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I did 30% down on a $540k home in LA county.

sychang888 said:   I put 100K down on my 320K house (sold for around 500K in 2007)knowing I still have enough cash left for other things and rainy days. Maybe I am too conservative, but the last thing I want is to see "foreclosure" "short-sale" sign ever posted in my front yard.

I know past performance is not indicative of future returns and all that.

Still, this is what makes real estate seem like such an alluring investment vehicle. 30% down ~ 300% leverage. The property went up by +56% (320k->500k), while your investment went up by +180% (100k->280k). Even if it took 6yrs, that's like 6yrs of +19% returns... which probably outperforms 99.9% of equity investors. (Although, maybe need to cut a few percent off for taxes, maintenance, and closing costs).

Does this type of return also outperform 99.9% of real estate owners? Anecdotally, doesn't seem to be, but haven't seen the data. Just makes me wonder if outsized returns are more feasible for the smart investor in real estate than in equities?

It's right to get your ducks in a row and see the maximum realistic ability to purchase. And if you can identify that buying into the DOW or S&P at multi-year highs is a mistake, you're smarter than the 99%ers and should revisit stock investments. May be by buying SPY or DIA and selling out of the money S&P call minis or buying in the money puts. Or if you wanted to buy at a lower price if the market comes down, sell some puts, that way if the market doesn't fall you take in some income and if it does you're forced to buy at whatever your put price is.

Back to buying a house. I learned that although I could buy an expensive house, I didn't need to have the biggest baddest energy consuming behemoth. Big houses need more energy to heat and cool driving up energy bills. Replacing a single zone 4 ton HVAC system sucks. If you have dual zones, double the price, and you're telling yourself you could have put a down payment on a Porsche. Buy a house because you love the house, not because you can afford it. Just because you can stretch and afford a 458 Italia, is it a smart financial thing to do? And don't go bringing up how a house can appreciate in value. If you sell yours in the future and it doubled in price, you still have to find a place to live and you're going to end up buying another house that's just as expensive or more. If you buy a $500k home or a $1M home, you're going to end up spending tens of thousands personalizing it anyway and you'll probably never re-coup that money. If the kitchen is already nice, spending $20k on changing the kitchen isn't going to make it worth any more, it'll just be different and more to your liking. Now if you buy a 1000 sq ft shack on an acre of land and build it into something great, yeah then you'll be able to sell it for more.

statusquotoday said:   sychang888 said:   I put 100K down on my 320K house (sold for around 500K in 2007)knowing I still have enough cash left for other things and rainy days. Maybe I am too conservative, but the last thing I want is to see "foreclosure" "short-sale" sign ever posted in my front yard.

I know past performance is not indicative of future returns and all that.

Still, this is what makes real estate seem like such an alluring investment vehicle. 30% down ~ 300% leverage. The property went up by +56% (320k->500k), while your investment went up by +180% (100k->280k). Even if it took 6yrs, that's like 6yrs of +19% returns... which probably outperforms 99.9% of equity investors. (Although, maybe need to cut a few percent off for taxes, maintenance, and closing costs).

Does this type of return also outperform 99.9% of real estate owners? Anecdotally, doesn't seem to be, but haven't seen the data. Just makes me wonder if outsized returns are more feasible for the smart investor in real estate than in equities?

Where does it say it went from 320k to 500k from 2007 to 2013?
I think OP bought it for 320k (dont know when but presumably AFTER 2007); the house had previously exchanged hands for 500k in 2007.
You may recall that 2007 was perhaps the height of the housing bubble.

Still, this is what makes real estate seem like such an alluring investment vehicle. 30% down ~ 300% leverage. The property went up by +56% (320k->500k), while your investment went up by +180% (100k->280k). Even if it took 6yrs, that's like 6yrs of +19% returns... which probably outperforms 99.9% of equity investors. (Although, maybe need to cut a few percent off for taxes, maintenance, and closing costs).

Still need to factor in sellers responsibility of paying the commission on the sale. Commissions range, when I bought my last one the agents split 3% both. Call it 5%. You might be up 56% on your property, but gone is $25,000. That's almost 8% of your original purchase price. And there's more work with selling a house. All those documents, staging, cleaning, waiting for lenders to cut the check. Let's go back 5 years and if you didn't manage to sell your house in the window of a couple months at the housing peak you were pretty much screwed. With stocks and bonds, all it takes is to point and click and in milliseconds one can get out of a trade and it only costs $7, or whatever your discount broker charges.

For your primary home, you buy a house to live in it, nothing more. But it's strange how psychologically you feel really good about yourself when you see your neighbors selling their homes for double or triple what they were worth in 2009, even though there's no way of realizing the monetary value without levering up and taking out a fat loan against your equity or selling and moving to a cheaper neighborhood that usually involves driving in more traffic.

FreddyPharkas said:   scripta said:   statusquotoday said:   30yo... ~$250k range this yearwhat do you do, and where do you do it?

BIGLAW (is my guess)


If it is BIGLAW, then OP needs to figure in his post-BIGLAW salary into the "Can I Afford It?" equation. Helpful hint to OP: You're not making partner. Your next step is more than likely going to be down the salary chain and it's probably coming in 2-3 years, possibly can stretch it out a little longer due to personal performance, practice area, and firm. But that ain't forever. And if you want a spouse and a family, you may find yourself wanting to exit earlier.

statusquotoday said:   sychang888 said:   I put 100K down on my 320K house (sold for around 500K in 2007)knowing I still have enough cash left for other things and rainy days. Maybe I am too conservative, but the last thing I want is to see "foreclosure" "short-sale" sign ever posted in my front yard.

