Discussion:
Good debt and bad debt
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Ablang
2004-02-22 01:35:19 UTC
Permalink
Good debt and bad debt
By Larry Getlen • Bankrate.com


Debt is a concept as intricately intertwined with America these days as
baseball, mom and apple pie.

The amount of personal debt in this country is ever increasing, and a large
part of the reason is that credit has never been easier to get. Whereas
credit card issuers previously looked for customers who could repay, today
card issuers relish the chance to reel in those who'll continuously charge
beyond their means at 18 or 20 percent.

But debt is a complex concept. Not all of it is good -- a fact a surprising
number of Americans fail to realize until they're in the hole -- and yet
not all of it is bad. When used intelligently, debt can be of tremendous
assistance in building wealth.

One of the secrets, therefore, to being smart with your money is to
differentiate between good debt and bad debt. While the differences often
seem logical, it is a logic that apparently is missed by many Americans.

"When you buy something that goes down in value immediately, that's bad
debt," says David Bach, CEO of Finish Rich, Inc. and author of The Finish
Rich Workbook. "If it has no potential to increase in value, that's bad
debt."

Good debt
"Good debt produces cash flow, and bad debt doesn't," says John Waskin, CEO
of national nonprofit debt counseling service Bill Free - American Credit
Counselors. "If you go into debt buying an apartment building that will
produce revenue and deductions, that's good debt.



"Mortgage debt is good debt. You're borrowing money, but you're getting a
tax advantage and can write off interest on an asset that's appreciating
over time. Plus, you get to live there."

Robert Manning, author of Credit Card Nation: The Consequences of America's
Addiction to Credit, also recommends taking on debts that are tax-
deductible, and debts that produce more wealth in the long run.

"If you are talking about reducing current debt, that's where it starts to
get nuanced," says Manning. "If you take a home equity loan because you
have 17 percent credit card, and you go with a 6 percent loan that's tax-
deductible, that's good debt."

These general rules of thumb set some clear delineations -- buying a home
or refinancing to get rid of excessively high rates is usually good debt,
as is generating debt to buy high return stocks, bonds and other
investments.

Bad debt
The concept of bad debt comes in when discussing the purchase of disposable
items or durable goods or, in general, the use of high interest credit
cards.

"The problem is, people don't realize that credit cards are just plastic
cash," says Chris Bender, Communications Manager for the National
Foundation for Credit Counseling. "They think when they pay with credit
cards they don't have to pay for it quickly, and so they don't keep track
of what they spend.


Looking for a better credit card? Check rates in your area.


"When you hand someone cash, it's a psychological wake-up. 'Why, I just
gave away $40.' When you charge something, you don't see the money go, and
in your mind that makes a difference."

But buying on credit isn't the same as buying with cash, because cash
doesn't make you pay interest on items as they drop in value.

"When you buy clothes, they're probably worth less than 50 percent what you
pay for them when you walk out the door," says Bach. "So if you borrowed to
pay for them, that's bad debt."

Not to mention what that debt could potentially do to your credit rating.

"Your debt-to-income ratio shouldn't go above 20 percent," says Rob Harol,
Credit Card Category Manager at LowerMyBills.com. "If you find yourself
above that, it doesn't look good on credit reports, even if you're making
payments on time."

When it comes to buying durable goods that won't contribute to wealth
generation, Bach offers a basic rule of thumb.

"My grandma used to say that if you're going to buy something that doesn't
go up in value, and you can't afford to pay cash, then you can't afford
it."

Exacerbating the bad debt factor is that people will apply for store credit
for the savings, offers that say if you open a credit card account today,
you can take 10 percent to 20 percent off the cost of your purchase. What
people often don't realize is how much of that savings will be destroyed by
the high interest rate on the card if they fail to pay for the items
immediately.

"You can open a store credit card account," says Bach, "and what they're
not telling you is that after the first few months, the rate jumps to 20
percent or greater."

Driving into debt
Another bad debt area is auto debt. While most people need an automobile,
and the ultimate cost of an auto is higher than many people can pay in one
lump sum, the way people go about it -- namely, purchasing more car than
they need -- turns it into bad debt.

"People can afford to pay cash for a car," says Waskin, "but not the car
they see themselves in from an ego extension standpoint. So you buy a car
at a much higher rate than a house, and that asset is worth less the day
you drive it off the lot."

Bach considers auto debt a Catch-22.

"People borrow to buy cars before homes," says Bach, "and that's
unfortunate. For most people, their first major loan is a car loan. That's
guaranteed to go down in value. So you really want to borrow less. For
example, instead of rushing out to borrow to buy a $50,000 BMW, you'd be
better off buying a $25,000 car."

Harol reminds us that just a few years ago it might have made more sense to
buy a car at 6 percent or 7 percent, and then invest in other avenues and
earn 10 percent or higher on your money, than to pay off the car. Now, of
course, with traditional market investments substantially riskier, that is
no longer the case.

