Washington Post real estate chat:
The Lovely Penn Quarter, D.C.: My friends and I came up with the idea last year that we could make a living by buying condos, living in them for two years, selling for a big profit and repeating. The appreciation would be more than we could make by working and the profits would be tax free. What could be better, right?
So I bought my first condo in Penn Quarter at the end of last summer. Now all my friends have decided to hold off. They say that they aren't sure real estate is "it" anymore. But I'm counting on my condo to appreciate significantly over the next two years to help me pay down some credit card debt I've been carrying for a while.
My condo hasn't really gone up in value since last summer, but I'm thinking the market is just taking a healthy breather before skyrocketing again. Should I be getting worried at this point or are my friends just being chicken littles during the market's pause in appreciation? I don't want to own my place if its not going to increase in value soon. Help!
I suppose I shouldn't be too harsh, given that I missed out on a lot of appreciation over the last several years by not owning. But really, the idea that there are people out there who thought they could make a living indefinitely by "flipping" condos just boggles the mind. It makes me feel like I could make a living selling money trees (or maybe Brooklyn Bridges) to naifs. As I pointed out last June, the launch of "condoflip.com" was "a sign of the housing apocalypse."
With that said, here was another pretty amusing question from the same chat session:
What I don't understand, David, are all the folks who seem to believe the status quo is sustainable. Do they realize that the only ones who can afford to buy right now are people who already own houses? Have they seen the number of properties nationwide being bought by people other than those looking to move in? Do they understand that there haven't been any major changes in US demographics over the last decade that could precipate such a shift? It boggles the mind.
(1) It's different this time.
(2) Everyone wants to live in ___ (NY, Boston, LA, San Diego, etc.)
(3) Real estate always goes up.
(4) Prices may stabilize, but they never go down.
(5) They aren't making any more land.
Can you say "day trader?"
That's why they are called long-term investments.
Then there is Part Deux:
Dear God, please give me another boom and I won't piss it all away this time.
A: Buys house in L.A. in 1997 for $300K. Still lives in it. Current value $1.1M
B: Buys house in L.A. in 1997 for $300K. Sells in 99 for $500K. Buys house for $450K, sells in 2001 for $650K. Buys house for $600K, sells in 2003 for $850K. Buys for $800K, sells in 2005 for $1M, buys house for $950K, still lives in it. Current value $1.1M
The difference is simple. Person B has been borrowing money, pocketing the gains, and if the bottom drops out of the market he walks on the loan. In CA purchase money loans are non-recourse. OF course, he'd be wise to get out at a wash if he can.
Person A has a house with $800K equity.
Person B has pocketed $850K less fees, with less than $200K of that invested in the current house. Possibly much less.
Then again, when the eventual last sale happens, B has money and no house, A has a house. But B is NOT crazy.
Right now it is looking like I will make 50-70k on this house, which will fund a significant portion of my living and educational expenses over the next 3 years. I bought a cheap fixer-upper and have spent the past 2 years working on it. I dont feel that I am "making money without doing work." Laying floor is a collosal pain in the ass.
There have been speculative bubbles without fiat money. The classic examples of bubbles, the Tulip bubble and the South Sea bubble, both took place in a monetary enviroment of competing commodity-backed currencies.
Also, doesn't this require that one move into progressively less attractive homes? You buy a condo, let it appreciate, sell it, and live off the gains. You reinvest the original principle, but this now buys a smaller, less attractive condo. When that appreciates, you sell it, live off the gains and reinvest the principle. Buying an even smaller, less attractive condo.
It does sound like the person who describes this "plan" is kind of stupid.
Living off capital gains from real estate is possible. Doing it with your own home is doubtful. And it certainly isn't tax free.
Wait until they appreciate to 500,000, sell, pocket 400,000. Buy 3 houses (1,500,000) pay 300,000 down. Rent two out and use the 100,000 to help make payments.
Rinse. Lather. Repeat.
The key is that you capture 100% of a house's appreciation, but only have to pay 20% down. This process scales even faster with lower % down payments. Also with more people owning multiple properties (and always looking to buy more) demand shoots through the roof thereby increasing prices and helping out the appreciation process.
Flipping by itself shouldn't make you rich (you still gotta live somewhere). Leveraging appreciation gains to purchase multiple properties can.
The problems come when you can't make the payments (a problem that becomes more sensitive to macro conditions the more properties you hold - but less sensitive to micro conditions). This can come from running out of renters which means you're getting no help on payments or that rent drops significantly. Or you could've taken one of the more exotic loans to help purchase more homes faster and after a few years of not moving a property the payments spike up. Couple either with decreasing house prices and heavily leveraged multiple house owners get hit hard across the board and the bubble pops.