I know past performance is not indicative of future returns and all that.

Still, this is what makes real estate seem like such an alluring investment vehicle. 30% down ~ 300% leverage. The property went up by +56% (320k->500k), while your investment went up by +180% (100k->280k). Even if it took 6yrs, that's like 6yrs of +19% returns... which probably outperforms 99.9% of equity investors. (Although, maybe need to cut a few percent off for taxes, maintenance, and closing costs).

Does this type of return also outperform 99.9% of real estate owners? Anecdotally, doesn't seem to be, but haven't seen the data. Just makes me wonder if outsized returns are more feasible for the smart investor in real estate than in equities?


If you look over lots of long term real estate pricing history you'll discover(and this makes sense) that real estate historically tracks very, very closely to wage inflation which is a couple pts a year. This explanation should make sense because real estate is bought when the monthly payments usually fit around a certain percentage of peoples incomes which means that if interest rates are flat average mortgage payments are around 20-25% of income and average purchase prices are 2.5 - 3 times of income. The only exception to that is if you can get a bull market in interest rates(which is what we just went through for the last 30 years) or a bear market in interest rates which what we're heading into in which case the former can result in a large bull market as a larger and larger home requires a smaller percentage of income finance and the latter is where housing appreciation can lag wage inflation rates because of larger and larger interest rates driving up the cost of financing requiring housing appreciation to lag behind.

There is a piece of data out there that is the annual housing appreciation numbers of a town in the Netherlands going back several hundred years. It represents largest data set on housing appreciation numbers in the world(if I'm not mistaken) over all of that time it was concluded that housing generally mimics wage inflation with it averaging a very boring couple pts a year. Data from the US pre-1970s confirmed the same thing and its been confirmed in countless countries when you looked back over a period that didn't result in any large change in interest rates.

Let me point out also that wage inflation is very difficult to happen when you have significant slack in unemployment. For many bosses why pay out significantly higher raises when you can get a second person also on the cheap?

So again flat. You buy on leverage to get flat appreciation it's not that great even though I'll admit the downside risk of that leverage turning against you is pretty low. The real play again is levered rental income or levered rental avoidance(presuming you're only buying what you need).

How much is your student loan and what is the rate? If you are looking for a guaranteed return, knocking your student loan may be a good option.

I make more than OP, yet I've recently bought a nice 1,800 sqft house for $215,000. Just because you make a lot doesn't mean that you have to get an expensive house to go along with it. Save for bad times

newbietx said:   Has anyone considered that the OP may have plans to settle down in the next few years and have kids. In which case this house will come in handy and will build equity in the meantime, instead of him getting a smaller house now and then having to upgrade in 4-5 years. Just a thought (without exactly knowing the OP's situation).

Good idea, but needs to be weighed against the eventual partner wanting a completely different style house 4-5 yrs from now (which requires either moving or renovating). Would be easier to get to that point if the current house was smaller or still renting.

Have the OP done a buy vs. rent scenario on his proposed purchase yet? In many high-cost areas renting is cheaper unless you are assuming a high rate of price appreciation.

LukFilm said:   I make more than OP, yet I've recently bought a nice 1,800 sqft house for $215,000. Just because you make a lot doesn't mean that you have to get an expensive house to go along with it. Save for bad times

Seems like one of his concerns is having the money just sit there and do nothing while inflation slowly eats away at it. If buying a more expensive house is a better investment, then why not do it (assuming here that this is actually true)? It might be a better investment for the OP to buy a reasonable house for himself and then try and save up for another investment property in a year or so.

statusquotoday said:   Still, this is what makes real estate seem like such an alluring investment vehicle. 30% down ~ 300% leverage. The property went up by +56% (320k->500k), while your investment went up by +180% (100k->280k). Even if it took 6yrs, that's like 6yrs of +19% returns... which probably outperforms 99.9% of equity investors. (Although, maybe need to cut a few percent off for taxes, maintenance, and closing costs).

Does this type of return also outperform 99.9% of real estate owners? Anecdotally, doesn't seem to be, but haven't seen the data. Just makes me wonder if outsized returns are more feasible for the smart investor in real estate than in equities?


Here's one answer to the age long question:

Stocks vs. Real Estate
Both real estate and stocks have had their day, but the question you need answered is this: Which contender is the superior long-term bet today?

http://money.cnn.com/galleries/2007/real_estate/0704/gallery.sto...

If I were in the OP's situation, I'd just take the $100K and use it to buy an undervalued REO that's in decent shape.

If you're single... Buy what you need... Almost any home you buy now will not be the dream home of your future spouse. You'll end up buying a new house after you get married. Save your money for that house and the budget it will take to decorate it, she'll want her furniture and personal decorating taste.

So you don't trust your investing ability, and to counteract that, you want to put 1000% of your portfolio (10:1 leverage) in a single asset in a single asset class?

OP - oversold doesn't mean what you think it does.

http://www.investopedia.com/terms/o/oversold.asp

You can go back and forth on this, and there's good reasons to take either course. I always look at it this way tho:
1) If I have a financial emergency, what I need is $ in the bank, not equity in a house
and
2) It's the market that will build you wealth in real estate, not you paying off any loans

So my advice is to make the smallest down payment possible that will enable you to avoid stupidities like a VA funding fee or PMI



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