Buy your house first or last?

[sptrawler]

A share that pays dividends that you never intend to sell is still an investment, a property pays a weekly dividend In The amount of rent it offsets that you would normally have to fund from another income source.

There are share holdings that have been held in families for generations, and probably never be considered for sale, this doesn't stop them being investments, contributing value into the family. Whether you intend to sell something or not isn't what qualifies something as an investment.

Yes of course it is, I've made quite a big profit on a ppr in the past and I'm still getting it in the ear.
There is nothing wrong with sit and hold, also there is nothing wrong with sell and take a profit, it is all personal perceptions.
That is what makes us all different.

 

[Value Collector]

Yes of course it is, I've made quite a big profit on a ppr in the past and I'm still getting it in the ear.
There is nothing wrong with sit and hold, also there is nothing wrong with sell and take a profit, it is all personal perceptions.
That is what makes us all different.

Yeah, allow me to share my personal perception.

Say I buy an investment property for $500,000 and it delivers me $20k a year free cashflow after costs, no body would disagree that's an investment, it's storing a lump sum of value and it's producing a return, and the capital value and income will generally grow atleast with inflation.

So that's an investment.

Now if I evict the tenant, and move in myself, I feel it's still acting as an investment, it's still storing value, it's still providing the inflation hedge, and most importantly it's still producing $20k a year in value, it's just that rather than get that $20k per year in cash, I am consuming it directly.

 

[Smurf1976]

After allowing for rates, insurance and basic maintenance my PPOR (owned outright) is saving me at least $15K a year (haven't checked the exact figures recently) that I'd otherwise be spending on rent.

Whilst I can't get the capital out without selling, it's an extremely reliable source of returns via rent not paid. That's money that I don't need to get hold of by some other means be it working or investments.

So I do consider it to be an investment on account of the ongoing, very regular and reliable albeit rather modest, returns it provides.

 

[sptrawler]

After allowing for rates, insurance and basic maintenance my PPOR (owned outright) is saving me at least $15K a year (haven't checked the exact figures recently) that I'd otherwise be spending on rent.

Whilst I can't get the capital out without selling, it's an extremely reliable source of returns via rent not paid. That's money that I don't need to get hold of by some other means be it working or investments.

So I do consider it to be an investment on account of the ongoing, very regular and reliable albeit rather modest, returns it provides.

I tend to think an investment, is something that is bought to supply an income, or to be sold later for a capital gain.

If you were buying a ppr on the basis of saving rent, you would buy the cheapest house that could accommodate your family.
Most people buy a house because they like it and think they can afford it, the rent savings in most cases is a by product and is easily cancelled out by borrowing costs. This is where calling it an investment, gets cloudy.IMO

To realise the stored capital, the house has to be sold.

Having said all that, I think it imperative low to middle income earners, own their own house as early as possible.
Then concentrate on building investments, to supply them an independent income, to do both is difficult.

 

[Craton]

@tech/a.

Wisdom is meant to come with age---so Ill go with that.

Supply wisdom and employ willing bodies!
That's how I do it

Yep, I'm hearing you but I was thinking of health not strength.

@sinner and skc

I hear this crap spouted all the time but what does it actually mean? It means nothing, it's nonsense.

Those on a more/larger disposable income may see things different to those on the lower socio/economic scale.
I understand we all have different circumstances and attitudes but allow me to relate a couple of tales of two battler couples I know well. We were all in the same boat of being renters at the same time, my wife and I chose a different path.

First couple of battlers I know have rented the same place for over 25 years along Salt Pan Creek, Sydney. They bemoan the fact that they have no savings/assets, live week to week and that they've helped the l/lord pay 2 times the value of the property in that time.
Mind you, they have raised a family there as well. Now that they are both in their mid/late fifties, he with health issues, they'll be renters forever.

Another battler renter couple also mid/late fifties I know living in Port Noarlunga, Adelaide. He has just passed away (RIP Mark) thanks to prostate/colon cancer, raised a family, again living from week to week and what has he left his family?
Zero savings/assets and a widow wondering how she'll make ends meet.

