Millennials: Avocados or homes?

[DoubleF]

Originally Posted by OMG!WTF!

Sadly it's never rent free though. Property tax is getting very high and will increase dramatically in the future. As well maintenance and upgrades will take their toll over time. Your capital counts for something too. Rent also increases so it's a wash there. But financially real estate really needs to go up a lot to make owning a financial success. Or you need to get income from it too.

I've held a mortgage on a house since 2008. The people bought it for 950k. It was just reappraised at 925k. They've paid off about 150k in mortgage and so are quite happy with the whole thing even though they are down 25k. But the real loss is around 250k in interest, 50k in property tax, about 25k in repairs and maintenance. Also their 250k down payment has to count for another 50k. It's just funny how some people calculate wins and losses.

IMO, one of the biggest issues with owning is that people are buying the biggest home they can get their hands on and putting in the least down payment possible. In that way, they are paying a ridiculous amount of interest over the life of their mortgage. People need to spend time looking at their mortgage statements and the amount of interest per year vs focusing on whether they can meet their payment. IMO, it's almost like paying the minimum balance on a CC.

When my wife and I bought, we decided not to max our borrowings. We maximized our payment plans and made lump sum payments to drop the amortization years as much as the lender would allow. It makes way more sense to pay minimum payments when the mortgage is low and nearly done, and not at the beginning when you accrue the most interest.

[blankall]

Originally Posted by DoubleF

I personally view my primary residence as a consumptive good. A secondary residence+ can be considered an investment.

I keep meeting people who think their primary residence is an investment. I've had weird conversations with people who just regurgitate and never think critically about the whole scenario. They never think about the end game. Usually it's something like:

Investment, in what sense?
"Oh, you can sell it and take the gains."
And then what? Rent?
"Obviously you don't sell it if you need to live in it."
Then when would you ever be able to sell the home?
"I don't know, but it's an investment."

I mean, I own my own home. In a horribly misguided financial way, I view it as a vehicle to force myself to save. I wouldn't have the diligence and control to properly save excess money I earn. I'd probably blow a huge portion of it on things I wouldn't normally do if the cash wasn't liquid (like a home).

The rental perspective is starting to get more and more accepted vs home ownership, at least in my friend circles. That being said, I don't know of many individuals who rent and have big savings. I think I literally know of 1 guy like this and he's not even a normal millennial. He's planning to retire in his mid 30s, has very few vices, sits on a pile of cash and has a few minor business ventures set up in anticipation of retirement.

I mean, geez. That's the way to do it if you are diligent and disciplined isn't it? I'd be elated to be mortgage free at 35. This guy is contemplating retirement at the age of 35 without lucking out on building some app or program.

It's more like a retirement savings plan. Theoretically, you will accumulate housing equity until you have an empty nest and then sell it for a smaller place and use the excess as a large chunk of your retirement savings.

[mrkajz44]

I've never understood the rent vs own argument. Am I crazy, or is it not reasonable to think that the overall cost of renting and the overall cost of owning is generally the same? That is why some people rent and some people buy? Each individual circumstance is different of course, but in the long run, the market is priced as such that you should be indifferent between renting and buying.

[blankall]

Originally Posted by mrkajz44

I've never understood the rent vs own argument. Am I crazy, or is it not reasonable to think that the overall cost of renting and the overall cost of owning is generally the same? That is why some people rent and some people buy? Each individual circumstance is different of course, but in the long run, the market is priced as such that you should be indifferent between renting and buying.

There are other market factors. A lot of people rent, because owning is a huge commitment. You also need to have a down payment. Buying also requires employment and income stability.

[opendoor]

Originally Posted by mrkajz44

I've never understood the rent vs own argument. Am I crazy, or is it not reasonable to think that the overall cost of renting and the overall cost of owning is generally the same? That is why some people rent and some people buy? Each individual circumstance is different of course, but in the long run, the market is priced as such that you should be indifferent between renting and buying.

If that was consistently true then no one would ever be a landlord.

