Assumptions in Rent Vs. Buy Calculation

I'm saving nearly $1100/month by owning my apartment rather than renting a comparable one.

3% return for the down payment may seem pretty low. However...
- that is an after tax number
- historically real estate has shown low volatility (unlike recent years)
- This investment does not require lots of active management like a stock portfolio
- Bond yields are pretty low themselves

1% price appreciation for the apartment is a pretty big assumption, and dramatically skews rent vs buy comparisons
- Real estate has historically gone up, so should you assume 0 or negative?

I really chose 1% for my calculations out of convenience. If you are looking to put down roughly 30%, the 3% return on the down payment, and the 1% price appreciation roughly cancel each other out, which simplifies things.

> 3% return for the down payment may seem pretty low. However...

its wacky low. dishonestly low.

> historically real estate has shown low volatility (unlike recent years)
Except when it is leveraged 5x or 10x. That is a HUGE factor that can't be ignored.

> This investment does not require lots of active management like a stock portfolio

Buy an S&P fund. A stock portfolio needs no more management than a RE portfolio unless you're looking for work. Rebalancing should be done once a year the stats say. And thats certainly a lot less work than managing a property (even if you live in it).

> Bond yields are pretty low themselves

Low risk bonds, of course.

Buying junk bonds on margin will do a hell of a lot better than 3%.

> I'm saving nearly $1100/month by owning my apartment rather than renting a comparable one.

only if you're miscalculating the cost of the equity already within.

SWE

What assumptions do you think are appropriate, and for what reason? I think these assumptions are the biggest difference between bulls and bears.

Leverage is a choice that is more or less known when someone decides to buy, and not an assumption.

What assumptions do you think are appropriate?

f'n matt....

yeah and if you sold at the top and rented you'd be saving $2000/month on housing, w/ zero risk on realized capital gain w/ $0 paid on taxes on said gain based on the greatest RE bubble EVER in the history of the wooooooorrrrrrrrrrrrrlllllllllllldddddddddd!

FLMAO. R ppl really that financially STooopid? I mean I just heard Bernie go on and on about teaching our HSers to be financially savvy.... well I guess for most of the ADULT american lemmings ITZ just too too late.....

w67

What assumptions would you use or think is appropriate, and why?

"eah and if you sold at the top and rented you'd be saving $2000/month on housing, w/ zero risk on realized capital gain w/ $0 paid on taxes on said gain based on the greatest RE bubble EVER in the history of the wooooooorrrrrrrrrrrrrlllllllllllldddddddddd! "

exactly.

matt's "savings" (which don't actually exist) are also dwarfed by the lost equity.

SWE

What assumptions would you use or think is appropriate, and why?

jhooch.. the ONLY variable that matters is where do you think rents for a like kind unit will go... and keep in mind we are coming of the biggest RE/Tulip bubble known to man and it's synchronized with the world and China has yet to take it's lumps... I'm saying I ain't putting away my shovel and canned foods yet...

??

I think rents will go up, so I should buy at any price? That is the only variable? Really?

What marginal return should you assume for your down payment?

What (if any) price appreciation (depreciation) should you use to estimate potential exit price?

Some assumptions are debatable and difficult. Here are some that are easy.

Equity is riskier than debt, because debt has the right to be paid first.

In the case of US home mortgage debt, the market understands that most of the debt's default risk is held by the US government for free via FNMA or the Greenspan/Geitner Put. That is, US mortgage debt always has an artificially low rate that does not reflect the full underlying investment risk due to this heavy government subsidy. Moreover, at the moment, the Fed is using all the tools at its disposal to keep interest rates below the levels that ordinary risk-based market analysis would put them. Moreover, the debt investors are diversified, eliminating another part of the risk, while homeowners ordinarily are not. So, in owner-occupied homes, equity is even more than usually more risky than debt.

Thus, the expected return on a downpayment should always be considerably higher than the market interest rate on the financed part: same investment, far more risk.

Using a LOWER (3%) expected return for a RISKIER investment makes sense under only three scenarios that I can see:

1. You are confused,
2. You believe that mortgage interest rates are irrationally HIGH, because you believe that you have non-public information that the future of the real estate market is far more bullish than the professionals think, or
3. You believe that you are Mr Rosewater -- that God or Fate has ordained that your investments will do well without regard to the ordinary rules of economics and statistics.

jhoooochhhh.... if you think rents will go up hurry it up and buy every single unit that is available in NYC cause if you are correct, then you are gonna be filthy rich...

yeah. and edumcate yourself from Financeguy's post... .most americans are financial imbeciles as this bubble attest to and your line of reasoning for buying now....

thatz what I love about SE, I can actually tell you that you are a financial moron... see it's very hard to do to the RE borkers that have kids that are my daughter's classmates...