The best type of debt is debt that builds wealth over the long run, and the
number one example of that is mortgage debt.

"Home values have increased an average of 6.5 percent a year over the past
30 years," says Bach. "So when you borrow to buy a home, chances are that's
good debt. You'll build value."

Bach heavily promotes the idea of homeownership, saying that everyone needs
to own where they live.

"About 40 percent of Americans are renters," says Bach, "and the fastest
way to wealth in America is buying where you live."

Bach cites some shocking numbers to back this up.

"The average renter has a median net worth of $4,000, and the average
homeowner has a median net worth of about $150,000."

Manning also emphasizes what a good time this is to build wealth through
debt.

"This is the most advantageous time ever to be in debt," says Manning, "in
terms of opportunities to get low income loans, or to renegotiate or
refinance."

Duh, debt?
One of the reasons so many Americans seem mired in bad debt (both Bach and
Waskin report that the average American carries approximately $8,400 in
credit card debt) is that financial education is virtually non-existent.

"This type of common sense stuff isn't taught in school," says Bach, "and
most Americans don't realize how bad high-rate credit cards are hurting
them."

"We are stupid people when it comes to financial education," says Waskin.
"Only 40 percent of high school students receive any economic training. We
don't teach kids how to balance a checkbook, what a credit card is, paying
rent. We just say, 'Figure it out.'"

"People are getting in debt before they have a job," says Manning.
"Education is important. We used to encourage kids to save, and that has
been missed. Students now refer to their credit cards as yuppie food
stamps. They see cards as entitlement, and see they will be in debt all
their lives."

Waskin says that the way to fix this is to educate kids on the difference
between good and bad debt, and to return to some basic fiscal common sense.

"We need to go back to the fundamental values our parents and grandparents
had, saving for a rainy day," says Waskin. "The best thing you can do is
hope for the best, but plan for the worst."

http://www.bankrate.com/brm/news/debt/debt_manage_2004/gooddebt-baddebt.asp
--
Hilary Duff turns 18 in this amount of time:
http://www.timeanddate.com/counters/customcounter.html?day=28&month=09&year
=2005&hour=00&m

"At a dinner party, one should eat wisely but not too well, and talk well
but not too wisely." -- W. Somerset Maugham
Anthony Matonak
2004-02-22 14:50:26 UTC
Permalink
Ablang wrote:
...
Post by Ablang
"Good debt produces cash flow, and bad debt doesn't," says John Waskin, CEO
of national nonprofit debt counseling service Bill Free - American Credit
Counselors. "If you go into debt buying an apartment building that will
produce revenue and deductions, that's good debt.
...

I think the terms are misleading. It's not so much "good" debt as "not
as bad" debt. It's better to not have any debt at all.

Anthony
baron48
2004-02-22 20:30:31 UTC
Permalink
Post by Anthony Matonak
...
Post by Ablang
"Good debt produces cash flow, and bad debt doesn't," says John Waskin, CEO
of national nonprofit debt counseling service Bill Free - American Credit
Counselors. "If you go into debt buying an apartment building that will
produce revenue and deductions, that's good debt.
...
I think the terms are misleading. It's not so much "good" debt as "not
as bad" debt. It's better to not have any debt at all.
That is misleading also. Is it better to have a house than no house?
Is it better to have a successful business than not? Most people
need to go into debt to do these things. You need to look at the
full financial picture (cash flow, net worth, future economic
reward, amount of risk, etc...). It is often better to have
some "good" debt than no debt at all.

-Tom
mightybargainhunter
2004-02-23 03:15:36 UTC
Permalink
Post by baron48
Post by Anthony Matonak
...
Post by Ablang
"Good debt produces cash flow, and bad debt doesn't," says John Waskin, CEO
of national nonprofit debt counseling service Bill Free - American Credit
Counselors. "If you go into debt buying an apartment building that will
produce revenue and deductions, that's good debt.
...
I think the terms are misleading. It's not so much "good" debt as "not
as bad" debt. It's better to not have any debt at all.
That is misleading also. Is it better to have a house than no house?
Is it better to have a successful business than not? Most people
need to go into debt to do these things. You need to look at the
full financial picture (cash flow, net worth, future economic
reward, amount of risk, etc...). It is often better to have
some "good" debt than no debt at all.
-Tom
Taking out a $500/month mortgage to secure an investment property that
brings in $750/month rent is most definitely good debt because it puts
money/equity/assets in your pocket. Or paying $3k/month on a business
loan that does $10k in profits per month. I'll take some of that kind
of debt any day. Alas now, all I have is the mortgage on my house,
which is bad debt because I can't charge my wife rent to create
positive cash flow. :)

