Local governments should consider all of the perverse incentives they create when making these sorts of changes.
(If you do this, note that if you let someone stay in your Airbnb for a month, they also cannot be evicted in some jurisdictions.)
Say a potential buyer has a mountain of cash. They can scoop up a property with no issue. Financially, owning makes sense to them (no interest payments due to a mortgage), especially if they pick location correctly and see a property value increase.
Next, say a potential buyer has a small pile of cash. A mortgage will almost certainly be needed to finance property, though this buyer should be able to cover the down payment. If location is right, it should work out well for this person, but it will take decades to see a positive return.
Finally, say a potential buyer has little-to-no cash, living month-to-month on rent. They simply cannot afford to purchase a property and/or get approved for a mortgage.
Let's consider each of these three categories of buyer in your scenario, where a local government makes it more difficult to seek rent. The wealthy buyer doesn't care, unless they own many rental properties, in which case they'll possibly have a harder time filling their units. The second buyer will benefit the most, potentially allowing more of this class to purchase properties (theoretically, more properties will be on the market). However, the third buyer is out-of-luck because they simply don't have the financial resources to outright purchase a property. Decrease the number of rental properties, and rents will increase, unless the number of new buyers balances existing renters.
In summary, in your scenario, I would bet the wealthy will sell some properties and cash out, while the middle class will scoop up more properties and be able to pay for higher rents. The poorest, however, will likely need to settle for a lower overall standard of living.
This is why home buying assistance exists and is a very very good program for the government to subsidize, renting should, ideally, be a tool for those just starting life and those with the means to indulge in luxury - most people should own their homes since most people are living in the same place for extended periods of time. The exceptions to that are rare and need consideration, but the majority of renters today are people who are stuck in the rent cycle or don't know any better.
I'd be very curious to know what kind of exceptions you mean.
I've owned where I live a few times, each time it ended poorly. Now, I rent. The problem is, I can't buy what I want to live in even if I wanted to buy. Here's what I want to buy:
- Inside the city limits of Seattle; location is not fungible, I can't substitute a property in Spokane or Atlanta for one in Seattle.
- Within a 10-minute walk to a train station or rapid bus route.
- An outdoor space of my own, not a shared garden but a balcony or private garden of some sort.
That's it. That's the Tweet.
You'd think that would be trivially easy, but the exactly two places I've seen where property can be owned (one is a townhouse development in Rainier Valley with an astoundingly expensive HOA, yet still sold out and the other is a condominium development near the stadiums but the handful of units with a balcony sold out immediately) are unavailable.
There's nowhere else. No condos, no townhouses, no rowhouses, not even any detached houses. It's all rented apartments. No one is building ownable properties, because of a combination of striving for rental returns, zoning, and Washington's condo liability law.
It is financially advantageous to own a property, it is usually financially advantageous to own a property if you purely want to rent it out - renting is a profitable business that's why there are a lot of really large companies holding insane amounts of property in the US. If the city/region has some guaranteed demand for rental numbers (like uni stundents and young people working their first job) then the math changes to make it even more advantageous to rent - what you're essentially seeing is that owning property is the correct decision, it's so correct that the market for property is being soaked up by landlords that can make a tidy profit on the margin and are more reliable load recipients than individuals.
I'm sorry you're in the housing situation you're in because it sucks but, if you did see two identical places you liked and one was available for sale and the other for rent then it'd be the correct financial decision (really correct in fact) to buy the property.
Various regions within the US have toyed with ideas around taxing property ownership for investment more heavily but there is a lot of lobbying money pushing back on that. A lot of places (including BC where I'm at) actually have a primary residence tax credit for owners - if you own your property and use it as your primary residence you get a bit off your taxes to help swing the balance back toward individual owners.
Is it still the correct decision if I do not have a 20% down payment (or even a 5% down payment)?
