Don't buy, rent instead?

11 Replies

Hey - Did anyone read this article on MSN recently? It's an article about the benefits of renting instead of buying. He tries to make the case that the stock market is a smarter investment. Thoughts??

http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx

It reads like someone came to a conclusion and then looked around for a way to justify it, if you ask me. He says stocks return "7% after inflation," but he just ignores the fact that he's talking about before income taxes/capital gains taxes. Then he concludes from this:

If you have $300,000 and a choice between spending it on a house or shares, you'll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero.

So he's would be paying $15,000 a year in rent, but that's after-income-tax money he's spending. He thinks he's making a killing because he's earning $21,000 a year on his stocks, but that's before taxes (and he'll be paying income/capital gains tax, either now or in future, on the actual amount of his earnings, not the "adjusted for inflation" amount). I see people make this mistake all the time when doing these types of calculations, I'm just surprised to see it come from someone who bills him/herself as a money expert. A pre-tax dollar is not the same as a post-tax dollar.

There are other problems with renting. How many times have we seen renters of houses post in these forums because their lease had expired and they were being told to move out without the option to renew it? Maybe that happens less often in apartments, but the guarantee that my family is not going to be ripped out of its home at someone else's arbitrary decision is worth something to me, too.

Down in Florida right now there is so much inventory, renting is an option that should be considered and is, by a lot of people. The investors that are upside down are having to go that route. The apartment to condo conversions are swing back to rentals. A good strategy will add this as an option.

However, a person with two or three properties, which has not done this before, has too much homework to do. Contracts, listing, renting procedures, evictions, and more. Too many issues, unless you are experienced.

Just my 2 cents...Stuart

Obviously if he rents or advocates renting then he's got a very low net worth, and probably knows very little about business in general. Besides if you buy a stock you have nothing. What you're buying is a piece of paper. It has very little security in it. If the stock plumits then what? At least with property You can't lose any money. Absolute worst case senario is that you break even. Also a bank won't lend to someone to buy stock, but they will lend in some cases up to 100% of a house purchase, why would a bank do that? Think about it because they're money is safe. Anyway stocks are okay for a tiny part of your portfoilo but I think it's a waste. Why buy a piece of paper. It's worthless.

When you buy a stock you're not buying "a piece of paper", you're buying a "share" of the ownership of the company. Saying otherwise is like saying when you buy a house you're buying a piece of paper (deed).

Over the long haul stocks gain about 10% +/-.

For most people RE should be a small part of their portfolio.

There are one heck of a lot more posts on here about how "nothing will cash flow in my area", than there are about "how great appreciation is in my area.

I can't think of too many markets in the US today where unless I KNEW I was going to be there very long term it wouldn't be CHEAPER to rent than to buy; FL, San Francisco Bay Area, LA, Seattle, Portland, Chicago. Landlords have big negative cash flows in these markets so renting is definitely cheaper.

The list (out this past week) of the top 25 appreciating markets in the US didn't show too many that were outpacing the stock market gains of the past 10 years.

Right now I have about 35% of my net worth in RE. I think that's about right, FOR ME. I dont' think it's a good idea for most people as many/most people DON'T make money on REI, or if they do it takes them one heck of a long time to do it.

RE is illiquid. If you own several $300K properties and need a quick $100K you can't just sell a bedroom to get it. With stocks (or mutual funds) you just sell the appropriate number of shares.

r2dw wrote;

At least with property You can't lose any money. Absolute worst case senario is that you break even

Yeah! Try telling that to the people in Detroit, Toledo and other rust belt cities. In Houston from '82-'88 the average house LOST 50% of its value. On top of which many people were financing those houses with 10% + loans.

r2d2 sounds a lot like he's had a bad experience in the stock market.

BTW, over the long haul, the wealthiest members of any society are the OWNERS OF BUSINESSES. Actually the owners of any of the "means of production" which are LAND, LABOR AND CAPITAL. And since it's illegal to own labor (except for professional sports teams) then you need to invest in land and capital.

all cash

Well I'm not saying it's impossible to make money in stocks. I'm just saying in general it's far risky. You have no control over what the business does, you're just along for the ride. And I'm sure all of those houses eventually bounced back. So the owners who had locked in mortgages for even five years probably didn't have higher mortgage payments for much of that time frame. And eventually now they're houses are worth far more than they paid, not to mention they probably have paid off the mortgages years ago. Unlike a stock which if it plumits could mean the company goes bankrupt. And you never see a dime of your money again. Yes I've tried the stock market too. I know you can make madd money, but you can also lose you principle. After trying a lot of other investmensts I know I'm never going to invest in anything but apartment buildings. There about the safest asset out there because regardless of the economy people always need a place to live. And if you want to make a fortune off one apartment building, all you have to do is condo convert it and you can pull out millions in net profit. How do you do that with a stock?

