this! They’ve sadly stopped working on it but there’s a few differences:
- We’re moving away from a spreadsheet-y UI (e.g separate sections for inputs, model, output vs all homogenous cells/nodes). UI might seem like a trivial differentiator, but I think it significantly affects use-cases for the product.
- Guesstimate doesn’t handle certain things very well, like time dependent models, conditioning on variables, etc
- Building for enterprises requires certain bells and whistles (e.g integrations with data sources)
The first version of Causal won’t be a million miles away from Guesstimate, but the vision is to build a general tool that lets non technical people work seriously with data. Specifically, right now we’re working on letting models learn from data (“machine learning”) via Bayesian inference, and letting people build causal models.
Probability and random variables are a great unifying framework for dealing with data. We’re trying to make this more accessible, so there’s a lot to do beyond what the demo model shows :)
Hey HN, I’m one of the makers. Enjoying the discussion about buying to rent!
We’re building a tool to let anyone create models like this one — models that incorporate uncertainty in their variables and outputs. This is the kinda stuff people do in Excel right now, with much difficulty.
We’re working on a couple more demo models — let us know if you have any suggestions. And if this kind of tool resonates with you, then we’d love to chat — hi@causal.app. Thanks!
The bottom line isn't clear because there's too much information. I'm expecting a single number in 60-point font like "You'll save X amount of money by renting instead of buying". Some information can be hidden behind progressive disclosure.
Also, it's US-specific. Let me choose a currency, and format numbers accordingly, like "₹2 crore", not "$20m". In India, we use lacs and crores, not millions.
I also like that you're using Monte Carlo simulations. Though it would be good to augment that with real-world data from the user's country. If I'm in India, which Indian city has had the worst-case real-estate investment performance? The worst-case is useful information to consider when making an investment.
Hey! I'm a really big fan of this idea! Well done on tackling something really important.
I think the examples you've chosen are good but not great examples of where you can add significant value. A house being rented where there are a few variables and a good/better/best outcome is not especially gnarly Excel for the Hacker News audience. I think marketing and sales forecasts and stock option pricing and DCF might be more impactful, if more esoteric, in showing the power of what you're building.
BTW, it'd be cool to be able to anchor a variable to a historical base or average. So maybe if you have seven or eight forecasts of CAGR, Casual could accept 'citations' and in its output show a user of the model that this isn't totally speculative.
Love what you're doing and have signed up. Well done again.
You’re totally right that these aren’t the best examples to show the real value of the approach. We wanted to keep things super simple to start getting feedback, but are working on a more involved example now. DCF valuations and options pricing sound like great ideas – will look into them!
What do you mean re: citations? Validating Causal models using forecasts from other means?
In forecasting folks will often use external data. For example let's say you have six different estimates on the growth potential of a market from six external reports. It'd be cool to be able to specify that a range of assumptions have citations. At the moment folks do this using accompanying appendices to financial models, which is pretty gross.
To me, one of the advantages of representing the story in a probabilistic way, similar to how you have shown it, is that I am able to sell an idea to my audience.
If you are looking for use cases to build for a demo, in addition to DCF, as someone suggested before, you might want to consider currency movements and also IRR calculations.
One feature request, if I may, is the ability to manipulate the end result (time horizon in the demo of rent vs buy) and see how it impacts one of the features (rent, market return, etc).
Pension growth over time (and depletion after retirement), and investments in the stock market with compounding gains would be good ones to make. Also perhaps one predicting the probability of lottery wins over a lifetime?
I immediately signed up, as this is the kind of tool I could really use. There are a number of scenarios (especially financial ones) that involve uncertainty in my life, and I've been attacking them with spreadsheets and later Mathematica. But spreadsheets are too simple, and Mathematica is too cumbersome. Applying probabilistic programming tools is too complex: I would spend way too much time on details. So, this seems like just the right tool for the job.
Example scenario: should I pay off my mortgage, which is in a foreign currency?
just take the loan out of the equation. don't borrow money trying to make money. that's like having a margin account with etrade! You don't pay interest on a loan and use the money from that loan to buy stocks do you? Just saying, real estate is a fine thing to buy, with all cash! hashtag https://en.m.wikipedia.org/wiki/Dave_Ramsey
> don't borrow money trying to make money. that's like having a margin account with etrade! You don't pay interest on a loan and use the money from that loan to buy stocks do you?
The difference is that interest rates on margin accounts are far higher than they are on real-estate. A margin loan may be 8% or more. So you have to invest in something that grows faster than that to make any money. However real estate loans are 3-4%/year, and in addition they generate rental revenue which is also roughly 3-5%/year.
Taking out a loan on real-estate makes far more sense than taking out a margin loan.
> Just saying, real estate is a fine thing to buy, with all cash!
The model clearly proves you wrong (even though it's not very realistic in general). If you have cash lying around, you're better off investing in the stock market, or buying houses with loans anyway (just more of them).
I've been thinking about buying a house recently (I am in a ultra-fast growing area Nashville, TN) but not sure the risks and frankly annual returns can beat the stock market (specifically S&P $SPY). S&P average annual returns are 8%, it seems unlikely to beat that long term with real-estate.
If you’re buying a house to live in and you plan on living there for awhile, buying a house, especially in a fast growing area should be considered an inflation hedge.
We moved into a three bedroom apartment (1652 square feet) in 2012 and we were paying $1200 a month. When we left in 2016, rent was $1700. Now rent is $1925.
Our mortgage three exits up is less than $2100 for a 3000 square foot house. Besides slight changes in property taxes and insurance, our house payments are not going to increase. This is in the suburbs of Atlanta.
True but if you need to replace the roof tomorrow you suddenly have an unexpected expense of $20K+.