Depending on the real estate market and your specific property, a monthly mortgage payment has a good chance at being lower than comparable monthly rental payments. Bear in mind: every dollar paid for rental is burned, whereas every dollar paid to a mortgage has at least some potential to be recovered in the future. And think a few years out: say you pay $800/month for rent. Over three years, that adds up to $28,800. If you live in a hot area, your rent will likely increase, so you'll pay more in the long run. A mortgage payment, however, will not, and you might get that $28,800 back through renting it and/or selling.
I see renting vs ownership as "XaaS" vs in-house. Renting is essentially Housing as a Service. There's a use case for XaaS, but at a certain point, owning critical infrastructure just makes sense.
Oh, I know it's very difficult for poorer people to buy property. Are you familiar with land contracts (also called contract-for-deed)? In certain scenarios, they provide a path to ownership for poorer people, but they're also offered in a predatory manner.
I'll add that a poorer person seeking to buy might consider moving out of a big city to a smaller town. Obviously, this approach isn't for everyone. However, if home ownership is that important, you can find nice homes for sub-$150k in many smaller towns. At that price, a 30-year mortgage is under <$1000 a month. Considering how much a two- or three-bedroom apartment may cost in a big city, financially, it works out.
This is a valid rule of thumb only because transaction costs are generally much higher when buying a home than when renting. Typically 6% of the cost is siphoned off by brokers (3% to each side) and the fees people pay to take out a mortgage loan are significant. Fees you pay to start a lease generally amount to only a small fraction of these.
1: This gets complicated because (at least in the US) most people don't leverage their investments at a 5:1 ratio, but do leverage their home value by that much.
In markets where people want to live. Owning a couple acres around the far-flung suburbs of Seattle or DC will net you some good money.
No one is buying housing in Gary, Indiana. Floods have annihilated many towns around the Mississippi River, and there is plenty of real estate in Detroit and New Orleans that sure as hell ain't gonna exceed the S&P 500 anytime soon.
As far as "markets where people want to live" goes: yes, in any market, you can outperform the average if you can predict the future better than other investors. Some of the places around the Mississippi River probably used to be considered good investments; now they aren't. If this whole full-time remote thing catches on, it's possible that the bay-area will drop in prices. It's also possible that only part-time remote catches on, and interviews resume in person so people want to stay in the Bay Area. Heck, it's unlikely, but possible, that Cupertino or Saratoga decides to rezone large swaths of the town for more density and the increase in supply drops prices.
Basically - you're trying to avoid the scenario where you live in a place so short that the exchange cost you pay to flip it on the far side exceeds the amount of rent you'd pay to reside in it.
Determining the exchange cost isn't always straight forward - the 6% given above may or may not be realistic for you, there are some brokers that will take a 1% cut and those folks are more common in hot markets, and there may also be taxes you need to take into consideration.
Also, there is a risk of getting stuck with a lemon - if you purchase a house which seems fine but actually has extensive water damage and mold you could lose a portion of the value, this is a really significant consideration in quiet housing markets (like the midwest) and less important in areas like SF where most of the property's value is likely the land itself - in either case you're taking a big chunk of the value of the structure out of the equation when reselling the property but in the later case the value of the structure is rather minimal while in the former case the land is essentially free.
Basically you almost always want to buy if you are able to. The money you're spending on housing when you own a property is accruing as equity instead of being siphoned off by a landlord.
In principle, the principal payments are doing that (interest payments are being siphoned off by a bank, instead of a landlord), as is any delta in the property value (but if that's negative, that's anti-equity).
Put 10% down on 1M. Goes up in value to 1.5M in a few years. Boom. 500K gain on 100k. Not that uncommon.
Also, if it's your primary, then tax free income up to that 500k if filing jointly when you sell if you lived in it for 2 years. Hard to beat.
1M. Goes up in value to 1.5M in a few years. Boom. 500K gain on 100k. Not that uncommon.
Also there are tons of options to flip if you want to put in some work and have the funds. Not that hard when the price per square foot grossly exceeds the cost to build.