Flipping property aside, the fact that your PPR is CGT free shouldn't be dismissed out of hand and should be considered in one's retirement planning. The earlier the better.

Spout what you like about renting and dead money but the fact is, renting only serves the l/lord and I know who'd I rather be. Oh, and for the record, I'm not against renting.

@sptrawler.

Having said all that, I think it imperative low to middle income earners, own their own house as early as possible.
Then concentrate on building investments, to supply them an independent income, to do both is difficult.

Starting as early as one can, darn straight and pay as much extra into that mortgage as possible right from the get go.

Get some equity into it and then the opportunities flow.

 

[Value Collector]

If you were buying a ppr on the basis of saving rent, you would buy the cheapest house that could accommodate your family.
Most people buy a house because they like it and think they can afford it, the rent savings in most cases is a by product and is easily cancelled out by borrowing costs. This is where calling it an investment, gets cloudy.IMO

The savings would work just as well if you were to buy a house of the same level you would normally rent.

the rent savings are easily cancelled out by borrowing costs

not really, if you bought a $500K home and paid it off over 30 years you would pay about $500K in interest, which sounds like a lot, but it's not.

If you rented that home, paying $480 per week, over 30years you will pay $750,000 in rent, but in reality you will have rent increases over 30years, so probably end up paying well over $1,000,000 in rent, so you will end up outlaying more money over time and not end up owning your house.

 

[skyQuake]

The savings would work just as well if you were to buy a house of the same level you would normally rent.



not really, if you bought a $500K home and paid it off over 30 years you would pay about $500K in interest, which sounds like a lot, but it's not.

If you rented that home, paying $480 per week, over 30years you will pay $750,000 in rent, but in reality you will have rent increases over 30years, so probably end up paying well over $1,000,000 in rent, so you will end up outlaying more money over time and not end up owning your house.

But in your example, the $500k home would have >$480/wk in repayments. (assume 5% rates vs 5% rental yield)
$480/week only covers interest expense.

 

[sptrawler]

The savings would work just as well if you were to buy a house of the same level you would normally rent.



not really, if you bought a $500K home and paid it off over 30 years you would pay about $500K in interest, which sounds like a lot, but it's not.

If you rented that home, paying $480 per week, over 30years you will pay $750,000 in rent, but in reality you will have rent increases over 30years, so probably end up paying well over $1,000,000 in rent, so you will end up outlaying more money over time and not end up owning your house.

As I said in the earlier post, low to middle income earners, should buy a house as early as possible. It also IMO, should be a basic house, for shelter not a McMansion, $500,000 is a ridiculous amount for a low to middle income earner to borrow.
Yet to have a reasonable retirement, they require a house, paying market rent on a pension is difficult, if not impossible. To have any chance of owning a house outright, and have income producing assets, is difficult unless the house is bought for a realistic price.
IMO too many young people today, are trying to enter the market, at the second or third house level. This is putting them under mortgage stress immediately, which makes it difficult for them, to see the light at the end of the tunnel.

As I said it is only my opinion, from my personal experience and the experiences of my family and friends.


The high income earners, have much more flexibility and are generally in a position, with many more options.
But returning to the above title, if I was a low to middle income earner, I would buy the house first.

If I was a high income earner, a lot more scenarios have to be considered.

 

[Value Collector]

But in your example, the $500k home would have >$480/wk in repayments. (assume 5% rates vs 5% rental yield)
$480/week only covers interest expense.

As you pay off the loan the interest bill gets less and less each year, so over a 30 year loan you will only pay $500K interest (I used CBA home loan calculator to get that)

however, the rent won't decrease year by year as the interest bill does, so 30 years of 480 weekly payments is $750,000 which is 50% more than the interest bill, also as I said rents rise year by year, so after 10 - 15 years your rent will probably double and be more than triple by the 30 year mark, when you factor that in your rent for the next 30years will be over $1,000,000

renting is cheaper in year one, but gets more expensive over time as inflation and demand pushes up rents.

Buying is more expensive in the early years, but gets cheaper every year until finally the house is paid for and all you have to spend money on is ownership costs, which are about 20% of the cost of renting.