On he flip side, if the property goes vacant for a while, that same
$500/month good debt becomes bad debt in a hurry because it no longer
puts money/equity/assets in your pocket. One of my friends had 3 out
of 4 rentals vacant or with deadbeats for tenants, and it really
strapped him for a while. While his tenants paid, the debts on those
properties were very good.

mbh
Chris Hill
2004-02-23 16:01:35 UTC
Permalink
Post by mightybargainhunter
Taking out a $500/month mortgage to secure an investment property that
brings in $750/month rent is most definitely good debt because it puts
money/equity/assets in your pocket. Or paying $3k/month on a business
loan that does $10k in profits per month. I'll take some of that kind
of debt any day. Alas now, all I have is the mortgage on my house,
which is bad debt because I can't charge my wife rent to create
positive cash flow. :)
On he flip side, if the property goes vacant for a while, that same
$500/month good debt becomes bad debt in a hurry because it no longer
puts money/equity/assets in your pocket. One of my friends had 3 out
of 4 rentals vacant or with deadbeats for tenants, and it really
strapped him for a while. While his tenants paid, the debts on those
properties were very good.
Depends. If after you do this some problem with the property
necessitates a $10,000 repair (out of money you don't have) to make it
livable again, then it was a bad deal. If buying rental property was
such a good deal, you'd think every bank in the nation would have a
giant rental portfolio.
mightybargainhunter
2004-02-24 03:35:57 UTC
Permalink
Post by Chris Hill
Post by mightybargainhunter
Taking out a $500/month mortgage to secure an investment property that
brings in $750/month rent is most definitely good debt because it puts
money/equity/assets in your pocket. Or paying $3k/month on a business
loan that does $10k in profits per month. I'll take some of that kind
of debt any day. Alas now, all I have is the mortgage on my house,
which is bad debt because I can't charge my wife rent to create
positive cash flow. :)
On he flip side, if the property goes vacant for a while, that same
$500/month good debt becomes bad debt in a hurry because it no longer
puts money/equity/assets in your pocket. One of my friends had 3 out
of 4 rentals vacant or with deadbeats for tenants, and it really
strapped him for a while. While his tenants paid, the debts on those
properties were very good.
Depends. If after you do this some problem with the property
necessitates a $10,000 repair (out of money you don't have) to make it
livable again, then it was a bad deal.
I certainly left out a bunch of contingencies; there is of course much
more to being a landlord than buying the property and collecting rent
checks. The main purpose of the response was to illustrate a good use
of debt. I (tacitly) presumed that the property was in fine shape
when it was bought and will last forever without repair. Part of my
background as a physicist I guess; I assume a cow is a sphere to make
the math easier :)
Post by Chris Hill
If buying rental property was
such a good deal, you'd think every bank in the nation would have a
giant rental portfolio.
Rental property is a good deal if you're willing to subscribe to the
upkeep of the property. Of course, this can be a lot of work.
Banks/credit unions are in the business of loaning money. They
generally get rid of any foreclosure as quickly as possible because
they don't "do" property any more than they rent/lease their
repossessed autos. I think also that they're just not allowed to
invest in these types of financial vehicles. I serve on a supervisory
committee at a credit union, and I know that management is very
restricted as to how it can invest the credit union's assets.

mbh
Lou
2004-02-24 01:24:20 UTC
Permalink
Post by mightybargainhunter
Post by baron48
Post by Anthony Matonak
...
Post by Ablang
"Good debt produces cash flow, and bad debt doesn't," says John Waskin, CEO
of national nonprofit debt counseling service Bill Free - American Credit
Counselors. "If you go into debt buying an apartment building that will
produce revenue and deductions, that's good debt.
...
I think the terms are misleading. It's not so much "good" debt as "not
as bad" debt. It's better to not have any debt at all.
That is misleading also. Is it better to have a house than no house?
Is it better to have a successful business than not? Most people
need to go into debt to do these things. You need to look at the
full financial picture (cash flow, net worth, future economic
reward, amount of risk, etc...). It is often better to have
some "good" debt than no debt at all.
-Tom
Taking out a $500/month mortgage to secure an investment property that
brings in $750/month rent is most definitely good debt because it puts
money/equity/assets in your pocket. Or paying $3k/month on a business
loan that does $10k in profits per month. I'll take some of that kind
of debt any day. Alas now, all I have is the mortgage on my house,
which is bad debt because I can't charge my wife rent to create
positive cash flow. :)
Start with a piece of paper divided into two columns, or a blank
spreadsheet. In the first column fill in your mortgage payment amount (for
most people, this covers mortgage interest, mortgage principle repayment,
local property taxes, and homeowner's insurance, and PMI if you have that).
On the next line, subtract any income tax savings due to the deductibility
of mortgage interest and property taxes. On the third line, add in the cost
of utilities. On the fourth line, subtract any market appreciation on the
price of the house.

In the second column, fill in the amount that rent would be on an apartment
that would meet your needs in your area. On the second line, add in
renter's insurance on your personal property. On the third line, add in any
utility expense.

