Sunday, April 15, 2007

A Real Estate Double Whammy?

The housing market is always in the news. Prices soar. Then prices fall because there is a glut on the market. But within a couple of blocks of where I live, there are two apartment buildings that both have a for sale sign and a for rent sign on the front lawn. It seems like the for sale sign would scare away renters since you won't know who your landlord will be. The for rent sign would scare away potential buyers since they might wonder if they could actually make money on the building. It would also make you think that is why the building is being sold-not enough renters.

Maybe this is sign of where the housing market is. There are so many houses out there that not too many people need apartments anymore. So being a landlord is not attractive. But owning a house is not always better than renting an apartment. When my wife and I looked at houses a few years ago, anything that would have given us a comparable amount of square footage as our apartment would have been $200-$300 more a month when you consider the mortgage and property taxes. Then if anything needs fixing, we would have to pay. And take care of the lawn.

Now some would say we would build up equity in the house. But we can also save more money and that builds up over time. The only good the equity in the house would be is if we borrowed against it later in life, like with a reverse mortgage. But that is only if the value of the house appreciates. There is no guarantee that the value of the house would rise fast enough to match how much our savings account would increase.


Carl said...

I know that you are correct, but we have all been brained-wash about the American dream, a house with backyard and a driveway for the 2 cars. How do we counter the argument that renters are just making their landlords richer? Is the best scenario to own a home that has two apartments, one you live in, and one you rent out?
Does home ownership offer diversity in an investment portfolio, at least later in life - as opposed to having all of our money in the a diversified market portfolio?

Cyril Morong said...

I don't think you necessarily make the landlord rich. For one, as I stated, finding a house comparable to our apartment was going to cost alot more. So we are getting "rich" saving that extra money. You can also save by not having to pay for repairs (although in the long run, the landlord will pass some of this cost along to the renters like an excise tax). Renting is less work. I don't have to spend time fixing anything or finding someone to do it. All else being equal, more leisure time is preferred to less.

For some people owning a home with a rental unit attached may be a good idea. The rent will help defray the cost. Mulitiple unit buildings can have some efficiency to them like shared walls. In an apartment complex (or condos), only one person, the maintenance man, has to mow the lawn. That could be like a gain from specialization.

You may not need to own a house with a rental unit for diversification. You can always invest in a company that builds and runs apartment complexes. But having alot of money in a house could actually mean you are less diversified. If you spend less each month on your apartment, that money can be invested any way you want, in a variety of assets, that includes real estate if you so desire.