Owning a property is work - sudden repairs at an otherwise busy time in your life. Phone calls and customer service for tenants. New tenants. Paperwork. It's partly the time actually worked, but also the unpredictability and out-of-hours nature of the work.<p>Looking at the model I guess the nearest factor is Annual Costs (maintenance). But it doesn't feel properly measured.<p>I note that for someone on Hacker News, it needs charging at the day rate for a programmer. Or even as an opportunity cost - charging with a risk-based possibility of the reward of starting a successful technology startup. Or of spending more time with family or in sunlight, amongst trees. At peace.
This is pretty cool.<p>One thing that feels like a serious oversight though is that it isn't factoring in taxes. Rental income is taxable income. If you depreciate the property to avoid or reduce your taxable income you'll end up taking a big hit on the eventual sale as it will all be capital gains.<p>Another issue I'd take with this is that it's a lot smarter to focus on cashflow then gross income because odds are you aren't going to last 30 years to watch your net worth grow if you are losing cash on a monthly basis, even if you are technically building equity.<p>I'm currently getting out of being a landlord because while it was overall profitable, the margins are alot tighter after factoring in taxes and it's also a massive headache. That income certainly does not feel passive.
Calculations of this model are misleading. One hugely important parameter missing: inflation rate. This would tell us what part of that 2.1 million in 30 years is real return and what part is simply inflation, i.e. depreciated money. Put it differently, it’s important to know what the investment will yield in terms of <i>today’s dollars</i> - not depreciated dollars.<p>For such a long horizon of 30 years modeling without accounting for inflation makes little sense. For instance that 7% stock market return used by the model as a default, which perhaps may be used as proxy for inflation, would return 661% over 30 years.<p>Default values for other parameters and their <i>distributions</i> also look very optimistic to me. Like 4% annual appreciation which maybe drops to 2% annual appreciation. How about 40% annual <i>depreciation</i>, your mortgage being 30% underwater, and foreclosure? How about the bank that issued your mortgage going bust, then the bank which bought that bank going bust, and then you 30-story building being shut off from public utilities? What am I smoking? Neh, I just bought investment properties in Miami and other places in Florida in 2007. Anyone too young to know what I’m talking about: I urge you read up on the 2008 crisis before you start buying up investment real estate, after 10 years of unprecedented growth of both real estate and stock market.
I live in a 3 room 90m^2 apartment in central Aarhus in the middle of the university. It’s worth $350,000, but and you can rent out each room for $700-$800 a month, to an endless stream of students.<p>The guy who was elected head of our ownership organisation/community (might be a danish construct) bought two apartments when he moved in. He did have $150,000 to make both loans not-bank loans (again this might be a Danish thing, but we have special loan institutions that cover 70-80% of personal house loans at really low rates). Anyway, the one he rents out pays for both loans, taxes and added expenses and after 20 years those loans will both be paid out.<p>It’s really kind of silly how easy life can be if you start out with a little money and use them wisely.
This definitely is missing property tax and insurance, as well as a bucket for maintenance cost, ex, property management (8-10% monthly estimate), vacancy (5-10% monthly estimate), and repairs (5-10% monthly estimate). These are all coming out of the bottom line. Especially if the assumption is that the property will be held for 30 years. For a lot of states, Texas for example, the property tax inflates with property prices, assessed every 2 years, so you can build in some calculation assumption with that.<p>Cash on cash yield from rent may not be great for the most part. But with leverage and tax savings, that is where real money is made in the long run in the rental game.
Hey HN, I’m one of the makers. Enjoying the discussion about buying to rent!<p>We’re building a tool to let anyone create models like this one — models that incorporate uncertainty in their variables and outputs. This is the kinda stuff people do in Excel right now, with much difficulty.<p>We’re working on a couple more demo models — let us know if you have any suggestions. And if this kind of tool resonates with you, then we’d love to chat — hi@causal.app. Thanks!
I did this back in 2010 or so. I wanted to diversify out of the stock market so I put some money into 20% down on a single family home. My sister was a single mom at the time renting an apartment in a good school district for her daughter. I told her "go find a house you'd like to live in", bought and rented to her. She was agreeable. Our plan has been for her to buy the house at a discount when she's able (a little rent to own) but that hasn't happened yet.<p>Financially, from principal paydown I estimate about $400 a month profit from the deal. Last year the house required a new roof, which was $5000 after insurance covered less than half, and broken pipe flooded a bathroom and adjoining bedrooms. So that was my profit for the year.<p>Overall it's been a net gain, but my money would've performed much better in stocks during the this period.
