This compares against the opportunity cost of investing the initial down payment, but does not seem to factor the opportunity cost of ongoing carry costs.
For example, I was able to easily craft a model where my expected monthly income was negative. (Just bump the expected annual costs to 2.0%, which is actually more realistic since 1.0% = tax and 1.0% = maintenance.)
Surely the couple hundred dollars a month could also be continuously invested and producing returns if they weren’t being driven into the real estate asset.
I plugged in some reasonable numbers for rent & home prices in my area and found that basically all of the net worth was due to home price appreciation. While houses here are appreciating at rates far higher than the 4% of the model, that's because the stock options of the buyers have been going up at ~25% annually.
My takeaway: bubbles rule. As long as you're in a region eating the rest of the world, owning property will let you share in that windfall. As soon as that economic engine sputters, they will be ruined, and so will you. Better watch for that next big thing, and then hop on something else once it's no longer the next big thing.
Also, it seems wrong to assume 4% annual appreciation of an asset whose discounted cash flows are negative. At some point that gets unsustainable, and nobody will bother to buy the asset.
> for rent & home prices in my area and found that basically all of the net worth was due to home price appreciation.
It's not just home appreciation, it's down also the down payment.
Say the housing market increases at 5%/year. If you buy a house in all cash, you will get 5% returns.
However, if you use that same money for a 20% down-payment to take out a loan (say 3% interest) to buy a house that's 5X more expensive, your returns will be 13%/year (=5% * 5X leverage - 3% interest on 4X of the cost). Huge difference.
Of course, these are fake numbers, and fail to account for a variety of other factors (taxes, closing costs, maintenance, etc.). However, the point is that housing market increase is not at all the full story.
So your investment is basically a proxy for stock prices? Why not invest in those stocks directly?
Although if all the net worth was due to house price appreciation, stock options don't seem to be making up much of net worth, or weren't included, either of which seems to undermine your argument?
We did kinda assume that the buyer would set the rent to at least cover her ongoing costs. In the UK, for example, you can only get a “buy to let” mortgage if you can prove that you can reasonably charge enough rent to cover your mortgage payments.
You’re totally right about reinvesting the earnings into stocks etc — we excluded this in the model to simplify things and not be too prescriptive. But if I were thinking of doing this, I’d definitely want to take that into account :)
It’s more than just mortgage payments — taxes, maintenance, management fees, empty losses, etc. all make it easy to have negative carrying costs.
There are _lots_ of people owning to rent that don’t cover their actual carrying costs. They just justify it by thinking about the equity growth.
In fact, even the default example has negative carry costs. The initial interest on $480k plus $6k isn’t covered by $2k monthly rent, let alone principle payments and a more realistic maintenance amount.
For example, I was able to easily craft a model where my expected monthly income was negative. (Just bump the expected annual costs to 2.0%, which is actually more realistic since 1.0% = tax and 1.0% = maintenance.)
Surely the couple hundred dollars a month could also be continuously invested and producing returns if they weren’t being driven into the real estate asset.