Go on in this fashion with any other items that may apply in your case, but
try to be fair. For instance, I have cable in my house, but in my last
apartment cable wasn't available, so it wouldn't be fair to add the cable
bill to the house column.

Total both columns. Which total is bigger?

Just as a for instance, judging from what I can find in a short web search,
a two bedroom two bath apartment in my area seems to start at about
$1,000/month. I find one place offering two bedroom one bath apartments in
the $1,200 to $1,300 per month range - others in the area are closer to
$1,500 month.

I'm reasonably sure there's cheaper stuff out there, but I'm not sure that
they'd be in neighborhoods I'd want to live in. If these prices are
representative, I don't have to do the calculation described above. My
mortgage is cheaper than renting (at least, renting anything "nice" - in a
decent neighborhood, large enough to not feel cramped, new or well
maintained enough to be pleasant), and the positive cash flow is the
difference.

If you're only recently in your house, that might not be the case for you at
the moment. But consider projecting into the future a little - one year,
five years, ten years.
SHARX.
2004-02-23 00:49:21 UTC
Permalink
Post by Anthony Matonak
...
Post by Ablang
"Good debt produces cash flow, and bad debt doesn't," says John
Waskin, CEO of national nonprofit debt counseling service Bill Free
- American Credit Counselors. "If you go into debt buying an
apartment building that will produce revenue and deductions, that's
good debt.
...
I think the terms are misleading. It's not so much "good" debt as "not
as bad" debt. It's better to not have any debt at all.
Anthony
That's fine, if you want to rent for much of your life.
james b
2004-02-22 17:52:13 UTC
Permalink
Post by Ablang
"Mortgage debt is good debt. You're borrowing money, but you're getting a
tax advantage and can write off interest on an asset that's appreciating
over time. Plus, you get to live there."
I don't agree that mortgage debt is always good debt. I am paying
more in interest on my house right now that it is appreciating. Even
with the tax advantage I won't get back the total of my
payments+downpayment when I sell in a few years. If you figure in the
maintenance, this is definately expensive rent. Given the
alternatives I don't mind paying, but I wouldn't try to call it any
sort of investment . . . it is an expense.

- James B
Lou
2004-02-22 18:29:10 UTC
Permalink
Post by james b
Post by Ablang
"Mortgage debt is good debt. You're borrowing money, but you're getting a
tax advantage and can write off interest on an asset that's appreciating
over time. Plus, you get to live there."
I don't agree that mortgage debt is always good debt. I am paying
more in interest on my house right now that it is appreciating. Even
with the tax advantage I won't get back the total of my
payments+downpayment when I sell in a few years. If you figure in the
maintenance, this is definately expensive rent. Given the
alternatives I don't mind paying, but I wouldn't try to call it any
sort of investment . . . it is an expense.
This is, I think, a decidedly short term way of looking at it.

If you add up everything the house cost you over the period of ownership -
down payment, closing costs, payments, insurance, less any reduction in
income taxes due to deductions and less whatever cash you are left over with
after you sell - you'll come up with a net cost. Add up everything renting
would have cost you over the same period - at least rent payments and
renter's insurance. We can perhaps consider utilities a wash.

Is the total you'd pay as a homeowner greater or less than the total you'd
pay as a renter? Most people come out ahead owning instead of renting.
There are exceptions of course.
james b
2004-02-23 17:18:02 UTC
Permalink
Post by Lou
Post by james b
Post by Ablang
"Mortgage debt is good debt. You're borrowing money, but you're getting
a
Post by james b
Post by Ablang
tax advantage and can write off interest on an asset that's appreciating
over time. Plus, you get to live there."
I don't agree that mortgage debt is always good debt. I am paying
more in interest on my house right now that it is appreciating. Even
with the tax advantage I won't get back the total of my
payments+downpayment when I sell in a few years. If you figure in the
maintenance, this is definately expensive rent. Given the
alternatives I don't mind paying, but I wouldn't try to call it any
sort of investment . . . it is an expense.
This is, I think, a decidedly short term way of looking at it.
If you add up everything the house cost you over the period of ownership -
down payment, closing costs, payments, insurance, less any reduction in
income taxes due to deductions and less whatever cash you are left over with
after you sell - you'll come up with a net cost. Add up everything renting
would have cost you over the same period - at least rent payments and
renter's insurance. We can perhaps consider utilities a wash.
Is the total you'd pay as a homeowner greater or less than the total you'd
pay as a renter? Most people come out ahead owning instead of renting.
There are exceptions of course.
Maybe I didn't do a good job of stressing my point: buying a home
isn't an investment it is an expense. I can do the math on my last
house without a calculator and easily see that if I rented and
invested the difference, I would have walked away with more money that
I got when my house sold. My current house is on the same path. Now
if I paid cash for a house or planned to live in it for the rest of my
life it might be a different story, but how many people can do that?
If one adds up the taxes, homeowners insurance, homeowners association
dues, PMI insurance, lawn mowing, weed removal, pruning the trees and
shrubery, exterior painting, keeping the windows caulked, staining
the deck and 400 feet of fence, maintaining the exterior cement
(driveway joints and stair treads), wear on plumbing (washers, toilet
rebuilds, valve cartridges), blowing the air out of the sprinkler
system, carpet cleaning, window cleaning, interior paint, boiler and
furnace maintenance, gas systems maintenance, light bulbs (halogen
floods for the track lights, spotlights, and standard bulbs), and then
repair of items that actually break, the total is huge. If you
subtract off rent from everything I pay, then look at how much I get
when I sell minus 6% for the realtor, the return on investement is
negative.

