Tell Me Again How Awful HOA’s Are?

[BehindBlueI's]

Ok, if I understand your math renting and investing will put you slightly ahead all other things equal.

Buy home @150k, sell after 30 years and get $400k in your pocket

Or rent, invest ~87k over 30 years, get 359k profit for $446 in hand

That said, I don't see renters being that disciplined. Seems to me the best option would be buying a smaller house and still investing so you don't lose all the rent money.

It varies, and all things are never equal, but that's the gist of it. Buying a cheaper house is also a good option, particularly if you are likely to have no need to move with little or no notice. Stable job, no sick grammy you've got to go back to Kansas to take care of, etc.

That's basically what we did, although we bought 'cheaper' and not 'smaller'. Banks tell you that you can have a mortgage payment of about 25% of your income. Mine is 11% and falling as my salary rises but mortgage stays the same. It's no real secret why I can then put 10% of my salary in retirement savings while living the same 'lifestyle' of someone else at my salary but who's house rich/cash poor.

Most people aren't that disciplined, renters or not, which is why they have debt, live hand to mouth, and are financially ruined by the smallest of financial bumps.

 

[Ingomike]

I honestly think much of this discussion, particularly IngoMike's early pushback/disbelief on those who said they wouldn't care if they lived next to LPH (Little Pink Houses), is the mindset that your primary residence is an 'investment'. This is a marketing driven device to convince you to overspend on your house. With that mindset it's ok to be 'house rich/cash poor' because on paper your net worth is higher. Then you're encouraged to borrow against your paper value as an equity loan when being cash poor bites you in the ass. As such, you have to be on constant guard against market fluctuations for value and people who have no intention of selling today put way too much emphasis on today pricing.

Your primary residence is not an investment. It is an asset, but that's not the same thing, and if you get the liquidity out of that investment you are now 'homeless' until you replace it. Will you actually make money on your primary residence? Maybe, but not nearly as much as you are conditioned to believe. The marketing wants you to look at purchase price vs selling price and wants you to forget all the interest you paid, PMI you paid, taxes you paid, and definitely wants you to forget the opportunity costs.

Let's say you bought the perfectly average US house in 1990 for $150k with a 30 year mortgage and paid it off, then sold it to move to Tahiti in your golden years in 2020 the day after you paid it off. Your perfectly average US house was worth nearly $400k that day. You've been conditioned to think you just made $250k on your 'investment'.

Interest rates were about 10% for mortgages in 1990, but have dropped over the years. Let's simplify and say you paid an average of 6% via refinanacing a few times. Let's further assume you put down 10% cash and only paid PMI for the first 5.5 years. Let's oversimplify and just assume a 1% property tax rate on initial value for the life of the loan.

You paid $156k in interest.
$45k in property tax
$5k in PMI

Down to $44k profit

What did your home owner's insurance run? Say $600 annually on average?

Down to $26k profit.

Hope you didn't have an HOA and pay $100 a month on average to that, or now you're $9k in the hole. And that's with $0 in maintenance over 30 years. Maybe you made it back on tax savings on mortgage deductions, this is an oversimplification, but you get the point I think. That $250k gain is an illusion. You had a place to live, though.

Just for comparison, let's say you took that same 10% down and put it in an S&P500 index fund and added $200 a month in a tax deferred account. That should be easy to do in Average US Town because average rent is significantly lower than average mortgage payment for the vast majority of time. You get a 7.9% return on that money, assuming you reinvest dividends. Now you cash out for your Tahiti move.

Total profit: $359k pre-tax. Huge difference in terms of maximizing wealth.

That's an investment. Obviously everbody's situation will be different as nobody is going to have the perfectly average scenario, but it should be an illustrative of why 'your house is your biggest investment' is terrible advice that profits the real estate industry more than the home owner. I intentionally way 'underbought' on my house vs what the banks said I could afford because I know the difference and bought a house to live in, not as a status symbol or the notion it was an investment. I'm on track to retire a millionaire before most people are on track to retire period, and that's on a pretty mundane household income. Don't be house rich/cash poor.