But in general I agree with your point. Buying a place is about stability and control. Especially no one can kick you out as long as you make your payments. I don't think it's a better investment option out there but it's safer for most people than investing in things they don't understand. And if you happen to buy a place in an area that is booming in the next few years then it can really be worth it. But that's the same like buying early a stock of a company that makes it big.
I wouldn’t go that far. If that place is “booming” likely so is all the other places that are similar that you would like to live. Unless you sell and move to a much lower cost of living area, the equity in your house doesn’t help you.
If you go by the popularly accepted rule of thumb, you should put 1% of your house’s value in savings for unexpected home repairs per year. Feels a little high to me.
This is not about buying or renting, it's about an alternative to Spreadsheet for model building. But not much info on the process itself.. can creators expand on this.
Haha yes — glad that came across :) It's still very early days for the product, but the basic "building block" for models will be these nodes that you see on the demo. They can be fixed constants, inputs, functions of other nodes, etc. You can create these nodes and define how they related to one-another — this is the "model". Then you can decide what kind of outputs you care about and how you want to show them.
Probably sounds quite abstract! If you leave your email on the site then I'll drop you a line as soon as we're ready to show the product :)
And you think if everybody would buy their own houses, that wouldn't be the case? Like the poor artists who made Berlin famous, who thrived when there was an endless supply of living space (because of the wall and other issues), they would just have bought their own places and gentrification would have been staved off forever?
Are you sure it is not the other way round: increasing attractiveness of the city (change of character) has lead to increased housing costs?
70% of Germans rent. Any increase in rents is broadly felt, especially compared to America, where most political power in most cities resides with homeowners (~63% of the population).
Increases in rent are driven more by people wanting to rent in a given area (typically driven by jobs) than by an owner or landlord selling a house to a different landlord. Rental demand is much more variable over time than the change in supply from marginal landlords buying existing properties.
If prices are rising, people are crying because they are not home owners. If they are falling, people are crying because they are homeowners. Weren't a lot of people in the US screwed when the last housing bubble burst (2008)?
I'm struggling to understand what "Atlas shrugged" means in the context of your statement. I understand the term in the context of the story, as well as in the context of Rand's philosophy. But what could it possibly mean here?
If you think houses are a good investment, buy them. Even the poor can get a loan from the bank and do it.
The reality is probably that it is an investment like any other, with risks. People who buy houses to let take that risk and provide people with living space to rent. Which has advantages as well as disadvantages.
I think you can start with buying smaller things first, and build up from that. Like buying something for 100000$. Then you don't need as big of a loan.
Also, isn't that an argument for providing housing to rent. If poor people can't afford to buy houses, where would they live, if there weren't houses to rent?
I think we have very different definitions of poor. $100k with a LTV of 10% means savings of $10k (besides the other fees of buying a place). Poor people don't have that.
A quick Google showed that the median savings account balance across American households is $4,830. And when you have a median that's considerably lower than the average, it means that the poor people are doing worse. The likelihood is they're in debt.
And as an aside, seeing as this is the UK, $100k wouldn't buy a house in an area that is desirable or has jobs, so you'd struggle to live there or rent it out.
How many people are poor like that? And the amount of money they hold seems a poor indicator, too. People who have paid off half their million dollar house, and have an income of 20k/month would count as poor.
If the average household has 5k in savings, pool with your parents to get to 10k.
Or take on some night time job once per week, to earn an extra 400$ per month, and save for 2 years.
And you don't have to buy a whole house, a small flat can be a sufficient start.
I have to say I have never done this, but I was recently in talks with people who propose doing that and help people who do it. It sounded plausible - why not? You can buy a rented flat (that already has tenants who pay rent). So the numbers are pretty much clear.
They told me the bank doesn't count the rent as your income, though. That is the catch. So for your first investment like that, you have to be creditworthy on your own. However, after a while you can build trust with the bank (they see the rent from the tenants keeps coming on a regular basis), and get more credit. Then you can start the next project.
You don't have to invest in a desirable area, as you don't want to live there yourself.
Nevertheless, I am still not convinced it is for me. I worry too much about bad tenants, things breaking on the property and so on. I have almost no knowledge about housing properties (like to how do you recognize damage to the property before buying it, how much do repairs cost, and so on).
My experience is that it is a significant percentage (i.e. more than 10%)... And about your point about home owners being poor - not everybody owns their own home (stats show it's about 2/3rds). I just don't see BTL as realistic for people struggling to make ends meet.
I said the metric of "money held in the bank" would count many home owners as poor, even if they own a house that is worth 1 million dollars. Not that they are actually poor - that is the point. The metric may not be very useful.
It is different. Corporations can then go and list their holdings as a REIT on a Stock Exchange, thus allowing the general public to benefit from their arrangement. When private ownership is renting housing, you have either Banks (in the case of servicing debt) or individuals profiting at the expense of the general public.
Renting homes is not causing social and economic problems.
Technology and efficiencies of scale obviating many jobs and concentrating them in small regions, causing an increase in demand without a correspondingly large enough increase in supply of housing is causing social and economic problems.
The solution to pricing problems is adjusting the demand or the supply curves.
You can only "leverage" that against those that don't because of excess demand versus supply. If there were many regions with good income security and upward potential, then it would bring rents down to levels at which owning vs renting wouldn't be so lopsided.
The other side of this coin is also the lack of income (or sufficient income), due to the reduced value of human labor due to the aforementioned automation and also the 3 billion other people in the world wanting to share in the dream of having the luxuries of the developed nations.
My point is that offering a residence for rent isn't inherently bad, and that attacking that isn't going to solve anything. Although, I think there are other problems caused by private ownership of land.
I’m not disparaging people looking out for themselves.
However, renting out an asset (which generally isn’t depreciating) is only going to increase the inequity between the renter and the landlord. If their relationship is based entirely on who can afford a deposit then I don’t see what excess of demand and supply has to do with it.
