If you had $10,000 laying around...

[rondocap]

Originally Posted by Perfectlap

^It's not just mutual fund managers, it's every kind of investment manager. I've seen studies that hedge funds (as a class) keep 98% of the profits they make with their investors money.
And that's because so few can beat the S&P over any significant period of time and simply shut down the fund. But they become fabulously wealthy collecting that cut of your initial investment win or lose. And private equity fund managers have the best deal of all: they get to keep that management fee even if they decide not to allocate a dime of your money towards any PE investment, getting rich for doing nothing! And if they lose any money they can simply walk away from any new debt they created (and used to pay themselves big salaries) thanks to the bankruptcy laws and the rule of OPP (other people's money).

To the OP, when people say "10K is not a lot of money" think abou this.
in 1965 $1,355 would be the equivalent of $10K today. Had you invested that $1,355 in the S&P, today you'd have ~$51K. Do you know how many seniors today can not write a check for $600? USA Today did a story on just that and the number is somewhere in the high 90% range (staggering numbers of seniors still living pay check to pay check after 65 -- I blame the costly pipe dream of home ownership).


Had you invested that $1,355 in Berkshire?

$14,000,000.

^ Timing is everything... but I'll settle for $51K if that's all I can get.

Rarely did a huge pile of money not start as a very very small one. If you wait until you have "a lot of money" to start investing in your future you're going to miss one boat after another. You'll never have good timing if you're on the sidelines.

I agree with you on The home ownership pipedream. What made you to reach that conclusion? I'm just curious, because I kind of felt the same way. I'd like to hear more about it.

[Topless]

I completely disagree with PL re: home ownership. It is only a pipedream if you are looking for short term gain or if your eyes are bigger than your wallet. Long term, real estate is a win and should be in the mix along with stocks for a true diversified investment strategy IMHO.

Warren Buffett agrees:
Warren Buffett - Investing in U.S. Real Estate - YouTube

http://www.bloomberg.com/news/2011-02-28/buffett-says-buying-his-home-for-31-500-was-third-best-investment-he-made.html

[BruceH]

I have to agree with Topless. You need a place to live, but you don't need 4000+ square feet to heat/cool pay taxes on, maintain. Most people spend way too much on their homes, that is the problem, not home ownership. Having a reasonably sized house allows you to pay it off before retirement, then, you will be able to write a check for a lot more than $600. You will be living in your house for much less than an apartment. Also, the reasonable house costs less to maintain, ie, taxes, utilities. And $10,000 is not a small amount of money when the time value of money is factored in.

[Perfectlap]

Originally Posted by rondocap

I agree with you on The home ownership pipedream. What made you to reach that conclusion? I'm just curious, because I kind of felt the same way. I'd like to hear more about it.

Because every investment has two sides. Performance and cost. Some think the former is the only thing to consider. Big mistake.

The real estate industry love to run commericals with Tom Selleck voice overs telling you that a home purchase is not an investment, it's a way of life. That's total BS. I can barely watch those things. Many do make a comfortable living and can do the double: A) paying a mortgage with interest, property taxes, maintenance and all the other mandatory costs that go above an beyond the cost to rent, AND B) put away enough into a retirment account to live off for 20 years after the age of 65-67.

I can tell you right now the average American can not buy the home they feel has enough square footage, amenities and quality of schools without taking on more mortgage than their retirement planning can ever allow. Since 1980 the securitization of mortgages has made it far too easy for people to borrow money they have no business borrowing if they aren't planning on working until they drop dead at 75. The bank approves a young couple for X amount of loan and then they go out and see how much home they can buy for X without ever sitting down with a financial planner or investment adviser to see what they should be spending in the first place. Is it a wonder why the average American has almost nothing saved? This spend now plan later over-leveraging raises real estate prices to unreachable levels. The municipalities reward these poor planners with higher property taxes because the only people who can qualify for higher and higher mortgages are those with rising incomes -- precisely the targets of municipal and state tax authorities. So your home went up 10% this year? Great, that's peformance now what about the rise in cost to hold that investment ??

