6 Responses to “Should you buy a property? Here’s a real life example to help you decide” »»

1. Fever
   Comment by Fever | 06/27/06 at 3:20 pm

   Real Life Example Has Plenty Of Flaws

   1) The only reason stocks appear more volatile than

   real estate is because the stock market is an efficient market and real estate is an inefficient,

   illiquid market. Real estate owners justify their investments by simply assuming that values

   always go up. They do this because there isn’t a highly liquid mechanism like the DOW to

   properly price their assets.

   2) As a former appraiser I can assure you that virtually all

   appraisals are “Made As Instructed�. In fact, I never did an appraisal where my client

   didn’t give me the number first; I just had to justify it.

   3) If you had invested in the

   stock market during the same time period as when you invested in real estate you would have made

   27% return based on the historic DOW levels (June 1, 2003 – June 1, 2006). In fact, by the time

   you factor in annual ownership expenses (subtracted by what it would cost to rent the same

   property), pay brokerage commissions and actually sell the property for market value (see #2) I’m

   not sure if stocks wouldn’t have been the wiser investment decision.

   4) Even if we

   calculate an IRR and determine that real estate produced a better return than stocks I would argue

   it would have to be a significant higher return because stocks are liquid and can be converted to

   cash at any time.

   5) During the time period you bought your house I bought a little

   company called RRC for $4 a share. Does that mean I’m right and everyone should sell their house

   and buy stocks, NO. It just means that you and I timed the market right. Now is the time to get

   out of residential housing, I suggest buying office buildings, they are currently priced well below

   replacement cost.

2. Tom_v
   Comment by Tom_v | 06/27/06 at 3:59 pm

   Fever:

   We all know that

   real estate and stocks are all about timing when it comes to investing either or. But at least

   with real estate i know the value of my property does not drop that much significantly within a

   month or even a week (as one’s stock shares can within a couple of days), so there is much better

   predictability on where the real estate market is heading vs. the DOW.

   By all means i’m

   not discouraging anyone to do one over the other, i’m just saying, as above posted, that it was

   “In My Honest Opinion” that I think Real Estate is a more stable investment if I were to chose

   either to invest into stocks or real estate; and it has so been proven to me over time by many

   wealthy clients of mine who have gone from ground up.

   But the true subject of the matter

   is even with all of the annual expense (which i highly doubt you’d be able to rent out a house for

   the same size or even a 1 bedroom apt. for the same amount as the mortgage payment), i get to own

   it in the end plus have extra cash from the sell (even with paying off what ever brokerage fee)

   from what i’ve already put into it towards a bigger and better place.

   1) I don’t

   understand how it can be an illiquid market? People constantly buy, sell and flip (i don’t always

   agree with this method) properties all the time, does it not become liquid when the property is

   sold? I’m a little confused when you say it’s “illiquidable”; When you “liquify” your assets

   doesn’t that mean you’re converting the property (real or not) into cash?

   2) I work with 5

   different appraisal companies throughout the New England area on a daily basis, and I can gaurantee

   you that I would never ever tell them how much a property “should” be worth just to get some sort

   of approval on a loan; and I would never work with appraisers who would pull that kind of crap

   either. And I do understand the Market Value vs. the Appraised Value. I was being conservative on

   the numbers shown above; I just checked 3 different comps and appraisals to the property, and I can

   tell you it’s worth more than $450k with the improvements made.

   3) What stocks are you

   talking about in particular? I can gaurantee you that I can give you more symbols where you

   would’ve lost money in those years rather than ones that you would’ve gained from.

   4) True

   you definitely can convert those stocks to income at anytime? And how much of a garuantee can you

   put on your returns if you invested your money into stocks? Can you also rent out your stocks and

   gain a persistant flow of income from it like you can as if you were to purchase an investment

   property (or several) for rental? I can give you several more examples on ROI with Real

   Estate.

   5) I 100% agree with you it’s all about timing, but again, this is all from my

   personal experience and I hope to learn something from this discussion, I mean honestly, if you’ve

   personally have made more money from stocks than Real Estate and has some great success stories

   than I would really love to hear them; and I do love hearing success stories.

   *ps. Please

   keep in mind that these are from my personal experiences and i’m not trying to prove you wrong or

   anything, but I just wanted to make my point as you have with yours, and I hope we can keep this a

   friendly discussion. I mean this is a forum and that’s what they’re all about right?

3. fever
   Comment by fever | 06/27/06 at 11:02 pm

   Tom:

   Let me first say that

   since discovering this site I’ve been having a lot of fun with this dialogue and I also enjoy

   writing with an adversarial tone. So I apologize and hopefully nobody takes this stuff personally.