The huge advantage of housing is that the government essentially supports infrastructure to get massive leverage. With 1:5 or 1:10 leverage, 10% appreciation with 1:10 leverage means you double your money. The downside is that with a 10% decrease you lose all your money.<p>Otherwise real estate is not liquid, annoying to manage, and constantly incurs real costs.<p>The stock market is relatively competitive as an investment and includes REITS which let you get some of the returns of real estate without the hassles.<p>I had vacation rentals that cost about 50K each and returned about 8K/year after costs (each). But in the end when there was a problem and the maintenance company wasnt available, I was the one that had to drive 3 hours. I really needed to own at least 5 to make them worth owning. But then there would be the hassle of people constantly coming and going.
It's a nice app and all, but the rigorous calculation for these kinds of things really needs to consider tax implications (both depreciation deduction & property taxes), liquidity value, and expected outside returns. It's not a simple thing to simulate even without getting into exotic scenarios.
It seems the simulation just gives the upper bound and lower bound based on the input ranges. A spreadsheet model can do the same thing by running the model with different input ranges. In fact, that's what a spreadsheet model is for, trying different input to run what-if scenarios.<p>On the rental investment example itself, it would really help to have a finance person to go over the model. A rental investment needs to be modeled like running a business, not like buying a house to live. Its analysis is usually done using net operating income, CAP rate, cashflow, ROI, and IRR.<p>BTW there's no magic 1% to 4% annual appreciation in rental investment. Appreciation is purely based on increasing net operating income faster than market rate, or in simpler term improving CAP vs the market CAP rate. Let's say you buy a property with 4% CAP rate and the market CAP rate is 4% now. 10 years from now your NOI still produces the same 4% CAP but the market CAP rate has risen to 6%, your property will depreciate! Market CAP rate is affected by different things that're out of your control and it's hard to model.
No. The literal definition of the economic drag on value creation is "rent seeking".<p>Be a part of the solution and build something. Do not be a part of the problem and become a landlord.
This compares against the opportunity cost of investing the initial down payment, but does not seem to factor the opportunity cost of ongoing carry costs.<p>For example, I was able to easily craft a model where my expected monthly income was negative. (Just bump the expected annual costs to 2.0%, which is actually more realistic since 1.0% = tax and 1.0% = maintenance.)<p>Surely the couple hundred dollars a month could also be continuously invested and producing returns if they weren’t being driven into the real estate asset.
I think this is supposed to be more about demonstrating the simulation modelling tool than about houses and rent.<p>The tool looks like a copy of getguesstimate.com. What's
new or different?
What a horrible idea<p>Buy-to-let is causing immense social and economic problems in the UK.<p>It's a nice way for the rich to tax the poor.<p>Atlas shrugged.
This is not about buying or renting, it's about an alternative to Spreadsheet for model building. But not much info on the process itself.. can creators expand on this.
For a single property it usually won't be worth it. But if you can build a portfolio of properties in a reasonably small geographic area, then you can gain economic scale benefits (which especially will allow you to outsource more of the management/maintenance).<p>Of course, you need a good source of credit or great people skills to get that started (or wealthy parents to loan you a million or so).
As others have pointed out this model is oversimplified and doesn’t break out maintenance and taxes. 1% is unreasonably low for both considering that 1% is a low property tax rate first of all and second because rental income itself is taxable.<p>Another point in actual real estate proformas is expected vacancy and leasing costs. Ie. you will have tenants leave and when you do it isn’t always easy or fast to find good tenants to replace them.<p>There’s also the significant consideration of transaction costs missing. Conservatively you should budget 8% to sell and 4% to buy.<p>The asset is also highly illiquid compared to stocks, and also has ups and downs just like the stock market but in slow motion. If you happen to want to cash out your equity during a downturn it can be years before you get back to where you’d be with your “long term expected appreciation.”<p>And one last bit: since a house isn’t fungible you need to accumulate the entire downpayment all at once, and to liquidate you must sell it all at once, whereas stocks you can accumulate and release incrementally.<p>TLDR; this model makes it look a lot more attractive than it really is to be a single-property landlord.
Any data supporting the appreciation of 4% a year?<p>This seems socially much more acceptable to taking a loan and then invest the money in stocks for example, but to me is not <i>that</i> different.<p>True the volatility is much lower, but so is the liquidity if you have to dispose of the propery in a short time due to life circumstances.<p>If this is a single property and plan is to be the bulk of one's net worth it seems risky to me.<p>Then there's the "dealing with tenants" variable which can be none to a ton of work/hassle.<p>REITs are imho an interesting way to get rental income with less hassle and much more diversification if you can stomach the stock price moving up and down.<p>Look at Vanguard VNQ for example.