If you live in a state with low taxes different story, but generally, that's not where real estate prices are rising because wages tend to be flat or falling in those states. It's a catch 22. And of course this doesn't even address the fact that you'll be paying 15 years of interest before any of the money even goes into the loan itself. So your home has to go up that much more to compensate for the performance you missed out on in other asset classes, namely the S&P 500 which the average investor can't time, they have to be in it without interruption all while they are working. So that mortgage interest cost you more than you think.

Real estate is simply an asset class that carries probably the highest cost to hold -- which means the return is compromised. If you are properly diversified in all asset classes then you can't possibly be putting half your income into your home like so many do. Much like going too deep on stocks, going too deep into a mortgage as % of income, leaves your net worth extremely vulnerable to the whims of the real estate industry/TBTF banks who may decide to dump so much inventory into a state like FL for instance, such that houses will never be worth what many paid or they'll have to wait 15-20 years until their back at BEP. While in states less prone to bubble to bust cycles.... from MD up to Maine where property taxes are reaching absurd levels, the politicians will slowly be draining your net-worth of the equity you were building to the point where you will not be able to afford the taxes (and other costs) on the house you finally paid off!

If you don't have kids, don't enter the real estate market if it interferes with your retirment savings plan.
If everyone followed this advice real estate prices would fall dramatically in all but the high income/high net worth zip codes. That in itself should tell you the disaster that we are setting up for the future.

[ProjectM96]

Originally Posted by particlewave

What would you do with it?

$10k isn't much these days, but I'm looking to do something aside from blow it on crap that I don't need. Was thinking of investing, but haven't the first clue where to start.

So, $10,000 that you don't need(assume that all bills, etc. are paid)...what comes to mind?

I know this is off topic, but who cares?

1. Part of downpayment on an investment property like a condomium. Little maintenance required because condo/HOA fees takes care of most of it. Rent it out to someone.

2. Start your own business doing something you love part time. $10,000 is not much, but it will get you started.

3. Invest in your happiness and spend it on a hobby. Racing, collecting things, etc.

4. Invest in your house. Do some renovations that improve the value of your home.

[Topless]

PL, here is the fallacy:
"paying a mortgage with interest, property taxes, maintenance and all the other mandatory costs that go above an beyond the cost to rent"

Long term over the life of a 30 yr mortgage, these costs are always lower than the cost to rent a similar living space. This is an important distinction often overlooked in investment planning. Buffett agrees.

[Perfectlap]

Originally Posted by BruceH

I have to agree with Topless. You need a place to live, but you don't need 4000+ square feet to heat/cool pay taxes on, maintain. Most people spend way too much on their homes, that is the problem, not home ownership. Having a reasonably sized house allows you to pay it off before retirement, then, you will be able to write a check for a lot more than $600. You will be living in your house for much less than an apartment. Also, the reasonable house costs less to maintain, ie, taxes, utilities. And $10,000 is not a small amount of money when the time value of money is factored in.

Needing a place to live in not a rationale to enter into a RE investment. That's a rationale for convenience. Owning will always be more convenient, no debate.
The question is how much are you giving up for that convenience? To a limited U.S. average income, it's a luxury that leaves them retiring on a prayer.

And you really don't have to buy a lavish home to over-leverage yourself.
It's a basic fact that incomes are not rising and job creation has been falling for for decades (yes while corporate earnings and the stock market hit new all time highs). They will have LESS money to invest in their retirements once that mortgage check is written each month. In other words it's eating up a larger and larger % of their income as time goes by because home ownership carries other costs that are not fixed like their 30 year mortgage. Neither are their living expenses fixed either. Rather than cutting back on what they spend on housing they cut back on what they spend in their IRA/401K/savings. The return on the average real estate investment after costs are weighed do not make up for this lost income in their retirement accounts.