Where does the years of rent that one must pay to live come into this over simplified project? That should be deducted from the investment account. So you believe renting is a better deal but you bought a home?

 

[BehindBlueI's]

So you persist in pushing this line? You can always buy a cheaper house just like you can find a cheaper apartment. There is NO way to rent cheaper because the taxes, debt service or profit do not allow for that. The only way to get to your answer is to compare renting an apple to buying a grapefruit…

Your averages lead to an average answer just not the right one for the real world…

You can. Of course a "cheap" house may come with some pretty significant maintenance bills, be in a much worse neighborhood than a similarly priced aparment, etc. If you're going to rent a McMansion, of course it's cheaper to buy the McMansion. Probably. Depending on if you get forced to sell in a downturn. But other than a few historical aberrations, yes. If you're living 10' from your neighbor, might as well be in an apartment anyway.

People can believe what they want. I'm pretty comfortable in both my understanding of how finances work and my ability to maximize what I've got. The only validation I need is seeing those numbers in my accounts, seeing my diminishing needs to rely on a salary as my money works to make more money, and seeing my retirement coming at an age I'm able to travel and enjoy it.

And I've spent enough time on it already, so I'll just leave the thread with this: I highly recommend Ric Edelmann's book "The Truth About Money" for anyone who doesn't really understand personal finance or investing but wants to start learning...and never ask the barber if you need a haircut.

Where does the years of rent that one must pay to live come into this over simplified project? That should be deducted from the investment account. So you believe renting is a better deal but you bought a home?

Already explained as far as rent vs own cost.

I rented and then bought, but I bought for reasons beyond financial. Same reason I bought my Camaro. I wanted it. Not everything is about maximizing return. Find the balance, just don't lie to yourself or your customers that they are 'making hundreds of thousands' on the 'investment' of a house.

 

[Ingomike]

Already explained as far as rent vs own cost.

Was the rent cost deducted from the investment outcome?

 

[BE Mike]

It varies, and all things are never equal, but that's the gist of it. Buying a cheaper house is also a good option, particularly if you are likely to have no need to move with little or no notice. Stable job, no sick grammy you've got to go back to Kansas to take care of, etc.

That's basically what we did, although we bought 'cheaper' and not 'smaller'. Banks tell you that you can have a mortgage payment of about 25% of your income. Mine is 11% and falling as my salary rises but mortgage stays the same. It's no real secret why I can then put 10% of my salary in retirement savings while living the same 'lifestyle' of someone else at my salary but who's house rich/cash poor.

Most people aren't that disciplined, renters or not, which is why they have debt, live hand to mouth, and are financially ruined by the smallest of financial bumps.

My daughter and son-in-law graduated from Financial Peace University and live it. It has made all of the difference in their financial health. People (especially young people) are their own worst enemies when it comes to managing money. Many people have no concept of "delayed gratification", since they grew up getting everything they wanted, when they wanted from mommy and daddy.

 

[jkaetz]

Most people aren't that disciplined, renters or not, which is why they have debt, live hand to mouth, and are financially ruined by the smallest of financial bumps.

You're not wrong here. I don't see how rent is cheaper though. In 2006 I went from an 800 sqft apartment to a brand new 1500 sqft house for roughly the same monthly payment including property tax, insurance, and PMI. I'm also having a hard time with your claim that rent is less expensive than a mortgage for anyone with decent credit.

 

[BugI02]

So you persist in pushing this line? You can always buy a cheaper house just like you can find a cheaper apartment. There is NO way to rent cheaper because the taxes, debt service or profit do not allow for that. The only way to get to your answer is to compare renting an apple to buying a grapefruit…

Your averages lead to an average answer just not the right one for the real world…

I think you are paying insufficient attention to the fact that a Federal Reserve survey found that 50% of US households would be unable to weather a $400 unplanned expense (like a car repair) with 40% of those households being unable to pay the expense at all