Pretty cool demo for causal.app.<p>Feedback on the framework itself:<p>* I found the interface to widen/narrow the variance of ranges painful to use. Why not just let me plug in an exact number?<p>* I assume the output for the variance is 95% interval? This should be stated.<p>* There's major math problems with respect to how you are handling variance on compounding rates and reporting it. Most importantly, the distribution should almost certainly not be normal (lognormal makes more sense). If you don't use lognormal distributions, your confidence interval after N years makes no sense as the product of two normal distributions is not normal (nor even symmetric) - I'm actually not even sure how to interpret your confidence interval after 30 years because of this fact!<p>* The line becomes impossible to see if it has no variance!<p>Feedback on the calculation:<p>* I'm guessing all these numbers are real rates, as there is no inflation?<p>* Monthly rent is really "rent realized" as you are ignoring vacancy.<p>* I'm not following how you are calculating accumulated rental earnings. It is more than the sum of historical rental earnings, but less than your rental earnings being re-invested in the market<p>* "We assume that these cover at least the cost of your monthly mortgage payment" -> including interest + principal? I'm not sure if your calculator per se relies on this assumption, but this would not hold in many markets (e.g. SF Bay Area)<p>BTW, for those who want to do a simple buy/rent trade-off: I have a google sheet here:<p><a href="https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calculator-22d0bf9bbbb5" rel="nofollow">https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul...</a>
It can be a good way to finance a vacation home that you eventually want to live in. There are other more niche cases such as student housing, corporate furnished, Airbnb, etc, that can be interesting, but you need to know the specifics of each case. For ex, in student housing, everything needs to be thought of in terms of durability and security (steel cased doors, durable surfaces). It also pays to be handy - when you turnover an apartment plan on a repaint. You can hire this at $750-$1000 or you can put on your face mask, rent a sprayer, and knock it out. We’ve been lucky not to have extreme maintainable issues but there are usually minor issues that you’d expect to see. In my view, stocks are entirely more liquid and it’s not that difficult to find high yielding companies where you don’t have the complexities of tenant relations, marketing, repairs and fixed expenses like property taxes.
I've been thinking about buying a house recently (I am in a ultra-fast growing area Nashville, TN) but not sure the risks and frankly annual returns can beat the stock market (specifically S&P $SPY). S&P average annual returns are 8%, it seems unlikely to beat that long term with real-estate.
Great visualizations and simple clean presentation. I tried to use a number of these simple tools to evaluate investment properties but they were usually too high level. I ended up building my own very detailed spreadsheet where the inputs can be tailored very specifically. I know it's not "software" in the HN since, but I made the Google Sheet available online [0] here if any one wants to use it. Note that this is a shared demo so your data will be overwritten by other users.<p>[0] <a href="https://docs.google.com/spreadsheets/d/1i6xNZiNVn53_bnibfEvKeMQi52ueFYMWFjUDUTprFqs/edit#gid=1180945299" rel="nofollow">https://docs.google.com/spreadsheets/d/1i6xNZiNVn53_bnibfEvK...</a>
The math on appreciation rate is a bit off because of how risk adds up to itself over time.<p>For example, if you assumed 3 +/- 3% appreciation, then the calculator applies that range to every single future year, whether 1 year or 20 years, e.g. 20 years later, the realized appreciation seems to be 3% +/- 3%.<p>However the normal way this is done in economics and finance is to assume independent increments of return volatility (let's say 3% per annum). This gets you:<p>- 1 year out: 3% +/- 3%<p>- 10 years out: 3% +/- 3% / sqrt(10)<p>- N years out: 3% +/- 3% / sqrt(N)<p>Intuitively, imagine if having a 'good year' were simply a coin flip, e.g. either you get 6% in a year or 0%. Over N years, the sum of your total return is a binomial distribution with standard deviation that grows with sqrt(N). Since your annualized return is approximately total / N, the standard deviation of realized annualized return scales at total / sqrt(N).<p>Probability cones should always look like sideways parabolas:<p><a href="https://sixfigureinvesting.com/wp-content/uploads/2018/11/MonteCarlo-vs-theor-simple.jpg" rel="nofollow">https://sixfigureinvesting.com/wp-content/uploads/2018/11/Mo...</a><p>More here:<p><a href="https://sixfigureinvesting.com/2018/11/predicting-price-ranges-with-historic-volatility/" rel="nofollow">https://sixfigureinvesting.com/2018/11/predicting-price-rang...</a><p>One more thing: the chart has no provision for inputing stock market volatility, which (historically) is quite a bit higher than real estate volatility. You're comparing a 'risky' bet to an assumed 7% riskless bet when stocks are also at an all-time high. The better thing to do would be to model the volatility of the stock market (historically ~15% per year), then show the distribution of (real estate return - stock market return) (with some correlation assumption).