[Perfectlap]

Originally Posted by Topless

PL, here is the fallacy:
"paying a mortgage with interest, property taxes, maintenance and all the other mandatory costs that go above an beyond the cost to rent"

Long term over the life of a 30 yr mortgage, these costs are always lower than the cost to rent a similar living space. This is an important distinction often overlooked in investment planning. Buffett agrees.

who said you have to be in the same rental for 30 years? and who has ever actually lived in the same rental for 30 years?

Putting a cap on your housing expenses, something a primary residence will never allow you to do as mortgage costs are not, nor will ever be, the only ownership cost, basically means that the renter/worker can simply give up convenience/amenities and move to an area where rent is lower or stable. Most importantly this allows the middle class worker to keep their retirement contributions untouched.
Mobility means flexibility in retirement planning. A home owner on a fixed income, without outside sources of passive income, on the other hand is giving up tomorrow to live well or conveniently today. Disaster. Particularly when you consider the fortunes that are being made in the oil/gas industry, health care/pharma/biotech and technology software/services/hardware that these middle income home owners aren't participating in as investors because they have to meet each uptick in the costs to own (aka owe).

Also, we just had a nearly seven year bubble of house-building, and after trillions in intervention by the Fed and Treasury house prices are still struggling five years after this bubble burst. That's a ton of inventory that renters can choose from, even if rent goes up, you can bet that the cost to own goes up that much more if that zip code also has rising incomes.

Basically you have to be extremely careful in doing some very long-term calculations of where you are buying and the expected ownership costs of buying into that zip code. And that's after you've calculated how much your income you can actually spend on the home purchase in the first place. If most people are not doing any of these calculations and simply out-bidding each other for homes (the very nature of RE) then these bidders have basically made it impossible for you not to over pay.

[BruceH]

I did not call home ownership an investment. My mortgage, taxes and insurance on my 2300 sq ft house equals the cost of a nice, not luxiourous, 2-3 bedroom apartment. I make my payments and by the time I retire, my house will have value, and then I will only be paying taxes, insurance and up keep for a whole lot less than a 1 bedroom apartment. As I get older, I can sell the house and use the proceeds to live out my final years where I want, wether it is a retirement community or what ever. My point was, home ownership is a good deal IF you don't overspend on a large, asset eating abode. If your income only allows buying a one bedroom condo, then that is what you can afford, and I still say, that is a better way to go than renting your entire life. Like I said, my home costs me monthly what a 2 bedroom apartment would cost but I have much more, including a two car garage to park my 986 in

[tortoise944]

I had this same dilemma a few months ago.

Background:
My wife and I both budget well, are saving for retirements, kids college, have a rainy day fund >6 months.

The company I work for ended up giving out much bigger bonuses this year, so we decided that we should replace the 986 we sold 3+ years ago.

Turns out, with ultra low interest rates and great credit, many banks are almost giving money away (~1% interest on new car loan), so we ended up getting a new 981 S.

Summary: If you have a budget with savings already, extra money is good for fun things.

[Perfectlap]

Originally Posted by BruceH

I make my payments and by the time I retire, my house will have value, and then I will only be paying taxes, insurance and up keep for a whole lot less than a 1 bedroom apartment. As I get older, I can sell the house and use the proceeds to live out my final years where I want

most are making that same bet. That the % of their income that goes into their home (above the cost to rent) will perform better going to the bank each month, than going into the investment account(s). And they're making that bet based on a real estate market that once existed but is no longer the case. Today equity-killing ownership costs are much higher, while the only thing that drives up real estate prices, rising incomes -- in a sustainable way (not a bank-fueled credit bubble) -- will not be there like it once was. A new math is required and most home buyers are still using the old math.

Also, if you look at the performance of real eastate vs most asset classes it contradicts that very bet over most time periods. Now subtract the costs involved in holding investments in each asset class from the performance and the rationale for shoveling that extra income into the bank's TBTF grubby mitts, for 30 years, becomes even more perplexing.