You will have a commission in the expense ratio indefinitely.
But yes, definitely a decent option if you want to put your money in real estate with less headache.
Those who have a million or two but a house not because it's good for financials, but because they can't stand cranny rentals. Those with bare minimum money jump into a mortgage because for them it's the only efficient financial instrument available (a margin trading account essentially). If they tried to open such an account with a brokerage, they would be told no after looking at their net worth.
How is that, or even the 250k individual comical? Also, that's the gain that has no taxes AFTER fees/commissions. It does not get "eaten away".
You can also do 1031 exchanges, opportunity zones with real estate, or put it into an LLC. A lot of flexibility and tax strategy available.
lol what? Trees fall on houses all the time. Pipes break and water damage can seriously impact structure & foundation. Dumb-ass kids accidently drive their mom's car through the veranda. Houses burn down and kill people. A factory shuts down and now there are no more jobs so everyone leaves, driving your house price down.
Assuming a home is a secure investment -- even in a hot market like SF or DC -- is foolish.
> More than one-quarter (27%) of reported fires in 2014-2018 occurred in homes. Even worse, more than three-quarters (77%) of civilian fire deaths and almost three-quarters (73%) of all reported injuries were caused by home fires.
> During this five-year period, US fire departments responded to an estimated average of 353,100 home structure fires per year. These fires caused an annual average of 2,620 civilian deaths; 11,030 civilian fire injuries; and $7.2 billion in direct property damage.
https://www.nfpa.org/News-and-Research/Data-research-and-too...
Meanwhile, someone not investing on margin will be up 60%.
You should generally only reneg if interest rates are dropping - and interest rates dropping causes an upward pressure on home prices.
Even in a mildly inflationary economy, making fixed nominal payments on a salary rising more in line with inflation for an asset valued more in line line with inflation can be a fairly attractive deal.
But none of the above is meant to be investment advice. Homeownership has its risks and certainly loses flexibility.
- $3300 in principal + interest
- $1000 property tax
- $500+ HOA
- $200 homeowners insurance
That is $5000+ monthly and requires $200k upfront (and significant upfront cost as the brokers are paid off). How is that comparable in after-tax payments to renting a $3000 apartment?
I must admit that I had forgotten how high property taxes in the US can be, though. HOA surely depends a lot on what exactly you'd be buying.
The standard deduction was increased for everyone to compensate for it.
Owning in SF is generally more expensive than renting. Why? Because house prices have appreciation assumptions already priced in. Plenty of people lose money every month versus rent but appreciation more than covers it.
In a market where housing development is less restricted and construction occurs to meet demand, the addition of more investor capital means that more houses will get built. This is a good thing! It means that renters who don’t have enough wealth to build a house still get a place to live. In that case, you want to make it easy to be a landlord to encourage more capital to be in the landlord business and building homes.
I’m not convinced higher prices means more supply for housing. Building a house is labor intensive, and labor costs increase with housing costs. As stupid high as Bay Area housing prices are, new construction costs are even worse. It’s literally cheaper to build houses elsewhere and ship them in. However, in SF, at least, the construction worker unions are trying their best to block such projects: https://news.ycombinator.com/item?id=26526455
It doesn't always work that well in practice as investor demand can drive housing stock that is a poor match for housing demand. In theory this should all wash out in a free enough market, but no guarantee that won't take many decades - so it's not much help to people needing housing now.
The structure of investment vehicles for this makes a big difference in what is actually built too, and how the development companies are funded.
Only if you don't count the equity built from the rent that you can cash in by selling at pretty much any time.
Point is, when renting out an appropriating asset for the same as the monthly payments on your loan, defining "making a profit" as "completely paid off my loans on the appreciating asset that I can sell at any time" is a bit disingenuous.
What do you mean by this? You still have the property which presumably hasn't depreciated in price.
