"and renting for $3K per month"
I think you make a lot of assumptions, like the one above, which don't fit my admittedly anecdotal experience. I live in one of the hot markets, I bot a place at the peak of the market before the last crash, and found myself nearly $200k in the hole on paper. That was roughly 10 years ago, and here's what happened.
I lived in it for 10 years, and I just sold it for more than I paid for it. Obviously this in isolation wasn't a good investment, but I did nearly the worst thing, bought at a peak before a crash, and still came out net positive 10 years later.
Second, you said "and renting for $3K per month" which is a mistake because it's assuming rent will not go up in any significant way. Where I live, rent goes up a lot. That place I bought 10 years ago, a couple years back we thought about selling and renting (to get into a different school district) and we realized that our mortgage was lower than what we would have to pay in rent to get a similar place in the same area.
Again, these are just anecdotes, but my experience doesn't fit with the assumptions you are making above.
$1 today is worth .85¢ in 2007. You'd have to sell your place for 21% more than its peak price just to break even (15% inflation + ~6% realtor fees and other costs) and that doesn't include the returns you could have made in, say, an index fund over the last 10 years.
I'm not trying to make any assumptions on your anecdote, but only the very hottest markets have been able to pull off that kind of recovery.
In most cases you have a mortgage so it isn't as simple as that. For example, you didn't pay $1 million (even if that is the cost) - maybe you put down $200,000. If it goes to $1.2 million you sell it and get $400,000 (paying off the $800,000 you borrowed). That is 100% of your $200,000 even though the price only went up 20%.
This is oversimplified for illustrative purposes. You have to pay interest, taxes, get a place to live... but the example shows why you don't need the sales price to go up by inflation to break even or make a profit even in 2007 dollars.
Good point. What you're describing, at core, is leverage. The general principle of leverage is that it exaggerates the market's natural results. When things go up you stand to make a lot of money. But when things go down you stand to lose a lot of money.
One mistake (IMO) many people make about housing is not adequately thinking through the second possibility.
You can achieve the same in the stock market by buying on margin. In both cases, financing the majority of an investment with debt cranks up the risk.
If you put $200k in an investment (say, the stock market, or bonds, or whatever) and it goes down by 10% then you've lost $20k. But if you're leveraged 5x (as in your example: putting in $200k on a $1M investment), then that's a multiplier in the positive and negative direction. A fall in housing prices in your city, area, neighborhood, of 10% will now wipe out 50% of what you put in.
Leverage is considered very risky. Housing is considered fairly safe to begin with, so when you use leverage on it it only becomes moderately risky.
But basically there's no such thing as a free lunch. The reason your $200k can double if housing prices move just a little bit up, is because it can also be wiped out if they move just a little bit down.
I agree that I don't have all the info to make a true apples to apples comparison, but even your illustrative example is way off:
1.2M - 6% realtor fees is 1.128M. Thats 72K just for realtor fees right off the bat.
not including including costs like city transfer tax, capital gains for short term sales, and countless other seller fees that vary by market temperature.
All this comes off your 200k "profits", which is still great, but homeowners typically take years just to stop being underwater when buying a home.
All I was trying to point out is that the return isn't just the sales price having to beat inflation.
You are completely right that I forgot to mention buying and selling costs (which, as you note, are very high in real estate).
There are a lot of things missing though in this analysis for the homeowner if you want to do a true comparison.
1) The difference between the mortgage payment and equivalent rent for an equivalent place
2) Tax write offs (mortgage interest deductions)
3) Principal pay down
4) Property Maintenance costs
5) Property purchase fees (transfer tax, loan origination fees, etc)
And then for the stock holder you missed...
6) Taxes paid on cashing out stocks
I didn't see where the parent assumed the $3k per month would stay static.
Also recall that selling a place for more than you paid for it doesn't mean you've made money. As I'm sure you know, owning property also involves substantial ongoing costs (beyond the purchase price) that never get recouped: maintenance, property fees, incidental construction / renovation, insurance, mortgage taxes, real estate fees, and so on. Never mind the lost investment potential from the down payment, which is now a sunk cost vs. something that could have earned interest in the markets.
I'm not trying to challenge your anecdote; just to recognize that even with stories like yours the truth is complicated and hard to assess.
