I’m still busy overthinking it. Is B+insurance really all of the cost of buying though? Is A really part of the cost of renting? (I don’t insist you answer - that’s just what I’m thinking about)
Yes. You are overthinking it still. And I kinda knew this would happen, just not from you. The problem is we are so steeped in this capitalist culture that it’s hard not to view this shiz a two sided transaction and who “morally” deserves separate parts, Cut that shiz out. None of it makes any sense to being with,
There’s only one peep in this story: Joe. So even though it doesn’t make a lick-o-sense to try to puzzle out “who” gets appreciation to begin with, even if it did… it wouldn’t matter in this case, because there’s only Joe.
Let me ask you two Qs here…
- Let’s say we were back in the old days, back when there was still evictions (but no covid), I wanted to hang out in a bar near where you live. For whatever reasons, I narrowed my options to two: driving -vs- taking the train. I can calculate my costs either way: For the train say Lyft to Old Town, Amtrak to LA, Lyft to your hood. Or for driving: gas, wear-and-tear on my car, prorated insurance/reg/etc. I’d have two numbers. One would proly be higher. My marginal cost for taking the higher one is (higher-lower), let’s call that number Q.
It’s the same with Joe and his housing. For whatever reasons, he has already picked a brand new house, and has narrowed his options to two: buy or rent. Renting will be higher. His marginal cost of renting, over the useful life span, will be (total cost of renting - total cost of buying), let’s call that number Z.
If we cared to, we could calculate the ratio of Z divided by the new home sales price of S. Let’s call that number (Z/S) by the name D.
If we cared to, we could calculate the ratio if D divided by the useful lifespan Y. Let’s call that number (D/Y) by the name Glurbo.
Can you pick reasonable numbers, just like you were doing yesterday (240k replacement value, 1.2k rent, etc), for these parameters, and calculate a sample Glurbo for us?
- Glurbo has another name. That name is “simple effective interest per year”. Is your problem with the name here, and not about the numbers?
cost of renting = 1500 * 12 * 100 = 1800000
cost of buying = 230000
Z = 1800000 - 230000 = 1570000
S = 230000
D = 6.83
Glurbo = .0683
I think the problem at hand has more to do with really deciding what the costs of renting and costs of buying are than picking numbers and plugging them into something.
I had proposed what I thought was a more realistic calculation of those same things.
Assume Joe can get a loan amortized over the entire useful life of the property. Assume this is just about the structure. You can do this if it’s in some remote area or maybe a condo in a huge building. $230k amortized over 100 years and having a payment of $1500 is equivalent of 8%. Joe can rent it and pay the equivalent of 8% or he could buy it and probably get a better interest rate and pay $1200 or something.
SMH. Use my first formula. The Z/D shiz was just me trying to puzzle out WTF malfunction you are having at your thinking jct.
Y = useful lifespan (yr) = ________
S = sale price (house + lot) = _______
R = rent (mo) = $1500
M = PMI (yr) = _______
B = exp (replace house cost) = $230000
A = exp (appreciation) = _____
And no, figuring out how much renting costs is trivial: months * rent.
Figuring out home much buying costs is also trivial. The house+lot costs $S to buy. For every year of the useful lifespan, PMI will need to be spent (that’s an additional $YM). At the end of the useful lifespan Joe pays construction workers to replace the worm out house with a new one (that’s an additional $B). Joe’s gross cost of ownership is (S+YM+B). Then, complete the round trip, Joe sells the lot+house for $(S+A). To calculate his Joe’s total cost of ownership, aka net cost of ownership, we subtract the sales price from the gross cost of ownership, which is…
(S+YM+B) - (S+A).
Which is…
YM+B-A
Stop it. That’s a different problem. That’s a mortgage. WTF BBQ ???/?
I don’t know what A is and I don’t know how to ignore that Joe probably got a mortgage, or, if he had $230k and rented anyway, he could have put that $230k in a mutual fund or somehow benefited from having $230k for 100 years. If you want to assume it costs nothing to put $230k on ice for 100 years, assuming no appreciation is not that much different.
If the discussion is fundamentally about whether land is ownable, then yeah, maybe the appreciation is shrinkage.
I could still go with no appreciation. Back in 1987 or so a friend of mine bought a lot in California City for about $3000. Right now a lot there is worth about $10000. Put a new house up out there and let it get completely worn out and appreciation will not figure much into the equation. (if there’s no mortgage there’s no PMI)
And I really have no idea what to put in for A in your equation. In that California City case it’s $212/year. In Manhattan Beach a lot has appreciated about $27000 a year for the last 60 years.
No. The discussion is only about figuring out a number. Nothing more, nothing less.
We can do three options if you really insist, buy/mortgage/rent. But that’s three different formulas instead if two, and it doesn’t change the other two at all.
And no, we are not trying to figure out what the best deal is for Joe. We don’t care about the opportunity costs of money. Were only trying to figure out a number one little number. Really stop it.
I’ll give you two ways out of this foolishness (besides just stopping it).