So buying is harder in the early years, but eventually you have a decent asset, and your housing costs are 20% that of a renter.

 

[sinner]

As you pay off the loan the interest bill gets less and less each year, so over a 30 year loan you will only pay $500K interest (I used CBA home loan calculator to get that)

however, the rent won't decrease year by year as the interest bill does, so 30 years of 480 weekly payments is $750,000 which is 50% more than the interest bill,

That is some funky magic maths you've got there VC.

So interest is $500k, and the house is $500k, but apparently you only pay $750k on the lifetime of the loan?

Magic!

Weird though, because when I use the same calculator the magic doesn't work and it appears to just show plain old reality... i.e. $1mil over the lifetime, assuming a constant interest rate for 30 years when rates are at historical lows



If I try for the 15 year fixed to get some cashflow certainty happening...oh look...more reality...

also as I said rents rise year by year, so after 10 - 15 years your rent will probably double and be more than triple by the 30 year mark, when you factor that in your rent for the next 30years will be over $1,000,000

renting is cheaper in year one, but gets more expensive over time as inflation and demand pushes up rents.

Yayyyyyy linear extrapolation forever into the future. Rents will be $1,000,000 per week and wages will still be $20/hr, I am sure. As I said, rents do not track inflation, they track wage growth.

 

[Value Collector]

That is some funky magic maths you've got there VC.

So interest is $500k, and the house is $500k, but apparently you only pay $750k on the lifetime of the loan?

Magic!
.

No,

I said the Interest Bill on the loan would be $500K, I wasn't factoring in the principle payment because that's not really a "cost", it's a form of saving, you get the principle back when you sell the property.

The $750,000 I mentioned is the cost in rent when you pay $480 / week for 30 years. but that's unrealistic to think rents wont increase at least with inflation, so the actual rent over 30years would be double that.

Weird though, because when I use the same calculator the magic doesn't work and it appears to just show plain old reality... i.e. $1mil over the lifetime, assuming a constant interest rate for 30 years when rates are at historical lows

Yes, you will pay $1,000,000 over the life of the loan, but as I stated above, only $500,000 of that is interest, the other $500,000 has accumulated as equity which when you sell you will get back, but also you will probably get a lot more than that, because inflation would have pushed up the value of the home.

Yayyyyyy linear extrapolation forever into the future. Rents will be $1,000,000 per week and wages will still be $20/hr, I am sure. As I said, rents do not track inflation, they track wage growth

Don't you think rents will rise with inflation over time?

Wouldn't it be silly to assume that in 30 years you could still rent for $480 per week?

Yes wages will rise with inflation too, but both the home owner and the renter will see their wages rise with inflation, but the renter will have a rental payment that's increasing with inflation, where as the home owners interest bill steadily reduces over the years as the loan is repaid, and once the loan is repaid, the owners cost of ownership will be rates, maintenance, insurance etc which is about 20% of the rental amount.

 

[sinner]

Yes, you will pay $1,000,000 over the life of the loan, but as I stated above, only $500,000 of that is interest, the other $500,000 has accumulated as equity which well you sell you will get back.

I really don't understand how it is OK to just gloss over assumptions like being able to sell the house back at a value greater than or equal to what you paid.

It's not OK. Don't gloss over it.

Don't you think rents will rise with inflation over time?

Wouldn't it be silly to assume that in 30 years you could still rent for $480 per week?

What's silly is linear extrapolation informed by recency bias, especially when forecasting 30 years out.

No, I do not think the coming 30 years will be like the last 30 years.

Take a look at Japan, and how foolish any such assumptions and extrapolations made in the year 1985 would appear today, regardless of how valid they appeared at the time. (or the USA in 2006, or Greece in 2003, or whatever).

 

[tech/a]

And now for something Completely Different.

I agree with Sinner.

In most part anyway.

 

[Value Collector]

I really don't understand how it is OK to just gloss over assumptions like being able to sell the house back at a value greater than or equal to what you paid.

).

This conversation started, because some one made a comment that you are either going to rent a property, or rent money.