For my part, my experience has taught me to be especially wary of "hot markets" - the hype that comes with them IMO artificially inflates real estate prices to a point where the underlying value can easily get lost. I happen to be very lucky in having a rent situation that easily beats purchasing, even over multiple years. But I acknowledge rental arrangements can also get hyped, so a bad rental situation can also cost you.
I bought a condo at the peak of the market before the crash, 11 years ago. So far, it's only gone down in value, regardless of what the rest of the market does. Even after refinancing it years ago into a 15 year mortgage, it's STILL worth less than I owe on it.
That's with a small correction followed by a new bubble. Property values have dropped over 50% in various corrections around the world EX: Shanghai @ 64%.
The US is easily that inflated relative to historic norms, so what we think of as a huge correction could basally be a minor blip vs what's next. Or even just a 20+ year stagnation in housing prices. Worse real estate transaction fees are are massive.
PS: Same as it ever was. http://www.businessinsider.com/the-economic-crash-repeated-e...
> with $1K+ per month maintenance fees.
wow! How are these itemized? Or is it just referred to as a single line-item "$1,000.00 Maintenance fee" ?
In NYC, most property ownership is through coops or condos. and in both, you'll pay a monthly maintenance fee - which includes things like common charges, landscaping for the complex/building, building mortgage, coop mgmt, real estate taxes, etc.
I pay ~$900/month in fees for my 1 bedroom (charged based on the 113 shares i own) - and then I pay another 20-30 for electricity, which is billed on the same ticket. Then, come tax time, I get to deduct around ~35% of those maintenance fees as real estate tax.
it varies from building to building and borough to borough.
Brownstone neighborhoods stress these numbers even further (e.g. much of "hot" Brooklyn).
These consist largely of 19th century buildings. And even the "modern" apartment buildings are 1920s, 1930s, etc. These are also precisely the neighborhoods that zone-limit modern construction to avoid compromising their character.
So you have a bunch of old buildings that need serious maintenance, sometimes by firms with specialized and otherwise outdated skill sets (e.g. stoop rebuilding and iron fence work).
Many of these neighborhoods are also in historic districts, meaning they're landmark-protected to preserve traditional architectural character.
Brooklyn Heights is a prime example. Essentially the whole neighborhood is one big historic district. The housing stock is ancient. And it's a highly desirable neighborhood. Maintenance fees can easily waver between $1,000 and $2,000. There are very few modern condos (which basically avoid these problems). So their very scarcity inflates their purchase prices. All in all you get a very difficult place to live in and own property.
Buildings will have an association fee, similar to an HOA. I've never looked into NY condos, but I've seen buildings in Northern NJ with fees at 500/mo. I would guess there is literally a $1k association fee to pay.
It will be divided into operating expenses and the reserve fund. The detailed financials should be mailed out at least yearly. So you can see where all the money is going. The operating expenses will cover the hot water, garbage, exterior building insurance, snow removal, sewer, common area maintenance like landscaping and floor cleaning. The reserve fund covers the long term maintenance, painting the exterior, roofing, replacing water heaters, carpeting replacement in common areas. High cost areas like that probably have a pool or a front desk person too.
NYC was minimally affected by the real estate crash because of the ubiquity of co-ops, whose boards were not going to approve an onslaught of people with wealth that was only on paper or that were speculating on them as investments rather than using the dwellings as their primary residences. Prices dropped some, a little more so in the outer boroughs, but where did you see "10 - 20%"?
The real problem with buying an apartment (as I see it) is that you don't really have most of the benefits of "ownership" aside from cost and location stability, and even that is somewhat in flux due to association/management fees, and if you have a co-op., mortgage rates. But, it's worthwhile for some, and IIRC, the return was better than the S&P 500 from 2000 through about 2013.
And if that's not a wild enough ride, try land leases.
I can't for the life of me figure out any way to be truly comfortable with a land lease.
NYC real estate is a really weird world.
Buying is almost always a good idea except in the hottest of real estate markets.
If done properly (buy, then rent out when you move, managed by prop management company), you'll come out far ahead versus just renting. You should of corse still be investing in equities for diversification.
Depends if it is going to be your primary home.