Originally posted by "r2d246":
And if you want to make a fortune off one apartment building, all you have to do is condo convert it and you can pull out millions in net profit.

This is an interesting statement. Is this from experience? If not, give me some for examples on how this would happen? unit price, cost of special financing needed for condo conversion, est cost of attorney setting up an association, cost of renovation, if any, and sales prices of the units.

No disrespect intended, just curious if this is an accurate statement. In my experience it is not.

Originally posted by "mike_mn":
Originally posted by "r2d246":
If not, give me some for examples on how this would happen? unit price, cost of special financing needed for condo conversion, est cost of attorney setting up an association, cost of renovation, if any, and sales prices of the units.

There was a "Flip this House" (I know, gag me with a spoon) type show on recently that featured this.

$30 million purchase
$50 million in sales

I think it was for 300 units? Something like that. They didn't go into detail about the actual deal, as that wasn't what the episode was about. I can't imagine you'd spend more than $10k-$15k per unit fixing 'em up.

See FL for the whole Condo conversion fad though. 100,000 condos on the market in Miami. Another thing they did down there were hotel conversions - buy up old hotels and turn 'em into condos.

mike_mn................

It's like this. In most areas apartment buildings can be converted into condos. All that's required is city approval getting a survey done and then getting a lawyer to draft up a few documents, such as reserve fund study, individual condo plans and titles, condo association and whatever else. Those things do not cost a lot to do. Usually no more than $3 to $5k per unit. Usually a condo will sell for about double what the per door price is on an apartment unit. So by converting to condos you can often increase the value of your building by double the price. And in some rare cases even more.

For example a smart real estate developer might look for an old decrepid building located in a trendy Manhattan area, or any other expensive downtown core. They buy it as a rental building for not that much. Then they renovate and sell off the units for top dollar. Donald Trump does this a lot. Buys a building and sells of units for millions each after renovating them.

But the rule of thumb is about double. All you have to do is check what 1 and 2 bedroom condos sell for in the same neighborhood to figure out how much you could expect them to be sold off for.

So if you bought a building say that has 30 units. And say you spent 1m to buy the building. So each unit costs $35k roughly. Then if you could sell them off individually as condos you might expect to make around $70k each as a condo. So you do the conversion which will cost some, depending on what upgrades are required to be done to the building. Such as upgrading common areas. Then you advertise them say for example as $70k plus a $10k credit for the owner to do renovations, so you the buyer gets it for $60k if he takes it as is. Plus you spent say $5k per door to convert it. So you're left with $20k profit per door. Times 30 doors = $600k net profit plus whatever downpayment you put into the building.

In my city currently almost every building is being sold specifically to condo convert them right now. But that's a whole other industry to learn. But the profits are always in the hundreds of thousands to millions.

Wow, sounds like a great pocket area you have there. Where are you in Canada? Edmonton? Most major metros in the states don't sell for 50% ARV of condos. More like 80-90% ARV of condo prices now, around my area. And I would love to see a listing of a 30 unit building anywhere near manhatten for 1 million bucks. In the 7 county metro, the cheapest 30 units you will find is 60+k unit for apartments. With a possible $100-130k each after putting granite counter tops, stainless appliances, all new kitchens and baths and sprucing up the common areas. Along with a 2+ yr wait ($$interest$$) to sell them all, you are talking profits of maaaaybe 100-200k. With 2-3MM into a deal, that is not a risk I would ever take.

Many would been condo converts have been canned, with the market shift we have seen. All real estate is local, so, if you are seeing it on the up trend, take advantage now, cuz it wont last more than a few years before apartment buildings go up in value to cover the profit potential of a conversion. If I were you, I would buy as many buildings as possible and hold them til they double. They will if your conversion market is that hot. You won't have to do a thing, but collect rent til the market saturates and some schmuck comes along to buy your 105 units for 60k/unit as is. Along the way you cash flowed for a yr or 5 til this happens.

Ya that's the thing it's different everywhere you go. Here it's super hot right now. People getting rich off one conversion of a small building. Other places there's probably no point in even trying.

This is misleading. I agree with previous posters.... location location location. In a hot market there is value -- value that those who buy stocks could see. But in a down real estate there is still value, but value that stock brokers would balk at. Right now is a great example - supposedly real estate is in a "bubble" and it will tank soon. Foreclosures are at an all time high. For the RE investors this is great, and we can see the opps to make money. Stock brokers don't see that and couldn't find a decent contractor.