If you’re talking about building so many houses that they loose their value as a commodity entirely, the problem there is an entire generation who have staked their pensions on property.
Hold up, I thought Atlas referred to the rich people that made their money by building up industries, and that their shrugging was them "dropping the mantle" because they were getting taxed to death?
I haven't read that book in a while, but it really feels like you're misconstruing this.
It seems the simulation just gives the upper bound and lower bound based on the input ranges. A spreadsheet model can do the same thing by running the model with different input ranges. In fact, that's what a spreadsheet model is for, trying different input to run what-if scenarios.
On the rental investment example itself, it would really help to have a finance person to go over the model. A rental investment needs to be modeled like running a business, not like buying a house to live. Its analysis is usually done using net operating income, CAP rate, cashflow, ROI, and IRR.
BTW there's no magic 1% to 4% annual appreciation in rental investment. Appreciation is purely based on increasing net operating income faster than market rate, or in simpler term improving CAP vs the market CAP rate. Let's say you buy a property with 4% CAP rate and the market CAP rate is 4% now. 10 years from now your NOI still produces the same 4% CAP but the market CAP rate has risen to 6%, your property will depreciate! Market CAP rate is affected by different things that're out of your control and it's hard to model.
For a single property it usually won't be worth it. But if you can build a portfolio of properties in a reasonably small geographic area, then you can gain economic scale benefits (which especially will allow you to outsource more of the management/maintenance).
Of course, you need a good source of credit or great people skills to get that started (or wealthy parents to loan you a million or so).
Four percent and higher residential real estate appreciation over that long of a period without massive inflation is mind boggling. I don't think I make that investment just because if it is successful, the inequality in society at the end of the loan is soul crushing.
I don’t know of any country that does this, but it’s not completely unreasonable for all tenants to be accumulating equity in their residence, so that living in the same place continuously for a long time will eventually result in them owning it.
The future of housing IMHO. Equity based rental models, modeled on REITs. You earn shares in the operation as you pay rent, eventually owning your share of the house in a time period that is similar to a traditional mortgage. End the inflation of the monetary base caused by property speculation. As time progresses, and larger housing loans from Banks is required, we are being robbed of our savings.
What’s in it for the landlord? They’d only agree to this scheme if they get a lot more rent, perhaps double. Also no bank would loan to the landlord for such an arrangement. Governments could provide such a scheme if they are the builder.
Any data supporting the appreciation of 4% a year?
This seems socially much more acceptable to taking a loan and then invest the money in stocks for example, but to me is not that different.
True the volatility is much lower, but so is the liquidity if you have to dispose of the propery in a short time due to life circumstances.
If this is a single property and plan is to be the bulk of one's net worth it seems risky to me.
Then there's the "dealing with tenants" variable which can be none to a ton of work/hassle.
REITs are imho an interesting way to get rental income with less hassle and much more diversification if you can stomach the stock price moving up and down.
Hey, I really like the app and have signed up. One thing I would add is multi- family units. Even better would be the concept of "house hacking" or buying a multi-family and moving into one of the units. This may just be a US thing, but this allows you to have a low down payment and cash flow and live for free. This is a pretty popular thing to do in the US, and I haven't seen any tools that account for it. I am currently doing this and use excel for all my calculations.
Also, maybe add a remodel calculator, I. E. If I do a remodel for 10,000 and the rent goes up by 500 my yoy roi is like 60%. This number goes up even more of you get a loan and use leverage.
Hey, sorry for the confusion. The rent you set is at year 0, and your rent increases each year according to "Annual Appreciation" (in reality this isn't quite what goes on!). The "net monthly earnings" in the output section tells you the numbers for the year you selected, so if you're looking 10 years down the line then the rent number will be significantly more than what you set it to be.
This is pretty opaque and we should have explained where the numbers were coming from. Had intended to add a tooltip there explaining this but looks like we forgot!
247 comments
[ 0.20 ms ] story [ 229 ms ] threadOne thing that feels like a serious oversight though is that it isn't factoring in taxes. Rental income is taxable income. If you depreciate the property to avoid or reduce your taxable income you'll end up taking a big hit on the eventual sale as it will all be capital gains.
Another issue I'd take with this is that it's a lot smarter to focus on cashflow then gross income because odds are you aren't going to last 30 years to watch your net worth grow if you are losing cash on a monthly basis, even if you are technically building equity.
I'm currently getting out of being a landlord because while it was overall profitable, the margins are alot tighter after factoring in taxes and it's also a massive headache. That income certainly does not feel passive.
Yeah you're totally right about taxes — it does make a big difference. We had to make simplifications somewhere, and taxes are quite country-specific so we didn't want to be too prescriptive. We hoped you could increase "Annual Costs" as a very rough proxy for taxes.
Cashflow is a really good point, and something we hadn't considered much. You can get a rough idea of cashflow in the "Net monthly earnings" section of the output, but it probably deserves more focus for sure.
Operational headache is interesting to account for haha — we'll add these things to the model explanation :)
Anything that draws attention to that field, as 1% doesn’t draw attention.
In my case, taxes are roughly 2.5% alone. Then while a given year maintenance doesn’t feel like 5%, over 30 years you have to peanut butter the big expenses such as roof replacement, or kitchen renovation, and those really do add up.
By and large, all fields should be a bit pessimistic, let people bias them back down, or simply add a “risk” field that can fold in pessimistic outliers into the simulations.
Given you're positioning this app and article as a means to answer the question on buying a home and renting it out, you should disclose these items (liabilities) to the reader and let them figure out the scenario for their local market, rather than hoping for the reader to do something.
