Have We Hit The Top?

[Sweet]

The only way that renting makes sense is if you are renting a dump or a single bed room.  I did the single bed room in a house for a decade when I worked in the city.  Even then I’m not sure that the money saved and invested really outperformed by much, if at all.  It probably would have been better to put suck up a mortgage and own my own home.  More space and enjoyment that’s for sure.

[Gregmal]

Yup. That and I cant tell you how beneficial the financing element is as well. I knew so many people who were smart and risk averse and rushed to pay down their mortgages the pst decade, or chose to be all cash buyers, that now cry thinking about the idea of having 6-7 figures of 30 year fixed under 5% locked up. 

[Spooky]

I'm in the other camp, mainly just due to the reality that home prices where I live in Toronto are out of reach for most people and some differences between the US and Canada (average price in the Greater Toronto Area is $1,182,000). However, I think there are real advantages to renting over owning and investing the difference in the market.

 

The first is that here my rent increase is capped at 2.5% per year - my landlord is taking all of the interest rate risk (in Canada you can only get a fixed rate mortgage for 5 years).

 

Also, maintenance expenses are all borne by the landlord and included in my rent. The washer and dryer needed to be replaced and the landlord replaced it.

 

But the key thing is really flexibility. If I lose my job tomorrow I just need to give 60 days notice and I am out of here. There is also no idiosyncratic risk of having a majority of wealth tied up in a single somewhat illiquid / immovable asset.

 

Also, in Canada you can't write off your mortgage interest from your taxes on your principal residence but you can if you borrow for investment purposes. I haven't been using any debt but this could be a huge tax benefit.

 

Lastly, when I back tested the results of the TSX with dividends re-invested versus the growth in the average home value in Toronto, the TSX outperformed by 4X (and this doesn't take into account maintenance costs on a house). So there is the opportunity cost of tying up a good chunk of capital in a house.

 

My results have been very good and I haven't even used any leverage, building my net worth from negative to over the price of an average home in 7 years. I also think the longer the time horizon the more this strategy will outperform as dividends get reinvested and the higher rate of compounding works its magic (i'm actually generating significantly positive dividend and interest income every month / quarter). The beautiful thing too is that in the long run at the end of the day I will have a portfolio / income stream that is not tied to any specific physical location giving me the flexibility to move or travel anywhere I like.

 

 

[Castanza]

4 hours ago, Gregmal said:

My leases even state that “there is no such thing as normal wear and tear” lol.

LOL have to admit that is a gangster move to put that in there. I'll have to remember this for future use. 

 

@changegonnacome @Gregmal Agree that for 99% of people the mortgage mechanism is a great forced savings tool. Similar to 401k etc. Yeah I guess there could be better options, but sometimes good enough is best and removes the added stress of trying to eek out an additional 10% like Bluegolds alluded to above. Appreciate the thoughts.

[Castanza]

31 minutes ago, Spooky said:

I'm in the other camp, mainly just due to the reality that home prices where I live in Toronto are out of reach for most people and some differences between the US and Canada (average price in the Greater Toronto Area is $1,182,000). However, I think there are real advantages to renting over owning and investing the difference in the market.

 

The first is that here my rent increase is capped at 2.5% per year - my landlord is taking all of the interest rate risk (in Canada you can only get a fixed rate mortgage for 5 years).

 

Also, maintenance expenses are all borne by the landlord and included in my rent. The washer and dryer needed to be replaced and the landlord replaced it.

 

But the key thing is really flexibility. If I lose my job tomorrow I just need to give 60 days notice and I am out of here. There is also no idiosyncratic risk of having a majority of wealth tied up in a single somewhat illiquid / immovable asset.

 

Also, in Canada you can't write off your mortgage interest from your taxes on your principal residence but you can if you borrow for investment purposes. I haven't been using any debt but this could be a huge tax benefit.

 

Lastly, when I back tested the results of the TSX with dividends re-invested versus the growth in the average home value in Toronto, the TSX outperformed by 4X (and this doesn't take into account maintenance costs on a house). So there is the opportunity cost of tying up a good chunk of capital in a house.

 

My results have been very good and I haven't even used any leverage, building my net worth from negative to over the price of an average home in 7 years. I also think the longer the time horizon the more this strategy will outperform as dividends get reinvested and the higher rate of compounding works its magic (i'm actually generating significantly positive dividend and interest income every month / quarter). The beautiful thing too is that in the long run at the end of the day I will have a portfolio / income stream that is not tied to any specific physical location giving me the flexibility to move or travel anywhere I like.