Sometimes renting is cheaper than owning but often it isn't; it really depends on the prevailing conditions. I know in BC in the early 2000s you could put a small down payment on a rental house and be able to pay it off in 10-15 years with the rental income covering the mortgage and all of the expenses. Cap rates of 7-10% were pretty normal in residential rentals back then.

[V]

Originally Posted by DoubleF

Usually it's something like:

Investment, in what sense?
"Oh, you can sell it and take the gains."
And then what? Rent?
"Obviously you don't sell it if you need to live in it."
Then when would you ever be able to sell the home?
"I don't know, but it's an investment."

People always seem to come across as super stupid and unbelievable whenever people write dialogue on this board. Everyone on here must have a lot of dumb friends.

In any case, I know people that think it's an investment because they can build equity and buy something cheaper when circumstances change.

I don't see it that way, because I'm living in the house I expect to live in until I die, but I guess others don't mind the idea of downsizing in their retirement years.

[Slava]

I don't really want to wade into the rent/own debate, but the one thing I prefer about owning, amongst others, is that you don't have to move if your landlord changes their mind. I could deal with that kind of inconvenience when I was young and had nothing, but now with kids and trappings that come with that it would be no fun.

[Sylvanfan]

No matter what people say housing is not a liquid asset. For young people it can tie you down and hinder mobility. For many home ownership at some point in their life is a good way to build wealth. But I have found that many mythically try to paint it as a no risk way to make gobs of cash.

As people need more education to enter the work force, it does delay people in getting to the stability part of their life if ever.

[jammies]

Renting is definitely cheaper than buying, at least in Calgary. I'

[FireGilbert]

Growing up all I heard out of my parents was how buying a house was an important step in life and a great investment. As soon as I got a job I was being regularly asked when I was going to buy. I started looking for a place in Calgary and then I got laid off work and saw the market crash. I was so happy I didn't buy anything.

I have been renting my entire life and these are my pros and cons of renting:

Pros:
-You can usually afford to live in a nicer area renting than buying while still having more disposable income and savings to invest.
-You have the flexibility of easily moving out if your circumstances change or you are just looking for something different.
-When something goes wrong the landlord pays for it.

Cons:
-Your rent money is going towards someone else's mortgage payments.
-You cannot change anything which makes simple tasks like hanging a picture or baby proofing cupboards difficult. Also, it takes ages to get issues fixed.
-You are at whim of the landlord who can decide not to renew your lease for any reason and deduct your damage deposits with little recourse.

[V]

Originally Posted by FireGilbert

Cons:
-You cannot change anything which makes simple tasks like hanging a picture or baby proofing cupboards difficult. Also, it takes ages to get issues fixed.

For what it's worth, I own my place and my wife will tell you that things don't get fixed any faster just because you own the place.

[jammies]

Renting is almost always much cheaper unless you want a giant place for a short-term. That's why people can afford to live in Vancouver but not in their own place, or rent in downtown Calgary without being able to purchase a half-million dollar condo with $700/mo condo fees.

There's a huge upfront cost to ownership that just isn't there with renting, and landlords don't charge according to their costs, they charge according to the market. It almost always takes multiple decades to recoup the investment on a rental property, and mostly the money is gained back by increases in the value of the property when it is finally sold, not rent paid.

There's certainly advantages to owning, but it is more cultural and status driven than economic. North Americans especially want their own tiny plot of land in a low-density neighborhood, somewhere to feel rooted and safe. You can usually translate the arguments against inner-city, high-density living into those terms: it isn't mine, it isn't private, it isn't safe.

[I_H8_Crawford]

Not sure if this has been posted already, but I'll leave this here:

http://www.millennial-revolution.com

My wife and i are of similar mindset to them, just we will be financially independent a bit older than they are

[DoubleF]

Originally Posted by V

People always seem to come across as super stupid and unbelievable whenever people write dialogue on this board. Everyone on here must have a lot of dumb friends.

In any case, I know people that think it's an investment because they can build equity and buy something cheaper when circumstances change.

I don't see it that way, because I'm living in the house I expect to live in until I die, but I guess others don't mind the idea of downsizing in their retirement years.

Ugh, I got a little animated and made a fool out of myself. You know how sometimes things sound better in your head? You were right to point it out. It was bleh.