Property tax is a large expense, and insurance is also a required expense if you have a mortgage (in the US). Finally, income you generate from the house (Rental Income) is taxed at your effective tax rate, and this will be a Large Liability at the end of each year.
Although there may be deductions you can take to minimize some of the expenses (in the US), you will be required to pay taxes on the income you generate and I suspect that's the case across all countries.
Surely it depends on your aims? If its your pension you may not mind adding money in every month, as long as you get that lump sum/ steady income at the end.
For example, I was able to easily craft a model where my expected monthly income was negative. (Just bump the expected annual costs to 2.0%, which is actually more realistic since 1.0% = tax and 1.0% = maintenance.)
Surely the couple hundred dollars a month could also be continuously invested and producing returns if they weren’t being driven into the real estate asset.
We did kinda assume that the buyer would set the rent to at least cover her ongoing costs. In the UK, for example, you can only get a “buy to let” mortgage if you can prove that you can reasonably charge enough rent to cover your mortgage payments.
You’re totally right about reinvesting the earnings into stocks etc — we excluded this in the model to simplify things and not be too prescriptive. But if I were thinking of doing this, I’d definitely want to take that into account :)
There are _lots_ of people owning to rent that don’t cover their actual carrying costs. They just justify it by thinking about the equity growth.
In fact, even the default example has negative carry costs. The initial interest on $480k plus $6k isn’t covered by $2k monthly rent, let alone principle payments and a more realistic maintenance amount.
My takeaway: bubbles rule. As long as you're in a region eating the rest of the world, owning property will let you share in that windfall. As soon as that economic engine sputters, they will be ruined, and so will you. Better watch for that next big thing, and then hop on something else once it's no longer the next big thing.
Also, it seems wrong to assume 4% annual appreciation of an asset whose discounted cash flows are negative. At some point that gets unsustainable, and nobody will bother to buy the asset.
It's not just home appreciation, it's down also the down payment.
Say the housing market increases at 5%/year. If you buy a house in all cash, you will get 5% returns.
However, if you use that same money for a 20% down-payment to take out a loan (say 3% interest) to buy a house that's 5X more expensive, your returns will be 13%/year (=5% * 5X leverage - 3% interest on 4X of the cost). Huge difference.
Of course, these are fake numbers, and fail to account for a variety of other factors (taxes, closing costs, maintenance, etc.). However, the point is that housing market increase is not at all the full story.
Although if all the net worth was due to house price appreciation, stock options don't seem to be making up much of net worth, or weren't included, either of which seems to undermine your argument?
Another point in actual real estate proformas is expected vacancy and leasing costs. Ie. you will have tenants leave and when you do it isn’t always easy or fast to find good tenants to replace them.
There’s also the significant consideration of transaction costs missing. Conservatively you should budget 8% to sell and 4% to buy.
The asset is also highly illiquid compared to stocks, and also has ups and downs just like the stock market but in slow motion. If you happen to want to cash out your equity during a downturn it can be years before you get back to where you’d be with your “long term expected appreciation.”
And one last bit: since a house isn’t fungible you need to accumulate the entire downpayment all at once, and to liquidate you must sell it all at once, whereas stocks you can accumulate and release incrementally.
TLDR; this model makes it look a lot more attractive than it really is to be a single-property landlord.
Be a part of the solution and build something. Do not be a part of the problem and become a landlord.
Well, presumably he built something, and then exchanged that something for a home - the exact sequance being:
1. Do some work for someone.
2. Get paid money for results of that work.
3. Use that money to buy a house.
No, that's not the literal definition of "rent-seeking", not even close. I really wish this term had a different name because I see people on HN misusing it on a daily basis. "rent-seeking" is a specific term in economics that refers to entities colluding with the government to distort the market in their favor. The taxi medallion system is a classic example of rent-seeking. Owning property and leasing it out, whether it's land, vehicles, apartments, or machinery, is NOT rent-seeking.
> Be a part of the solution and build something. Do not be a part of the problem and become a landlord.
Would you prefer a world in which people are not allowed to rent apartments?
> The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. [1]
https://en.wikipedia.org/wiki/Rent-seeking
I find this mis-use of the term a useful and unambiguous signal that the commenter is not fully versed on the topic. (cf. https://news.ycombinator.com/item?id=19707924 )
> The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. [1]
https://en.wikipedia.org/wiki/Rent-seeking
If you dig a canal and charge for passage, that is equivalent to renting a house (and is not "rent seeking" either per economics/public policy discussion).
Most landlords simply purchase, or very often inherit, their property, not unlike feudal lords, and then charge rent to live there. We are drawing some very small lines to separate those two.
I should add that I consider it much different if someone builds a structure and then rents it out. I, and most, would not consider that rend seeking, as they created new value in the creation of the house. Simply purchasing land and then renting it out, creates no new value.
Normal investments, stocks, bonds, etc help to create value in that the things they support need capital to be built. Land itself, will exist with or without capital resources. So the things that make capital markets work, do not apply to land.
The guy who was elected head of our ownership organisation/community (might be a danish construct) bought two apartments when he moved in. He did have $150,000 to make both loans not-bank loans (again this might be a Danish thing, but we have special loan institutions that cover 70-80% of personal house loans at really low rates). Anyway, the one he rents out pays for both loans, taxes and added expenses and after 20 years those loans will both be paid out.
It’s really kind of silly how easy life can be if you start out with a little money and use them wisely.
Could you clarify? Is it a comment on the randomness of life? Because at the moment it doesn't read like that at all.
I owned a student home which I bought from partly smart and mostly lucky stock investing (I had savings from strawberry picking (yes, really; that made money faster than coding in those days for me) and I put it on Borland before 2000; they went up big time, I sold at the right time and student me could buy a house suddenly); it was in a city with high student housing prices and it was a really good house for it; it was big and could house 8 (to 16 if pairs) students paying 8*400 euros/mo. It was not easy money though; I lived there too for a while and the constant maintenance drove me up the wall. I am (always was) mostly someone who lives in his head and thinking about code and leaking toilets, pipes, flooding etc really is something I cannot deal with. So I sold it after 4 years of getting stressed.