My point here, is that the interest bill is most likely going to be a lot less than the cost of renting, and that in general the interest bill reduces over time, where as the weekly rent is almost 100% guaranteed to rise over time.

So you have the situation where the owner, has a weekly interest bill that will reduce from roughly what the weekly rent is, to zero over thirty years, where as the renter will probably never see a long term reduction in weekly rent, and if we are honest, will likely see a massive rise in rent over thirty years.

It's not OK. Don't gloss over it.

I don't think its ok to gloss over the value his equity will have by claiming the $500K in principle payments is an expense in the same way the interest bill or rental payment is.

The principle payment accumulates, and represents the owners ownership interest in the underlying property.

the property will always be worth something, even if he over paid by 20% initially, he will still get a large chunk of his principle back, so its not an expense, but after 30 years of inflation, even without real growth, the amount in dollars he gets back will be more than his principle payments.

What's silly is linear extrapolation informed by recency bias, especially when forecasting 30 years out.

What's your guess as to the inflation rate over the next 30 years, I thought you believed there was a chance of lots of inflation, hence your gold position?

Take a look at Japan, and how foolish any such assumptions and extrapolations made in the year 1985 would appear today, regardless of how valid they appeared at the time. (or the USA in 2006, or Greece in 2003, or whatever

Do people in japan not have to pay rent?

 

[skyQuake]

As you pay off the loan the interest bill gets less and less each year, so over a 30 year loan you will only pay $500K interest (I used CBA home loan calculator to get that)

$480 interest repayment + principal repayment
vs
$480 rent payment + asset investment

apples with apples etc.

For this example I thought we were going to compare pure interest only vs pure rent.

however, the rent won't decrease year by year as the interest bill does, so 30 years of 480 weekly payments is $750,000 which is 50% more than the interest bill, also as I said rents rise year by year, so after 10 - 15 years your rent will probably double and be more than triple by the 30 year mark, when you factor that in your rent for the next 30years will be over $1,000,000

That depends on whether you think house prices will increase. Assuming that the rental yield stays constant. If house prices fall, then rents will get cheaper

 

[Value Collector]

$480 interest repayment + principal repayment
vs
$480 rent payment + asset investment

apples with apples etc.

For this example I thought we were going to compare pure interest only vs pure rent.

either way, you would still have a rising weekly rent that is likely to triple over 30 years, compared to a interest bill which would likely remain largely stagnate, see for yourself, put a 4% rental increase each year on the $480 for thirty years

Also, the capital value of the house would probably increase at least by inflation so even an interest only loan would likely see some equity generation over time.

the main phenomenon I am trying to point out is that apart from the ups and downs in interest rate, the owners costs are largely locked in and unaffected by inflation, where as the rental has the ever present inflation pushing up his costs.

____________________________

But also, principle payments onto a house are a very good form of saving, especially to those who would find it difficult to maintain the discipline of saving over the years.

That depends on whether you think house prices will increase. Assuming that the rental yield stays constant. If house prices fall, then rents will get cheaper

rents won't drop just because prices fall, rents are based on supply and demand of rentals.

In the GFC houses prices plummeted in the USA, but rents didn't fall by the same amount, rental yields increased.

 

[skyQuake]

either way, you would still have a rising weekly rent that is likely to triple over 30 years, compared to a interest bill which would likely remain largely stagnate, see for yourself, put a 4% rental increase each year on the $480 for thirty years

Also, the capital value of the house would probably increase at least by inflation so even an interest only loan would likely see some equity generation over time.

the main phenomenon I am trying to point out is that apart from the ups and downs in interest rate, the owners costs are largely locked in and unaffected by inflation, where as the rental has the ever present inflation pushing up his costs.

Point taken. Inflation will help owners as opposed to renters (unless you think there's going to be deflation

 

[satanoperca]

Point taken. Inflation will help owners as opposed to renters (unless you think there's going to be deflation

Glad for the tongue in cheek comment. There seems to be no inflation anywhere in the western world, there does seem to be an abundance of cheap credit and a massive amount of QE money pumped into the system over the last 5 years and still no inflation.