Hey, I really like the app and have signed up. One thing I would add is multi- family units. Even better would be the concept of "house hacking" or buying a multi-family and moving into one of the units. This may just be a US thing, but this allows you to have a low down payment and cash flow and live for free. This is a pretty popular thing to do in the US, and I haven't seen any tools that account for it. I am currently doing this and use excel for all my calculations.
Also, maybe add a remodel calculator, I. E. If I do a remodel for 10,000 and the rent goes up by 500 my yoy roi is like 60%. This number goes up even more of you get a loan and use leverage.
Nice. Some questions:<p>- How are you modeling property tax payments?<p>- Would be nice to show the annual return for the investment. You have a chart, I can read it so see whether I'd do better than the market, but would be nice to show '13.4% return', vs. a dollar amount after some time period.<p>- Are you modeling tax benefits at all? Mortgage interest, property taxes, maintenance costs and depreciation all impact the net return for the investor. This would be hard to model since the tax situation changes by individual investor and local tax rates.<p>- Have you contemplated whether the investor is self-managing or hires a property manager (perhaps included in the annual 1% expenses?)
I love scrubbing calculators like these that help make complex decision making easier. A year ago I was interested in comparing buying vs renting, the other demo calculator on the Causal app homepage. If anyone is interested in playing around with real code to produce similar charts here is the source: <a href="https://github.com/radekstepan/buy-vs-rent" rel="nofollow">https://github.com/radekstepan/buy-vs-rent</a><p>It's Toronto/Ontario/Canada specific, but you can plug in your own taxes, fees and estimates.
Buying a rental property a very simple form of startup for the unskilled, requiring a very high startup cost for a small return.<p>I bought a house one year ago, spent $200k and then another $50k in repairs, and now I'm renting it at $1500 a month ($1200 profit after property taxes and miscellaneous)<p>On the other hand, I also started a new company about a year ago, spent $0 upfront investment, $50 in monthly hosting costs, and it is earning a monthly profit of $2000 currently.
I've been looking on Redfin for potential investment properties in SF but I cannot find a single home on the market where rent would remotely cover the mortgage.
Having a higher end ($350+/night) house on AirBnB was pretty fun. The higher price plus AirBnB screening kept out the rifraf so we had very few problems.
Agree with much of the commentary here. Investment returns on real estate ownership (whether as primary residence or as income property) often ignore externalities and the time investment by the owner. Having the freedom to not worry about or arrange resolution of leaking toilets, gophers in the lawn, broken fences, etc is a great return on non-ownership!
Here's the most complete buy vs. rent calculator that I have come across:<p><a href="https://michaelbluejay.com/house/rentvsbuy.html" rel="nofollow">https://michaelbluejay.com/house/rentvsbuy.html</a><p>His other articles are also often worth reading.
I suggest considering REIT stocks that actually own real estate instead. They push through 90% of their income as dividends and enjoy a tax shelter because of it. It’s a liquid and passive proxy for real estate investing.<p>Also, the RE market is just lousy for buyers right now all around.
Four percent and higher residential real estate appreciation over that long of a period without massive inflation is mind boggling. I don't think I make that investment just because if it is successful, the inequality in society at the end of the loan is soul crushing.
It does not seem to take either inflation or lost growth on the down-payment. These two factors have a huge impact on evaluating property against other investments. It would be nice to factor in an interest-only mortgage rather than a repayment mortgage.
See also: <a href="https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html" rel="nofollow">https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...</a>
Note that these models are created in an era of great inequality. You can expect that if at any point a correction is made to this disparity these numbers will also be effected.
just take the loan out of the equation. don't borrow money trying to make money. that's like having a margin account with etrade! You don't pay interest on a loan and use the money from that loan to buy stocks do you? Just saying, real estate is a fine thing to buy, with all cash! hashtag <a href="https://en.m.wikipedia.org/wiki/Dave_Ramsey" rel="nofollow">https://en.m.wikipedia.org/wiki/Dave_Ramsey</a>