Idea wise, what I was trying to get at was that most individuals don't know how to unlock the gains of their investment in a primary residence. Most of the understanding I hear is that they build equity and in the future can sell at a gain or re-mortgage a home. When I ask about the high interest payments they are making, the response usually is along the lines of "interest rates are low" as if it's <3% on $1000. But we're talking $100k increments which is a lot of interest per year. Somehow, I am thinking because an asset is involved, the debt doesn't register to many individuals. They don't realize that most of their payments aren't going towards their mortgage. Collateral is a weird concept to many people.

Agreed also about a house being an illiquid asset. You could be rich on paper, but cash poor. There's a reason why many of my generation call each other house poor. Unlocking value in a house isn't the easiest thing in the world to do. Many people don't like renting out space in a home they live in. Some people then say refinancing a home can unlock value only to miss the fact that refinancing is just taking out more debt.

Once you pay off a home, yes, you have an asset that is worth (likely) quite a sum of money that is completely yours. However, in general, many people don't realize that they've spent a lot of their time and money to service a debt.

[V]

It's a recurring theme in this thread. People (of all generations) are generally bad with money. Spending, allocating, planning, it's all bad.

[DoubleF]

Originally Posted by I_H8_Crawford

Not sure if this has been posted already, but I'll leave this here:

http://www.millennial-revolution.com

My wife and i are of similar mindset to them, just we will be financially independent a bit older than they are

I understand what their idea is getting at, but IMO it's confusing a few things and comparing apples to oranges.

As stated earlier, IMO a primary residence is a consumptive good, not an investment. In a nutshell, I own a condo downtown which I rent out. This is an investment, but the numbers I get to see make it an easy comparative for me.

Total servicing of the condo (mortgage payments, property tax, condo fees etc.) are around $1400. Due to the current economic circumstances, I can rent the same unit for about $1100. This to me means that as a living consumptive good, it costs more to own than to rent. Cash flow wise, I am out $300 a month.

But as in investment rental property, things are a little different. In the video link, the couple said they made their portfolio work for them. They stated a 4% return (which is a good conservative number). Let's say you have $200k portfolio vs a $200k rental property. Assuming neither is leveraged to make their return, a 4% return on the portfolio is $8,000 a year or about $667 per month. If I assume I paid off my mortgage, I'm pretty close to that after expenses are deducted from the rents.

... Ouch.

Good thing I have a nice capital gain, or I'd cry myself to sleep thinking about how my rental property barely matches dividend payments of some stocks out there.

In the latter half of my schpiel above, I realized I'm holding on to a dud of an "investment". However, I have seen other properties (generally without condo fees) that actually make decent coin each year or around 6-8%.

Now, IMO, the million dollar portfolio vs the (presumably paid off) million dollar home comparison doesn't fully make sense because one is an investment and the other a consumptive good. But I get their point.

IMO debt is a huge factor

According to this site:
http://www.bankrate.com/calculators/...alculator.aspx

If someone borrowed $500k (house?) and took 25 years to pay at 3%, they'd pay a total of around $711,318 over the life of the mortgage, or $211,318 of your money that didn't help build equity.

As we all know the rent vs own is a convoluted mess when it comes to break even calculations. People taking on excessive debt to acquire homes is probably making that break even time longer and longer to the point that it's not worth it to own anymore.


I think a good focus word would be net worth. Many people struggle to build net worth because they don't live within their means and spend a life time enslaved to unnecessary debt. A home could fall into this category and there are plenty of other things that chip away at someone's net worth. You don't have a $500K net worth if you own a $500K home and have $400k debt against it. You have $100k net worth.

I think the couple in the video accidentally stumbled upon this idea. A modern day home is perhaps not a good place to build up net worth these days but that is not the only trick that the couple in the video used to build their net worth. A huge part of it was a conscious effort not to bleed away net worth on frivolous things (on top of home, they mentioned car in the video).

Rent or own, someone wasting money will have difficulties building net worth.

[Jason14h]

I look at it differently. As long as real estate price increase at the interest rate (not a sure thing for sure) then there owning of the home is a net wash in the long run.

