comes out with a Top 10 list of best places to buy vs. rent. This is their formulation in their words:
If there’s one thing I know I will regret 15 years from now, it’s not buying property over the next 12 months. Last Friday’s 7.6% YoY jump in existing home sales was a big shocker that helped propel the stock market to new highs. What’s exciting though, is that the property markets have lagged, creating what I think is a golden opportunity to pick up some rentals for one’s retirement.
If you look around the world, from the UK to Hong Kong, property prices have rebounded double digits this year. Yet, the US is slowly but surely coming out of price declines largely because of still massive consumer debt overhang. Volume growth generally always supersedes price growth. Who knows exactly when the property market will bottom, but what we do know is how to calculate simple math to make proper purchasing decisions.
Some of you have asked me to write about property, a topic still dear to me despite the correction. First and foremost, I believe a property is not so much an investment but a lifestyle decision. When we choose to buy property, we’re choosing to plant roots in a neighborhood we love, and build our lives accordingly. Not to say you can’t do the same renting. When you have a large financial commitment to your abode, you tend to be less transient, all with a heightened sense of awareness that your home brings you great pleasure but also great financial responsibility.
When people get in the mindset of buying a property to flip, things can go seriously wrong due to the illiquid nature of the asset and the high transaction costs. Although the hurt in property has been broadcast everyday in every media outlet for the past year, less than 3% of the housing stock trades a year. In other words, the large majority of property owners shouldn’t be affected unless they just had to sell today. This is not a post about the merits of owning vs. renting, a topic which we can get into later.
Buying property is relatively straightforward. Your high tax bracket is killing you, you have at least 30% of the properties’ value in cash so that you can put 20% down and have a 10% buffer, you believe you’ll live in the place for 5-7 years, the rental yield compares favorably with the current gov’t 10 yr risk free rate, the place is nicer than anything available in the rental stock, and the location is good, so you buy. Let’s assume you own a piece of property, and you’ve got a nice big fat juicy Home Equity Line of Credit (HELOC). You’ve noticed the HELOC rate drop to an outrageously low interest rate equal to Prime, or 3.25%. What do you do with it?