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| Thursday, August 10, 2006 |
| From owner to renter |
USAToday's article: For some, renting makes more sense, talks about some owners in high priced real estate markets (like San Francisco) who are looking to sell and become renters.
To me this smacks of trying to time the housing market. Never a very smart thing to do. While it may make sense in some cases to sell your home and downsize to a rental for economic reasons (going back to school, starting a business, etc.) generally I would not think this was a great idea. Personally I prefer the idea of being both an owner and a landlord. Owning a two family home seems like a way to hedge your bets against both the home owner market and the rental market. If more people are buying rather than renting, then your house appreciates. However, if more people are selling and renting, then your home may depreciate in value, but the amount you charge for rent should increase (since more people are looking to rent).
I am sure this is not a fool proof idea - but an interesting one to explore. What are your thoughts? Is the owner-occupied two family home the best way to get the best of both worlds (owning a home while getting the benefit of a renter helping you make your mortgage payments)? |
| posted by Boston Gal @ 12:59 PM *
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| 6 Comments: |
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I agree in theory, but hedging this way impacts your day to day living and some people just don't want to live "cheek to jowl" with a tenant. No matter what the financial benefits may be. Also, many areas of the country don't have duplex units. This tends to be more common in large urban East Coast cities.
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Many of the housing bloggers are predicting doom and gloom--houses losing 50% or more of their value. While I, personally, don't think things will be that bad, I do think the couple in the story are smart to do what they are doing. If you can't rent out your house and cover the mortgage payment, you may be in over your head. And like they also said, they can rent a house just as nice and be able to save money. The people who are counting on house prices to continue their upward climb are likely going to be in for a shock in the next few years. And if they have no savings and an I/O loan, watch out.
Just FYI, here is one of the more popular housing bubble blogs. He also has links to many other bubble bloggers in the sidebar.
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I generally don't think its smart to time the market, but when fundamentals (for example home price to rent and home price to income http://neweconomist.blogs.com/new_economist/files/HSBC_frothfindingmission.pdf) are so out of wack with historical norms, I think this is very prudent.
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As I'm looking to move from a Boston suburb to San Francisco, I have to say I appreciate what these people are doing. My $280K place in San Francisco would be worth about $750K. So for me to buy there, I'd have to come up with nearly 3 times the mortage.
However, I can rent my place for about $1400 and rent in San Fran for about $1800. What's a better option, get in over my head on a mortgage that I can't afford or rent? Obviously the former. The people in this article may be able to pocket $400K in the transaction, which invested at just 4.5% interest would nearly cover their rent for a year.
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I don't think you get much diversification by being both a homeowner and landlord. If you are a homeowner then the income from your home is the rent you don't have to pay (plus any psychological/emotional benefits). So if rents are rising and property prices are falling, the fall in the value of your property (which only matters if you want to move or borrow against the property) is offset by more rent you don't have to pay to some extent. This is the idea that money not spent is money saved.
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its much easier to find the fair value of real estate than to find the fair value of say, a stock. rather than having to project earnings, and find an appropriate multiple, the value of real estate is just the net present value of its rental cash flows. since (owner's equivalent) rent is the largest component of core inflation, you can see why owning is essentially a hedge against inflation. since the fed has basically contained long-run inflation expectations to 2.5%, the rent vs buy calculation is very simple. the only rational decision is to rent.
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I agree in theory, but hedging this way impacts your day to day living and some people just don't want to live "cheek to jowl" with a tenant. No matter what the financial benefits may be. Also, many areas of the country don't have duplex units. This tends to be more common in large urban East Coast cities.