I sold my last house for more than I purchased it. Next week I'll create an investor's newsletter about how to purchase a house and get paid to live in it!
Oh god, I’d wager you just described 1000 different real real estate newsletters:P
My biggest pet peeve is these “real estate investors” who don’t understand investing in any serious way and so falsely misrepresent renting out a property as “passive income” (how laughable) and list their “investment returns” without any noting of the massive leverage it took to get those returns.
If you buy a house with 5% down and the housing market goes up 50% in 5 years you’re not an investment genius, you just took a risky highly leveraged bet and it paid off (and housing bets at least in America do tend to pay off thanks to the insanity of central-bank-attributable rock bottom interest rates as well as the essentially propagandistic way that Americans are taught to think about real estate)
So not sure if I have a coherent point here but I wish people would (a) actually adjust for inflation when telling their “I bought at X and sold at the 1.5x 4 years later” stories and (b) would also show some awareness of how insanely leveraged people often are on their houses.
> If you buy a house with 5% down and the housing market goes up 50% in 5 years you’re not an investment genius, you just took a risky highly leveraged bet and it paid off (and housing bets at least in America do tend to pay off thanks to the insanity of central-bank-attributable rock bottom interest rates as well as the essentially propagandistic way that Americans are taught to think about real estate)
I agree with most of what you're saying, but if your mortgage is non-recorse (which is the case for purchase first-mortgages in CA at least), I wouldn't say it's a risky bet. If it goes poorly, you can walk away and the bank gets your house (and you get imputed income maybe). You only lose your down payment and any equity, which at 5% down is probably less than the loss the PMI took.
It's not the same riskyness as say buying stocks on margin, or selling short or writing uncovered options.
NOW, in my much-anticipated newsletter I will reveal all the tips and game-winning strategies I've discovered over the course of my high-powered investment career.
If you act today, I will include the secrets of how to get a 5%-down mortgage without any PMI!! This is a hidden method used exclusively by the super-rich to get even richer. Once you learn what I will teach, you will live worry-free, regardless of what pitfalls you encounter in life.
BONUS! The government doesn't want you to know this secret method to get a 15% piggyback loan, but I will show you this super-simple almost "devious" extra double-tranche, rolling mortgage financial instrument - and even more.
Why wait to order, when you could make them all wait on you?
The credit union I borrowed from says their first time [1] home buyer program will do 95% LTV to $1.5M. Depending on where you are in california, that's likely enough (97% LTV to $850,000, but that doesn't get you much in the Bay Area).
Of course, if you just bought your house, I don't think you'd be able to cash out refi down to 5%, and certainly not under a first time homebuyers program. Cash out refis may not be non-recourse in California either; I'm not sure.
[1] I can't see the requirements, but usually it doesn't actually mean first-time, just that you haven't been a homeowner recently.
The more accurate analogy is if you can charge rent to tenants in the property in a way that covers all expenses. Then other then the down payment the tenants are basically letting you leverage an appreciating asset at no cost to you.
I do this now in California and with the essentially 0% interest rate I refinanced the loan and now I generate a profit every month from leveraging an asset on top of the appreciating value.
Rent is the black hole people can use to leach resources away from productivity. Simply by taking a loan and redirecting the economic output of people who live on my property towards the loan I benefit without producing any utility for the economy at all. That is in a sense "Free." If the loan is paid off, that money gets redirected towards me again with minimal effort on my part.
I didn't own property, then I went to a bank to apply for a loan. Now my tenants pay for that loan with rent. They are paying the bank interest and money for my loan on a property I never lived in nor have the money to purchase without a loan.
You had the credit and financial resources to commit to that purchase.
Some reasons they may choose to rent instead:
- lack capital
- lack credit rating
- not willing to commit for the long-term
- not want to be responsible for maintenance
- not willing to assume risk in the real-estate market
I know people who are financially literate and have capital who choose to rent. I chose to purchase, but came to realize that “home ownership” is two-way — to some extent you’re also owned by the home.
I didn't say the transaction wasn't "fair." Fairness depends on your definition of fair and it's fine if you think this transaction is very fair.
What I am saying is that usually in an economic transaction somebody contributed something to the economy. A product was distributed or created. A service was offered or provided.
I offered nothing to the economy. I am simply gaining money by doing nothing.
Also I'm referring to my specific situation where the rental costs are covered fully by rent. If you take on the loan yourself with your own money.. well that's a different situation.
>I know people who are financially literate and have capital who choose to rent.