As home buyers, what is the likelihood they will be able to save even 5% down ($15000 on that 300K house of yours). Sure, no down payment if they're VA qualified but PMI is maximized when they have no equity at closing, so probably another $200 per month on top of the payment for a 30 year plus around $350 to $400 a month to escrow for property taxes and perhaps $70 to 80 per month for insurance

I make that about a $1083/month even if they have the 5% down (3.8ish percent apr on a 30 year loan at 3.5%) plus at least another $620 to escrow, or around $1700 per month for the first 7 to 10 years until they generate enough equity to end PMI and escrow. That is without mentioning the other closing costs including likely at least a point on the mortgage

I'm pretty certain you could rent a comparable house for at most about 75 to 80% of that

 

[Ingomike]

So in 1990 someone buys a home on the north side for $150,000 and puts a $30,000 down payment and 6% interest, with a payment of $1100. In 1990 the rent would have been about $300 more than the payment. Without ever refinancing the buyers payment remains near the same with just increases in insurance and taxes, while rent for that home has now risen to at least $3000 a month. Now in 2022 the house is paid off and worth near $400,000.

For a $30,000 cash outlay an appreciating asset was purchased that resulted in $250,000 of worth of gain and a place to live below the cost of rent early on and significantly below rent in later years. The owner now can live there for as long as they want for the cost of taxes and insurance. That is exponentially below rent.

They do a lot of figuring to sell books…

 

[Ingomike]

I'm pretty certain you could rent a comparable house for at most about 75 to 80% of that

Not possible in Indy. Owners are not in the business of rent charity. Why would one be able to rent cheaper when rent in Indy includes double property taxes, higher debt service costs, more investment costs, maintenance costs.

$300k houses rent for $2500-$3000 in Indy depending on neighborhoods.

 

[Route 45]

If you're living 10' from your neighbor, might as well be in an apartment anyway.

That's what it's all about to me. I'm much less concerned about how much my house is "worth," when the important metric is my peace of mind and quality of life. Living shoulder to shoulder in a neighborhood where petty tyrants can force compliance on how I enjoy my property is no way to live.

 

[BehindBlueI's]

I said I spent enough time on this, but obviously I feel the need to waste just a *little* more, so here we go.

https://www.moneyunder30.com/why-your-house-is-not-an-investment Good reading, and discusses the idea of carrying costs, which I laid out in an earlier post with a simplified version. Yes, I didn't account for the cost of weedeater string for doing your own lawn, but the principal is hardly controversial.

Anyone arguing "why don't you just buy a cheaper house" is actually arguing against the mindset a primary residence is an investment. If it's an investment that will accrue a return, minimizing your investment also minimizes your gain. If you really think it's a strong investment with good returns the argument should be buy more, gain more.

You're not wrong here. I don't see how rent is cheaper though. In 2006 I went from an 800 sqft apartment to a brand new 1500 sqft house for roughly the same monthly payment including property tax, insurance, and PMI. I'm also having a hard time with your claim that rent is less expensive than a mortgage for anyone with decent credit.

And in 2008 I increased my monthly payment by about $500 a month to buy a house instead of stay in an apartment. Exceptions exist in both location and timeframe, already mentioned it, and we're kind of blessed with low interest rates right now that definitely make homebuying a more attractive option cash-flow wise than is the historic norm. If that's the new norm or if that trend will reverse is beyond my crystal ball abilities given the novel influence of REITs, threat of inflation, etc. As I mentioned earlier, owning is a good hedge against short term market fluctuations, which rent leaves you exposed to...as long as you aren't forced to sell.

 

[churchmouse]

I'm not sure most people are looking at their house as a retirement investment strategy. The investment is that they get to live in it for a lot of years before they could have saved the $$ to buy it outright.

If they bought a larger home presumably to support a family and they sell the home at retirement time they still have a sizable pile of cash saved and can likely now purchase a smaller home outright with money left over.

They're also miles ahead of renting as they have not lost any $$ even paying for interest, PMI, insurance, etc...

Investment is likely the wrong term for a home but for the large percentage who don't even have a savings account it's as close as they'll likely get so long as they don't continually take out equity loans. People make poor financial choices all the time. Buying a house usually isn't one of them unless they buy too much house.

