Sigh - I give up on my friend...

[NsXMas]

A good friend of mine has rented since he got out of college over 10 years ago.

He has an incredibly good credit score of well over 800, and has had stable income greater than the average household income in the US.

I've nagged him to buy a house, because of what a great financial move it would be.

I finally thought I had him convinced, but then I got this email from him:

I can tell you that I am not ready yet, and don't want to cause any hardship or delay on anyone you know. Besides, this house is probably too much house for me anyway. I'm not looking for something in this price range. And roommates -- jeez, I'm 32, I don't want room-mates.
I was trying to tell you this before on the phone, but you just seem so
gung-ho - you're a hard man to say no to, could be why you're a good
salesperson. If you're looking for the investment and all, I think you
should go at this on your own. I'm still not dead-set on a house right
now. I'm so close to finally being "debt free" and would like to be like
this for a while.

He keeps coming up with excuses as to why he doesn't want to buy a house. Since he's single, he doesn't want to buy a big house. But he doesn't want a small house either, because the re-sale value may not be as nice.

I've committed to him that I'd finance a bigger house with him, but even with that backing he's still gun shy about buying a house.

Sigh - I guess you can lead a blind elephant to water, but you can't make it drink... too bad.

Amazing how someone can be so scared to buy a house. I don't remember being so scared about buying a house during my first time, even though housing prices had not risen.

The act of buying my house was almost dumb luck, as my first home doubled in value as I owned it. My buddy doesn't realize what he's missing out by renting versus owning his own home, with no risk - since I'd be helping with the financing and anything else he'd need.

Opportunity cost of house not owned - $50-100,000 gain on real estate value
cost of rent down the toilet - $600 X 12 months per year X 10 years = $72,000 gone
Amount of tax deduction not taken advantage of from owning a new house = $$$$$???

Sooo sad.

[/rant off]

 

[awsomr1]

I've committed to him that I'd finance a bigger house with him, but even with that backing he's still gun shy about buying a house.

Sigh - I guess you can lead a blind elephant to water, but you can't make it drink... too bad.

[/rant off]

Would you like to back me??? :tongue: :tongue: :tongue:

 

[NsXMas]

Would you like to back me??? :tongue: :tongue: :tongue:

Sure!! :biggrin:

 

[burbel]

From your post I'd guess you're from the West Coast or another real-estate hot-spot. I've done the numbers, and a tax deduction on the interest paid never amounts to more than I'm paying on interest in the first place. For a place that won't see high rises in property values (significantly above inflation), I'd be very hesitant to buy a house as an investment. Now, if I was going to rent it out to someone, sure, good idea, but a house you live in is a liability, not an investment, IMO.

 

[NsXMas]

From your post I'd guess you're from the West Coast or another real-estate hot-spot. I've done the numbers, and a tax deduction on the interest paid never amounts to more than I'm paying on interest in the first place. For a place that won't see high rises in property values (significantly above inflation), I'd be very hesitant to buy a house as an investment. Now, if I was going to rent it out to someone, sure, good idea, but a house you live in is a liability, not an investment, IMO.

My house I'm living in has risen in value about $100k. I don't see that as a liability. In fact, the increase in the equity allows me to draw on it should I desire to put that money to work for me.

And it's all but paid for. Which means no rent needs to be paid, ever... It sure looks like an investment to me...

Rich dad says "homes are not assets". Corporations count their buildings as assets, so I think the view that your house is not an asset/investment is a bit off.

 

[Carguy!]

I can think of a lot of reasons he might not want to purchase a house and all of them are valid in my opinion.

Personally I would NEVER purchase a house with anyone who isn't married to me or a very close relation. I have seen lifelong friendships end because of this, I once purchased a used police car at an auction with a friend of mine. This caused a horrible strain on our relationship over silly things like who put more gas in or who had use of the car more.

The next reason is houses don't always go up, there are plenty of people who have lost a lot in real estate.

Home ownership means a lot more responsibility and maintenance then renting.

It is much easier to move for a job or romance if you don't own a house.

If he does find the right significant other and wants to get married, most spouses would like some input as to what type / size / location / school system the house is.

Tax rates are on the rise, this usually means a slow down in real estate. People that believe these explosive markets can't collapse had better look at some history. I have never seen banks more willing to let someone take 100% of the equity out of their house, if the market starts a down turn this could be devastating.

Don't get me wrong I think there are a lot of benefits to home ownership, but it isn't right for everyone at every time in their life.

It sounds like your buddy is making some very good choices by trying to be debt free, remember even though the interest on a primary residence is tax deductable you are only able to deduct the money you already gave to a financial institution.

 

[hlweyl]

I wouldn't push him at all to buy a house. Maybe he's just not ready or he's knows something you don't.