I also rent. I also never said there was anything wrong with renting. I'm just saying that rent is an economic black hole. No energy was expended to increase GDP in exchange for rent money. I benefit by doing nothing and so does the person who rents to me.
You’ve just stated that you choose to rent. Your landlord is thus providing a service you value (adding to the economy).
You are providing a service your tenants value. In your case, this may be mostly the assumption of risk - what if your tenants stop paying, and the government says you can’t evict? What if rental prices drop dramatically? Or real estate prices drop dramatically? What if your tenants move out and it takes X months to rent?
You are still on the hook for your payments to the bank, and your equity and credit rating are at risk.
The bank lending you capital in exchange for interest (rent) is also providing you a valuable service - and you are providing a valuable service to them, giving them a return on their capital (with an acceptable risk of default).
That’s the “invisible hand” of free market exchanges - each party gives what they value less to obtain what they value more, so both parties are better off (if they didn’t feel themselves to be better off, they would not make the exchange).
> You’ve just stated that you choose to rent. Your landlord is thus providing a service you value (adding to the economy).
The land existed before my landlord was alive. It's the equivalent of charging me to breath air because someone owns it.
>You are providing a service your tenants value. In your case, this may be mostly the assumption of risk - what if your tenants stop paying, and the government says you can’t evict? What if rental prices drop dramatically? Or real estate prices drop dramatically? What if your tenants move out and it takes X months to rent?
Sure you could say that I take on the risk, but that's also dependent on data. Historically for the last century the risk is highly minimal. I could also, If I wanted pay off the entire loan. Then there would be no risk. It would essentially become the economic equivalent of me charging people for breathing air that I own.
>You are still on the hook for your payments to the bank, and your equity and credit rating are at risk.
I can afford to pay on my own. Additionally I can sell the property at anytime as well. Of course there is still risk in depreciation but I already know the risk is minimal based off data.
>The bank lending you capital in exchange for interest (rent) is also providing you a valuable service - and you are providing a valuable service to them, giving them a return on their capital (with an acceptable risk of default).
Yeah, a service in exchange for what? For interest. Interest that I don't pay for. The exchange is more between the tenants and the bank and I function as a middle man leaching from the tenants. It is their blood sweat and tears that will be fronting the loan and the house that I will own.
>That’s the “invisible hand” of free market exchanges - each party gives what they value less to obtain what they value more, so both parties are better off (if they didn’t feel themselves to be better off, they would not make the exchange).
The invisible hand is an outdated concept. The world has moved beyond Adam Smith as the data shows that economic systems are far more complicated.
The current status quo belief argues that the average return on investment outpaces productivity-based income by a wide margin. So basically not only does owning property allow me to gain money from it without an ounce of work. But investments on all forms of capital from property to human capital is responsible for much of the wealth inequality that exists today.
Such capital ownership allows people to have incomes that far exceed what any one human individual is capable of generating through productive labor.
Middlemen get a bad rap, because people don't see that they are providing a valuable service.
Your financial resources make the risk acceptable to you. It's probably less acceptable to your tenants. In the same way, you choose to keep your capital and not commit it to your own housing, even though your landlord is also benefiting from that relationship.
If your landlord is not providing you a valuable service, cut him out. Vertical integration is a time-proven way to remove middlemen that don't add value. The fact you are aware of the alternatives and that they are easy and yet you choose to continue paying rent shows it is valuable to you.
We all have incomes that far exceed one person's labor, because of the
benefits of specialization and free exchange, which are still fundamental to economics. The stored surplus is capital, which further magnifies productivity, and is necessary for any modern lifestyle - without it, we'd be a lot more equal, but it would be the equality of hunter-gatherers.
Those middlemen and providers of capital are why you and your tenants can rent homes, in a city, working desk jobs, and eating turkey sandwiches on demand for $10 instead of $1500 and six months of labor. https://youtube.com/playlist?list=PLLXfVEsLI-qSO5XzEa0pOJyXl...
>Your financial resources make the risk acceptable to you. It's probably less acceptable to your tenants. In the same way, you choose to keep your capital and not commit it to your own housing, even though your landlord is also benefiting from that relationship.
No I told you the risk is nothing. I just have capital to make a down payment that's it. Additionally risk isn't an economic product. How risky something is does not contribute extra GDP to the economy. Only productive work contributes to the economy.
>If your landlord is not providing you a valuable service, cut him out. Vertical integration is a time-proven way to remove middlemen that don't add value. The fact you are aware of the alternatives and that they are easy and yet you choose to continue paying rent shows it is valuable to you.