I definitely wouldn't do real estate again; I like virtual assets and the stock market & starting + selling companies treated me a lot better than real estate ever can do. Without the worries of brick & mortar.
That's more dots than I'm willing to connect from one passing comment from someone whose first language I don't think is English, so I'm asking for clarification.
So as a neutral statement of fact no it isn't either ideology. Its the opinion that goes with it.
The guy I mentioned is 30, and in 20 years when both apartments are paid out, he’ll be a multimillionaire (in Danish kroner), as well as having a passive monthly income that exceeds most lower class jobs. Just by having some starting capital from his rich parents.
I’m not particularly against having rich parents helping you, but because real estate taxes are so low and prices so high, it’s just extremely hard to catch up if you don’t, and I think that’s unhealthy for society in general.
There are great opportunities to set yourself up for life, but many of those require a chunk of money to begin with.
In my country the rental yields are about 6% and interest rates on commercial loans about 3.5%, and you can get commercial loans financed to about 70%.
In other words, with 300k down you can invest $1m. You gain about $60k a year. You pay about 25k.
The remaining $35k you use to maintain and, if you want, pay down the loan.
Average 3% long-term price inflation after 30 years means your asset grew in nominal terms by 2.5x, while your debt didn't inflate. So even if you never paid down debt but only paid the interest, you could still sell the asset for $2.5m and pay back the $700k you borrowed, leaving you with about $1.8m. The present value of that would still be double what you started with.
Of course, the $60k annual rent inflates, too. After 30 years it's about $145k. And of course, your interest of $25k doesn't inflate.
In other words, suppose you inherit this like my friends at age 20. You make an investment. By the time you're 50 years old, you've got a $2m retirement fund that cashflows >$100k a year. Yes, in nominal terms, but it's still a pretty sweet deal.
And don't forget, that is without ever paying down debt. Over the course of the 30 years, you cashflow $1-2m. If you actually use that to pay down debt and keep reinvesting the money, you'll end up quite rich.
To put the initial investment in perspective, if you get a 6% rental yield, a modest 3% appreciation, you get 9% total gross returns on $1m. You pay about 1% in costs on the $1m, and 3.5% in interest on the $0.7m, or about 3.5%. In short, you net about 5.5% on the $1m, or $55k, but you only invested $300k. So you're looking at a leveraged return of about 18% on your cash.
Suppose instead you have more modest assumptions, say 15%. If you take $300k for 30 years at that rate, you're looking at $20m, and a multi-million dollar income.
Hell even if you put it in the stock market, inflation-adjusted, at 7%, you're still looking at >2m by age 50, at which point you're looking at a >150k income, inflation-adjusted. Just from inheritance.
In other words, this person never has to save. He can spend every dime he earns, and still retire decades before most Americans. Or he could take that money and enjoy a far greater lifestyle, doubling a normal person's salary for the rest of his life and spend that, too.
And $300k isn't even an amount where you'd say 'damn, his parents were filthy rich'. It's the kind of money that a lot of upper-middle class people will inherit, when their parents pass away and leave them and their sibling a $500k paid off house, some stocks and some cash.
I've got a lot of my friends who go through life on such an easy-mode, while others literally have $300 in the bank, go into lots of college debt, and are struggling their way through life. The difference is pretty huge.
Inheriting a bunch of money and making basic smart decisions with it, is like a super generous form of welfare. Like playing the Sims with a $2k a month bonus-salary cheat, which grows into a $4k a month cheat and eventually a -20 year retirement cheat.
And I know because I grew up poor and got such a small cheat a little later in life myself, approaching 30 years old. I was already doing well and 'getting there', but the cheat made everything so much easier. It's kind of sad because as much as I respect the idea of building something, and passing it on to your children (inheritance)... it generates a society that's the opposite of a meritocracy and is dictated to a very large (inordinate) degree according to a socioeconomic birth lottery if you ask me.
Excuse the rant!
Well, at least in København there are so many rules that it is hard to navigate even as a tenant.
Looking at the model I guess the nearest factor is Annual Costs (maintenance). But it doesn't feel properly measured.
I note that for someone on Hacker News, it needs charging at the day rate for a programmer. Or even as an opportunity cost - charging with a risk-based possibility of the reward of starting a successful technology startup. Or of spending more time with family or in sunlight, amongst trees. At peace.
Historically house prices have risen enormously and a whole lot of people have made money, so everyone believes this will continue forever despite a huge political movement behind building more houses and other (good) policies that will reduce prices. On the linked page I typed in "-20%" into the annual appreciation field and lost $717,000.
You know the same thing applies to stocks and shares. And in fact stocks and shares have risen more historically [1]
Shares also have liquidity, you can easily sell them in part or whole. You can diversify. One incident could easily destroy a house, if it destroys your well diversified stock investments you've probably got other problems.
So agreed the stock market is the better investment, but as we can't see the future, both are based on past performance. Yes there are headwinds, there always are, I can think of many many reasons why stocks could fall, that doesn't really change what has happened historically though.
Of course the beauty of investing is that if you disagree you can put your money where your mouth is :)
[1] https://www.investopedia.com/ask/answers/052015/which-has-pe...
buying a house to live is not an investment, and i should think that people ought not to treat it as such. Buying a house gives you stability and security for shelter. It's quite possible that renting is cheaper, but you also can't do certain things while renting - such as small renovations (some places don't even let you nail a painting on to the wall).
Investments in real estate is a different ballgame to buying your home.