Just be a friend and support him either way. If it's an investment you are looking for, why don't you invest in a property without him, that's safer IMO.

good luck

 

[NsXMas]

I wouldn't push him at all to buy a house. Maybe he's just not ready or he's knows something you don't.

Just be a friend and support him either way. If it's an investment you are looking for, why don't you invest in a property without him, that's safer IMO.

good luck

I've known this guy since way way back, and we've supported each other through many phases of life.

I have no problem investing in other properties, but I thought I'd help him do the one thing that has been one of the smartest things I've ever done.

I know what it's like to be single and hesitant to buy a house. I bought a house for a stupid reason when I was single - just so I could have a garage to house my new SUV. I hoped I could be the catalyst for him to do something equally good for his future.

But you're right, it's his decision, and there's no way anyone's going to motivate him otherwise...

 

[nsxtasy]

I agree with Carguy!. And keep in mind, neither of us is saying that home ownership is a BAD idea, only that there are often legitimate reasons for not doing so. I don't think it makes sense for everybody.

Carguy! mentioned the possibility that real estate values can go down. This is a serious consideration. Not that they necessarily will... but real estate is not a guaranteed investment. There are indeed some markets (e.g. Southern California in the 1990s) where values went down for a while. It might happen again, it might not. Furthermore, there are transaction costs involved in buying and selling a house - realtor fees, transfer taxes, mortgage fees, etc - that can be a significant factor in evaluating it economically. From a financial standpoint, I think a house is an excellent investment but primarily if you expect to be living in it for a long period of time, 5-10 years or more. If you think you might need to move within a year or two (for whatever reason), then these risks are more significant, and you may not make anything at all on your investment. (Note that there are also tax consequences, e.g. if you already own a house and you're moving, you may need to buy another one to avoid getting taxed on the capital gain or using your once-in-a-lifetime exemption.)

One other point - people claim that when you rent, you are "throwing away money", whereas when you buy, you are investing your payments. That is at best an oversimplification, and at worst a fallacy. With rent as well as with a mortgage, most of what you are paying is for interest and property taxes on the value of the home. If you are renting, you pay a single rent payment to the landlord, who then pays interest and property taxes; if you own your home, you make these payments yourself. The after-tax costs* of rent and interest and taxes are EXPENSES, not INVESTMENTS. They are gone when you spend them, never to be seen again. 90+ percent of a typical mortgage payment pays for interest except towards the end of the mortgage, and the amount going to principal is usually very small. (If you're renting, it would be wise to pay a similar amount to the principal into a savings/investment account to be used for a downpayment on a home some day.)

*Note - There IS a tax advantage to home ownership, in that you can deduct mortgage interest and property taxes from your income taxes. (Although in many cases part of the amount of this deduction simply substitutes an itemized deduction for what you would already be able to take as a standard deduction.) So in comparing the costs of home ownership vs home renting, it makes sense to look at the AFTER-TAX costs, i.e. after adjusting the costs of interest and taxes by the amount that their associated deductions lower your taxes.

Again, like Carguy!, I am not saying that home ownership is a bad idea; buying a home CAN be the best investment you ever make in your life. It's just a lot more complicated than a simple "ownership is good" concept would imply. There are risks and advantages and disadvantages, some of which may be more relevant to one person's situation than another.

 

[NsXMas]

I agree with you, Ken, but I have guaranteed my friend that I would pay for all transaction fees related with the house purchase and sale, should he desire to sell it. There really is no downside for him to buy a house, as I am taking all the risk... Just a move for him, and he pays the same amount of money, to have a place with a garage...

I am trying to make this as risk-free and painless as possible for my buddy.

 

[NsXMas]

... (Note that there are also tax consequences, e.g. if you already own a house and you're moving, you may need to buy another one to avoid getting taxed on the capital gain or using your once-in-a-lifetime exemption.)
....

By the way, the tax rules changed in 1997. You can no longer roll over the sales price of the old house to the new house. The once-in-a-lifetime exemption has been eliminated. People can now buy and sell homes every 2 years (if used as a primary residence) tax free, up to $250k per person, $500k per married couple.

See this article for good info:

http://www.bankrate.com/brm/news/real-estate/20041018a1.asp

Wow, for once I get to correct Ken!!! :biggrin: (we still love ya, Ken!!)

 

[zomby woof]

two good reasons:

it's his money, not yours.

it's his business, not yours.

i'm sure your intent is pure, and you've obviously made your points to your friend. now leave him alone.

 

[NsXMas]

two good reasons:

it's his money, not yours.

it's his business, not yours.

i'm sure your intent is pure, and you've obviously made your points to your friend. now leave him alone.

Hence the title of this thread "I've given up on my friend". :wink:

 

[ChopsJazz]

And he says he's "almost debt free" now. Thats a nice goal for anyone. I wish I was debt free!

You don't have to give up on him, just let him live his financial life as he wants.