Hey at least someone said that is wrong, and came up with a reason.

What rate do you think is appropriate, if you care to share?

I also am not assuming a 3% return on an investment, but rather an after tax marginal alternative. Something higher than expected government bond yields and lower than expected stock market returns.

The assumption is...I could buy this bond, stock or X, or I could buy real estate, pay lower monthly payments, but lose that income from the bond or stock or X.

What you assume 6%, 10%? I am curious what people think they can make on their money. Outside of the obvious that real estate is sure to tank.

Isn't the more important variable the price % appreciation? I would do an analysis based on a 5yr, 10yr, and 15yr timeframe. I would do separate analysis because the price % appreciation parameter used for each timeframe will be significantly different. i.e. I might use a number between -2% to 1% for a 5 year analysis, 1 to 2% for 10yr, etc... In most cases, such analysis is really used to justify your decision as oppose to being used to make a decision... You can always tweek the numbers a little to justify your decision to buy vs. rent.

jhochie.. if nyc re is such a sure bet vis a vis bonds, gold, commodities, china re, blk pearls... wouldn't GS and all the firms sitting on a $trillion in cash have sopped up all nyc re by now?

wait a minute, there are only two alternatives in the world? Buy a leveraged deflating RE or buy a margined bond, stock, commodity? How about sitting in cash, just don't let Geitner fool you into buying his Larchmont house by paying you 0% on your savings.... when he does unload his house at 50%, your rate of return on your cash will be in the high teens versus buying his house 2 yrs ago... See multiple way to teach the lemmings finance 101...

FLMAO....

Sunday:

There are a ton of assumptions that go into these calculations. I think your idea of running multiple calculations makes a lot of sense. You are correct to point out that you can make the model say anything you want by stretching some assumptions.

I do think there are 2 more fundamental questions that are related, but not entirely correlated.

-Is is cheaper on a month to month basis to rent or buy?
-Will I make money on the investment if/when I sell?

The month to month question largely hinges on how much down payment you use, and what return you assume you could get elsewhere with that down payment.

The makes money on the investment question largely hinges on what appreciation you assume if any, and how long you hold the investment.

I think you should do what LICC claims to be the truth: REAL ESTATE ONLY EVER GOES UP IN VALUE!

That would get you the answer he wants.

SWE

> What assumptions would you use or think is appropriate, and why?

Depends on what your leverage is. 5x? 10x?

"Using a LOWER (3%) expected return for a RISKIER investment makes sense under only three scenarios that I can see:

1. You are confused,
2. You believe that mortgage interest rates are irrationally HIGH, because you believe that you have non-public information that the future of the real estate market is far more bullish than the professionals think, or
3. You believe that you are Mr Rosewater -- that God or Fate has ordained that your investments will do well without regard to the ordinary rules of economics and statistics. "

Bingo.

3-4X leverage

10-12%

Pre or post tax?

You are asking the wrong question.

Why does it matter whether you should be using 5% or 15% as expected return on downpayment? In either case, if prices are returning to fundamental value, you are going to be underwater. You can drown in 15 feet of water just as easily as 1500 feet. Once you are insolvent, it doesn't make much difference how insolvent you are.

To justify current prices, you only have a small number of stories.

You could assume market rationality in general, but an odd exception here:

1A. The bubble story is backwards. In fact, investors are in a panic. The mortgage market is irrationally pessimistic, so mortgage rates are wildly too high. For some reason the owner-occupied market has escaped this pessimism and is more realistic.

Since current prices cannot be justified based on current rents, this "no-bubble/homeowners-market-is-rational" story also requires believing:

1B. Rents are about to soar, so using current rents as a proxy for value gives a wildly too low number. NYC's job market is about to grow so explosively that developers won't be able to keep up (and their costs will soar if they try). For some reason neither professional landlords nor the banks are aware of this likelihood, but homebuyers do understand it and are bidding prices up accordingly.