The operating expenses of the house (Tax, insurance, maintaince) are the real short term living expenses

So when people say "you pay 200k in interest over 25 years" my answer is "what's your point?" As long as the long term real estate price increase matches the interest rate I pay, in the long run it doesn't matter if I borrow 300k or 600k

The other issue on the rent vs own, is the saved money doesn't actually go to savings or other investments, because people are not disciplined. Owning your home forces you to pay the mortgage. This does build real equity.

I believe in most normal real estate markets you will always end up with a larger net worth of you were to rent and invest all the savings from renting. But how many actually are discipline enough to do that?

[Rutuu]

This thread honestly breaks my heart.

Some of the investment guys on here should start a fund of a fund for CP. Get some of the web developer guys to help with the code/design. The accountants for tax advice. Some of the lawyers to do the documentation.

Our pitch will be to provide a transparent passive investment vehicle for our clients. Direct debits, money goes straight into the below ETFs with a fee under <0.5%, with different mixes based on age/finances/goals (create an IPS updated yearly).

Horizon Bond ETF: http://www.horizonsetfs.com/ETF/HBB
Horizon S&P/TSX60 ETF: http://www.horizonsetfs.com/ETF/HXT

Vanguard US Bond ETF: https://investor.vanguard.com/etf/li...th-end-returns


Vanguard US S&P500 ETF: https://personal.vanguard.com/us/fun...dId=0968#tab=1

Help out with taxes - CGT, taxed, tax exempt, tax deferred accounts and what should be where

Also look at the rent/buy issue to explain how housing prices are tied to income ratios, economic growth, interest rates, inflation and the effect of leverage.

CP's biggest jihad yet.

[Fuzz]

Originally Posted by Jason14h

I look at it differently. As long as real estate price increase at the interest rate (not a sure thing for sure) then there owning of the home is a net wash in the long run.

The operating expenses of the house (Tax, insurance, maintaince) are the real short term living expenses

So when people say "you pay 200k in interest over 25 years" my answer is "what's your point?" As long as the long term real estate price increase matches the interest rate I pay, in the long run it doesn't matter if I borrow 300k or 600k

The other issue on the rent vs own, is the saved money doesn't actually go to savings or other investments, because people are not disciplined. Owning your home forces you to pay the mortgage. This does build real equity.

I believe in most normal real estate markets you will always end up with a larger net worth of you were to rent and invest all the savings from renting. But how many actually are discipline enough to do that?

Bare minimum, your math should be interest + inflation <= appreciation if you want to say you are ahead.

[Slava]

Originally Posted by Rutuu

This thread honestly breaks my heart.

Some of the investment guys on here should start a fund of a fund for CP. Get some of the web developer guys to help with the code/design. The accountants for tax advice. Some of the lawyers to do the documentation.

Our pitch will be to provide a transparent passive investment vehicle for our clients. Direct debits, money goes straight into the below ETFs with a fee under <0.5%, with different mixes based on age/finances/goals (create an IPS updated yearly).

Horizon Bond ETF: http://www.horizonsetfs.com/ETF/HBB
Horizon S&P/TSX60 ETF: http://www.horizonsetfs.com/ETF/HXT

Vanguard US Bond ETF: https://investor.vanguard.com/etf/li...th-end-returns


Vanguard US S&P500 ETF: https://personal.vanguard.com/us/fun...dId=0968#tab=1

Help out with taxes - CGT, taxed, tax exempt, tax deferred accounts and what should be where

Also look at the rent/buy issue to explain how housing prices are tied to income ratios, economic growth, interest rates, inflation and the effect of leverage.

CP's biggest jihad yet.

I get what you're saying and don't entirely disagree. The problem is that running a mandate like that will make zero dollars at 0.5% and end up costing money. The only way you could make that profitable at this point is to have enough volume to make it that high (which would be hundreds of millions of dollars).

I should add that there are fund of fund mandates just like you describe available for a little more than 0.5% right now. They don't have the housing angle and such that you're throwing in there, but if you just want the ETF investment you can buy that for sure.