 

[supra2nv]

I am a strong believer in home ownership vs. renting (potential equity upside, tax advantages, pride), but keep in mind we are likely in a rising interest rate environment. As such, home prices will act like bonds do. i.e. there is an inverse relationship between interest and principal.

Other factors are involved as well (i.e. general econonomic environment, employment, supply of homes for sale), but still not a compelling time to buy a house. I have been noodling on buying another house for a few weeks now.

Ideal time to buy is in a high rate environment at a low principal and capitalize on the low rate via a refi when the time comes. Best of both worlds then ==> low principal, low interest.

Easier to do in theory than in practice. Timing is everything haha!

Jack

 

[NsXMas]

I like buying a house, if you can afford it, because no one can raise the rent on you.

Being a renter means your monthly payments will go up, guaranteed.

 

[MJK]

I am a strong believer in home ownership vs. renting (potential equity upside, tax advantages, pride), but keep in mind we are likely in a rising interest rate environment. As such, home prices will act like bonds do. i.e. there is an inverse relationship between interest and principal.
<snip>
Ideal time to buy is in a high rate environment at a low principal and capitalize on the low rate via a refi when the time comes. Best of both worlds then ==> low principal, low interest.

I agree with this completely.

I also agree that home ownership is generally the correct long term strategy, but IMO renting is sometimes a very acceptable short term solution. For example:

If you are planning on moving soon - any appreciation would be eaten by realtor fees leaving your money tied up for no reason.

If you are in a higher cost of living area and prefer a lower risk - rising rates present more of a risk in higher value areas because a larger portion of your net assets are tied up in the property. Yes, real estate values have done very well in the past couple years, but this type of property value growth cannot continue with rising interest rates. Its not too tough to get yourself into a bind in a higher cost of living area. Example: you extend yourself to buy a nice house in a low interest rate enviornment. Rates rise, property values decline and you are upside down on your house. Values will return, but a job opportunity arises across country. You either have to eat the property value decline (& realtor fees) or miss the opportunity. Your cash flow during that time is also wasted.

If you can rent modestly and redirect the rest of that cash flow to a higher return investment. (investing in a business, stock market, paying off high interest debt). Overall, this can present less of a risk (you can only lose what you put in) and a higher return.

IMO, renting can be a very acceptable short term solution and is even more so in an enviornment of rising interest rates.

 

[Briank]

You might try to steer you friend into a condo as kind of a half way house, ownership without all of the responsibilities.

 

[steveny]

I think real-estate is one of the better investments someone can make. At one time I had close to 600 rental units. In 2001 I sold everything to take it easy for a while, maybe for the rest of my life.

Well starting last summer I started buying up property again. It is in my blood. I love to fix up a crappy place and make it nice for someone to buy or rent. I enjoy putting deals together but the best part is the admiration I receive from the people in the neighborhoods I improve upon.

Originally I didn't want to expand as big as I previously was but I am buying at a rapid rate of 2 - 5 houses per month. It is starting to get busy again which is the part I disliked the first time around. I think this time I will hire a office manager to take care of paper pushing, but I find it hard to get someone who has the same goals in mind as I do. I am 110% customer oriented and want an office manager who is the same. Currently I have my G/F doing it but she has her own career to take care of. I have tried to partner up with friends but that hasn't worked out yet either.

As far as your friend goes I have a similar situation with the maintenance manager who handled things for me the first time around. He and his growing family, two children now, have lived in the same two bedroom apartment for the last 17 years. The complex he lives in is one of the properties that was sold in the back in 01. I have continually offered him several house that fit his needs at no money down, I pay closing costs and a 5% note for 30 years. I am blown away why he wants to continue to rent and throw his money down the drain.

 

[steveny]

I like buying a house, if you can afford it, because no one can raise the rent on you.

Being a renter means your monthly payments will go up, guaranteed.

IMO this is the best reason to buy Vs. renting. I know of several people who have mortage payments on notes that were taken out in the early 80's and those payments are 100 dollars or less. Back when those notes were written average rents were 100 a month now average rents are 800-1000 a month.
It is a no brainer IMO.

Also I would never move for a job or romance. Where I live is where I will always live.

 

[WeakestLink]

IMO.....

I don't believe that buying is always better than renting. Especially when it involves having multiple buyers involved (other than spouses).

Over the LONG term, real estate prices will likely always increase due to inflation and population growth. But, unless you know you are going to live there forever, then there is no assurance that the value when you need to sell will be higher than when you bought. There is nothing worse then trying to negotiate with a friend to get out of an investment even when the investment has gone up (as I have unfortunately experienced) What happens when one of you has:

a planned or unplanned job change?
forced relocation?
marriage (or divorce)?
a change in tax status?
unexpected family emergency?
financial troubles?

Are buy of you prepared to buy out the other one? Even at a loss? Can both of you individually afford to buy the other one out on your own? If you are, why not each just buy your own place?