Alternatively, you could believe the market is irrational and getting more so:

2. Markets often depart from fundamentals, so even if fundamental analysis says that this is a bubble, there is no reason to think that it will be at fundamentals when you sell. To be sure, capitalist markets have strong incentive structures driving them back towards fundamentals, so future prices are more likely to be lower than higher, even though statistics has no tools to predict the precise course of a chaotic system.

Still, for some reason -- divine revelation? -- you are confident that you can predict both the market's course and your own life, and therefore you are confident that the market will be in an even bigger bubble when you sell, so you will make money on appreciation even though you (and your buyer) are going to lose it on fundamentals.

The question you should be asking is not "do I use 1% or 10% expected return." Instead, it is "am I paying bubble prices, is the bubble still inflating, and how confident am I that I can sell while the bubble is still inflating?"

If this is a dying bubble, you are going to lose money -- lots of money. If you get a good deal today and prices return to fundamentals, your downpayment will be gone. Almost gone, barely gone, or way gone doesn't really matter (and is impossible to predict anyway). Paying current prices will be like going to a very expensive restaurant: you may have a wonderful experience, but you will never see that money again. If you got a great deal in NYC real estate in 1933, you didn't break even for at least a generation even in the middle of the fastest growth this country has ever seen (google the Empty State Building); if your ancestors bought in Amsterdam at the peak of the tulip bubble, you're still waiting (google Shiller long term real estate returns).

If the bubble is going to continue, or NYC is about to have explosive economic growth leading to rent increases that won't be competed away by new building, then the details again don't matter. If you overpaid by 20% in 2003, the market caught up with you by 2004.

Past bubbles have followed fairly standard forms, which do not include sudden revivals. But past performance does not predict future returns.

Use whatever story seems right to you. Just be aware of the assumptions implicit in the numbers you put into your spread sheet. 3% isn't arbitrary -- it has a definite story that goes along with it.

I find it helpful to start with your conclusion and then find assumptions that justify it.

Yes, Socrates persuaded many of us in the "fact-based community" that if a "conclusion" requires assumptions that don't make sense or are self-contradictory, logic provides a good reason to abandon that set of conclusions.

Of course, faith and hubris sometimes counsel abandoning logic instead. And when the free-marketeers have weakened the regulatory regime enough, sometimes you do just fine for a while by just assuming the numbers you need to make the spread sheet work. Both systems do require an adequate pool of fools, however.

"I find it helpful to start with your conclusion and then find assumptions that justify it."

Isn't that what all of your posts are about, RS?

Very little insight for such a long post.

I guess you think the bubble has yet to deflate...thanks

My question is to try to assert how far out of whack the rent vs buy comparison is. I think that is based on a lot of assumptions, namely what you can earn on your down payment. You respond by saying it doesn't matter because it obviously costs so much more to buy than rent. I happen to think there may be places out there that are not more expensive to buy than rent, but again that is based on assumptions. I would like to get people's opinions about what appropriate assumptions are. There are different segments of the market and I suspect some present a much more attractive rent versus buy comparison than others.

P.S. Nobody is buying tulips here, and I do not think I have any type of divine relation.

Fundamental value is not determined by whether it is more expensive to buy than rent.

Equilibrium is when an INVESTOR in a similar unit would be indifferent between buying, selling, holding to rent, constructing a new one or renovating an obsolete one, converting a rental to owner-occupied, or putting money in a different investment with similar risk. All you need to do is to run your spread sheet assuming that equity investors will demand more than mortgage investors, as they always do in non-bubble markets, to see that we aren't close to fundamental pricing.

If you think you can make sensible assumptions that require getting into the detailed numbers -- why don't you tell us what they are. Maybe you have something to teach us.

As for me, I apologize for the lack of insight. I have no insight to add to Finance 101. Perhaps I was wrong to think that Finance 101 might do you some good. However, your very short posts suggest that you are compounding your macro error (treating supply as fixed) by underestimating the cost of ownership -- valuing your opportunity cost based on alternative investments without correcting for risk, double-counting appreciation, ignoring diversification and liquidity, underestimating the cost of maintenance and assuming continuing bubble pricing without realizing it. But maybe you are just suffering from blog shorthand and you could clarify all in a longer post.

Oh, and if you are including imagined future capital gains as a component of current value, you are buying tulips.

I am a CFA charter holder, I don't need a finance 101 lesson, thanks.

Then just tell us your assumptions.

j i suggest you don't engage financeguy anymore. He will tell you the same thing over and over again and tell anyone who asks the same question that in no uncertain terms that they are stupid to think that buying an apartment is smart. It does not matter if prices have stabalized or gone up, he will continue to say we are still in a bubble that has to deflate and we are not talking about a little, because he is tellign you that you will need 20 years to recover (a generation).