It is valuable to me. Your statement proves nothing. It's similar to how air is valuable to me. Take the concept of property ownership and place it on air. Now I have to pay some owner of air money because he is providing me a valuable service of letting me breath his air?
I'm not providing a "service" to anyone anymore than a hypothetical owner of oxygen is providing a "service" to let people breath.
>We all have incomes that far exceed one person's labor, because of the benefits of specialization and free exchange, which are still fundamental to economics. The stored surplus is capital, which further magnifies productivity, and is necessary for any modern lifestyle - without it, we'd be a lot more equal, but it would be the equality of hunter-gatherers.
No we don't. I'm not talking about income from manual labor of one hunter gatherer. I'm talking about the average possible income one man can make without hiring any employees or investing in capital in a modern economy. I thought this was obvious, guess not.
Many people make less than this, many people make significantly more. The people who make significantly more tend to have had hired human capital to produce output equivalent to multitudes of people.
>If your landlord is not providing you a valuable service, cut him out. Vertical integration is a time-proven way to remove middlemen that don't add value. The fact you are aware of the alternatives and that they are easy and yet you choose to continue paying rent shows it is valuable to you.
No it's not. Dude. By middleman I'm not talking about some hustler who connects two potential clients together or fronts some kind of risk. I'm talking about people who are sitting on tons of investment capital and just living off the growth of that capital by doing Zero work.
Warren Buffet invests in low low risk companies and profits off the growth of these investments by doing no work. Literally if warren buffet didn't exist the world wouldn't really change... If Elon Musk didn't exist on the other hand, the space industry and automobile industry would be very different.
Warren Buffet by owning a bunch of stock from a lot of companies isn't contributing anything to the economy. No services, no risk, no nothing. He's just benefiting from the growth of others peoples' work.
Both of these people benefit from human capital but warren is the more apt example because he doesn't even contribute anything to the investments he owns. He's just a stock picker.
Whatever you think about the economy this much is real: It's already officially known that the wealth inequality is the result of income from capital growing faster than income from productive labor.
It's free money in every sense of the word. And because productive capital is the basis of an economy what you get is wealth inequality.
Does air have economic value? Yes it does. Does that fact help your point in any way? No.
If I make a law to allow people to own air, then people start renting out the air and living off of the income of renting air. That's where your archaic Adam Smith model of the economy completely fails.
Under your idealistic model there's no concept of an unfair transaction because all parties benefited from the transaction. One person can breath so he's happy, another person got money from renting air so he's happy. Everyone is happy, so the concept of getting ripped off doesn't exist.
Markets for air already exist where scarcity prevails:
- scuba
- medical oxygen
- submarines
- space
- polluted areas (search for "beijing canned air")
The law privatizing air that you suggest would match rental housing only if you're renting a vacant lot w/o buildings in a place without land scarcity. It's actually most similar to copyright - inducing artificial scarcity to create a market.
I already described some criteria for unfair transactions: compulsion or deception. You could also make arguments that if one side captures nearly all the economic surplus, the transaction is unfair (generally maintained via government-enforced monopolies limiting competition).
Rather than trying to assert Adam Smith's obsolescence, you should probably try googling "Adam Smith landlord". I expect you'll like the quotes. (I'd recommend learning more about the context more than just the quotes, but hey, it's the internet).
> Markets for air already exist where scarcity prevails:
Scarcity is not the issue here. Energy is the issue. This is where you lack intense knowledge.
In every scenario you describe energy was used to compress the air and place it into the canister. That it productive work.
For air and land in your typical scenario, there is zero productive work. This is what I'm referring too. Your scarcity argument is off topic. Nobody is talking about that scarcity in your sense. What we are talking about is artificially induced scarcity. By owning air, and owning more land that I need, I artificially induce scarcity and force people to pay me rent to live off of land I don't need and contributed nothing to the economy in exchange for economic gain.
The important factor here is that each instance of artificially induced scarcity sets up a scenario where the person who owns capital does not have to contribute to the GDP in order to benefit from the profits coming out of the asset. I'm not going to be paying a dime for the house I currently will own or sell. I am simply using a complex financial tool, to redirect wealth towards me.
>I already described some criteria for unfair transactions: compulsion or deception. You could also make arguments that if one side captures nearly all the economic surplus, the transaction is unfair (generally maintained via government-enforced monopolies limiting competition).
What do you think is going on when "one side" owns property that can house 400 people and just rents it all out? Also who do you think actually allows one person to own more property than they need or to even own air if such a concept existed? The Government.