You need a roof on your head. You might as well pay the rent 10-30 years and own the place, rather than have nothing.
It's like anything else. Buy low, sell high.
Capital is cheaper than ever and prices are insane right now. If your goal is to make money, this is pretty clearly not a time to buy in many markets.
Renting always has very significant downsides. You have no control, sacrifice flexibility, and are always exposed to any market price changes in the market at lease renewal.
The rent vs buy calculators focus too much on asset value vs. cash flow.
Is renting out really that low risk even with a property management company?
You are also now exposed to the vagaries of rental pricing and demand.
It depends on the market segment. It's not that difficult to pick markets where the 1% rule (rent should be ~1% of the value of the home) applies and maintenance and vacancy are minimized. That's going to be primarily middle class and upper-middle-class markets in areas that don't have absurd "values" for homes.
I think people misunderstand low risk. On average it easily nets out positively depending on location. The problem is the "on average" part. If due to bad luck you aren't the average, is it catastrophic for your finances, or is it just painful. I wouldn't take the risk if I were in the first category.
When my wife did the math before purchasing in our market, you'd have to have frequent or catastrophic repairs, have crazy vacancy (>50%), or be taking in well below market rate for comparable units (or some combination there-of).
It seems the kind of property management it takes to sink the rent-vs-buy gap is beyond abysmal and made us really confident that we could afford to purchase despite not being sure if we're staying in the place long-term.
Real estate has a long negative tail if e.g. the renters stop paying and trash your place when evicted.
That's what reserves, insurance, and a real estate attorney are for.
It's an even better idea in hot markets. That is, unless you get in at the end of a cycle and need liquidity now.
>Buying an apartment in New York City is a marker of success for some residents
It's also a sign of folly for some. Many people hate-read the Sunday Real Estate section. There are often one-bedrooms listed for $700k – $1 million, with $1K+ per month maintenance fees. Add on to that $200 – 1K per month in taxes, and suddenly you will have to wait a VERY long time to make anything like the return you'd get from investing in a Vanguard Total Market Fund and renting for $3K per month.
Everyone in the real estate industry loves purchases because of the fees associated with purchase. But buying is often not a good idea (though it depends on when). If we get another real estate crash and prices drop by 10 – 20%, buying may start to make sense again. In 2011 buying was a great idea.
This same basic dynamic plays out in many cities. The NYT has a decent rent-vs-buy calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal... that can help answer some questions. Notice the investment return expected, which is a vital part of these calculations.
I was living the nomadic developer lifestyle for a couple years, and it has been the best experience of my life. Living in and working from a dozen or so different countries has given me an incredible perspective on where in the world I actually want to be.
If you and your SO are a developers, then I would highly recommend a work-cation in Prague. I spent a few weeks at a really cool co-working space, PaperHub, which was part of the Institute of Cryptanarchy (lol). They take BTC for everything, the transit system is a dream, and there are tiny little specialist grocery stores everywhere. If I was ever going to return to the same place twice, it would be Prague.
Beware of burnout, though - there is no rest in this lifestyle. The home office wants me online during their business day, and constantly learning new cultures is a huge cognitive load. After two years of this, I needed to settle down for a while; right now I am resting between jobs, thanks to a very supportive mother. Oh, make sure to take good care of your parents, they may end up being the only solid, reliable people in your life.
> I spent a few weeks at a really cool co-working space, PaperHub
I honestly don’t get the attraction of co-working spaces for most digital nomads. The costs often outweigh simply working from a cafe or the balcony of your AirBnB – 3G internet is cheap in most of the world now. In my hometown, co-working spaces attract locals who set up small teams with other local freelancers and could benefit from in-person collaboration. But for a solitary digital nomad all of whose contacts are remote, what's the point?
Good coffee shops are certainly adequate, and many of them, in Europe anyway, have a section that is nicely furnished for a full day's work.
There are some extra perks to a good co-working space, though. It is library-quiet, and you are surrounded by people who are living and working a similar plan. I was actually able to informally recruit a guy who often worked near me, when we needed to bang out a bunch of UI components and their services, for a design that the client and I had already detailed fairly well.
For me, work/life separation has been important. It's nice to have a routine to just walk down the street to a WeWork. It's also great for meeting people and events.