So 1) the example of a flipping a single house isn't representative of the real estate phenomenon (though to answer questions about why B's house appears to be appreciating faster, presumably B is making improvements to each house as B goes along - improving kitchens are supposed to be the most cost effective for flippers) 2) Kinda obvious, real popping occurs when payments can't be made. As such a recession will probably represent a bigger "needle" than rising interest rates (even those who didn't take exotic loans may have to sell). However, more needles make the bubble deflate faster.
That's an interesting claim.
Is there basis to it?
In anything resembling a normal market, short-term real estate speculation is tough, because given transaction costs, you generally need a 10% increase in price just to break even.
I found the washington post chat really depressing because the chat host was so ridiculously noncomittal. Oh, so you thought you could live entirely on home appreciation without working? Well, gee, I don't know whether you'll succeed or not! She is to bad investment as Paula Abdul is to bad singing, or as an enabler is to an alcoholic.
Positive Dennis
Last I looked, it's a $250K exemption ($500K if married), but only if the home qualifies as your primary residence.
Assuming you are correct, fiat currency and central bank manipulation certainly don't help matters. And with fiat currency you have multiple bubbles - the increasing supply of money flows from one asset class to another after each collapse. I don't know what stops that - maybe a currency collapse.
In general-
What's this "getting rich without working" crap? Did this place suddenly turn into a communist re-education camp? Most of these people worked for their down payments, and they work to pay the mortgage payments. They are putting their money at risk, and if it works out they deserve to be rewarded for it. If it doesn't work out, they suffer the losses. That's how a capitalist system works. If you don't like it there are several communist countries you can move to. And before the conversation turns to unions they invest their pensions in real estate, stocks, and bonds too.
What's this perception that putting your money at risk shouldn't be rewarded? It's like every generation is going to have to learn for itself that communism is worthless nonsense after inflicting bloodshed, theft, and misery on millions upon millions of people.
1) Person B's transactions fees are $180,000 plus state recordation taxes. In California at least, his property taxes are three times as high as Person A's, but that's an anomaly we can ignore.
2) The model assumes a 20/80 mortgage each time. Add another $50,000 in after-tax interest expenses to Person B's account over the nine years, though perhaps that's counteracted because he invested his equity wisely.
3) If Person B has an income that permits him to have an $800k mortgage in the last trade, why did he buy a $300k house in the first place? Even if he's a lawyer, his income has doubled, not tripled over that time.
That's rich! It's the Right that glorifies the idea that investment income is better than income from wages and should be taxed at a lower rate. That the Paris Hilton's of the world should pay lower taxes on their unearned income than someone who is working forty hours a week at whatever hard, dangerous job you can imagine. That inherited wealth shouldn't be taxed.
AFAICT, only a a very small number of people actually try condo-flipping - far fewer than were ever involved in day trading, for example.
Same thing for intellectual property - royalties, licensing, etc.
This is not a partisan issue - politicians on both sides tend to be wealthy and they all benefit to some extent or another from "passive" income.
In fact, passive income is a crucial component to class mobility. I would guess that most people who have moved up in economic status have employed "passive" income to do it at some point. In many cases there is no other way to do it. Are you saying that you want to stop this as a way of class mobility? Do you want a permanent caste or serf system - your father was a landscaper so you must be one too? Or do you just want people that you like to move up in economic status, and the people you don't like to become poorer - the Nazi model for economic status?
The difference is that the investors will invest their money and create jobs for people. The liberals who get the something for nothing will do nothing with it and thus not create jobs. The ones doing something for nothing are from opposite ends of the spectrum. Note also that the liberal supporters (see Hollywood liberals et al) are more than happy to partake of the investment credit and then preach against it. See who screams the loudest when their toys are taken away. Compare the requirements of Cheney and Kerry as they travel. Check the Babs manques and their requirements for travel with the private jets because they don't want to mix with the common people. Hypocrisy, thy name is LLL dems.
Oh good! A quiz. Many have already mentioned taxes. Here's another difference:
If the Guy B used a realestate agent and paid a commission of 6% on each transation (the average in the US), his net "gain" is $754 K. Gal A who bought and held has a net gain of $800K. So she's ahead $46K!
If Guy B lived in the house, he also probably paid moving expenses. Guy B almost certainly spent money to improve each house. If Guy B didn't live in the house, he had to pay rent during this period.
For Guy B to pull ahead of Gal A, he either needs to make much, much more on each transaction, act as his own sales agent, rent the unit, and/or do something to offset the costs of selling, moveing. Most of the things he would need to do are called "work"; when other people do them for you, you have to pay them.