>Rather than trying to assert Adam Smith's obsolescence, you should probably try googling "Adam Smith landlord". I expect you'll like the quotes. (I'd recommend learning more about the context more than just the quotes, but hey, it's the internet).
What do you mean trying to assert? You're the one talking about an invisible hand in a world that is clearly not auto-magically heading towards equilibrium. Nobody and I mean basically nobody deciding economic policy and nobody in academia thinks this stuff is relevant in the discussion of a modern economy. If you knew what you were talking about you'd realize that I'm not asserting anything. I'm just restating the assertions of the rest of the world. https://hbr.org/2012/04/there-is-no-invisible-hand
Heck, why do you think the Fed exists if Adam Smith had any relevancy today? Why do you think bubbles and market crashes exist? Adam Smith is basically famous for being like Sigmund Freud. The Father of a modern academic field of study but still mostly wrong in the face of scientific evidence. By referencing him in a conversation about the modern economy makes you look like you don't know what you're talking about.
As for the quotes, it's not that I don't understand the context of "quotes" it's just that you're not quick enough to grasp the context of why I used the "quotes." See? I did again, let's see if you can kick that brain into gear and "grasp" why I chose to put the quotes around this "word."
Sorry you were offended - I was suggesting you would enjoy quotations from Adam Smith's "Wealth of Nations" where he describes landlords as non-productive leeches. I was not commenting on the use of quotation marks.
My suggestion that you also pay attention to the context was that those quotations really do apply to unimproved land (though he notes that landlords will happily increase rents based on tenants'improvements).
No you are being deliberately offensive. It’s like me suggesting you go to school to take an economics course. You clearly don’t know what you’re talking about and I’m just being nice and trying to help you not be stupid.
Too put it tersely some people on HN throw under the cover insults by being subtly condescending so as to not trip any red flags and get warned by the admin. For example, like suggesting I look up the purpose of quotations.
Don’t play games, I hate that stuff and while manipulative under the cover insults can get around Dang’s filter it really goes against the spirit of HN.
" I expect you'll like the quotes. (I'd recommend learning more about the context more than just the quotes, but hey, it's the internet). "
This is what you said about my penchant to use quotation marks. There's not a single person on the face of the earth who won't find that rude.
It's subtle but it's akin to saying "go learn English" or "go learn proper grammar" in the middle of a debate but disguised as a "suggestion." You can't even say that garbage to a person who speaks English as a second language.
It's a low blow and I'm calling you out for what you are. You did that on purpose and you are a rude person. Your initial apology is therefore not accepted because I know it's fake.
We're done. I have no interest in continuing a conversation with you.
>For air and land in your typical scenario, there is zero productive work.
Someone has to build the property.
Someone has to maintain the property.
Someone has to own the property and its associated risk.
Someone has to pay taxes on the property.
Someone has to find a tenant that lives in the property.
Someone has to be rich enough to do all of the above, lots of people aren't. So the work gets split over multiple people. For example, a developer wants to focus on building properties, this means he wants to sell the entire property as soon as possible so he can start building the next property instead of waiting for the first property to pay off. This requires a market for real estate. Someone who buffers the stock and makes it available to renters or future buyers.
>What we are talking about is artificially induced scarcity.
How is land artificially scarce? If anything, it is naturally scarce and landlords make it less scarce through vertical scaling of the land. Given enough landlords there will be more housing than people and tenants will have an upper hand during negotiations. How is that not to their benefit? Take any existing housing market and eliminate 50% of landlords. Will this benefit tenants? No, in fact you want more landlords so that they end up competing against each other.
>The important factor here is that each instance of artificially induced scarcity sets up a scenario where the person who owns capital does not have to contribute to the GDP in order to benefit from the profits coming out of the asset. I'm not going to be paying a dime for the house I currently will own or sell. I am simply using a complex financial tool, to redirect wealth towards me.
The fact that outsize returns exist is a price signal that not enough people are doing this. If the risk free return is really as great as you say then everyone should jump into this market and reduce the risk free return until it reaches 0.
>What do you think is going on when "one side" owns property that can house 400 people and just rents it all out? Also who do you think actually allows one person to own more property than they need or to even own air if such a concept existed? The Government.
That is just the consequence of having to build large scale 50 story properties. If such a massive building is needed then it's a necessary evil.
I honestly don't understand your point. Whether an economic system favors workers or capital owners is purely a function of unemployment. Once unemployment is low enough inflation will pick up and completely decimate the ability to have an easy return on capital through unproductive endeavors. You're confusing the current system being unfair with the system always being unfair which is absolutely untrue. There is absolutely no guarantee that it will stay like this forever, if there is enough will power.