Years ago, people bought a home and most stayed for a while. Even into retirement once they had it paid for. We have/had several neighbors that did this very thing. Bought/lived/passed in the same house.
These days of refinance schemes people see the house as a piggy bank. Run up the CC's buy a big SUV and when it gets tight pull some money out of the house.

Ok, if I understand your math renting and investing will put you slightly ahead all other things equal.

Buy home @150k, sell after 30 years and get $400k in your pocket

Or rent, invest ~87k over 30 years, get 359k profit for $446 in hand

That said, I don't see renters being that disciplined. Seems to me the best option would be buying a smaller house and still investing so you don't lose all the rent money.

 

[mbkintner]

I honestly think much of this discussion, particularly IngoMike's early pushback/disbelief on those who said they wouldn't care if they lived next to LPH (Little Pink Houses), is the mindset that your primary residence is an 'investment'. This is a marketing driven device to convince you to overspend on your house. With that mindset it's ok to be 'house rich/cash poor' because on paper your net worth is higher. Then you're encouraged to borrow against your paper value as an equity loan when being cash poor bites you in the ass. As such, you have to be on constant guard against market fluctuations for value and people who have no intention of selling today put way too much emphasis on today pricing.

Your primary residence is not an investment. It is an asset, but that's not the same thing, and if you get the liquidity out of that investment you are now 'homeless' until you replace it. Will you actually make money on your primary residence? Maybe, but not nearly as much as you are conditioned to believe. The marketing wants you to look at purchase price vs selling price and wants you to forget all the interest you paid, PMI you paid, taxes you paid, and definitely wants you to forget the opportunity costs.

Let's say you bought the perfectly average US house in 1990 for $150k with a 30 year mortgage and paid it off, then sold it to move to Tahiti in your golden years in 2020 the day after you paid it off. Your perfectly average US house was worth nearly $400k that day. You've been conditioned to think you just made $250k on your 'investment'.

Interest rates were about 10% for mortgages in 1990, but have dropped over the years. Let's simplify and say you paid an average of 6% via refinanacing a few times. Let's further assume you put down 10% cash and only paid PMI for the first 5.5 years. Let's oversimplify and just assume a 1% property tax rate on initial value for the life of the loan.

You paid $156k in interest.
$45k in property tax
$5k in PMI

Down to $44k profit

What did your home owner's insurance run? Say $600 annually on average?

Down to $26k profit.

Hope you didn't have an HOA and pay $100 a month on average to that, or now you're $9k in the hole. And that's with $0 in maintenance over 30 years. Maybe you made it back on tax savings on mortgage deductions, this is an oversimplification, but you get the point I think. That $250k gain is an illusion. You had a place to live, though.

Just for comparison, let's say you took that same 10% down and put it in an S&P500 index fund and added $200 a month in a tax deferred account. That should be easy to do in Average US Town because average rent is significantly lower than average mortgage payment for the vast majority of time. You get a 7.9% return on that money, assuming you reinvest dividends. Now you cash out for your Tahiti move.

Total profit: $359k pre-tax. Huge difference in terms of maximizing wealth.

That's an investment. Obviously everbody's situation will be different as nobody is going to have the perfectly average scenario, but it should be an illustrative of why 'your house is your biggest investment' is terrible advice that profits the real estate industry more than the home owner. I intentionally way 'underbought' on my house vs what the banks said I could afford because I know the difference and bought a house to live in, not as a status symbol or the notion it was an investment. I'm on track to retire a millionaire before most people are on track to retire period, and that's on a pretty mundane household income. Don't be house rich/cash poor.

I approach owning a home as a break even proposition; better than paying rent. If I make some money all the better.

 

[Hatin Since 87]

So in 1990 someone buys a home on the north side for $150,000 and puts a $30,000 down payment and 6% interest, with a payment of $1100. In 1990 the rent would have been about $300 more than the payment. Without ever refinancing the buyers payment remains near the same with just increases in insurance and taxes, while rent for that home has now risen to at least $3000 a month. Now in 2022 the house is paid off and worth near $400,000.