Do i know if we are still in a bubble, who knows. But i do know that he spends a lot of time throwing out finance terms and questioning whether those that want to buy are divine because we can foresee the future. However he is the one who continues to tell us all over and over again how he can see the future and none of us will have any money left if we buy an apartment.

I see financeguy is up to his inaccurate rambling again . . .

How do you justify buying at a 3% expected equity return when the market tells you that a safer debt interest in the same investment pays more?

Why would you assume 1% appreciation rather than attempt to calculate an expected return and expected consequences of inflation/deflation in returns and costs? What assumptions generate a 1% return?

What is your data source for imagining low volatility in post-bubble real estate?

If you are borrowing at 5% to finance an asset that you imagine is going to make 1% with low volatility, how do you expect to make 3% on your equity investment?

Why do you think that markets will value investments with different expected risks at the same price?

Why do you think the law of one price doesn't apply here?

If you have coherent answers to these issues raised in your short posts, you have insights I **DO** need a lesson in.

yes, they are generous with the internet time in the sanatorium these days.

I started this post to ask others for what they think are appropriate assumptions.

I offered up some assumptions to start a discussion (what I would call the most bullish case, but I think they could be argued for, but that isn't the point). I have only gotten 1 response saying what is an appropriate alternative return for a down payment.

I understand what debt and equity are. I understand a bond yield plus equity risk premium. I also understand that there are many other ways to arrive at a required rate of return. I know what risk and volatility of returns are. I know what supply and demand are. I know what liquidity and the benefits of diversification are. I also know that nearly all securities models use an estimated terminal value, even when you are not buying tulips. I don't need a finance lesson from someone that just wants to show how smart they think they are.

There are many many more assumptions that go into a rent versus buy calculation, but the model is most sensitive to these two, and I would like to hear people's opinion on what they should be. I am not asking the question just so I can tell people how wrong they are or give them a lesson in finance 101. If you have an opinion of what is appropriate I would like to hear it. If not, I can just check out investopedia the next time I have a finance question.

3% is not the expected/required return. The expected/required/estimated return is only arrived at once a terminal value is determined (or estimated). The assumed return on the down payment is used to show the income that the buyer is giving up (opportunity cost) by tying up their money. The 3% is not risk adjusted. The total return on the purchase would/should be higher in order to justify the risk of buying, that estimated total return is risk adjusted.

There is a reason people buy stocks with lower yields than bonds.

There is a reason people buy stocks with lower yields than bonds.

True. But only a moron would buy a stock expecting it to return less than a bond. The expected return is higher because the risk of loss is higher.

Today, rates are so low that bonds offer little appeal. Try getting a return on your stock and bond investments today with the risk free rates near zero. It seems to me that today's bubble is in bonds, which never get as lofty as other assets. I bought BP and Anadarko Petroleum bonds at 15 and 10 % off par a few weeks ago when hedge funds were shorting them. Today they are 10 points higher. The bond market is unbelievable.

I would assume that you get 3% on your real estate deposit money--you'd be lucky to earn that on a 10 year CD and no where close to that on a shorter term investment.

Mikev -- Sorry, I'm not in the prophecy business. I'm not predicting the end of the bubble or anything about future prices.

I'm trying to understand how the market works. In particular, I'm looking for any justification of current prices that doesn't involve explicit or implicit divine promises or obviously false bubble logic.

I think the obvious explanation of current prices is that they reflect a bubble. The social dynamics of bubbles are not well understood. However, the general outlines of bubbles are. In particular, it is fairly clear that self-sustaining systems that require continuing growth eventually fail. Therefore, I think the most likely future course is that prices will drop.

Obviously, bubble dynamics are only a part of a very complicated story, so it is also possible that something else will happen. Moreover, fundamental pricing is less well understood, and the numbers that fundamental theories use are inherently squishy.

I'm hoping to understand what the optimists think is going to keep prices up, so that I can see whether it is convincing. Of course, that requires getting some optimist to say something other than "prices are going to go up" or "only socialists think that capitalist markets tend to approach equilibrium" or "anyone who thinks that theories might help understand a market is an elitist."

So, engage, or not. If you don't, I'll get bored and go away. If you do, maybe we'll learn something.

If you want to talk about if there is still a bubble, and how much much the market has left to collapse, start another discussion.