That said, buying a house is basically buying an index linked annuity that covers your rent on a property you have to maintain. So it is an investment, albeit one tied up with a lot of other baggage.
I'm happier living in a house than an apartment but my house is a place to live, and an item of value, but not an investment I expect to make profit from.
(according to random site on the internet, it's a little below inflation: https://www.in2013dollars.com/2002-dollars-in-2018?amount=30... )
Interestingly though 30% of people buying houses now in the UK are not getting mortgages (in some areas much more than that [1]) and I assume most of these will be the types of investors who are looking to buy a second home to rent out.
[1] https://www.thisismoney.co.uk/money/mortgageshome/article-63...
Borrowing to buy a house at 4.5% you might think, "Not much risk, will likely appreciate faster." Borrowing to buy stocks at 10% and you're almost certainly not going to come out ahead.
(Maybe my broker has terrible rates, others could be more reasonable.)
Though maybe LEAPS (and for indexes, futures) are a still cheaper way to get leverage.
Edit: goodness, the rates on some of those currencies is less than the dividend yield of those countries' indexes... If I don't expect New Zealand to sink into the sea, is it stupid not to borrow NZD and invest in the NZ top 50?
IIRC, last time I looked at margin out of curiosity with my brokerage firm (schwabs/2014), I also remember to be around 10%.
I can’t help but think we are living in a unattainable economic environment...
My subjetive experience in the USA (Seattle and NYC) is that you can get 4-5% with a steady job and 20% down for primary residence. Anything out of ordinary, like 2nd mortgage (since we are talking about real state as investment), the interest rate goes up (6-7% last time I applied for one).
Also, while the margin rates can be higher, there is more liquidity, smaller transaction costs, and much smaller fees.
Transaction costs are a big one. In some countries there's stamp duty, in the US there are unusually high closing costs (6%?). That said, the bigger the investment the longer I want to hold it, and those transaction fees aren't as steep when amortised over the home-onwership term.
Which kind are you talking about? I'd be surprised if the discrepancy between countries was as large as 6% to 15% for the same contract.
I don't want to belittle the $500, but if we had good tenants and dealt with them directly we'd be getting double that.
Now is an extra grand a month worth the hassle with GOOD tenants? Maybe. But all it takes is one bad one to be in the hole and full of stress.
1 - It does not imply that much work. Not even close. For instance, my uncle and aunt rented a flat for 6 years to the same family, and in that time my uncle had to go there about 1-2 times for minor problems, and I don't think it's an exception. There is a bit of work at the time of finding new tenants, but in the case of the people I know, it's like an average of 4 hours of work a year at the very, very most.
2 - (and most importantly): middle class people who invest in real estate are keen on having a rent. Stocks don't necessarily give you that. They see buying a house and renting it out as a way of having a monthly recurrent source of income.
https://fred.stlouisfed.org/series/ERENTUSQ176N
https://fred.stlouisfed.org/series/CUURA422SEHA
(Look at what happens after the dot-com boom.)
https://fred.stlouisfed.org/series/HOUST?utm_source=series_p...
Also it's not only about work, but cost of maintenance.
The only people who ask this question are people who haven’t been landlords. Every single one of my friends who has, can commiserate with me as a former landlord.
Maybe buy a vacation home to rent, or an apartment complex. And of course being a part- or full-time landlord is a perfectly reasonable job.
But if you think that being a landlord just means having someone else pay your mortgage, I guarantee you will think differently after a year with even exemplary tenants. And most tenants are far from exemplary.
(still shaking head)
The obvious downside is you'll never get any ROI beyond having a place to live like you may with property ownership. Homes are great when you have financial stability and freedom but can become a big shackle if you don't.
X% of tenants are reasonable and handle the repairs they are contractually required to handle smoothly.
(1-X)% of tenants are a massive headache, and call the landlord for every lightbulb that needs changing, threaten to sue you all the time, smash your property to pieces etc etc.
Compute the expected value, and compare with other forms of investment. In my experience, renting out a single property is not worth the expected reward, vis-a-vis other forms of investment. This changes if you can reap economies of scale from renting out multiple properties. (Cut-off point depends on ambient legal system, tax, your own background (e.g. if you are a lawyer, you can handle legal disputes yourself) etc.)
Excellent exposition!
You mean (100-X)% ?
Therefore rental price to purchase price ratios have historically been lower, as well as home ownership rates. Rents in desirable cities are going up faster than they had been, though, and Berlin has quickly gone from being one of the cheapest cities in the country to one of the most expensive.
Of course the best is to make it clear at the moment you rent, not when the issue arise.
Edit: I find it insane that most people in the US don’t see the advantages of renting. When you rent here, your housing cost is fixed for at least a year. Anything breaks, you call the landlord or leasing office and it gets fixed at zero cost to you.
I really miss renting. Now that I own a condo, I keep having to deal with unexpected expenses - fridge breaks, something comes off the drywall, microwave breaks, plumbing issues, etc. Plus, I don’t have the option anymore of moving closer to my kid’s school when she transitions to middle and high school (and those are quite far compared to her elementary school). I mean, I do, but selling a place and buying a new one is a monumental hassle compared to switching apartment leases.
I would go back to renting if I could.
8% off the top depending on your particular scenario could get you pretty close to the same net returns at the end of the day. If you went with a few REITs, management would take maybe a few hours a month even for a massive portfolio. This also has the benefit of being much more diversified than a single investor directly owning various properties could possibly manage.
Granted, using REITs is a tradeoff in granularity of asset allocation and potential upside, so there is always that zone of opportunity to exploit. It just takes a delicate evaluation of the value of your time vs the opportunity itself relative to other competing strategies.
Because REITs don't allow you to invest in one house via improvements at your discretion.
