New American Dream Is Renting To Get Rich

[NorthAmericanguy]

Rich Arzaga owns a luxury home in San Ramon, California, but he's not betting on it as an investment.
The founder and CEO of Cornerstone Wealth Management, who bought the 5,000 sq. ft. property in 2005 for $1.8 million and has spent $500,000 improving it, considers the abode a wonderful place for his family. But ask him to rate his home -- or any home, for that matter -- as a financial investment, and Arzaga balks. "It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom.

Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own."
That's right: 100 percent.

The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas."I don't have the emotions a lot of people do surrounding real estate," Arzaga says. "I have steely eyes for how investing in real estate works, and I'd better be a prudent investor for my clients."
Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners "not to meet their financial goals. They were going to fail."

Some real estate experts thought there was some truth to Arzaga's argument, albeit with several conditions.
"To state that owning a home is or isn't a good investment is too simplistic," says Jeffrey Rogers, president and COO of Integra Realty Resources. "It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home.

But in a reverse market, it wouldn't be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead." "Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return," says Jed Kolko, chief economist at Trulia.com,
a real estate search and research website. "But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving.

If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."
Greg McBride, a senior analyst at Bankrate.com, agrees with one point of Arzaga's. "Home ownership is not so much a creator of wealth as a store of wealth," he says. "The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn't rebate a dime."

The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security. "You have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children," McBride says. "There's no sense in buying a home if it's going to deplete your emergency or retirement savings."

McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is." (See the full chart at link.reuters.com/hej66s)
Then there's the emergency fund, a must for when a home requires unexpected repair work.
"As far as emergency savings is concerned, six months of a cushion is adequate," McBride says. "But only 24 percent of people have that kind of cushion, and about 65 percent own homes."


So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era. Indeed, Arzaga cites himself as an example of how home ownership doesn't pay off. His residence is today worth $1.5 million, about 17 percent less than what he paid. So why not sell? For Arzaga, it's a lifestyle choice, and one that he doesn't regret, since his big money-making investments are elsewhere.

http://www.reuters.com/article/2012/02/ ... LG20120215

[momopi]

"McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is." (See the full chart at link.reuters.com/hej66s)"

In the last RE cycle, pre-bubble is like, 1998 and not 2004.

1 bed new construction condos in Irvine, CA was $110K (phase 1) in 1998, selling for $165K in Summer 1999.

2 bed new construction condos in Placentia, CA were $130K in 2008, selling for $230K in 2002.

[Teal Lantern]

The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs,

I don't understand this bit. Doesn't the cost of those things (plus hopefully a profit) get covered by the rent payments?
Otherwise, it wouldn't be worthwhile to have rental property to begin with.

[momopi]

The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs,

I don't understand this bit. Doesn't the cost of those things (plus hopefully a profit) get covered by the rent payments?
Otherwise, it wouldn't be worthwhile to have rental property to begin with.

I think the assumption is that the house is being used as primary residence, and not rental/income property.

In the current California RE cycle, the best time to buy (cheaper to own than rent in many areas) was probably 2008-2012 or 2009-2012. In Los Angeles, a SFR that sold for $240K in 2012 bumped up to $360K in 2013. At $360K you can break even vs rent, but other cost of ownership will add up.

[jamesbond]

McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is." (See the full chart at link.reuters.com/hej66s)

http://www.reuters.com/article/2012/02/ ... LG20120215

Wow, this was as great article NorthAmericanguy! I always had a feeling it was better to rent than to own. When you rent, you don't have to pay any maintenance costs, real estate taxes or homeowners association (like you would if you lived in a condo or townhouse).

If I had known that there was going to be a housing crash, (I bought my place in late 2007 right before the housing crash) I would of just rented. All the money I put down on a down payment I could of put in the bank. My townhouse went down in value 30% in just 3 years! Even though I put 20% down, I am STILL underwater today!

I will NEVER invest in real estate, no matter how often I see those guys on late night TV selling their real estate courses! I used to watch Carlton Sheets, Dave Del Dotto and Russ Whitney on late TV pitching their "how to get rich by investing in real estate" courses.

I have to admit, I did buy Carlton Sheets course and went to one of his seminars and meet him in person and actually was able to talk to him for about 20 minutes. He came across as being sincere and wanting to help people who are interested in becoming real estate investors.

Personally, I would not want to be a land lord and deal with all the headaches of dealing with tenants. Also, "flipping" homes is kind of scary because you need to fix it up and sell it as soon as you can, otherwise you are stuck making mortgage payments on the home.

Check out this Carlton Sheets video where he talks about getting over your fears.

[SilverEnergy]

The key is to get money in real estate through CASHFLOW and EQUITY.