What marginal return should you assume for your down payment?

What (if any) price appreciation (depreciation) should you use to estimate potential exit price?

I am curious what people think, and their rational.

jhochle... Great questions. I've been playing extensively with the NY Times Buy vs. Rent calculator and have been toying with the same assumptions. (http://www.nytimes.com/interactive/business/buy-rent-calculator.html)

MARGINAL RETURN: I presume an after-tax return of 4%. Since it is a long-term investment, I can reasonably mix equity and bonds with global exposure. I can see an argument for 5% or even 6%. Of course, the higher the marginal return/opportunity cost, the greater the argument to rent (holding the many, many other factors equal).

PRICE APPRECIATION: I think 1% is a very fair rate -- though I think 2% annual appreciation if more likely. But if you are buying a place with a tax abatement that disappears by the time you sell, perhaps it should be held flat.

I weighed in on the down payment return assumption. My only other comment is that it never pays to buy a capital asset like real estate if you assume depreciation. You have to assume a flat asset price or appreciation to justify buying, unless rents are more expensive than the monthly cost of purchase.

jhocle: I'm not showing off, I'm asking for help. Now I see that I misread you.

Clearly you are using a different formula than the ones in my end of the business. Most likely, this is just a terminology difference, since all the formulas derive from the same theory. However, I have no idea what you are talking about. Please explain your model more clearly.

If you are assuming terminal value, obviously I was wrong to think you were trying to calculate value; if you aren't putting risk into the cost of capital, you must be putting it in somewhere else. So what formula are you using, what assumptions are you making and what variable are you trying to solve for?

novyankee, how was your IRA return over the last ten years? Did you do 4%? Do you think the next ten years look better or worse? I'm very interested because, as a practical matter the US stock averages were flat, so even counting dividends, the return was far less than 4%. Juice your returns with bonds, gold or foreign investments if you want, but how did you actually do?

PMG... I actually returned EXACTLY 4% each and every year.

[/sarcasm]

I did much better than 4% annually.

My real estate investment (an NYC co-op) has almost doubled.

I bought a lot of puts back in 2000 as the market fell. That helped me a lot.

I invested in domestic stocks throughout 2001 to 2006... Then pulled a lot of my money out of the market to start a business. That was luck and I missed the declines of 2008.

As of today, I think stocks are undervalued. But not by a lot, just a little.

I'll ask your question of you... How did you actually do? And you didn't directly answer jhochle's question. What are your assumptions?

I am treating the down payment capital both as debt (cost of carry) and equity (required return on investment).

Debt in that you are essentially borrowing from your own income. In order to figure out how much you are borrowing every month you have to ask yourself what you could make otherwise (3%, 6%?). This gives the buyer the monthly cost of carry (after adding in other costs and tax benefits).

It is also equity in the classic sense that it is a down payment on a levered asset that is at risk of loss. The return estimated to determine if you are being properly compensated for potential loss of the down payment should be higher than 3%, but is only arrived at when you calculate a terminal value of the apartment (appreciation, or depreciation assumptions). Obviously terminal value is a huge assumption.

I have not constructed any complex model. I am not trying to model out what the value of an apartment should be, but to compare renting versus buying. I have no choice but to rent or buy, I cannot pass like an investor.

I came across this info the other day on S&P's website. I understand that this period like all is unique, but I was struck by how low housing volatility was considering the boom and bust period during the time frame. It was only slightly more volatile than bonds during the same time frame.

Annualized
Asset Returns Volatility
Housing 4.74% 4.14%
Bonds 6.33% 3.84%
Stocks -0.95% 16.13%
REITs 10.81% 25.09%
Data from January 2000 to December 2009

novyankee, I asked you how you did in your IRA because you suggested 4%. I suggested 3% assumption for the deposit. I'm not interested in how your co-op did. My condo did very fine, thank you. My liquid assets actually returned 5-6% per annum for the decade. I had very little stock exposure since 2000. I got out before the major declines, but I didn't have your insight to buy puts or participate in this decade's mini bullish market, nor the ugly decline. So how did your IRA do? That was the simple question.

Jhocjie.flmao. No bubble? Fking ey!

We r now in the land of absurdity. Jhoooochie. Use the force....... What do you believe your ability to earn a rate of return on your investment is? Go from there bubble denier. Flmao.

JH: Here is some of our disagreement.