At least in the Bay Area, buying a somewhat run-down / older property, renting it out for a number of years, then renovating/upgrading it right before you sell has been a very profitable strategy for homeowners who have some project management skill.
Los Angeles (where we were) is a bit more volatile (ie it actually goes down now and then). If I had bought property in the Bay Area in, say, 1999-2000, I’m quite certain I’d be more willing to put up with tenant bullshit in exchange for nearly endless appreciation.
YMMV!
8% is not bad if the goal is income properties. However I would invest in a multi unit property if I were going to be a landlord again. Less concern about one bad tenant potentially leading to foreclosure if you get crunched from all sides. (Which seems to be how it usually happens)
If having to fix a clogged toilet at midnight once a year is the sacrifice I have to make to retire early, so be it.
I've been thinking a lot about buy an investment property, but the mixed workload reviews makes me hesitant
My partner had been renting her house out for about 5 years with the usual annoyances, when the newest tenants left a cabinet on a cord that after a few months started an electrical fire that torched the place. No one was injured and it was (mostly) covered by insurance, but it was still 6+ months of dealing with all the claims and repairs and getting it back into shape. And to top it off, the tenants took her to small claims court for the security deposit! (They lost.)
Most people are afraid of rental properties because it's out of their comfort zone.
Working a W2 job, socking money away in a 401k, and retiring at 65 = normal, safe, responsible, respectable.
Working a W2 job, slowing accumulating rental properties, fixing a toilet once in a while, and retiring at 45 or younger = deviant, risky, naughty.
I haven't been to my property in 2 years(probably not the greatest idea though)
And forget about evicting an unwieldy tenant on any reasonable schedule in California. I have friends who’ve been foreclosed upon while trying to get unpaid tenants evicted.
If you’re willing to do this as a second job, go for it! Personally I would (with the benefit of hindsight) invest in a multi-unit income property or a vacation home with rental potential if I were going to buy investment properties, but that’s just me.
Anyway, point being, this is like any other investment, you have to do the work up front to ensure the risk and payout are balanced. In their case, it was a no-brainer to keep the house when they moved into something larger. Almost zero chance of the home being unoccupied, better than average chance at a good tenant, etc. But, they're also financial well-off and could afford to keep a relatively expensive house in a nice area - obviously not an option for many in the middle-class.
The tool looks like a copy of getguesstimate.com. What's new or different?
- We’re moving away from a spreadsheet-y UI (e.g separate sections for inputs, model, output vs all homogenous cells/nodes). UI might seem like a trivial differentiator, but I think it significantly affects use-cases for the product. - Guesstimate doesn’t handle certain things very well, like time dependent models, conditioning on variables, etc - Building for enterprises requires certain bells and whistles (e.g integrations with data sources)
The first version of Causal won’t be a million miles away from Guesstimate, but the vision is to build a general tool that lets non technical people work seriously with data. Specifically, right now we’re working on letting models learn from data (“machine learning”) via Bayesian inference, and letting people build causal models.
Probability and random variables are a great unifying framework for dealing with data. We’re trying to make this more accessible, so there’s a lot to do beyond what the demo model shows :)
We’re building a tool to let anyone create models like this one — models that incorporate uncertainty in their variables and outputs. This is the kinda stuff people do in Excel right now, with much difficulty.
We’re working on a couple more demo models — let us know if you have any suggestions. And if this kind of tool resonates with you, then we’d love to chat — hi@causal.app. Thanks!
The bottom line isn't clear because there's too much information. I'm expecting a single number in 60-point font like "You'll save X amount of money by renting instead of buying". Some information can be hidden behind progressive disclosure.
Also, it's US-specific. Let me choose a currency, and format numbers accordingly, like "₹2 crore", not "$20m". In India, we use lacs and crores, not millions.
I also like that you're using Monte Carlo simulations. Though it would be good to augment that with real-world data from the user's country. If I'm in India, which Indian city has had the worst-case real-estate investment performance? The worst-case is useful information to consider when making an investment.
I think the examples you've chosen are good but not great examples of where you can add significant value. A house being rented where there are a few variables and a good/better/best outcome is not especially gnarly Excel for the Hacker News audience. I think marketing and sales forecasts and stock option pricing and DCF might be more impactful, if more esoteric, in showing the power of what you're building.
BTW, it'd be cool to be able to anchor a variable to a historical base or average. So maybe if you have seven or eight forecasts of CAGR, Casual could accept 'citations' and in its output show a user of the model that this isn't totally speculative.
Love what you're doing and have signed up. Well done again.
You’re totally right that these aren’t the best examples to show the real value of the approach. We wanted to keep things super simple to start getting feedback, but are working on a more involved example now. DCF valuations and options pricing sound like great ideas – will look into them!
What do you mean re: citations? Validating Causal models using forecasts from other means?
To me, one of the advantages of representing the story in a probabilistic way, similar to how you have shown it, is that I am able to sell an idea to my audience.
If you are looking for use cases to build for a demo, in addition to DCF, as someone suggested before, you might want to consider currency movements and also IRR calculations.
One feature request, if I may, is the ability to manipulate the end result (time horizon in the demo of rent vs buy) and see how it impacts one of the features (rent, market return, etc).
All the best and glad to discuss.
Signed up, curious to see how the sausage is made.
Example scenario: should I pay off my mortgage, which is in a foreign currency?
Only the 1% have the free cash to just buy upfront, outside of events like inheritance or pension maturity.
The difference is that interest rates on margin accounts are far higher than they are on real-estate. A margin loan may be 8% or more. So you have to invest in something that grows faster than that to make any money. However real estate loans are 3-4%/year, and in addition they generate rental revenue which is also roughly 3-5%/year.
Taking out a loan on real-estate makes far more sense than taking out a margin loan.