EDIT: Bonus plot
Zimbabwe had a land reform around the 00s. Mugabe wanted to redistribute the land of current wealthy white land owners because they obtained this land through British colonialism and thus never paid anything to acquire it and black land owners only got the worst land available. At first the government simply purchased farm land and made an agreement with the UK that it should cover some of the costs. So far so good. 3 million hectares were handed over without any big problems. But for some reason this wasn't enough. The plan was to acquire 11 million hectares but it was impossible to finance so violent repossession started.
There are obvious problems with this. First of all, redistributing all land, all at once is a recipe for disaster. The new owners don't get enough time to learn the ropes of farming. Some of them just become absentee farmers and fail to produce any food whatsoever. Others didn't get loans/financing from banks to start their own farm. So they could never buy the necessary equipment to actually run a productive farm. Worst of all, some people merely joined the program for personal enrichment without caring at all about how their farms are doing.
The government conveniently forgot that although the farms were owned by "rich evil" white land owners, the vast majority of the work was done by black people and they were reasonably compensated for their work. Maybe they deserved more money but they did have a job that paid the bills and let them live an average life in Zimbabwe. The land owner might have been a parasite but he was a parasite that cared about its host (the land).
The new black land owners didn't, because they felt entitled to their new possession. After all they fought long and hard for this, they spent a lot of time protesting, suffering from colonialism and so on. In their mind they already put in the hard work that made them worthy of owning the land which is perfectly fine but the way the land had been redistributed caused massive external damage. There are plenty of ways of making it fair for everyone involved, for the new black owners, for the new white owners but nobody cared. They just rallied for a populist political cause.
Remember all the black farm hands? Underutilized farms mean they end up unemployed. The average Zimbabwean consumer? Without food because production crashed. The government? With a huge deficit because the cash crop export industries collapsed and an obligation to import food from foreign countries. People's wealth? Gone because food imports have to be funded through printing money.
Your primary goal as a nation should be to take advantage of these "suckers" (the white land owners/investors) until you are strong enough to stand on your own feet, not kick them out.
I don’t pay a dime for for the property. I don’t pay taxes, I don’t pay for maintenance, I didn’t pay for the cost of building the property, I don’t even pay interest for the loan. I just applied for the loan and my tenants pay for the rest.
Land is made more scarce then it actually is. We all live on land so there is plenty to go around. The artificially induced scarcity comes from the fact that people live on land they don’t own. For this to happen it means Certain people own more land then they need. The extra land is not owned for personal utility, it is bought so that another person has no choice but to pay you money to use the land.
Everyone would jump into the market if they could. The reason why they don’t is because you need to front a lot of money to buy property. So if a house costs a million I can just buy the house and rent it out. I didn’t lose the million because I can always resell the house and I gained rental income on top of that. What prevents people from executing this strategy is that they don’t have 1 million dollars. For a loan, barrier to entry is lowered to the down payment.
It’s not a necessary evil. The most successful economies today involve a combination of capitalism and socialism. An aspect of the economy, like property can be enforced to be made fair. It’s never been tried but in no way would I call it a necessary evil. Either way I benefit from this evil so I’m against it.
You don’t understand because your reasoning is off. Owners of capital are protected from inflation because most owners of capital don’t own cash. Inflation is a phenomenon related to cash lowering in value. Owning assets that are not cash tends to make inflation not apply. Poor people tend to own cash and rich people tend to own assets, hence during inflation poor people tend to lose. Poor people continue working hard while their salaries stay the same and get inflated. The work that they do improves the worth of the company they work for. Who owns that company? The owners of capital. In short the owners of companies pay people less for productive labor.
Then a feedback loop occurs where laborers can no longer purchase as much from a company and the companies begin to lose as well. Overall the feedback loop hits companies later. Inflation hits the workers first during inflation.
But this is besides the point. My point is capital grows faster then productive labor. The main reason why this happens is because capital represents the output of productive labor in aggregate. This output in wealth allows owners of capital to easily climb over barriers for entry and purchase more capital. It’s like playing Texas Holdem, the more chips you have the more power you have.
I read your example, transfer of knowledge is a separate issue. The shock to immediately changing a system also can have bad side effects. I’m not suggesting that the current status quo should be fixed either, nor am I suggesting there is a easy solution. I am saying that in the status quo I benefit from money gifted to me by my tenants while contributing nothing to the economy.