Because there are two of us, we're being conscious of not spending every waking moment together. A coworking space helps with that.
Networking is a big one. Traveling around the world gives you a chance to uniquely expand your professional network.
I see. I guess this must be a developer thing. I’m a digital nomad, but my profession is translation. In a co-working space in a third country, I’d be unlikely to ever meet anyone who needs my particular language pairs, and the only benefit would be working in an unusually quiet place that, in itself, doesn’t seem worth the cost.
So, your mother's supporting you because you can't/won't work to support yourself. I might be old-fashioned, but this reads like a cautionary tale, or an anecdote made pointless by the backdrop of privilege.
She's an elementary school teacher, and I am living very cheap. No new clothes, minimal meat products, no social events. Just resting for a bit. From a global perspective, I am quite privileged, but within my home country, my family has been near or below the poverty line for most of my life.
Thanks for the advice - we'll keep Prague in mind. We're amid investigating visa options in Europe right now.
We're planning on staying places for 3 months at a time. Here in CDMX, that's let us get a coworking space, gym membership, and a semblance of a routine.
We're planning on spending extended time in our hometowns, too (though maybe not 3 months).
I have a few friends doing this, and saving a ton of money since they work remotely anyway. Like you, they're doing multi-months, and they actually save another ~10% by paying the host directly, using Airbnb only to find places.
How long have you lived this lifestyle?
About a week :-) Took about 2 months for us to ramp down life in SF. We're planning on staying in cities for ~3 months at a time each.
When we shut down  my last company, my girlfriend said "it's now or never." I had realized that I dreaded going to an office every day, so I'm working on making my new company 100% remote.
I would be interested to hear how this works out for you, do you plan on chronicling the experiences? I'd be worried about mundane things like income taxes and having a proper mailing address. This seems like something only enabled by having a truly 'digital' lifestyle.
For expats of most countries, if you spend no more than about a month per year in your native country and don't have property there, then you can declare non-residency. This way, you don't have to pay income tax to your home country, as you are not using their services. Also, if you are constantly on the move, not actually setting up shop and taking local clients, then local income taxes don't really apply either. Nomads aren't really compatible with most income tax systems, for better or worse.
It is different for Americans, though, they are on the hook for income tax regardless of where in the world they reside.
For us personally - we don't plan on being out of the USA enough for it to matter on income taxes. We plan on spending some time traveling through a couple US cities, too (like NYC, LA, and Chicago).
We'll set up a blog at some point - for now I have my personal  and company  Instagrams.
We're using Earthclass Mail for a mailing address. Works super well. They even cash checks for us.
Not OP, but I have been doing something similar in Airbnbs for three years ( I was interviewed for an article last year: https://qz.com/643181/ ). Sometimes I move between neighborhoods while working on-site in NYC / SF Bay Area, other times I was a traveling consultant, other times I work remotely and choose where I go. Usually I stay 1 month (reaching 2 months at only two places).
It works because I am flexible about renting studio apartments or rooms in Airbnb-dorm-like houses, and I don't have other responsibilities or attachments. Compared to the up-front costs, commitments, and assorted bills connected with an annual lease, I prefer it.
We're planning on staying in places for 3 months at a time. It gives us the flexibility to join a gym, take time to relax, and get a routine.
The question I ask everyone who highly recommends this lifestyle :)
I spent ~2 years as a completely untethered nomad, and love having my feet planted somewhere I love while I still travel+work 3+ weeks at a time regularly so so so much more.
Besides the means (financial) and freedom (remote-friendly employment/relationships) to do this, there are a lot of cultural/social aspects that influence the viability of the long-term nomadism.
1) White privilege: Are you white? Being a nomad is WAY nicer! People are nice and welcoming to you almost everywhere, and go out of their way to involve you in their local stuff, making life more interesting and fun. Also, everyone wants to bang you, if you're into that. Otherwise, get ready to lead a lonely life, struggling to build deeper connections, and having a hard time experiencing the "serendipity of traveling".
2) Your support network's relationship with this lifestyle: This is a romanticized lifestyle for the western world, whereas it's treated as a vagabond-like, evasion of responsibility in Asian culture. This can be draining if your family is mostly disparaging of your lifestyle choice (or others are of your parents for bringing you up wrong etc).