I don't mind paying this because I get a well maintained place to
live, a place to park my RV and snow car, shop space for my hobbies, a
cat I don't have to hide, and no landlord telling me what I can or
can't do. I'm not trying to suggest that someone shouldn't buy a
home, just that most home purchases don't fit the description of a
good investment.

- James B
Out There
2004-02-24 01:00:07 UTC
Permalink
Post by james b
Maybe I didn't do a good job of stressing my point: buying a home
isn't an investment it is an expense. I can do the math on my last
house without a calculator and easily see that if I rented and
invested the difference, I would have walked away with more money that
I got when my house sold. My current house is on the same path. Now
if I paid cash for a house or planned to live in it for the rest of my
life it might be a different story, but how many people can do that?
If one adds up the taxes,
<snip extensive list>
Post by james b
the total is huge. If you
subtract off rent from everything I pay, then look at how much I get
when I sell minus 6% for the realtor, the return on investement is
negative.
I don't mind paying this because I get a well maintained place to
live, a place to park my RV and snow car, shop space for my hobbies, a
cat I don't have to hide, and no landlord telling me what I can or
can't do. I'm not trying to suggest that someone shouldn't buy a
home, just that most home purchases don't fit the description of a
good investment.
A little Macintosh.Vs.Mandarin, no?
How much would rent cost for a place where you had space to park your RV
and snow car, had shop space for your hobbies, and allowed cats?
Or from the other direction, how much would a home where you had no
space to park your RV and snow car, had no shop space for your hobbies,
and could not support a car have costed you?
Lou
2004-02-24 01:49:31 UTC
Permalink
Post by james b
Post by Lou
Post by james b
Post by Ablang
"Mortgage debt is good debt. You're borrowing money, but you're getting
a
Post by james b
Post by Ablang
tax advantage and can write off interest on an asset that's appreciating
over time. Plus, you get to live there."
I don't agree that mortgage debt is always good debt. I am paying
more in interest on my house right now that it is appreciating. Even
with the tax advantage I won't get back the total of my
payments+downpayment when I sell in a few years. If you figure in the
maintenance, this is definately expensive rent. Given the
alternatives I don't mind paying, but I wouldn't try to call it any
sort of investment . . . it is an expense.
This is, I think, a decidedly short term way of looking at it.
If you add up everything the house cost you over the period of ownership -
down payment, closing costs, payments, insurance, less any reduction in
income taxes due to deductions and less whatever cash you are left over with
after you sell - you'll come up with a net cost. Add up everything renting
would have cost you over the same period - at least rent payments and
renter's insurance. We can perhaps consider utilities a wash.
Is the total you'd pay as a homeowner greater or less than the total you'd
pay as a renter? Most people come out ahead owning instead of renting.
There are exceptions of course.
Maybe I didn't do a good job of stressing my point: buying a home
isn't an investment it is an expense. I can do the math on my last
house without a calculator and easily see that if I rented and
invested the difference, I would have walked away with more money that
I got when my house sold. My current house is on the same path. Now
if I paid cash for a house or planned to live in it for the rest of my
life it might be a different story, but how many people can do that?
If one adds up the taxes, homeowners insurance, homeowners association
dues, PMI insurance, lawn mowing, weed removal, pruning the trees and
shrubery, exterior painting, keeping the windows caulked, staining
the deck and 400 feet of fence, maintaining the exterior cement
(driveway joints and stair treads), wear on plumbing (washers, toilet
rebuilds, valve cartridges), blowing the air out of the sprinkler
system, carpet cleaning, window cleaning, interior paint, boiler and
furnace maintenance, gas systems maintenance, light bulbs (halogen
floods for the track lights, spotlights, and standard bulbs), and then
repair of items that actually break, the total is huge. If you
subtract off rent from everything I pay, then look at how much I get
when I sell minus 6% for the realtor, the return on investement is
negative.
I don't mind paying this because I get a well maintained place to
live, a place to park my RV and snow car, shop space for my hobbies, a
cat I don't have to hide, and no landlord telling me what I can or
can't do. I'm not trying to suggest that someone shouldn't buy a
home, just that most home purchases don't fit the description of a
good investment.
No, you weren't clear at making your point before, and it still doesn't
sound like you're playing "fair". How much would it cost to rent a place
that included a place to park your RV and snow car (that sounds like three
parking spaces), shop space for your hobbies, pets (places around here
charge extra for pets if they allow them at all). I rented for several
years, and "they" would paint the place (white) before you moved in and
clean the carpets before you moved in - after that it was your lookout. I
never heard of an apartment that replaced light bulbs, or did the windows.

