Considering not ever owning a house again.

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Hi, as many of you know, I am nearing the end of my divorce.

With the settlement or ruling (if my stb-x takes it that far), I'll be getting a payout, anywhere from a low of 20K to a fathomable 100K (if the house valuation comes in on the high side).

I am estimating on the conservative side with 40-50K.

I have been staying at my parents vacation trailer in a beach town and will of course, seek to find a residence near my kids and business.

I am 42 y.o. and have 3 boys - 13, 8, and 2 so I have a lot of years of parenting left, that I am looking forward to. Of course, being divorced makes you flighty with new relationships and such.

Anyway, I know it's a buyers market if there has ever been one. In fact, I just heard through the grapevine that in my old neighborhood, I could find a 3bdr. house on foreclosure for 100K and probably good deals on non-foreclosures.

Still, I see this sort of "macro-economic" development happening in our country. I am a political moderate at heart (maybe lean a little liberal, because most Conservatives think everyone is either Conservative or "everything else"). Anyway, I was listening to NPR the other day and they had a panelist who was the editor of the National Review. He really made a strong case that politically and economically, we need to stop "propping up" the real estate market with borrowed money and more importantly, he made the good point that we may have reached the kind of end of an "era" where real estate is going to be an appreciating asset.

Another pundit remarked the same thing - "Real estate is a depreciating asset."

Consider if I buy a 100K house.

Expenses:

Taxes: $4000/year
Repairs: $1500/year
Mortgage Interest: ???? At least 75K over hte life of a loan probably.


All for what? Maybe I'll have 200K asset at the end of my youngest kids childhood (in 15 years?)?

Meanwhile, I could rent and then earmark some of the rent for a business and more importantly, invest in appreciating assets/debt mixture with my 20-100K.

I think the American Dream has died at the end of the Bush Administration (not Bush's fault per se - it's just when the death occurred).

What do you all think?

Would you invest money into a depreciating asset like a home?

I could probably get a decent house around here for $1200-1400/month in rent and could probably deduct 10-20% of it as a business expense (doctors are allowed to deduct a den for writing reports as per IRS code). I also tend to think our country with taxes. . .it's kind of like you are a major target when you are a homeowner, like politicians will put you in their sites and take aim.

There's one downside risk though. . .I can see where in our litigiouis society we live in it's easy for lawyers to take money away whereas it's hard to take homes away. It may be good "defense", being a chiropractor to lock up some of my assets into a home, even though it's a depreciating asset. I am well-insured on malpractice (1,000,000/3,000,000 on malpractice and $2,000,000/4,000,000 on business, $250,000/500,000 on auto), home and auto but maybe I should look into an umbrella policy.

I do live in the highest populated state of attorneys and should give them their dues in the form of being well-insured if I am not going to own a home.

[ferriwinkle]

If you are paying rent for the rest of your life, you will never get anything in return, but you still be making the payment. you could also write of a portion of your mortgage payment for your office and the interest as well. Over 30 years at $1200 a month for rent (of course assuming that your rent would never go up) you would pay almost $500k--with not house to show for it. Also, how is a house a depreciating asset--I know home prices have gone down over the last couple years in most places, but over time they go up in value.
In the end this is obviously your choice, and if you decide to rent, it's not like you can't buy a house later. I would recommend looking into buying a house now, as prices are pretty low, so you should be able to get a good deal.

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30 years of $4000/year = $120,000/year just in taxes (assuming taxes don't go up, ha!).

I think a home is now being pundited to be a "depreciating asset" because of all the attached expenses that go with owning a home, esp. in NJ being the highest taxed state in this regard.

I didn't even list all of the attached expenses. I budgeted repairs. . but then there is maintenance too. I'd say at least $100/month in maintenance (I think I am being conservative, esp. on an older home). I think I was being conservative also with repairs - new roofs, new air conditioner, etc - it's probably more fair to budget $200-300/month in repairs for the occasional doosie.

Remember also - it's 5% to just "get out" of that asset at the end of it's life, like a loaded mutual fund (real estate commission). . .so that theoretical 200K just became 190K to redeem.

I don't know. . .to live for 30 years and only spend 500K for shelter. . .that may not be a bad deal.

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Oh, and let's not forget capital gains. . .30% of a 90K gain would be $27000 in capital gains tax ( I guess, assuming I rent as a senior or move into a small modular or something). So, the illusionary gain at this point is $63,000.

In exchange for locking up my money? Is this really worth it?

I am not sure home ownership should be encouraged financially in this country.

Oh, I am sure I could swing a 15 year mortgage too and pay it down in 11 years.

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But. . .maybe I am being overcontrarian. . . wouldn't be my first time here.