Looking at the past 7 years, one can easily make the false conclusion that prices just go up. Those who ignore history tend to repeat it. Look at the real estate market in the early 80s when it was HOT (like today) to then late 80s when the market tanked. Why did so many people buy $900,000 houses (thinking they were stupid not to buy such a "sure bet"), have to sell them for $600,000 two years later to prevent further loss?

Also, it's not always "cheaper" to own. In a flat market, they may be true. But rents nationwide (though there are some exceptions) have been dropping b/c everyone is in a buying frenzy. In fact, many friends of mine are thinking about selling their houses to cash out, and renting until prices come down again. Take this condo as an example. Four years ago, $2000 in rent would have been easy to get. (it was worth about $300k so buying may have been slightly better than renting) But today, that same condo is worth about $450k but the rents have gone down to around $1800. At $450k, even with 20% down, the PITI would be about $2600 plus the $200 condo fee. The after tax payment is close to $2100. Would you rather pay $1800 or $2100? Even if they were the same, then you are basically tying up $90k to have the same net payment. And you still have to deal with repairs, maintenance etc. that you would not have if you were renting. This same situation also applies to SFHs and THs as well...so it's not just a condo problem.

I think people agree that when rates go up, prices come down. Would you rather buy at a lower price with a higher rate....or buy at a higher price with a lower rate? I would rather do the latter b/c I can always refinance when rates go back down. And if I need to sell, I'll be less upside down.

Conclusion: I believe that GENERALLY SPEAKING, it is better to buy than to rent. But you have to look at each individual situation. Stability, likelihood of changing jobs, going back to school, getting married etc. are all major points of consideration. Owning real estate makes one very inflexible in life decisions. I wouldn't want to be the friend who pressured another friend into buying anything (no matter how good of a decision I thought it was) knowing that there is a risk that my friend could get burned on the investment.

IMO

 

[NsXMas]

...As far as your friend goes I have a similar situation with the maintenance manager who handled things for me the first time around. He and his growing family, two children now, have lived in the same two bedroom apartment for the last 17 years. The complex he lives in is one of the properties that was sold in the back in 01. I have continually offered him several house that fit his needs at no money down, I pay closing costs and a 5% note for 30 years. I am blown away why he wants to continue to rent and throw his money down the drain.

Yes, it boggles the mind, doesn't it???

Here is the difference between people who like to be financially free, and those who actually take the action and do it.

Some people just can't make the leap, no matter if it's virtually risk free.

 

[NsXMas]

...Are buy of you prepared to buy out the other one? Even at a loss? Can both of you individually afford to buy the other one out on your own? If you are, why not each just buy your own place?
...

In answer to your question, yes, I have assured my friend I have no problem taking all the risk, and can buy him out should he wish to not own anymore.

Look, the main reason I am doing this is to be a catalyst for him to become a homeowner, to experience the benefits of home ownership as I have. Sure if the housing prices go up, I will benefit as well, but that is not the main intent.

There will always be excuses not to buy a house. Looking at your post, I can spot a dozen excuses not to buy a house.

Buying a house, especially with the tax advantages that uncle sam gives us, is one of the corner stones of becoming financially independent. So long as you have to pay for a place to rent, and that rent is variable, you will never truly be financially free.

Yes, interest rates may go up, and drive down house prices. Yes, house prices may fall, causing some short term loss in equity.

But you know what, nothing in life is 100% risk free, nothing, except death and taxes. Buying a house, as a primary residence, is one of those things that the government has made nearly as tempting as anything else out there. I am taking the additional risk away by agreeing to front certain risks.

This has nothing to do with whether house values will rise or fall, it's all about a psychological mindset that is scared and looks at all the negatives, on behalf of my friend. I have given up on him, and will let him explore his own future however he sees fit. I can only give advice and try to help, and if he ignores it, too bad for him.

I would like to know - are there anyone here, who is financially well off, who do not own a single home, and rent from others? Except for super expensive places such as New York and California, I would not expect anyone who has financial independence choose renting versus buying a house for his/her family.

 

[WeakestLink]

I'm not sure what you consider financially well off but a good friend of mine lived with his parents until he was 35 or so. Rather than making a $200k down payment on a house, he invested in his software business. My best guess is that his $200k investment in his company is worth over $20m. He just had more important places to put his money besides a house. He has since reluctantly bought a house though he didn't buy anywhere close to the price range where he could have afforded.

Another friend of mine is the CEO of a midsize telecom company (making roughly $500k/yr) and he rents. He is renting a house on the water in Annapolis for $1500/month. If he were to buy a similar house, he would probably have to pay $900k+.

Don't disagree with the arguments made for buying. But there are other points of consideration. Two cents....actually I guess that's four cents now.
=)

 

[W]

Homeownership isn't for everyone all the time.