Appreciation should be the last reason you invest in real estate.

Real estate's an excellent hedge against inflation.

“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.â€￾
-Marshall Field

[SilverEnergy]

McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is." (See the full chart at link.reuters.com/hej66s)

http://www.reuters.com/article/2012/02/ ... LG20120215

Wow, this was as great article NorthAmericanguy! I always had a feeling it was better to rent than to own. When you rent, you don't have to pay any maintenance costs, real estate taxes or homeowners association (like you would if you lived in a condo or townhouse).

My townhouse went down in value 30% in just 3 years! Even though I put 20% down, I am STILL underwater today!

Iif I had known that there was going to be a housing crash, (I bought my place in late 2007 right before the housing crash) I would of just rented. All the money I put down on a down payment I could of put in the bank.

I will NEVER invest in real estate, no matter how often I see those guys on late night TV selling their real estate courses! I used to watch Carlton Sheets, Dave Del Dotto and Russ Whitney on late TV pitching their "how to get rich by investing in real estate" courses.

I have to admit, I did buy Carlton Sheets course and went to one of his seminars and meet him in person and actually was able to talk to him for about 20 minutes. He came across as being sincere and wanting to help people who are interested in becoming real estate investors.

Personally, I would not want to be a land lord and deal with all the headaches of dealing with tenants. Also, "flipping" homes is kind of scary because you need to fix it up and sell it as soon as you can, otherwise you are stuck making mortgage payments on the home.

Check out this Carlton Sheets video where he talks about getting over your fears of real estate investing.

You bought to own?

You're supposed to rent out your property to tenants.

As a a landlord, you job isn't to deal with tenants, that's the property owner's job.

And you should hire a good property owner to deal with the grudge work associated with real estate.

Flipping houses and investing in real estate hoping the price will go up is speculating and it will land you in hot water real fast.

Cashflow is the name of the game when dealing with real estate.

You're supposed to learn from your mistakes in the world of business and investing, not run away from them.

[jamesbond]

You bought to own?

Yes I live in my townhouse, if I had known the market was going to crash, I would of rented instead.

[Contrarian Expatriate]

[SilverEnergy]

[momopi]

As a a landlord, you job isn't to deal with tenants, that's the property owner's job.
And you should hire a good property owner to deal with the grudge work associated with real estate.

I think you mean "property manager".

For most buyers, their first property will be their primary residence, so it's not realistic to expect them to rent it out as they need to place to live.

[xiongmao]

I've got one rental property, I'd like to buy another one ASAP. I bought at the '06 peak, but UK prices are pretty much back at their '06 values now. Property is a great inflation hedge, and there's always big demand if you buy in a popular area/country.

[droid]

The key is to look for the investment's "natural" price. In other words, how much real labor it takes to reproduce the asset.

For an average house, this would be more or less $100K (lot + materials +labor).

Or, for gold, for example, this would be the extraction cost, which is about $400-500 per ounce. I'm not a gold "bug" in any way really, but if it goes under $700 or so I would buy some.

When things are two or three times this "natural" price, you know it's unsustainable.

So yeah owning an upside down property doesn't make sense of course, but to a point only. If you rent for 10 years, you're dumping $120K down the drain; whereas you'd be better off losing $80K or so on an overpriced place that you own.

[NorthAmericanguy]

Wow, this was as great article NorthAmericanguy! I always had a feeling it was better to rent than to own. When you rent, you don't have to pay any maintenance costs, real estate taxes or homeowners association (like you would if you lived in a condo or townhouse).

If I had known that there was going to be a housing crash, (I bought my place in late 2007 right before the housing crash) I would of just rented. All the money I put down on a down payment I could of put in the bank. My townhouse went down in value 30% in just 3 years! Even though I put 20% down, I am STILL underwater today!

I will NEVER invest in real estate, no matter how often I see those guys on late night TV selling their real estate courses! I used to watch Carlton Sheets, Dave Del Dotto and Russ Whitney on late TV pitching their "how to get rich by investing in real estate" courses.

I have to admit, I did buy Carlton Sheets course and went to one of his seminars and meet him in person and actually was able to talk to him for about 20 minutes. He came across as being sincere and wanting to help people who are interested in becoming real estate investors.

Personally, I would not want to be a land lord and deal with all the headaches of dealing with tenants. Also, "flipping" homes is kind of scary because you need to fix it up and sell it as soon as you can, otherwise you are stuck making mortgage payments on the home.

Check out this Carlton Sheets video where he talks about getting over your fears.

Wow... I'm sorry to hear about that!

[jamesbond]

This video explains the trap of home ownership.

[youtube]http://www.youtube.com/watch?v=37nS42JX ... 46CdHRN3bl_[/youtube]