 

 

 

Timing and market conditions have a lot to do with it. I think what Greg and Changegonnacom allude to are soft benefits that you might not see initially on your bottom line. Which makes a lot of sense. But then you can look at things like appreciation of a house from 2009-2023 (200k -> 293k) vs SPY (200k -> 1.3m) over the same period. Lots of luck, time, and market conditions that go into that. But (and it's a big but) it's not as clear cut for people who actively play a role in their finances. 

 

I mean in Toronto you could just as easily buy a 2m house only to have the market tank and be stuck with a house with a market value of 1.6m. Then you've got variable rates on top of that....

 

All depends i guess. 

[changegonnacome]

17 minutes ago, Castanza said:

better options

 

Yep better technical options out there perhaps......but when you insert an average human being with all the behavioral quirks that bedevil us......it for sure represents the highest easiest implemented ROI around & the smoothest ride psychologically........ less opportunity for the big mistakes that can occur in financial markets or other investing endeavours.

 

Short version - it's hard to mess up the purchase of a US home over a 20 or 30yr time period. Your incented to hold, your forced to save via equity build, your home participates in GDP growth......and feckless politicians ensure the real inflation adjusted cost of your monthly mortgage is falling each year..

 

When folks ask me about financial advice.......I usually always ask have you secured your principal private residence....if they haven't I pretty much always suggest getting this element of their financial life secured as a kind of foundational block.....getting together a deposit can be non-trivial for most.....doing so earlier than later is a big tailwind....the returns to housing are modest but they are consistent...and time is most definitely your friend in this regard.

[Gregmal]

Exactly. I told myself and my wife(then GF) in my early 20s that once I had a decent house, a decent car, and a boat, the rest would be easy. And it really has been. Once the aspirational shit and necessity stuff is out of the way, you're just using money you dont need and money that has a very long time horizon and runway and investing that to me has always been pretty easy. 

[Paarslaars]

5 minutes ago, Gregmal said:

Exactly. I told myself and my wife(then GF) in my early 20s that once I had a decent house, a decent car, and a boat, the rest would be easy. And it really has been. Once the aspirational shit and necessity stuff is out of the way, you're just using money you dont need and money that has a very long time horizon and runway and investing that to me has always been pretty easy. 

 

 

Would never be able to sell that last one to my wife.

Edited July 27, 2023 by Paarslaars

[Castanza]

4 minutes ago, Gregmal said:

Exactly. I told myself and my wife(then GF) in my early 20s that once I had a decent house, a decent car, and a boat, the rest would be easy. And it really has been. Once the aspirational shit and necessity stuff is out of the way, you're just using money you dont need and money that has a very long time horizon and runway and investing that to me has always been pretty easy. 

 

What'd she say about the boat part?  

 

Agree 100% though.....quick trip over to WallStreetBets shows the opposite side of the coin. Dude Yoloing 10,20,30k sometimes 75-100k yearly and posting their loss porn. Always wonder what the rest of their portfolios look like. Or if they have a house, vehicle, student loans etc. 

[changegonnacome]

6 minutes ago, Gregmal said:

Exactly. I told myself and my wife(then GF) in my early 20s that once I had a decent house, a decent car, and a boat, the rest would be easy. And it really has been.

 

For sure - you become kind of antifragile in doing so.......and the master of your own destiny.....with a deposit gathered and your house secured.....I think you've got the bedrock to step into financial markets.........you've got a chance then at behaving well during a 50% drawdown for example.

[Gregmal]

9 minutes ago, Paarslaars said:

 

 

Would never be able to sell that last one to my wife.

Simple. My house, my rules lol. 

 

Boating/fishing works as my decompressor. Lets me get away from the daily grind. 

[rkbabang]

14 hours ago, Castanza said:

How do you guys factor costs of owning a home into this long term? When I bought my house (which I ended up paying off early) I wanted to keep track of every single input cost I have so in 30 years or whenever I decided to sell at this point I can see IF I’ve made a positive return. 
 

I have a journal titled “The Cost of a Home” where I keep a running tally of every single expensive used on the physical maintenance of the house/property. From every major project down to every box of screws, tube of caulk, paint brush, p-trap, toilet flange, load of mulch, etc. 