[jIM_Ohio]

I think Real estate is a depreciating INVESTMENT but an appreciating ASSET and generally fixes your COSTS. I chose those words carefully. Think about what an investment is, and what an asset is and think of how most businesses try to control their costs. Pundits usually don't go that deep into money and personal finance because they are idiots.

Really.

From an investment side of things, a house is terrible. If a house costs 100k and you finance 80% (80k) for 30 years, you paid $192,000 for an asset worth 100k. That is not a good investment. The investment would need to double in 30 years to break even. Works in HCOL areas, but where I live that isn't going to happen (my 280k house will not sell for 560k in 30 years). Plus the investment is not liquid, and it has high transaction costs to tap into the investment.

From an asset side of things, a house is good. You buy something you use for 100k and you can sell it for 125k later. It is an investment, it does go up, and that gain is not taxed (assuming the gain is less than 500k MFJ/250k single).

From the cost side of things, a house helps you control your costs- you can predict over 20-30 years what your housing cost will be, and outside of higher taxes on real estate and higher energy costs, those costs are fixed and quite predictable.

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JimOhio,

But rent is predictable too, on a yearly or bi-yearly basis.

In fact, I think you hit the crux of the matter for me. Rent is something more negotiable than taxes. Yeah, my landlord could hit me with a 3% COL increase and I am sure I am not going to "take my business elsewhere" for my rent going from $1200/month to $1235/month.

But. . .taxes, they ain't negotiable. The tax man cometh. The tax man getteth. Air conditioner repairmen - very little negotiating power. Roofers. . .little negotiating. Fixed mortgage - little negotiating. ( I doubt I'll be able to refinance for lower than 3-4%).

I don't know. . .I know you think pundits are idiots.

But many pundits pundit the opinion that "the markets are efficient", meaning, "There is no such thing as an undervalued stock, or an undervalued bond", that you can't pick those "sleepers" and then hope to ride it up. I'm sure you studied that in your "Finance Theory" classes, market capitalization and all that.

And I am not going "trade" (flip) my house. . .I would be an investor.

I have to consider that there IS a possibility, a real reason that real estate is so not worth much anymore, that the market is efficient.

That there is a real reason all of your homes out there in Saving Advice Land aren't worth anything (or much) to me as a buyer/investor, that it's like buying your used cars.

And we all know when you buy used cars, you are just buying someone elses headaches.

I am not sure I want to buy your headaches.

Only lease them.

[jIM_Ohio]

JimOhio,

But rent is predictable too, on a yearly or bi-yearly basis.

Yes, but on a decade basis, it will vary too much for some financial plans to survive.

If you think short term, rent will probably be better most of the time.

If you add time (like 10-40 years) as a variable, then look at past, I think most period would favor owning.


For example, take a person which bought a house in 1970, paid it off in 1985 (15 years later) then would look for an equivalent rental value when they retired in 2000.

The cost of ownership, over time, is less than renting. It is possible in 1970 they could have rented for less than they owned. Could be possible that was true in 1975 (5 years later), but by 1990 no way rent would have stayed that low unless there is another factor (like renting from a family member at below market price).

[MonkeyMama]

You will probably get some interesting replies and thoughts to help you chew on all this.

My thoughts:

#1: I have no idea why real estate is being touted as at all-time-lows. It's not. Prices have fallen to where they were a decade ago. Real estate in my own city easily fell 50% in a very short time frame, but it also went up over 100% just as quickly, before the fall. This means, as long as you didn't jump in during the huge run up, you are breakeven or ahead. Prices would have to fall a lot further for me to consider it a grand deal. For all the over supply of houses, good properties (not short sales; not trashed and sitting empty for months) that are priced on the lower side get bid up in bidding wars reminiscent of the boom. If I had a dollar for every person who told me in 1999 that real estate was too expensive (when we bought our first home), and then told me in 2009 it was "the deal of their lifetime" at the same price.

#2: You just have to work out what makes sense for you. Rents are sky high where I live, and so owning gives us a chance to control our housing costs for the long run. The added bonus will be some day paying off the home and having no mortgage. We didn't buy our house because of future appreciation - we really could care less about that. IT's just an added bonus, if it works out that way.

For anyone buying a house because of long-term appreciation, I think your thoughts and concerns are very valid.

[Andrew Jackson]

Yes, but on a decade basis, it will vary too much for some financial plans to survive.

If you think short term, rent will probably be better most of the time.

If you add time (like 10-40 years) as a variable, then look at past, I think most period would favor owning.


For example, take a person which bought a house in 1970, paid it off in 1985 (15 years later) then would look for an equivalent rental value when they retired in 2000.

