Owning a house. - Page 10

turnipmonster · #91 05-30-2007, 07:30 PM

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I thought that data was supposed to read as: for every dollar spent, you get 90 cents back.

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that's exactly what it reads. keep in mind is the data is the national average. like most averages, it is probably not composed of 2 million americans all getting 90 cents on the dollar for all their renovations. it seems more likely that most people are paying too much for renovations, some people are getting a good price (paying too little) and others are breaking even with the averages.

obviously I don't know the distribution, but it looks to me like it's quite possible to make +EV investments regarding renovations, because the distribution that puts the national average at 90% that also has all the data points below 100% seems very unlikely.

agree, or disagree?

I don't want to come across as rabidly defending home improvements as a great investing strategy, because it's obviously not, but intuitively it seems obvious to me that home improvements can be +EV and all the data posted so far seems to bear that out, if you buy my assumption regarding the distrubution.

turnipmonster · #92 05-30-2007, 07:35 PM

I didn't misspeak at all, although I agree most people are losing money. we all play poker, right? most poker players are losing players. does that make it impossible to make money playing poker? obviously not.

RunningSixes · #93 05-30-2007, 07:35 PM

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Otherwise, worth of house + cost of improvements is almost never > new worth of house.

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This usually depends on where the house stands relative to other houses in the neighborhood.

For example if you buy a house for 300k in an area where most houses sell for 400k, you may only need to spend 75k worth of improvements to boost the house's selling price up to 400k.

However, if you buy a house for 400k in an area where most sell for 300k, you might spend 100k on improvements and only increase the house's selling price by 50k.

turnipmonster · #94 05-30-2007, 07:40 PM

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I'm not saying you can't contract out work and make more than the costs,

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just for reference, here's the quote that started our discussion:
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something that hasn't really been mentioned is adding value to your home yourself. we got our apt pretty cheap but the kitchen/bathroom weren't really nice, etc. so a year ago we redid the kitchen ourselves and it's really nice now and will definitely add more to the value of the apt than what it cost us.

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This is a huge misconception and is entirely untrue.

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what exactly are you saying then? maybe our definitions of "entirely untrue" differ in some strange way [img]/images/graemlins/smile.gif[/img]. this seems to be a very straightforward exchange of me asserting it's possible to add value to your house through renovations, and you saying my assertion is false. if I am incorrect on this, let me know where.

elus2 · #95 05-31-2007, 12:44 AM

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I didn't misspeak at all, although I agree most people are losing money. we all play poker, right? most poker players are losing players. does that make it impossible to make money playing poker? obviously not.

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I don't think we're in a position to actually say anything about the distribution of the returns. If the majority of the gains are picked up by builders and others in the industry then that doesn't bode well for the rest of us.

DrewDevil · #96 06-01-2007, 10:11 AM

I've always understood the benefit of buying a house this way:

If you take out a mortgage at 6%, but the interest is tax-deductible, it's really only 4%.

If your house appreciates at least 4% a year, then you are basically borrowing the money for free. If it appreciates more than 4%, you are getting a positive return on the bank's money that you get to keep.

Not only that, but your gain when you sell is tax-free also. Based on this theory, the idea is that if you buy a house and live in it for at least 5 years, you will have lived there for free, at worst.

Thoughts?

DesertCat · #97 06-01-2007, 11:22 AM

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I've always understood the benefit of buying a house this way:

If you take out a mortgage at 6%, but the interest is tax-deductible, it's really only 4%.

If your house appreciates at least 4% a year, then you are basically borrowing the money for free. If it appreciates more than 4%, you are getting a positive return on the bank's money that you get to keep.

Not only that, but your gain when you sell is tax-free also. Based on this theory, the idea is that if you buy a house and live in it for at least 5 years, you will have lived there for free, at worst.

Thoughts?

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You are ignoring taxes and maintenance, and transaction costs. In Oregon for example, taxes are 1.5-2% per year (I paid $5600 on a $360k house), with maintenance included you probably reach 2% per year on average. My house in Arizona costs 1/3 of 1% in taxes, but maintenance brings me up to about 1% per year.

Then you are assuming that all mortgage interest is deductible. In Oregon again for an example, you have high income taxes and property taxes, which means the AMT (alternative minimum tax) kicks in earlier and reduces some of your deductions if you have a high income.

Plus you are tying up cash in your home that you should be able to invest at better returns elsewhere. Your 20% down payment (and any equity you build) could be earning a lot more than 4% a year.

And if houses have appreciated 4% per year during the last 37 years, ending in one of the biggest bubbles in history, what level of appreciation should we expect going forward from now?

And while gains are tax free, you usually have to pay a hefty transaction cost, 6% of the total sales price. For example, if your $500k home appreciates 4% per year for 5 years, you would sell it for $608,000. But you'd have to pay the realtors $36,000, leaving you with $572,000. Your annualized return has sunk to 2.7%.

So no, it's highly unlikely that your home will be "free" in the future. But that doesn't mean it can't be a better deal than renting, both financially and intangibly. Each house is an individual case, and should be evaluated as such.

Reef · #98 06-01-2007, 12:29 PM

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So after 110 years it has doubled. Are you trying to make my point for me?

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That's what I was thinking. This chart actually looks way worse than what I thought the housing market yields. He made your point, and then some.

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Yeah I'm not so sure what the point was. I understand it is inflation-adjusted, but I can come up with a ton of investments with much better inflation-adjusted returns.

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How good of an investment is (putting 30% down) buying a house at market value and then renting it out. And then 15-30 yrs later owning it outright (and then having option to keep renting it or sell it). I'm a noob at this stuff.

That and buying a house at below current market value seem like the only 2 ways to make money in RE. Not including being able to use equity in your properties for other investments. I'm a noob at this stuff. Am I missing anything?

jaydub · #99 06-01-2007, 01:14 PM

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How good of an investment is (putting 30% down) buying a house at market value and then renting it out. And then 15-30 yrs later owning it outright (and then having option to keep renting it or sell it). I'm a noob at this stuff.

That and buying a house at below current market value seem like the only 2 ways to make money in RE. Not including being able to use equity in your properties for other investments. I'm a noob at this stuff. Am I missing anything?

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A time machine, you'd need one to find a truly cashflow positive property.

J