 

Let me tell you that shit adds up over time! So far I’m ahead based on current market prices and what I could get for it if I sold. Obviously there is typically more upfront costs; but I’m really only through round 1 of repairs/updates over the course of ownership. 
 

I keep track of rents in my general area to get a ballpark for comparison. My gut tells me it might end up being closer than some think. 

 

 

The home you live in is different than most investments and needs different accounting.  You can do the above with an investment property but not your 1st home.   With an investment property you can either buy it or not and put all of the money elsewhere. But with a 1st home you don't have that option unless you plan to sleep under an overpass or in a van down by the river.  You need to track and subtract what you would otherwise have had to pay for rent if you choose not to buy the home.  And that rent would have increased every year indefinitely. 

[Spekulatius]

I would guess that for 90% of the people, it has worked out well to buy their home rather than to rent. That's about all you need to know, besides doing some basic rent vs buy comparison when you buy. Unless rent vs Buy cost comparison looks very lousy when you want to buy, go ahead and purchase your shelter and never look back.

[Gregmal]

Speaking of investments you can make with a longer term horizon...I gambled on some XRP right before it was delisted from Coinbase figuring the settlement or victory being favorable was inevitable. 3x'd that recently with the court win. Also had made several investments in Ripple preferred stock at valuations translating to $15-28 per share. Just got notice that the company is tendering for a chunk of them at more than $61 a share. None of these required anything more than a gee shucks I see lots of ways this works but dont have a time horizon and dont care if it takes awhile approach. All made possible by a higher risk tolerance due to life being secured. Whereas in 2011 I passed on pre IPO Facebook because I needed a house, car, and boat LOL.

[LC]

Yeah, homes that you live in are a bit different. I have two condos that I use/rent. Ski condo gets used most weeks during the season, then is rented on weekends. Then it gets used randomly during the summer/offseasons for fishing/hiking, or rented if people want it. Montreal condo gets used on/off during the warmer months, then gets rented during the schoolyear. 

 

Sure, all of that money would have earned more $ in the market. But then what, I have to Airbnb everytime I want to go skiing? Or have to find some random rentals during jazz fest over the summer? If I want to move to the mountains permanently in 20 years, now I need to deal with whatever the market looks like at that point? 

 

The forced savings part is useful. Shit ever hits the fan in my life, I can sell them. But I can't just sell and rebuy on a whim. Not like stocks where one day I sell OSTK at $30 and a few weeks later it runs up to $38, and now I'm like DOOF.

[Jaygo]

My plan was always have 1/3 net worth in stocks, 1/3 in house, 1/3 in business equity 

 

It has been damn hard to keep up with our ex-urban Toronto house and now id say we are well beyond 50% in our home. The thing is without the real-estate growth we would be nowhere near where we are today since we started so small and with mostly dept.

 

It started back in 2012, a small home for 325k, i put 60k down at the same time I had about 50k in the market. we sold that house for 850 and traded up in 2020 for 1.1 million. my neighbors empty lot just sold for 1.6 mill for the same 4 acres give or take a bit. 

 

There is no damn way I can keep up with that even though my savings rate is close to 40%.

 

this past year we passed 800k in the market. In my example the house has out earned my wife and I and our investments after taxes. There is no way renting and investing will keep up with a mortgage and investing the excess savings. The leverage is just to important to ignore.

 

I have given the same advice to my youthful acquaintances that something just mentally changes when you have a house and mortgage. For me all of a sudden I was an adult and had to put on my big boy pants, no more clubs, stupid purchases and wasting money. It was work, read, reno repeat for a long time and one day I realized i had become relatively wealthy and I can now see the snowball picking up speed. 

 

The 30k in dividends we get a year is now about the same as my after tax income back in 2012 lol.

 

Real estate for the win if only to give a young a guy a kick in the ass!

 

 

 

[Spooky]

I guess the question we should be asking is really where do things go from here and what is our best use of capital going forward. Can stocks / real estate as asset classes produce the same returns they have historically without the backdrop of 40 years of declining interest rates?

[Gregmal]

We were told stocks arent a good inflation hedge and from July 2020-today the verdict is pretty clear. Real Estate at decent valuations and with certain tailwinds too. I dont even think its a debate. You just wanna own assets through the cycle. 