Also whether you make money or lose money, you still need to file your taxes. Someone needs to do some paperwork and devote a bit of timekeeping track of the new mortgage, moving expenses, improvements. Guy B has a lot more paper work to track! This is an activity may do not enjoy and call "work".
I'm sure there are people who can flip properties and make a living. Doing it consistently is called "work".
Aye and the qualification is you must have lived in the residence 2 of the last 5 years. Clearly though falling in this range is huge help if you are trying to profit.
The poor sucker in the blog is going to be hurt. The bubble has way popped, for those that are still clueless. Not sure what other indicators you need than for sale signs everywhere and inventory going through the roof. Interest rates going up, cost of goods going up, value of dollar going down, and even things like insurance in Florida all deflate the housing market. Clearly condos get hit first as it is a softer market and that is what everyone has been seeing for the last quarter plus. We are starting to see housing prices drop 30k+ in north Florida in areas that are not even considered "bubbles" really.
Oh and just to throw a wrench in that Person A/B puzzle. We have assumed Person A didn't refi under the barrage of low interest offers and then spent most of the equity loan on crap thinking (falsely) that the money well would always be filling.
The well is drying up fast and it won’t rain for another 5-8 years so people should position themselves accordingly. Liquidate fast and hard (...and you are almost too late) then wait to buy when prices are low, or plan to cover the monthly costs on RE till the next boom comes around.
http://tinyurl.com/hf9mb
Built in 1779, it is in Brookeville, MD. It is currently known as the Madison House. During the War of 1812 Madison fled Washington just before the British burned it. (Fodder for W&M when they excoriate one of our other stalwart allies...haha.) He stopped in Brookeville and stayed here. Brookeville was the capital of the US for one day and this was the "White House". Also, the house was a stop along the Underground Railroad. Decades after the civil war a secret room was found under the family room during some renovations.
All in all, a bargain at a cool $995,000 :-)
Uncle Tom's Cabin was recently bought by the county for a million dollars.
Bingo. This is the secret.
I grew up extremely poor (we didn't have running water, and stole electricity). I'm now 34, and my net worth just crossed the 7 digit mark a couple of months ago. I'm in the process of buying a nice house in rural NE, moving away from Brooklyn, and I owe it all to working my ass off and building and buying passive income streams. The ironic part is that the most significant of them have been IP, and I don't personally agree with most extant notions of IP. But, they're there, and who am I to complain?
If you are earning money from investments, that says absolutely nothing about how that money is spent. I could make $100,000 dollars a year from a trust fund my daddy set up for me and blow it all on whores and drugs. I have not contributed anything to society and the return on my investments have only enriched drug dealers, pimps and prostitutes.
On the other hand, I could be a union plumber working sixty hours a week making the same $100,000 a year. If I spend frugally and invest wisely my excess income would actually be creating wealth because it would be invested in things useful to the economy, even stocks. Yet that plumber would be taxed at a higher rate than the trust-fund brat (and have to contribute to Medicaire/Medicaid and Social Security) because his $100,000 came from wages, not investment income.
And, on the 1990s tech-fueled stock market: as I recall the talking points back then, the Republican view was that the runup that ended in 2000/2001 was the inevitable result of Reagan's economic policies from the 1980s. This remained the story up until after the market crash, at which point the 1990s were retroactively named the "Clinton bubble", and Reagan had no longer ever had anything to do with it. See Cato from February 2001, for instance.
Well that's the thing - socialists and communists (and others) will call everything "gambling" because they want to seize everyone's property and "manage" (actually control) it themselves. (Making themselves the new "elite", of course, but they don't like to emphasize that to the "proletariat". No busybody likes to admit that at the heart of the issue they just want to be able to tell you what to do. Often this effort is directed to making sure everyone has less than them - no matter how much smarter, educated, harder working, creative, etc. other people are.) Austrian economists want people to be left alone to make their own decisions with their own property.
Take real estate. Some things can tell you that investment is becoming speculation - replacement values, comparisons to other areas, rent v. own comparisons, rate of price increases, etc. - but there are always factors you may be missing. Better to let people make their own decisions with their own property. (Of course socialists/communists want to make decisions with other peoples' property.) If you want to try to change their minds do it with persuasion - not by stealing from them using the government as proxy.
Fine - if taxes are higher for earned income versus "unearned" or passive income lets cut taxes on earned income until they're at parity. And then keep going until a flat tax of about 15% or less. Of course spending will have to be reduced as well, and also the size and scope of government. Glad we agree, heh heh.
As far as "trust fund brats" go, their families created tremendous value (exception being theft) at some point, and have a right to spend their money on whatever they want, including their kids. As long as they aren't violating anyone's rights or property, it's really not anyone's business. Of course if they are violating someone's rights or property they should face the consequences, just like anyone else.
Yes.