It sounds like you have a nice place, chock full of amenities. House rental
listings are kind of scarce around here, but what I can find seems to run
around $3,000 a month. That doesn't include utilities.

Still, one supposes that as an adult, you know what you're talking about.
It appears that you favor spending your money on present consumption rather
than savings and investment.
james b
2004-02-24 17:40:48 UTC
Permalink
a home is a good investment . . . no it isn't . . . yes it is . . no .
.
<snip>
Post by Lou
Post by james b
can't do. I'm not trying to suggest that someone shouldn't buy a
home, just that most home purchases don't fit the description of a
good investment.
No, you weren't clear at making your point before, and it still doesn't
sound like you're playing "fair". How much would it cost to rent a place
that included a place to park your RV and snow car (that sounds like three
parking spaces), shop space for your hobbies, pets (places around here
charge extra for pets if they allow them at all). I rented for several
years, and "they" would paint the place (white) before you moved in and
clean the carpets before you moved in - after that it was your lookout. I
never heard of an apartment that replaced light bulbs, or did the windows.
They replace the outside floods after they finish mowing and trimming
the landscaping.
Post by Lou
It sounds like you have a nice place, chock full of amenities. House rental
listings are kind of scarce around here, but what I can find seems to run
around $3,000 a month. That doesn't include utilities.
I looked in the local classifieds and rents on similar properties run
from $500 to $1000 less than my payment+escgrow. Forget all about the
other expenses. Over the last two years my property hasn't
appreciated enough to cover the real estate comission. So at a
minimum I am loosing about $500 a month. Over time this might change,
but I have never lived any one place more than a few years and don't
see this place being the exception.
Post by Lou
Still, one supposes that as an adult, you know what you're talking about.
It appears that you favor spending your money on present consumption rather
than savings and investment.
I don't see how you get that idea. For one thing buying a house is
like forced savings. While you may or may not get a positive rate of
return on everything paid on a house over rent, you still will at
least get a good percent of what goes into a house back. Thats why I
don't mind either paying or working to keep things in a good state of
repair.

- James B
mike
2004-02-25 01:44:36 UTC
Permalink
Post by james b
I looked in the local classifieds and rents on similar properties run
from $500 to $1000 less than my payment+escgrow.
?????

so what are you paying now?
and why didnt you figure this out before you decided to buy?

sounds like you overpaid, big time.
mike
2004-02-24 01:54:02 UTC
Permalink
Post by james b
If one adds up the taxes, homeowners insurance, homeowners association
dues, PMI insurance,
if youre paying an HOA fee, why doesnt it cover exterior maintenance? 9 of
the items mentioned below arent my responsibility. it also covers fire and
earthquake insurance.
Post by james b
lawn mowing, weed removal, pruning the trees and
shrubery, exterior painting, keeping the windows caulked, staining
the deck and 400 feet of fence, maintaining the exterior cement
(driveway joints and stair treads), wear on plumbing (washers, toilet
rebuilds, valve cartridges), blowing the air out of the sprinkler
system, carpet cleaning, window cleaning, interior paint, boiler and
furnace maintenance, gas systems maintenance, light bulbs (halogen
floods for the track lights, spotlights, and standard bulbs), and then
repair of items that actually break, the total is huge. If you
subtract off rent from everything I pay, then look at how much I get
when I sell minus 6% for the realtor, the return on investement is
negative.
I don't mind paying this because I get a well maintained place to
live, a place to park my RV and snow car, shop space for my hobbies, a
cat I don't have to hide, and no landlord telling me what I can or
can't do. I'm not trying to suggest that someone shouldn't buy a
home, just that most home purchases don't fit the description of a
good investment.
seems that just yours doesnt
Post by james b
- James B
Justin
2004-02-24 03:04:45 UTC
Permalink
I am from the San Francisco Bay Area. Homes are real expensive there. I
worked in the moving/storage business for 5 years there. I had a lot of
clients who walked in to rent storage or a truck and would comment that
they needed it because their parent died and left them a house which they
then sold. They would say "oh yeah, my parents bought that place back in
the 50's for $10,000 and I just sold it for $500,000."