The model clearly proves you wrong (even though it's not very realistic in general). If you have cash lying around, you're better off investing in the stock market, or buying houses with loans anyway (just more of them).
We moved into a three bedroom apartment (1652 square feet) in 2012 and we were paying $1200 a month. When we left in 2016, rent was $1700. Now rent is $1925.
Our mortgage three exits up is less than $2100 for a 3000 square foot house. Besides slight changes in property taxes and insurance, our house payments are not going to increase. This is in the suburbs of Atlanta.
But in general I agree with your point. Buying a place is about stability and control. Especially no one can kick you out as long as you make your payments. I don't think it's a better investment option out there but it's safer for most people than investing in things they don't understand. And if you happen to buy a place in an area that is booming in the next few years then it can really be worth it. But that's the same like buying early a stock of a company that makes it big.
If you go by the popularly accepted rule of thumb, you should put 1% of your house’s value in savings for unexpected home repairs per year. Feels a little high to me.
Probably sounds quite abstract! If you leave your email on the site then I'll drop you a line as soon as we're ready to show the product :)
Buy-to-let is causing immense social and economic problems in the UK.
It's a nice way for the rich to tax the poor.
Atlas shrugged.
Are you sure it is not the other way round: increasing attractiveness of the city (change of character) has lead to increased housing costs?
https://www.bloomberg.com/news/articles/2019-04-13/berlin-ho...
The reality is probably that it is an investment like any other, with risks. People who buy houses to let take that risk and provide people with living space to rent. Which has advantages as well as disadvantages.
You usually need a deposit for a loan. Poor people generally don't have huge amounts of savings.
Also, isn't that an argument for providing housing to rent. If poor people can't afford to buy houses, where would they live, if there weren't houses to rent?
A quick Google showed that the median savings account balance across American households is $4,830. And when you have a median that's considerably lower than the average, it means that the poor people are doing worse. The likelihood is they're in debt.
And as an aside, seeing as this is the UK, $100k wouldn't buy a house in an area that is desirable or has jobs, so you'd struggle to live there or rent it out.
If the average household has 5k in savings, pool with your parents to get to 10k.
Or take on some night time job once per week, to earn an extra 400$ per month, and save for 2 years.
And you don't have to buy a whole house, a small flat can be a sufficient start.
I have to say I have never done this, but I was recently in talks with people who propose doing that and help people who do it. It sounded plausible - why not? You can buy a rented flat (that already has tenants who pay rent). So the numbers are pretty much clear.
They told me the bank doesn't count the rent as your income, though. That is the catch. So for your first investment like that, you have to be creditworthy on your own. However, after a while you can build trust with the bank (they see the rent from the tenants keeps coming on a regular basis), and get more credit. Then you can start the next project.
You don't have to invest in a desirable area, as you don't want to live there yourself.
Nevertheless, I am still not convinced it is for me. I worry too much about bad tenants, things breaking on the property and so on. I have almost no knowledge about housing properties (like to how do you recognize damage to the property before buying it, how much do repairs cost, and so on).
My experience is that it is a significant percentage (i.e. more than 10%)... And about your point about home owners being poor - not everybody owns their own home (stats show it's about 2/3rds). I just don't see BTL as realistic for people struggling to make ends meet.
Again, I am not advocating either way as I am not in real state industry to have perspective on it.
Technology and efficiencies of scale obviating many jobs and concentrating them in small regions, causing an increase in demand without a correspondingly large enough increase in supply of housing is causing social and economic problems.
The solution to pricing problems is adjusting the demand or the supply curves.
In the UK a mortgage is generally cheaper than rent.
You "choose" to rent when you have no other choice.
The other side of this coin is also the lack of income (or sufficient income), due to the reduced value of human labor due to the aforementioned automation and also the 3 billion other people in the world wanting to share in the dream of having the luxuries of the developed nations.
My point is that offering a residence for rent isn't inherently bad, and that attacking that isn't going to solve anything. Although, I think there are other problems caused by private ownership of land.
However, renting out an asset (which generally isn’t depreciating) is only going to increase the inequity between the renter and the landlord. If their relationship is based entirely on who can afford a deposit then I don’t see what excess of demand and supply has to do with it.
If you’re talking about building so many houses that they loose their value as a commodity entirely, the problem there is an entire generation who have staked their pensions on property.
I don’t have any answers.
I haven't read that book in a while, but it really feels like you're misconstruing this.
On the rental investment example itself, it would really help to have a finance person to go over the model. A rental investment needs to be modeled like running a business, not like buying a house to live. Its analysis is usually done using net operating income, CAP rate, cashflow, ROI, and IRR.
BTW there's no magic 1% to 4% annual appreciation in rental investment. Appreciation is purely based on increasing net operating income faster than market rate, or in simpler term improving CAP vs the market CAP rate. Let's say you buy a property with 4% CAP rate and the market CAP rate is 4% now. 10 years from now your NOI still produces the same 4% CAP but the market CAP rate has risen to 6%, your property will depreciate! Market CAP rate is affected by different things that're out of your control and it's hard to model.
Of course, you need a good source of credit or great people skills to get that started (or wealthy parents to loan you a million or so).
:P
By your logic, Uber drivers should be criminals.
This seems socially much more acceptable to taking a loan and then invest the money in stocks for example, but to me is not that different.
True the volatility is much lower, but so is the liquidity if you have to dispose of the propery in a short time due to life circumstances.
If this is a single property and plan is to be the bulk of one's net worth it seems risky to me.
Then there's the "dealing with tenants" variable which can be none to a ton of work/hassle.
REITs are imho an interesting way to get rental income with less hassle and much more diversification if you can stomach the stock price moving up and down.
Look at Vanguard VNQ for example.
This is pretty opaque and we should have explained where the numbers were coming from. Had intended to add a tooltip there explaining this but looks like we forgot!