 

Apartments stuff I think is ok. Nice, safe alternative to bonds but still for grandmas. Awhile ago in my 2018/19 housing thesis I figured that rentals and homeownership would both go on a monstrous multi year, maybe even multi decade run, but with some see sawing where one is clearly favorable to the other. Right now you clearly wanna be on the homeowner/homebuilding/home related resources side of things after the apartment stuff just had its monstrous run. 

[rkbabang]

24 minutes ago, Gregmal said:

We were told stocks arent a good inflation hedge and from July 2020-today the verdict is pretty clear. Real Estate at decent valuations and with certain tailwinds too. I dont even think its a debate. You just wanna own assets through the cycle. 

 

Apartments stuff I think is ok. Nice, safe alternative to bonds but still for grandmas. Awhile ago in my 2018/19 housing thesis I figured that rentals and homeownership would both go on a monstrous multi year, maybe even multi decade run, but with some see sawing where one is clearly favorable to the other. Right now you clearly wanna be on the homeowner/homebuilding/home related resources side of things after the apartment stuff just had its monstrous run. 

 

I agree.  I'm basically thinking the Kuppy+Bitcoin portfolio (home/land/real assets related, oil, uranium, bitcoin) is the place to be the next 5+ years.

 

[Castanza]

2 minutes ago, rkbabang said:

 

I agree.  I'm basically thinking the Kuppy+Bitcoin portfolio (home/land/real assets related, oil, uranium, bitcoin) is the place to be the next 5+ years.

 

 

Throw in some Insurance and underlying commodity producers that back the other sectors like WFG and I agree whole heartedly. 

[Castanza]

Appreciate all the perspectives from the folks above1 COBF never disappoints  

[dealraker]

Hard one to word and hard place to do the math and make sense of it.   Waterfront lot and home bought and built 40 years ago by me, a licensed contractor.  The lot, if the house wasn't on it, would sell for 15-18 times what I paid 40 years ago.

 

With the house and structures separate from the lot...well the boat ramp, pier, seawall, extensive decks and such - all have been replaced - due to natural erosion and weathering--- I've gone backwards financially.  Then add in the boats and it is backwards on steroids.  Loved it from the beginning and loved it more as time passes.  Then there's the cost and maintenance of the land across the street and we go exponential in the backwards mode.

 

Overall, house and lot stuff total, worth about double to triple what I have in it.  Umm....maybe double is closer.

 

Lotta people do this stuff too.  Crazy!  And fun.  

 

 

Edited July 27, 2023 by dealraker

[SharperDingaan]

29 minutes ago, rkbabang said:

I agree.  I'm basically thinking the Kuppy+Bitcoin portfolio (home/land/real assets related, oil, uranium, bitcoin) is the place to be the next 5+ years.

 

We have been doing very similar, for a very long time; only thing to add, is cap valuation at some maximum number. Thereafter, systematically take every nickel above the cap, off the table as circumstance permits. BTC at 100K is great; but useless if it then falls to 30K, and you hadn't sold!  

 

SD

[TwoCitiesCapital]

1 hour ago, Gregmal said:

We were told stocks arent a good inflation hedge and from July 2020-today the verdict is pretty clear. Real Estate at decent valuations and with certain tailwinds too. I dont even think its a debate. You just wanna own assets through the cycle. 

 

I dunno - real returns are still negative. Even after returning to bubble-like valuations to pull indices higher on declining earnings, you're still -7 or -8% in real terms for the last 24 months. Hardly a great inflation hedge - especially considering the valuations that had to be reached to accomplish it. 

 

Real assets did better. Gold, real estate, oil, etc all out performed equities on a 24 month look back. I expect that will remain the case for the next 2-3 years (perhaps with the exception of real estate) and that broad fixed income may join the list of assets that outperform once we hit the next cutting cycle. 

 

Equities haven't done "terribly" as I expected, but they certainly haven't been a good inflation hedge. 

 

I also expect that the next few years may look like the last 2-3 years in regards to the instability of inflation. If that's the case, the rough start for equities is probably only going to get worse. 

Edited July 27, 2023 by TwoCitiesCapital

[Spooky]

I just keep thinking about Munger's statements that it is going to be much harder to build wealth going forward with the prices of everything so high now. I assume that he also subscribes in some degree to Dalio's thesis on the changing world order since he is heavily invested in China and has recommended buying Chinese companies over American companies given the price differences. Buffett is also pivoting somewhat to Japan as well as into oil investments.  Maybe I'm reading too much into it but it could be a rocky road for US equity markets on the horizon.