Oh yeah, one of the towns where I have property just pulled a new rental regulation out of thin air requiring a notification filing and fee for each rental property per year or on each new tennant lease. This country is turning into regulation hell.
Why would you personally own the property as opposed to putting it under an LLC or Corp? You would still have to pay taxes on personal income but it offers a lot more options on how to recieve the income and handle expenses.
So on one hand you could say the renters get a good deal but in the long run the upward price pressure makes it tougher for everyone.
In some jurisdictions, they can establish residence within 3 days and then can't be evicted without a court/judge being involved.
Too move we’re left with living in a hotel until something opens up.
My mother-in-law has 2 properties in SoCal and is dealing with this exact situation. She is speaking with a lawyer this week, in fact. I won't get into all of the details but will say that she owns these properties outright but has not collected rent on either since April and May of last year...
Is this not just due to the eviction moratorium?
I am almost certain this will be a trend.
This is weird to me - the renter wouldn't get an extension on remaining in their domicile if they payed for ten years straight and then hit financial hardships - if the renter is going to be bankrupted by Covid then they're better off hording as much as possible until that point.
Also, you need to remember that, during this pandemic, people are feeling real financial pain. There is a possibility this renter is trying to stretch their budget to afford food and power as-is, the landlord is, at worst, going to lose some value out of their held properties which may hurt their long term financial health but won't threaten them with immediate homelessness unless they're extremely overleveraged.
This isn't to dismiss the pain and stress of being a landlord - but there is a lot of pain going around right now and if your representative in congress or senators aren't fighting to distribute some relief for it then it'd be better to take that up with them. The economy is under heavy stress.
I fail to see how people could be struggling so when the US treasury has gifted people with tens of thousands of dollars.
Loss of work, loss of child supervision (in-person schooling and childcare closures), at times sharply restricted number allowed in stores (meaning parents have neither time without children to shop nor practically the ability to take children to shop) => increases reliance on delivery services for essential shopping with extra charges and higher losses; extra unemployment at its highest level (which wasn't maintained) was calculated to be approximately full-income replacement, so with the lower boosts, it still wasn’t full income reimbursement and large areas of the economy either haven't fully reopened or haven't fully rebounded., and for those who have been out of work the $3000 (+some for children) only compensates for a few weeks of the gap that hasn't been filled by the partially-boosted unemployment.
> froze evictions
Freezing evictions doesn't reduce the financial hardship of renters (who still owe the debt, they just aren't evicted for owing it), but does increase the hardship of landlords. It's not the same thing as covering rent.
> I fail to see how people could be struggling so when the US treasury has gifted people with tens of thousands of dollars. Because people have faced more tens of thousands of lost income or added expenses.
The US government acts slowly to provide relief and the last bill passed purely on a party line (even with one person celebrating the bill while voting against it for political reasons) - if people are facing financial uncertainty I'd definitely understand if they're counting every dollar that comes in and hording it due to the uncertainty of when this will actually end.
Also, most people, even most people on here, don't have 20k to throw around willy-nilly even if they have assets exceeding that amount.
Maybe Bill Gates and Bezos could execute a one time rent forgiveness program from their personal values - that might even work out pretty well in the short term, but it'd be placing too high of a burden on those two in particular.
All the billionaires in America do not just have that much money just laying around. This would be a budgetary concern of the federal government. No citizens could individually pay everyone's rents.
Well, to that I'd say, if my money had anywhere near the impact of everyone's money pooled together I'd do it. Until then I'll keep advocating for public funds to be spent this way, and I assume OP would as well.
If you lend each completely broke person $100 they are still about to be completely broke and your investment will be wiped out after a brief respite. But if you hand each bankrupt person $X,000 then many might be able to dig themselves out of the hole and remain productive members of society.
You can stress about this and spend a lot of your time chasing down someone for repayment. This is the wrong approach IMHO.
Instead just sure in small claims court (limited to $5,000). This is done without lawyers. You simply present your lease agreement, bank statement and any relevant communications.