The cost of ownership, over time, is less than renting. It is possible in 1970 they could have rented for less than they owned. Could be possible that was true in 1975 (5 years later), but by 1990 no way rent would have stayed that low unless there is another factor (like renting from a family member at below market price).

OT, but Jim I'm pretty sure you post on the Bills message board too right?

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JimOhio/Monkeymama:

Good points by both of you.

Jim, you said something that made me reconsider my contrarian position. . .that the fact that perhaps my house can be an "asset" if in 11 years it's paid off (and 2 kids are away at college) and now. . .now. . .in true Pat Kisoyaki format, it is turned into an "asset" because I could rent it then for an "Income." Mortgage is paid and now it's renting for $1200-1400/month and all I owe are taxes, repairs and maybe maintenance.

(Pat Kisoyaki is of the philosophical beleif an asset isn't an asset until it generates an income - I know - a controversial pundit, philosophical view).

MonkeyMama,

Yes, you made me consider that real estate is a local market. Being near the beach, I can always find cheap winter rentals. Even in the summer, to get a summer rental, it's $8500 (June 15th to Sept. 15th). The rest of the year, I found one place that was $540/month.

So total yearly cost for renting:

$13360.


Near the shore, you are usually in a higher state of glut than most other places, even if they command a premium for 3 months/year. You should see all the "FOR RENT" signs out in Ocean City, NJ. The whole town is for rent.

Something to consider all around.

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MonkeyMama:

Another point about how Pundits say we have entered a different era.

My parents bought their first house for $20,000, I think.

Now. . .at the end of their working lives (mom just turned 65), they may get $200,000 for it (probably less for a 3bdr. rancher w 1 acre of land but I'll be liberal with the estimate for sake of round numbers).

Well, that's a 1000% return on their money in 35 years. Now, I understand - they paid mortgage interest too, they paid taxes, they paid for maintenance and repairs. But this is all the more reason why they are at least glad they got a 1000% return on their initial investment. It's really barely a break-even proposition for them even, probably even a small loss.

That's essentially artificial or a once-in-a-millenium phenomenon, so I agree with you.

I am not going to buy a house today for $100,000 and be able to sell it for a $1,000,000 in 35 years.

Ain't happening. NEver happening. I see maybe $300,000, a 200% return perhaps on the price (not a return when you consider all expenses).

There are too many builders, too many houses, and not enough of a growing middle class to support this.

The American Dream has died.

[jpg7n16]

Pat Kisoyaki is of the philosophical beleif an asset isn't an asset until it generates an income - I know - a controversial pundit, philosophical view.

That's not that farfetched. Except that I'd say not that it currently generates income, but that it currently has the potential to generate income.


Your house is actually stopping you from having the expense of renting... and your house could generate income if you chose to rent out rooms today. So it could start generating income tomorrow. And if you consider how you don't have to pay rent, it is saving an expense - which is just as good as income.

The largest expense of the "home" -interest- is actually an expense of the debt on the home. Mortgage payments aren't because of the house, they're because of the mortgage - which is not an asset, but a liability. (note- the mortgage never has a potential to generate income, but constantly generates an expense)


If you own it, and could rent/sell it - it's an asset. (applies to home, car, investments, computer, etc.)

[jIM_Ohio]

That's not that farfetched. Except that I'd say not that it currently generates income, but that it currently has the potential to generate income.


Your house is actually stopping you from having the expense of renting... and your house could generate income if you chose to rent out rooms today. So it could start generating income tomorrow. And if you consider how you don't have to pay rent, it is saving an expense - which is just as good as income.

The largest expense of the "home" -interest- is actually an expense of the debt on the home. Mortgage payments aren't because of the house, they're because of the mortgage - which is not an asset, but a liability. (note- the mortgage never has a potential to generate income, but constantly generates an expense)


If you own it, and could rent/sell it - it's an asset. (applies to home, car, investments, computer, etc.)

+1 good post

If you rent your house, you need to weigh this against the costs renting gives you- which includes you paying rent yourself.

[cypher1]

If you own it, and could rent/sell it - it's an asset. (applies to home, car, investments, computer, etc.)

Agreed! I'm now renting two rooms downstairs at my house to friends, and who am I argue that by providing a roof for rent, in exchange for them covering over 50% of my mortgage? Now I realize that by having a renter(s) there is still risk/maintenance involved or price to pay, and you give up a % of privacy/freedom (esp if you have kids to take care of). But additional monthly income to yourself allows even more freedom for investing/liquidity overall, which IMO outweighs being the renter. Granted I'm not saying everyone should own a house, going back to need vs want subject. But I respect your reasons why you'd decide to rent. Another single friend had a house, sold it making some $ before the market tanked, and wants nothing to do with them going forward. I'm not going to argue him