A starter home in Boulder is about $1 million => if you can find one.
How do I look at rent vs buy?
Because it is so expensive to sell real estate, I consider a minimum five-year block. I ignore inflation and future predictions.
For our starter home, I assume that five-year rent is $180,000
My alternative uses of the funds, with five-year income shown:
- Five-year treasury bond $150,000
- Yield on Investment Real Estate $100,000
- Yield on Vanguard Portfolio (using my 40/20/40 mix) $100,000
If I buy then I don’t get the income (from the alternatives) and my cost of ownership is $75,000 across the period (maintenance, taxes, insurance).
To keep things simple, I haven’t assumed a mortgage. I didn’t buy my first house until I could pay cash. I earned a premium on my career by being able to easily change cities.
What does the above say to you?
Here’s what it says to me… if you think there is a good chance you will be able to buy during a market decline then rent.
The last time I bought a house (winter 2012/2013), the rental map was bare. Here it is this week…
Real estate and equity investments have the potential for capital appreciation/depreciation. Real-economic growth drives long-term asset values. I’m bullish for Boulder, Boulder County, Colorado and the US.
With real estate, my capital is locked in and it will cost me ~$55,000 to get out (exit costs are about 5.5% of sales price).
With real estate, you can get priced-out of a market. Relative to what I can afford in Boulder, I am priced out of London, Hong Kong and San Francisco (three cities where my skills are highly marketable). This “pricing out” happened within a five-year window.
Beware of FOMO (fear of missing out), after three years of rapidly rising prices, our minds will extrapolate never-ending appreciation into the future. It won’t happen. Your goal should be financial independence, not real estate ownership.
Inflation, future asset prices, vacancy risk, insurance hazards… can’t be known. Sometimes they can be hedged, insured or mitigated.
I don’t seek to predict an unknowable future. I ask myself, “Is this a good price, today?”
I have a few friends that sell real estate. I watch their their high-end sales to understand the mood of the market.
Nobody needs a 5, 10 or 20-million dollar property. So…
When the ultra-luxury deals start closing with regularity we can assume that we are on the upswing. The last 18 months has been a great time to be selling high-end real estate in Colorado.
I force myself to review: (a) annually, (b) prior to making any new investment decision and (c) prior to changing strategy.
For now, I’m not sure what to do.
My rule-of-thumb, when unsure, is rebalance, watch and wait.
A cash buyer in a credit crunch can count on a 10-20% discount from pre-crunch prices. Given the magnitude of the last downturn, deals were available at 25-40% discounts.