-
Joe’s a gold bug, He don’t use no stinkin mutual funds. We could go estimate historic trends in gold prices blah/blah. But unfortunately, the day after the useful lifespan of the house, the unsafe coal mine beneath it collapsed and Joe, and all his gold, vanished into the bowels of the earth,
-
Or we could go to do six different calculations, only one of which is even slightly relevant.
a. Mutual Fund Revenue on buy option
b. Mutual Fund Revenue on mortgage option
c. Mutual Fund Revenue on rent option
d. Total cost of ownership on buy option
e. Total cost of ownership on mortgage option
f. Months * Rent
Once again, we are only interested in D, and I’ve already explained D to you like you are a 5yo several times.
You don’t know what appreciation is? Or you don’t know how to WAG expected appreciation? I’ll assume the later.
Obviously this is information that the real estate speculators would be very interested in having a good estimate of. And we have voluminous data from the past. Like this…
So it’s just like picking reasonable sales price, replacement costs, or any of these other numbers.
And &&&& we’re not trying to “model” reality, and we’re not trying to figure out Joe’s best move. We don’t need any particular accuracy. We’re just trying to get a rough estimate of one little number…, a rough estimate… of one little number.
OK VG
Manhattan Beach example.
Useful lifespan (yr) Y= ______
Buy (house+lot) S= _______
Rent (mo) R = 1500
PMI (yr) M= ______
exp(house replace) = 230000
exp(appreciation) = 27000Y
We’re halfway there…
Still thinking about appreciation, but Manhattan Beach is a bad example. (I would guess average appreciation of land is something like 6%. It’s not easy to figure and you can’t just use prices of homes.)
Are you sure about PMI? (Mortgage insurance)
Sure, we can do US average. We’ll want to do a bunch of places: So Cal Beach, California City, US average, Milwaukee (for Inso0). And we’ll also want to try out different useful lifespans.
This is a constant cause of confusion as there is two different PMIs. One is Private Mortgage Insurance. I’m not talking about that.
The other is overhead. Regularly recurring expenses required to keep an asset usable and in a state of good repair. For a house, these are Property tax (where applicable), Maintenance, Insurance, and possibly some other minor expenses. This is the other PMI.
Ah…I worked at a mortgage company a long time ago and heard PMI as mortgage insurance a million times.
Dunno. I’m not sure the Glurbo makes sense as the effective interest rate of renting. You are borrowing a $230000 house and paying $18000 a year for it and that’s 8% and that makes sense. The (cost to buy) in the Glurbo doesn’t seem to be relevant. A Glurbo is a number - a ratio - a percent, but not an effective interest rate. I think.
But…anyway, if this will move us past the test: [($1800000+$11300000) - ($5400000+$230000)]/($200000*100) = .94 or 94% (you should assume B will be a lot higher because it’ll be more expensive in 100 years, but rents will go up too, this changes the number pretty significantly depending on estimates, but I don’t think it changes the point)
If you’re cool with the Sheriff evicting bad tenants then I won’t complain about rent strikes against bad landlords
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I mean if all the people who can’t afford rent in SoCal and NYC were put into dilapidated apartments in small rust belt towns, both the homeless numbers and the vacant housing numbers would look much better, but let’s stop pretending it is the greed of those property owners in the rust belt that stops this from happening.
Sigh. It’s not a test. The reasons I want you to pick the #'s is (a) you are in the industry, and might have some insight, (b) I don’t any lurkers to think I’m cherry picking an example, and (c) like I said, you might learn something, I cannot.
I resort to Glurbo when I run into someone who has a dogmatic word association. Which you do. We run into this all the time. In fact, @clovis8 had an epiphany regarding a couple ITT. What’s confusing me, is why you have one here over this. Now given enough patience by all involved, I can always fix this. But as you know, it’s a lot of work.
Yeah, We can use inflation adjusted numbers, or we could WAG an expected future rate of inflation, add that constant in everywhere, make the maths needlessly complicated (which seems to be your main goal BTW)… and come out with same exact answer in the end,
[($1800000+$11300000) - ($5400000+$230000)]/($200000*100) = .94 or 94%
Y = 100 (yr)
S = 200000 (house+lot)
R = 1500 (mo)
M = 54000 (yr)
B = 230000 (exp (replacement house cost))
A = 11300000 (exp (appreciation))
Are these WAGs from anywhere in particular, US average, or something else? They seem OK except the PMI, which is just way to high.
LOL you think paying 21.2% in interest over 3 months is a 5.3% interest rate per year?
Maybe math isn’t your strong suit.
$4000/yr maintenance. $1400/yr insurance. For 100 years.
It’s $5400/yr
(number should have been $540000)
And house + lot is $230000. $200000 is just the house. This is not California.
Numbers are pretty much based on national averages which I mostly looked up.
61%
I have no problem with people trashing the place/etc being removed, or pervs, or bad tenants of this nature. I’d have a problem if they were tolerated. I wouldn’t call someone who can’t pay the parasites a bad person. My gf would slap me!
But I’ll take this as a huge interwebs win. I knew there was a reason I liked you. You were the first peep in 10+ years who simply A’d that simple Q. Thank you !!!1!