1. You are borrowing from yourself, which seems safe, and therefore using a low interest rate. But you are not paying yourself appropriately for the risk that the asset price will revert to fundamentals. 3% is far too low. The rate should be relative to the actual investment, not the alternative -- otherwise your valuation depends on your personal alternatives, which leads to inconsistent results (if you get more conservative in your other investments, the value of your home or Pets.com goes up!?)

2. You seem to be double counting appreciation. Why are you assuming that a deteriorating physical asset would appreciate? If it is because you assume rents will rise faster than costs, are you sure that's right? (usually prices track costs in competitive markets; why is this different?) If you are, have you tried to estimate how it affects value? After all, expected increases in future net income should already be in the current price; they don't give you any future appreciation. And current prices appear to already assume imminent huge rent increases, so are you comfortable assuming that even more?

3. You should be estimating, not assuming, terminal value. If I understand what you are doing, you are implicitly building in an assumption that the bubble will get bigger without realizing it. Of course, the bubble might get bigger, but if that's the basis of your valuation, you want to be clear -- in a bubble market, these fundamental value numbers are all irrelevant. All that matters is your calculation of how likely LIC and SteveF are to set the market. Basing current value on expected future appreciation is the key to every bubble -- and it can justify any price, so long as enough people think it does.

4. I wouldn't put a great deal of weight on volatility figures derived from a bubble market. That's what took AIG down. Common sense should tell you that putting a large chunk of your net worth into an undiversified, illiquid investment the value of which depends highly on the competence of the City Hall, the MTA and Albany as well as the continued ability of JPMorganChase to extract rents from government and private industry -- is a risky investment and needs to be treated as such.

PMG... My IRA did about 6% -- mostly bonds. So what are your assumptions? Simple question.

Bubble logic: I could pay $5000 in rent, or $3900 in maintenance/taxes & occasional renovations to maintain the value of my apartment. I have the $2m purchase price in cash in T-bills earning, after tax, .06%, or another 1k/month. So, I save money each month by buying.

When I sell I make 1% per year over the long run, because RE goes up long term.

So, if I pay $2m, I make 20k/year. If I sell to someone for $3m, they'll make 30k/year. But why should I be such a piker? I should pay $20m -- then I'll make 2m/year.

Wow! Perpetual motion machine.

Any price is justifiable if you assume that someone else will be willing to pay even more.

Alternative investments options matter. There is a lot of cash out there, and while it may be held by a few, rather than many, it will buy Manhattan property when a decent cap rate can be earned. In a low rate environment, I think a 5% cap rate might be sufficient. Verizon stock yields 7%. Annaly Capital Management yields 15.6%. Since Annaly owns a leveraged position in agency bonds and it is yielding a distressed rate, that tells you we are likely entering a bear market for agency bonds, or for bonds in general. The stock market is telling you that rates will rise. That should raise cap rates and lower property values.

1. If real estate is more or less risky than another investment it does not change how much you borrow from yourself. Your monthly carrying costs do not go up or down if you think real estate is more or less risky. That amount does depend on your investment alternatives. Your expected total return should compensate you for the increased risk, which is calculated as an IRR after estimating terminal value and incorporating other costs and benefits.

2. No I am not. History tells me it is likely to appreciate, but I am asking what others think is a good assumption for appreciation. Of course that means appreciation over depreciation/costs, and that is not double counting, that is just counting. This number could be negative.

3. Semantics. The implied basis for valuation is carrying costs versus rents.

4. Volatility of returns is a very important factor in determining required returns. I can understand the argument that returns will be more volatile in the future. I was just surprised by how low the volatility was for a bubble and bust period. Also practically there is no margin call for an owner of residential real estate. The margin calls brought down AIG. Most investments depend on City Hall, etc.

I am done, this is pointless. Sorry to all you can go back to yelling buy and sell now.

go to school jhochhhh!
2) History tells you the dinos got wiped by an asteroid....

FLMAOz

hey financeguy... I likes the perpetual money machine... so cool...

Ok, you want to solve for IRR instead of price. That's ok. The IRR needs to be significantly higher than mortgage interest rate to make the project worthwhile, since it is riskier. It isn't.

Unless you assume unexplained capital gains on exit. Which you are asking us to estimate for you.

Why bother? Your capital gains on exit are either bubble profits or they are already included in your capitalization of anticipated future returns.

With bubble profits, any price works. You don't need to do fundamental analysis; you need to convince yourself that the bubble is back.