So one can only assume, if there wasn't money printing on a massive scale world wide, we would be in a deflationary death spiral but how long can you keep the deflationary genie happy.

 

[sinner]

This conversation started, because some one made a comment that you are either going to rent a property, or rent money.

My point here, is that the interest bill is most likely going to be a lot less than the cost of renting, and that in general the interest bill reduces over time, where as the weekly rent is almost 100% guaranteed to rise over time.

Yeah man. We get the point. It's not a hard point to understand. What I am saying is the assumption (what you refer to as "most likely") is dumb. You can prove this simply by trying to lock in the interest rate and see what happens. First of all, nobody is dumb enough to let you lock in a rate (at least, in Australia) for 30 years. Second of all, you can see the implied future rate when doing such a lock in is >7% per annum.

I already showed this above. The interest bill rises to >$700,000.

So you have the situation where the owner, has a weekly interest bill that will reduce from roughly what the weekly rent is, to zero over thirty years, where as the renter will probably never see a long term reduction in weekly rent, and if we are honest, will likely see a massive rise in rent over thirty years.

All certainty for the owner, nothing but not nice probablies for the renters?

I don't think its ok to gloss over the value his equity will have by claiming the $500K in principle payments is an expense in the same way the interest bill or rental payment is.

The principle payment accumulates, and represents the owners ownership interest in the underlying property.

And as the principle accumulates, the unmaintained value of the property depreciates and so on. It isn't so simple. Dumb to treat it like it is.

the property will always be worth something, even if he over paid by 20% initially, he will still get a large chunk of his principle back, so its not an expense, but after 30 years of inflation, even without real growth, the amount in dollars he gets back will be more than his principle payments.

I guess we better hope he didn't overpay by 30, 40, or 50% then? Or that we don't have 30 years of deflation? That wage growth outpaces growth in costs? and so on...

Another title for the man, AssumptionCollector.

What's your guess as to the inflation rate over the next 30 years, I thought you believed there was a chance of lots of inflation, hence your gold position?

Obviously unlike you I don't believe there to be one magical isolated factor called inflation. I recognise that there are different forms of inflation, some which lead to virtuous cycles in the economy and others which lead to negative feedback loops. The inflation you are talking about is the inflation of the last 30 years, i.e. all I'm hearing from you is how well I would have done to buy a house in Australia (first) in 1985 as interest rates went down in constant clip nearly every year to their current historical lows.

Yes. Real assets, good.

No. Leverage, bad.

Is caveman style simple enough to grasp?

Do people in japan not have to pay rent?

Ever looked at historical rents in Japan? My guess is not. Good luck plugging 4% rental increase into a model there. You'd be lucky to get that over a decade at the current rate.

 

[Value Collector]

Yeah man. We get the point. It's not a hard point to understand. What I am saying is the assumption (what you refer to as "most likely") is dumb. You can prove this simply by trying to lock in the interest rate and see what happens. First of all, nobody is dumb enough to let you lock in a rate (at least, in Australia) for 30 years. Second of all, you can see the implied future rate when doing such a lock in is >7% per annum.

I already showed this above. The interest bill rises to >$700,000.

Even at $700,000 its still roughly half what the rent will be once you factor in rental increases.

And as the principle accumulates, the unmaintained value of the property depreciates and so on. It isn't so simple. Dumb to treat it like it is.

Who said you shouldn't maintain your property, maintaining the property is included in the ownership costs, when I said eventually the owners cost reduces down to about 20% of the cost of renting, property repairs etc are factored into that.

I guess we better hope he didn't overpay by 30, 40, or 50% then? Or that we don't have 30 years of deflation? That wage growth outpaces growth in costs? and so on...

Obviously if you feel an asset is grossly over valued, you don't buy it, none of my arguments were saying todays prices are good or bad, I was discussing the general theory behind ownership vs renting.

Ever looked at historical rents in Japan? My guess is not. Good luck plugging 4% rental increase into a model there. You'd be lucky to get that over a decade at the current rate.

and what's the interest rate you would be using to calculate the owners interest bill there?

and how does that compare to the rental yield the renters are paying?