   I’ll respond to your points.

   1) Real estate is an illiquid asset by definition. Cash

   and cash equivalents (stocks) are liquid investments. See any business textbook.

   2) Based

   on the fact you work in the real estate industry, I’m shocked you don’t agree that the

   appraisal practice is a sham. I would like to know one person that bought a house and couldn’t

   find an appraiser to value the house at a similar number. Look at it this way, when you buy a

   house you most likely bought it for the highest number offered to the seller. How is it possible

   that you could also find an unbiased appraisal at a price where everyone else passed on (in some

   cases a higher price)? So just because you don’t specifically lead an appraiser doesn’t mean

   they don’t know what number to hit to continue to get your business.

   3) Fact: The DOW

   went up by 27% during the same time period you bought your house. So I have no idea where you get

   your information to make the statement “I can give you more symbols where you would’ve lost

   money in those years rather than ones that you would’ve gained from.�

   4) This whole

   dialogue got started on this very point. Yes you can rent your property and receive income but the

   income you receive will be far less than the monthly expenses. As you might guess I’m a renter

   and every month I build equity because the difference between my monthly rent payment and the

   payments I would have to make for the same property as an owner are drastically lower (lower to

   rent). That’s why I say rent is the best deal in town and only when rents goup significantly or

   values come down will I look to buy.

   5) A statement you made earlier keeps coming back to

   me “I know the value of my property does not drop that much significantly within a month or even

   a week�. Ask anyone who bought or built a condominium in the late 1980’s if values can drop

   and I think you’ll hear an emphatic “you bet your ass values can drop significantly�. Real

   estate appears to be exiting a period of unprecedented growth and I’m afraid we’re going to

   experience a period of unprecedented decline. That’s why if it wasn’t for stocks the mattress

   would work just fine for me.

4. Tom_V
   Comment by Tom_V | 06/28/06 at 5:19 pm

   Fever:

   I don’t take it personally, and I too

   am also having fun with the discussion :).

   my response:

   1) My mistake, I mistook the

   context as “illiquidable” as oppose to “illiquid” at the time of reading.

   2) By no means

   that I disagree with your point that it is a sham business, I just happened to mention that I avoid

   it the unethical portions of the business as much as I can. I am very aware of the tricks and

   gimmicks used in the appraisal business for repeat business, but I think the companies that I have

   stuck with have more integrity than others that i’ve dealt with in the past. And I judge them by

   the speed of the process with as much accuracy on the data as possible reflecting the price on the

   clients. There has been many hits and many more misses going through appriasers in my first year

   in the business. And there has been times where i’ve called an appraiser and asked why the

   numbers were so low, and I usually agree with them after looking at the report and sometimes seeing

   the property for myself; and yes, i’ve lost some deals because of that.

   3) Just because the

   overall DOW has risen doesn’t mean that if you were to put your money into a particular stock that

   that share will go up. My point was basically that you have a much higher chance in investing in a

   bad stock due to so many uncertainties and unpredictable events in the market that you can lose

   everything that you’ve invested on that one stock; ahem* Lucent *GM * name an Airline besides

   Virgin Atlantic and the list goes on.

   As if you invested in a Real property, sure the

   equity may go down, but if you pay your monthly bills on time and pay down the loan that you owe on

   the property as you should, then when you sell it you wouldn’t have negative equity and you’d

   still leave with some cash on hand.

   And I know that i’ll have a roof over my head if my

   stock investments went bad :).

   4) Honestly, how much do you pay a month in housing expenses?

   I pay about 2,000/mo. on house expenses give or take (depending on winter and summer) for a 3

   bedroom/ 2.5 bath house. You can’t tell me that when you’re renting a 1 bedroom in the city for

   $1400/mo. (not including parking) beats that. I agree somewhat with the rents, of course it

   depends on the property itself and also depends on how much cash you have on hand and how much you

   are putting down on the place; big difference in monthly expenses if you put 50% down vs. 10%. But

   I know people who have rented out their vacation properties for about $1200 a weekend up in VT, and

   it’s booked every weekend during the season and booked ever couple of weeks out of season; of

   course they also put more money down than just the minimum 10% so they are actually pulling in more

   money than they owe on it.

   5) You look at some of the same property from the 80’s and look

   at it’s value now.