3) You always have a home when you want it: There is a place where you feel safe, you belong, you love and can easily go back to and stay whenever you want for however long you want to recharge in between. If you end up nomading to someplace that doesn't work for you, you can bail on short notice and re-plan. If something happens or if you need to just take a break from the nomadism, you know where to go. If you don't have this (you don't care for your hometown, or was in my case, you have/had legal visa complications preventing you from "calling where you wanted to stay home"), being a nomad can be stressful and uncertain.
As a brown entrepreneur raised in Asia who wanted to settle in the Bay, and chose the nomad life while waiting for my visa to come through, I learned the above the hard way.
I've done long term nomadic with my wife twice so far (once in 2008 for 9 months, once in 2015 for 6 months).
It is very enjoyable, but at the end of each stretch I was ready to go home and reconnect with my family and friends.
Personally I found it difficult to feel connected in a place when I don't speak the language, and move every month or so.
Your personal needs may vary. Either way it should be a great time, at least for a while.
We're actually spending a couple months in each of our home towns (extending trips for weddings). It's a freedom we haven't had in the past, and hopefully it will address those feelings.
If I didn't have a kid, I would try to live this way as well. Sounds really nice.
You can still live minimally with a kid (obviously with school and such travel is harder, but homeschool/unschool is always an option). There are many tiny home documentaries out there with people who have kids. Because I don't have Netflix convenient, here's something I think might be relevant: http://www.theminimalists.com/familylinks/
Might want to consider the kid's wants and needs too.
My girlfriend and I were looking at real estate in SF. It was unreasonably expensive for places that we did not love. We have since decided to sell all of our things and live full-time in AirBNBs around the world. I now only have a carry-on suitcase and backpack, and getting rid of all of my crap was such an empowering feeling. For less than rent in SF, we are currently in a beautiful apartment in Mexico City that is decorated, has all services provided (including internet), and has weekly maid cleanings.
I don't know how long we will continue this lifestyle, but AirBNB makes it easy. For multi-month rentals, payments go through monthly.
After dealing with so many headaches in personal and commercial rentals in SF, I'm welcoming this lifestyle. I'm tired of setting up internet, enrolling in utility payments, disputing issues with landlords, and moving crap between apartments. The last year has been a nightmare for this stuff, and having to deal with long leases has been a root problem preventing me from walking out of bad personal and business rentals. (Fun fact - even canceling a month-to-month Comcast business internet account requires 2 months notice.)
No, you put 100% of your net worth into that condo. Assuming that a market crash doesn't affect your ability to pay your mortgage you're still seeing a positive ROI in regards to imputed rents.
You have $1M in real estate and an $800k debt. Your net worth is still $200k, however.
Why wouldn't the net worth be -$600k? Debt is usually accounted for in net worth.
You'd account for the debt, as well as the value of the property.
Net worth: $200k
$1M assets - $800k debt = $200k net worth
Assuming everything keeps its value equal and buying and selling have no cost (which at these scales and required accuracy is probably reasonable for the comment), any amount of buying and selling and borrowing should keep your net worth identical.
Buyers in a high priced area are taking on way more risk then people realize. If you have $200K and buy a $1M dollar apartment, you just put 500% of your net worth into one asset. If prices fall by 20%, you just lost all of your money. Hot markets like NYC and SF have inflated prices propped up by high incomes, restrictive building practices, low interest rates, and high desirability. You can't assume all of these factors will remain forever.
See, you've obviously put significant thought into this, even to the point of building a model. Most people I know, they buy a place because they need a place to live. They also tell themselves that buying a place is a great way to grow your capital. They may be right, but when asked "where are you going to live, once you've sold?" most people I know have terrible answers. Most people I know answer "I'll just buy a new place."
The reality is that most people I know would rather rent – it's easier and in many cases even cheaper here. But the problem is that here is Stockholm, and Stockholm has a highly dysfunctional rental market where it's practically impossible for anyone to just come on to the market and find a place to rent within a week or two. You're more or less forced into buying a place if you're going to stick around. People that stick around for a couple of weeks, maybe a month, are going to be fine – plenty of hotels and such make it easy to stay. But if you're staying for more than a month, but probably less than say three years – you're more or less SOL. There's a sort of secondary (and even tertiary, believe it or not) rental market, but you'll probably be moving around every few months whether you like it or not.