For a $30,000 cash outlay an appreciating asset was purchased that resulted in $250,000 of worth of gain and a place to live below the cost of rent early on and significantly below rent in later years. The owner now can live there for as long as they want for the cost of taxes and insurance. That is exponentially below rent.

They do a lot of figuring to sell books…

As long as nobody paints their house pink next door. Then it’s less than the 30,000 they bought it for in 1990.

 

[edporch]

Each to their own, but I'd NEVER live where there's a HOA.
And I can think of worse neighbors than one with a pink house.

And if my same exact house and lot was across the road on the next block from me around more upscale homes it would be worth more.
But I don't blame my neighbors for that.

The point is, if you're gonna live in town, there's going to be things that are less than ideal.
But on the flip side, if you choose to live out in the country away from town, there's going to be things that are less than ideal too.

I just know that I've never lived anywhere in my life that was ideal without some type of annoyances or downsides.

 

[churchmouse]

I approach owning a home as a break even proposition; better than paying rent. If I make some money all the better.

Bingo. Answer to a landlord for a while.
Tow his line and beg to get things repaired. When we had rentals we kept them up. Everyone of them were turn key live in no repairs needed. We got top rent from all of them unless a tenant went dead beat on us and it happened. When we saw the bubble topping out we sold them off. Some were on contract to the current renters if they were solid and everyone of those paid off. The remainder went on the block. I wish prices were as crazy then as now. Man that would have been a gold mine.
Renting can suck. You are under outside scrutiny and can be forced to move if the owner decides to sell out in a good market. Like now.

 

[jamil]

So you persist in pushing this line? You can always buy a cheaper house just like you can find a cheaper apartment. There is NO way to rent cheaper because the taxes, debt service or profit do not allow for that. The only way to get to your answer is to compare renting an apple to buying a grapefruit…

Your averages lead to an average answer just not the right one for the real world…

My son rents a ****-hole 1 bedroom apartment that would fit within the space taken up just by my living room + kitchen. He pays $200/month more than my monthly mortgage payment. There are pros and cons to both renting or owning.

Owning doesn’t make sense to him at this point in his life. Renting doesn’t make sense to me at my stage in life. His situation will change and so might mine. Investment isn’t high on the list of why it’s better for me to own. But with the equity I have it ain’t gonna hurt.

But that evaluation is for Southern Indiana. The housing market hasn’t been that hot. It’s really heating up now though. But anyway, if you live in a booming housing market and your timing is good, buying your home as an investment can be quite lucrative.

 

[jamil]

Each to their own, but I'd NEVER live where there's a HOA.
And I can think of worse neighbors than one with a pink house.

And if my same exact house and lot was across the road on the next block from me around more upscale homes it would be worth more.
But I don't blame my neighbors for that.

The point is, if you're gonna live in town, there's going to be things that are less than ideal.
But on the flip side, if you choose to live out in the country away from town, there's going to be things that are less than ideal too.

I just know that I've never lived anywhere in my life that was ideal without some type of annoyances or downsides.

Something that kinda sucks about living in the country, the nearest Jimmy John’s is like 10 miles away!

 

[Ingomike]

My son rents a ****-hole 1 bedroom apartment that would fit within the space taken up just by my living room + kitchen. He pays $200/month more than my monthly mortgage payment. There are pros and cons to both renting or owning.

Owning doesn’t make sense to him at this point in his life. Renting doesn’t make sense to me at my stage in life. His situation will change and so might mine. Investment isn’t high on the list of why it’s better for me to own. But with the equity I have it ain’t gonna hurt.

But that evaluation is for Southern Indiana. The housing market hasn’t been that hot. It’s really heating up now though. But anyway, if you live in a booming housing market and your timing is good, buying your home as an investment can be quite lucrative.

There are times to rent for sure…

 

[jamil]

Was the rent cost deducted from the investment outcome?

It’s close to a wash. You have to live somewhere. But, usually, if you pay a mortgage, your house payment is typically way less than renting the same space.