With fundamental valuation based on implied profits, you've already capitalized anticipated future profits. It makes no sense to anticipate unanticipated ones.

I don't think it's dishonest to calculate the cost of paying a downpayment by using the return that you would actually earn if you hadn't spent it buying the apartment. I guess it depends what you are measuring. Suppose if I weren't buying an apartment I would just put the money in a bank account. Then the actual opportunity cost to me is just 1.8% per annum or so.

this is so 1st yr analyst shit.. but run a sensitivity analysis on the variables... ya know what a lower imputed rent on a comp will destroy whatever the f'k you put into the rate of return on your DownPayment... seriously it will DESTROY your model....

really financeguy, what does it matter when you are paying w/the fiat currency? trading paper for bricks sounds like a great deal, no? And we'll all share everything once the great revolution comes....

"10-12%"

LMFAO

"I see financeguy is up to his inaccurate rambling again . . ."

Exactly

"I started this post to ask others for what they think are appropriate assumptions."

and your "others" turned out to be w67th, financeguy, and swe. Good luck with "appropriate assumptions".

Greater borrowing increases the risk and required return of equity in any investment.

If you buy a home with 100% equity, you have the same probability of equity loss as with 10% equity, but you have zero risk of losing all of your equity (within the bounds of normal discussion - I'm not talking about nuclear war). You also have ability to defer your equity loss for a greater period of time, and as anyone who has studied an option knows, greater time horizon is significantly to the benefit of the holder. Your horizon on a home with 100% equity can be near infinite, but for typical human and social reasons, from moving for jobs, to moving for family reasons, death, etc.

Additionally, the home continues to provide income to the resident in the form of a rent replacement. This is another reason why an owner-occupied home, with a long-term horizon, sufficient equity down plus amortization inuring to the benefit of equity, and a sensible ratio considering replacement, can be viewed with a low required rate of return.

The lesson that diversification is important to the investor - to everyone - is the last point I'll make here. Diversification is the reason why you can't blindly say that you ought to be viewing your equity in a home as an alternative equivalent to Stock W, Mutual Fund X, Bond Y, or Asset Z and the implicit rate of returns thereof.

WTF? Hey #5. Is a 50% annual return on x, a good return?

A: unknowable, what did #6 get on x investment?
1) person7 buys apt at x, 100% cash lives 30yrs, then dies;
2) person8 buys apt at x-20%, 100% cash, lives 30yrs, then dies;
3) person 9 rents apt x at 1/200th carry of person7/8 for 30 yrs and dies.

Who got more girlz in the 30 yrs? And finally, does person7 compare his imputed rent based on person8 or person9.

In this market, person9 Getz all the girlz.

W67: my conclusion is - just be born a man.

I was reading a NYT article about how a homeless tramp (male), not secretly wealthy or good looking and rather dirty-looking got an employed, way younger, more (IMO) attractive woman to fall in love and marry him. Sad to say, this would not happen to a homeless female tramp-ess.

10023, anecdotes are interesting, but statistics rule. and they agree with you. up to a point.

the woman was an idiot. I'm sure there are many tramp-esses who do better than you would expect.

By the way, jhochle, PMG and anyone else who is calculating your "opportunity cost" on the downpayment at 3% because you are borrowing from yourself or because you'd get 1% in T-bills:

If you actually are willing to give a second mortgage on a NY apt at 3%, how about giving me a first mortgage -- which is safer -- at 3.5%?

Increase my buying power by half, increase your returns and maybe even justify current NYC prices -- what more could you ask?

[No insight here -- jhochle's error is explained in ch 3 of every intro finance text]

> "10-12%"
> LMFAO

Ah Juice, mocking what he doesn't understand...

> "I started this post to ask others for what they think are appropriate assumptions."
> and your "others" turned out to be w67th, financeguy, and swe. Good luck with "appropriate assumptions".

Yes, better you get your "insight" from folks like Juice who have such a read on RE that they were able to make such awesome predictions as "[a market decline of 5-10% is] NOT gonna happen".

Yes, enloighten us, Juice. Tell the poor souls to use the risk free rate for a 5x leveraged investment!

I'm going to start calling you the wizard of Juice... "PAY NO ATTENTION TO FINANCE, MATH, OR THE BASIC PRINCIPLES OF INVESTMENT BEHIND THE CURTAIN!"

> [No insight here -- jhochle's error is explained in ch 3 of every intro finance text]

Chapter 1 in mine.