Assuming a 10% rate of return, over 50 years of compound interest, the
$10,000 could have ballooned to $1.2 million, but having to pay rent over
those years would knock that down to about $900,000, assuming a mean
monthly rent of $500 over that 50 year period. So I guess buying a home
isn't such a good investment, in some situations, areas.


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lpogoda
2004-02-25 18:22:58 UTC
Permalink
Post by Justin
I am from the San Francisco Bay Area. Homes are real expensive there. I
worked in the moving/storage business for 5 years there. I had a lot of
clients who walked in to rent storage or a truck and would comment that
they needed it because their parent died and left them a house which they
then sold. They would say "oh yeah, my parents bought that place back in
the 50's for $10,000 and I just sold it for $500,000."
Assuming a 10% rate of return, over 50 years of compound interest, the
$10,000 could have ballooned to $1.2 million, but having to pay rent over
those years would knock that down to about $900,000, assuming a mean
monthly rent of $500 over that 50 year period. So I guess buying a home
isn't such a good investment, in some situations, areas.
This is a common mistake people make, especially when they're trying
to use numbers to back up a supposition rather than crunching the
numbers and seeing where they go.

What makes you think that mom and pop had $10,000 that could have been
invested, all at once up front like that? Most people back then, like
today, put some money down and took out a mortgage - it took 20 or 30
years before that whole $10,000 was "invested".

I don't know what the "mean monthly rent" over the last 50 years was
in San Francisco, so I can't judge your figure there. But your
overall methodology is incorrect and your conclusions somewhat suspect
as a result.

In general, in the US at any rate, over the long term nothing
outperforms the stock market, historically. Real estate is usually
cited as second place. But most people have enough money to either
buy/rent a place to live OR invest in stocks, not both. In that case,
the question is are you better off buying or renting, not are you
better of living under a bridge somewhere while controlling a hefty
portfolio or locating your dwelling space inside some structure.
Post by Justin
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Sgt. Sausage
2004-02-27 01:02:30 UTC
Permalink
Post by lpogoda
Post by Justin
I am from the San Francisco Bay Area. Homes are real expensive there.
I
Post by lpogoda
Post by Justin
worked in the moving/storage business for 5 years there. I had a lot of
clients who walked in to rent storage or a truck and would comment that
they needed it because their parent died and left them a house which they
then sold. They would say "oh yeah, my parents bought that place back in
the 50's for $10,000 and I just sold it for $500,000."
Assuming a 10% rate of return, over 50 years of compound interest, the
$10,000 could have ballooned to $1.2 million, but having to pay rent over
those years would knock that down to about $900,000, assuming a mean
monthly rent of $500 over that 50 year period. So I guess buying a home
isn't such a good investment, in some situations, areas.
This is a common mistake people make, especially when they're trying
to use numbers to back up a supposition rather than crunching the
numbers and seeing where they go.
What makes you think that mom and pop had $10,000 that could have been
invested, all at once up front like that? Most people back then, like
today, put some money down and took out a mortgage - it took 20 or 30
years before that whole $10,000 was "invested".
I don't know what the "mean monthly rent" over the last 50 years was
in San Francisco, so I can't judge your figure there. But your
overall methodology is incorrect and your conclusions somewhat suspect
as a result.
Agree with all of that -- and the one most people ignore. How many
of the renters out there actually *invest* the difference between their
current rents and the mortgage they would have been paying. In my
experience as a landlord -- exactly none. They all spend it, spend
some more, borrow, spend even more and continue to do so.

I had one lady (who eventually did the midnight bail-out without
paying current -- she eventually paid, our court system is quite
good at that !) -- anyway, I had to make a 30 minute drive to the
property to catch her at home as she'd been dodging phone calls
on late rent. She had the balls to show off her new $5995.99
plasma flat panel hanging over the fireplace, but couldn't tell
me when she'd get current on the rent. Go figure.

If you ask me, the whole "invest the difference" philosophy is a
farce. Nobody does it.
mike
2004-02-27 01:41:37 UTC
Permalink
Post by Sgt. Sausage
Agree with all of that -- and the one most people ignore. How many
of the renters out there actually *invest* the difference between their
current rents and the mortgage they would have been paying. In my
experience as a landlord -- exactly none. They all spend it, spend
some more, borrow, spend even more and continue to do so.
thats why you have the "big ballers" living in crappy apartments but they
have a $50k SUV on chrome rims parked out front.
Dennis
2004-02-27 17:39:37 UTC
Permalink
On Thu, 26 Feb 2004 20:02:30 -0500, "Sgt. Sausage"
Post by Sgt. Sausage
I had one lady (who eventually did the midnight bail-out without
paying current -- she eventually paid, our court system is quite
good at that !) -- anyway, I had to make a 30 minute drive to the
property to catch her at home as she'd been dodging phone calls
on late rent. She had the balls to show off her new $5995.99
plasma flat panel hanging over the fireplace, but couldn't tell
me when she'd get current on the rent. Go figure.
I had the same experience as a landlord, even with the "poor" section
8 tenants. No money for rent (or for milk for their kd), but they
always had money for cigarettes, beer and cable TV.