Once you get that judgment give it to a collections agency and forget about it. The agency will take a percentage of anything they collect.
Then just look at anything you get back as a bonus.
Depends on your state. Here, small claims is limited to $25,000 with no limit for eviction suits.
Also, as others have noted, different jurisdictions may have higher limits.
But to go to civil court to recover $20,000 just isn’t worth it. Your legal expenses will be significant and you face the prospect of losing or being unable to collect.
So by limiting your potential damages you don’t incur litigation expenses, spend less time and stress on it and your net return may be similar.
What’s better? $5,000 it costs you nothing to get a judgement for (other than a nominal filing fee) minus 10-20% for the collection agency or $20,000 you may need to spend $10-20K to litigate?
> I often wonder how people on the verge of eviction think about this kind of thing — whether it is salient or even understandable.
If they're on the verge of eviction they're probably more worried about keeping heat, water, or food going. Landlords are an abstraction if your kid hasn't eaten in 2 days.
Sure, but the issue is that the suing party isn't getting anything out of it. You sue for damages, the defendant has nothing, so their credit score goes down.
That's fine, they get punished+the credit score decrease helps future landlords avoid the same situation with that tenant. But as a suing party, you get literally nothing out of it. The defendant's credit score going down doesn't help you personally one bit, you get no restitution or compensation.
People who aren’t paying rent after the pandemic started likely aren’t doing it for fun. Most likely they are underemployed, hence collections will stack up. “Living within your means” assumes it is even possible to find employment and a handful of life/medical/mental/family stability that not everyone has.
You seem to underestimate how much of modern life in the USA depends on credit. Electric, water, telephone, internet service require credit or suffer the costs and inconveniences of prepayment. Rental housing almost always requires credit checks in any desirable market.
You also seem to assume that collections can never be converted into a lean on your assets or garnishment of your wages. And that doesn’t even begin to crack the strange and painful tactics debt collectors use on your family, employment, friends, and other social pressures.
> This is all a result of me living responsibly within my means.
Implying that not using credit cards is how one lives responsibly within their means is kinda weird and wrong. Yes, you can live irresponsibly with a credit card. You can also live responsibly with it too. And it will give you extra consumer purchase protection (in case of a fraud or a bad fair vendor), as well as 1-5% return on purchases.
Some would argue that missing out on that 1-5% return and extra consumer protections is the irresponsible move. But either way, the whole "using credit cards means living irresponsibly and outside of their means" is absolutely nothing but a complete lack of understanding of how credit works.
The preceeding is a statement about most of my life. I've gotten better at such stuff and my lifestyle has changed after grad school -- and since I didn't have credit cards while living below the poverty line and generally being a schlub, I didn't fuck up my credit, so a few months of having a credit card as a de facto adult earned me a near-perfect credit score when I needed it.
Functionally, a credit card would work exactly like your debit card or cash, except you would also be reaping all the benefits of credit cards and improved credit scores.
But overall, I agree with your point about cost-benefit analysis and impulse control being difficult to overcome.
> I often wonder how people on the verge of eviction think about this kind of thing — whether it is salient or even understandable
My answer is that people in those situations think about these things very differently than people who have never encountered them. Or, flip it -- if dings on your credit score are the worst speedbump that society has thrown in your path, you probably don't have the skills necessary to live broke.
I didn't come for financial advice, but thanks
This situation is going to play out over the next decade at least and it will be terrible for (almost) everyone involved.
If you're renting and can afford to: pay your damn rent! In five years, you don't want to be staring down a judgement for a year of rent, plus interest, plus "collection" fees.
I suspect that once the moratorium is up, there will be a lot of landlords looking to sell. They've been not getting rent for a long time, and they may have to sell in order to get out of the hole they're in. Many still have mortgages, but they will have a hard time collecting a year worth of rent. But the bank won't have the same problem foreclosing.