I can't help but think the chips are stacked against those who just need a place to live for a while, here in Stockholm at least.
FYI here is a copy of my model: https://docs.google.com/spreadsheets/d/1esgwYfYhDo0JaFP0qGhr...
Can you talk more about the crazy low rates? What terms are you getting?
The first place i got 2.99% in 2014 on a 5 year fix [at the time 20% down], second was the house at 2.49% in 2016 on a 5 year fix [50% down], the 3rd an final was 20% down for 2.59% in 2017 [30% down].
uh it seems i brain farted, final place was 30% down...im not sure how i managed to type something conflicting twice in there.
So this is a fun topic. I own 3 places, two apartments and one house. One of the apartments I lived in [and co-own with my partner] before we moved to the house, the other apartment I purchased because I was able to make the month to month math work [read: cash flow break even] and it gave me the 60(personal property)/20(market funds)/20(investment real estate) net worth split i wanted.
The only reason real estate can work for me is because I'm able to put down 30% of the purchase price in cash for the apartments and borrow the rest at crazy low rates [2.99% & 2.59% for the more recently purchased unit]. If we assume a reasonable return on the apartment (4% annually) and a healthy yearly stock market return (8%), if you consider the fact that I couldn't borrow money to play with stock, the 'bonus' I get on appreciating portion of the property that is actually borrowed money makes them experience very similar performance when modelled over a 10 year period.
At the end of the day, as with all financial advice, what you should do dramatically depends on your current personal situation, goals and age.
Also the mortgage interest deduction. It essentially means that you pay interest on the mortgage with pre-tax dollars, not post-tax.
Most people overestimate the value of this deduction. If you are married filing jointly you would get a $12600 without itemizing. So you are only saving any money if your mortgage interest and property taxes are more than $12600 a year, or if you have other deductions.
One important benefit of buying: the $500K capital gains tax exemption for married couples on sales of their primary home after living for two+ years.
I lived in apartments since I was 18, up and down the east coast. After ten years renting and paying through the nose in DC I went to Atlanta and bought a house at 34. Sadly no jobs in my industry so I've moved back to the DC area and I'm renting out my house. The lesson for me was that I should have bought sooner. This house is a nice foundation for myself and it's actually freed my worry to be a little bold, and go where I need to go. I always have that house to go back to if all else fails, so to speak.
I think you bring up a big point that hasn't been discussed yet. If you own property and lose your job or get a job opportunity on the other side of a city with a lot of traffic or another part of the country it is a lot more difficult to shed an owned property than it is a rental.
Yes, exactly. Owning a home made a lot more sense when employment was for life and young adults had kids. But I don't have children and who knows where my next job will be? I'd take a good offer almost anywhere. Owning complicates that.
I lived most of my life in the Midwest and this was true for me there, too. I moved apartments a lot, because I enjoyed spending time in different neighborhoods. Plus, whenever I changed jobs, I moved to be closer to the office. Earlier this year I moved to New York. I couldn't have done any of that so easily if I'd bought a house when all my peers did.
I'm moving out of a house right now in the midwest that bumped my rent by $100/mo each year, but they listed it back at my original rate this year. For some reason, being a multi-year tenant cost me an extra ~$3000.
All of my NYC friends move to different apartments every year or two as well. For a completely different reason though, they can not afford the yearly increases. One friend had a place near Barclays for $2800 and it went up to $3500 in a single years increase.
In the small city where I grew up there is definitely a stigma attached to renting. The pool of rental housing is very small and poor quality/low-rent, so renting implies not having "made it".
I think it's more common among the very wealthy. When part of the appeal is flaunting your wealth, renting is probably not the way to go.
I think a 1000k 1 bed condo is comparable to a 200k car in that it isn't just a place to stay or a way to get from A to B.
> Ms. Braddock said: “Here, there’s no stigma attached to renting, which is not true elsewhere in the country.”
Interesting comment. Never in my life or travels have I met anoybody who attached stigma to renting a place.