Dennis (evil)
--
An inherent weakness of a pure democracy is that half
the voters are below average intelligence.
shinypenny
2004-02-27 16:09:20 UTC
Permalink
Post by lpogoda
Post by Justin
I am from the San Francisco Bay Area. Homes are real expensive there. I
worked in the moving/storage business for 5 years there. I had a lot of
clients who walked in to rent storage or a truck and would comment that
they needed it because their parent died and left them a house which they
then sold. They would say "oh yeah, my parents bought that place back in
the 50's for $10,000 and I just sold it for $500,000."
Assuming a 10% rate of return, over 50 years of compound interest, the
$10,000 could have ballooned to $1.2 million, but having to pay rent over
those years would knock that down to about $900,000, assuming a mean
monthly rent of $500 over that 50 year period. So I guess buying a home
isn't such a good investment, in some situations, areas.
This is a common mistake people make, especially when they're trying
to use numbers to back up a supposition rather than crunching the
numbers and seeing where they go.
What makes you think that mom and pop had $10,000 that could have been
invested, all at once up front like that? Most people back then, like
today, put some money down and took out a mortgage - it took 20 or 30
years before that whole $10,000 was "invested".
I don't know what the "mean monthly rent" over the last 50 years was
in San Francisco, so I can't judge your figure there. But your
overall methodology is incorrect and your conclusions somewhat suspect
as a result.
Yeah, that figure puzzles me as well. I rented for 5 years and my rent
went up every single year, well over the cost-of-living increases.
That's a huge reason why I finally decided to buy a house. Every time
I'd get a salary increase and think "Yeah, I can finally put this
extra into savings" my landlord would call with yet another rent
increase. And that included when the rental market was going south!
His attitude was, "Go ahead and move out to a place that's cheaper."
It's tough to do that when you're all settled and you're kids are in a
certain school district, plus you have to fork over first, last,
security deposit. They know that they've got you.

Now I have a fixed rate mortgage and any future salaries are all gravy
from here on out!
Post by lpogoda
In general, in the US at any rate, over the long term nothing
outperforms the stock market, historically. Real estate is usually
cited as second place. But most people have enough money to either
buy/rent a place to live OR invest in stocks, not both. In that case,
the question is are you better off buying or renting, not are you
better of living under a bridge somewhere while controlling a hefty
portfolio or locating your dwelling space inside some structure.
Justin
2004-02-27 22:41:02 UTC
Permalink
Post by lpogoda
I don't know what the "mean monthly rent" over the last 50 years was
in San Francisco, so I can't judge your figure there. But your
overall methodology is incorrect and your conclusions somewhat suspect
as a result.
I never intended this to be a scientific study (did you study economics or
finance? I studied general social studies with a little bit of economics
thrown in). I was simply using some general economic formualas to boast
the OP's assertion that real estate isn't a very good investment in terms
of net gains. I do believe in home ownership however. It's better to own
your own spot than rent a tiny apt. with about 5 square feet of yard.

Also buying and reselling or renting distressed properties seems real
profitible.


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timeOday
2004-02-22 22:38:15 UTC
Permalink
...
Post by Ablang
Bach heavily promotes the idea of homeownership, saying that everyone needs
to own where they live.
"About 40 percent of Americans are renters," says Bach, "and the fastest
way to wealth in America is buying where you live."
Bach cites some shocking numbers to back this up.
"The average renter has a median net worth of $4,000, and the average
homeowner has a median net worth of about $150,000."
...


Mostly a fine article, but that is a laughable statistic. What if I
could prove that people who drive Lexus have more net worth than those
who drive beat-up Fords (or who ride bicycles)? Would you run out and
buy a Lexus?


Other than that I guess it's a fine article, except it boils down to
"you should invest your money instead of blowing it." Well, duh. You
should also eat vegetables and get plenty of exercise. We Americans
know that perfectly well, and we're about the fattest people on earth.
baron48
2004-02-27 06:52:05 UTC
Permalink
Post by timeOday
...
Post by Ablang
Bach heavily promotes the idea of homeownership, saying that everyone needs
to own where they live.
"About 40 percent of Americans are renters," says Bach, "and the fastest
way to wealth in America is buying where you live."
Bach cites some shocking numbers to back this up.
"The average renter has a median net worth of $4,000, and the average
homeowner has a median net worth of about $150,000."
...
Mostly a fine article, but that is a laughable statistic. What if I
could prove that people who drive Lexus have more net worth than those
who drive beat-up Fords (or who ride bicycles)? Would you run out and
buy a Lexus?
That's not really the same concept though. Maybe you should look
at people who lease cars vs. people who buy. There are good and
bad apartments along with good and bad houses.

-Tom
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