   Here’s a historical chart from the US Census on the median value of

   homes in a 10 year break down from 1940 - 2000. Sure it’s not as lucrative as any stock, but at

   least it’s safer.

   http://www.census.gov/hhes/www/housing/census/historic/values.html

   All in all, at

   the end of the day it feels better to actually own a “home” and knowing what’s yours is yours

   (even if you’re paying a mortgage the bank cannot tell you that it’s not your place as long as

   you are paying your bills on time, as you should), and that you don’t have to worry about signing

   a lease in the next year, or move again because the landlord decides to raise your rent or sells

   the place. You have the freedom to come and go as you please, and of course it has a price

   (usually with a 10% downpayment), but that’s what this country’s all about, and that’s what we

   all wake up in morning for isn’t it? The freedom…

5. fever
   Comment by fever | 06/28/06 at 11:00 pm

   Tom:

   It’s clear the two of us are never going to agree and frankly I disagree with almost

   every point you just made. I’m going to focus on the statements that are just plain

   wrong.

   “I avoid the unethical portions of the appraisal business as much as I can�
   We

   are all guilty (buyers, sellers, mortgage companies, brokers) don’t blame the appraisers; they

   are just trying to put food on the table.

   “My point was basically that you have a much

   higher chance in investing in a bad stock�
   The DOW went up during the same period you bought

   your house, so chances are you made money if you threw a dart at the wall.

   “but at least

   real estate is safer�…than stocks
   Real estate is illiquid, bought and sold in an inefficient

   market and because of how expensive it is needs to be leveraged. Illiquid, inefficient and

   leverage = risk

   “I pay $2,000 a month�
   Who cares? You just go done saying your house

   is worth $450,000 and justified it by saying a buyer could always rent it out. There is no way a

   prospective buyer would be in the black based on a value of $450,000 in the Abington rental market.

   I’ll be happy to prepare an IRR to prove this point.

   “Ownership = Freedom�
   Ask

   some pore sole from Fidelity who’s job just got transferred to Smithfield how free he feels

   knowing he has to sell a house in this market. Remember Mortgage means “To The Death� in

   Latin

6. Tom_V
   Comment by Tom_V | 06/29/06 at 1:12 pm

   Fever:

   You’re right, I think we are both too far away on

   opposite ends on this point of view and you’re obviously not agreeing with anything i say at

   all:

   “we are all guilty (buyers, sellers, mortgage companies, brokers) don’t blame the

   appraisers; they are just trying to put food on the table.”

   -I still don’t know where you

   are getting this idea that i’m just blaming the appraisers alone! All i’m saying is that I try

   not to work with those kind of appraisers and and avoid it AS MUCH AS I CAN. I know how it is when

   a realtor is pushing me to change the appraisel numbers so he can get his commission check, and i

   tell every realtor that I only use my approved appraisers. So I know it’s not jsut the appraisers

   and i’m not blaming them alone nor did i ever.

   “The DOW went up during the same period you

   bought your house, so chances are you made money if you threw a dart at the wall.”

   -Again, I

   realize the DOW as the entire entity went up, but you still have to know what stocks to invest in,

   and be a fortune teller to not lose money in that particular stock; Walmart, McDonalds even Home

   Depot. You wouldn’t have been able to predict how well those stocks performed.

   “Real

   estate is illiquid, bought and sold in an inefficient market and because of how expensive it is

   needs to be leveraged. Illiquid, inefficient and leverage = risk”

   - Again it’s not as

   lucrative as stocks, but at the same time the loss on risk isn’t as great either.

   “Who

   cares? You just go done saying your house is worth $450,000 and justified it by saying a buyer

   could always rent it out. There is no way a prospective buyer would be in the black based on a

   value of $450,000 in the Abington rental market. I’ll be happy to prepare an IRR to prove this

   point.”

   - Go ahead and prepare an IRR to prove this point, but if you read the reply

   properly, I never mentioned anything about renting out this property in Abington. However I did

   mention of possibly purchasing some rental properties based on the sale of this particular

   property.

   “Ask some pore sole from Fidelity who’s job just got transferred to Smithfield

   how free he feels knowing he has to sell a house in this market. Remember Mortgage means “To The

   Deathâ€? in Latin”

   - Of course I wouldn’t ask a person who’s just lost his job! That’s a

   ludicrous example in this discussion! Someone with an UNSTABLE income should not be in the housing

   market in the first place, that’s where most of the foreclosures come from. And you can easily

   spot those people upon investigating:

   -High debt in credit
   -not enough down payment for

   house - 5%?
   -Low income to debt ratio
   -no savings or safety net.

   I wouldn’t be doing

   my job if I didn’t advise that person against getting a mortgage for anyone in any of those

   categories.

   Well it’s obvious that the context of my replies has been somehow

   misconstrued to you, so I apologize if you took some of the comments personally.

Leave a Reply »»