My guess: rent, invest the income you are saving in not working for the bank and the local tax authorities (a home owner's second job they don't know they have) into different asset classes, keep your investments out of actively managed mutual funds or all other types of managed funds and if you must own actual physcial real estate in your portfolio, do so with income properties in low property tax zip codes so that you can cut the bank out of the partnership ASAP and start collecting that rental income (or buy a primary residence that is also a multi-unit income property). Over the course of 30 years, you'll be able to buy twice the home you'll be living in now with a four car garage and you can write the property tax, utility, HOA and insurance checks without even looking at the amounts....because you'll be a millionaire.

[Porsche Chick]

Oh, lord.

I belong to a couple of real estate forums and the "rent versus buy" threads go on forever.

Pro-renters tend to use the "you could have made more in stocks" idea. Meanwhile, as we said at the top of this thread, most average people do NOT make more in stocks. They buy too high, sell too low, and their average return is very puny.

Pro-buyers tend to stick with the "in time, buying will be cheaper than renting". But I recently checked the value of the first house we bought 20+ years ago for $67K, and it's now worth $100K. If we had been paying a mortgage (at those rates) all this time, we would be into it for about $120K. Plus repairs.

So. . .

The sucker part of home ownership is the total of 30 years of mortgage costs (usually 2.5-3 times the original purchase price), holding on when the "fashion" of a particular house style or neighborhood fades, and choosing properties with high upkeep.

The sucker part of renting is there is no hope of any type of return, your neighbors are transient, and rental rates tend to only go up.

Point is, there are tradeoffs with both.

[TeamOxford]

Our house is paid for.

Don't know if it's an investment or not, but I can tell you that it feels wonderful not to have to write out a mortgage check each month.

We paid ours off early. In the final analysis, we paid 1.5 times the purchase price of the house. It is now worth that much.

Like I said, it feels DAMN good.

Gotta call my buddy Warren now..............

TO

[Perfectlap]

Originally Posted by Topless

I completely disagree with PL re: home ownership. It is only a pipedream if you are looking for short term gain or if your eyes are bigger than your wallet. Long term, real estate is a win and should be in the mix along with stocks for a true diversified investment strategy IMHO.

Warren Buffett agrees:Warren Buffett - Investing in U.S. Real Estate - YouTube

Buffett Says Buying His Home for $31,500 Was Third-Best Investment He Made - Bloomberg

If Warren Buffett put the $31K he used to buy his first home into shares of his own company instead, he'd have $42 million today... That house is not worth $42 million...

But that's why buying the home was such a wonderful investment. $42 million is 0.069% of his $60 billion net-worth. He could afford not to chase a better return elsewhere.

[Perfectlap]

Originally Posted by Porsche Chick

Oh, lord.

I belong to a couple of real estate forums and the "rent versus buy" threads go on forever.

Pro-renters tend to use the "you could have made more in stocks" idea. Meanwhile, as we said at the top of this thread, most average people do NOT make more in stocks. They buy too high, sell too low, and their average return is very puny.

Pro-buyers tend to stick with the "in time, buying will be cheaper than renting". But I recently checked the value of the first house we bought 20+ years ago for $67K, and it's now worth $100K. If we had been paying a mortgage (at those rates) all this time, we would be into it for about $120K. Plus repairs.

So. . .

The sucker part of home ownership is the total of 30 years of mortgage costs (usually 2.5-3 times the original purchase price), holding on when the "fashion" of a particular house style or neighborhood fades, and choosing properties with high upkeep.

The sucker part of renting is there is no hope of any type of return, your neighbors are transient, and rental rates tend to only go up.

Point is, there are tradeoffs with both.

I agree a poorly informed investor and the stock market are a disastrous mix.

Poorly informed investors are the life blood of the real estate industry and banks.

The average worker is first fleeced by the bank holding their mortgage and the actively-managed mutual fund industry picks off what's left. Both fleecings can be avoided, the latter easily, the former a bit trickier but doable.

[Topless]

Originally Posted by Perfectlap

If Warren Buffett put the $31K he used to buy his first home into shares of his own company instead, he'd have $42 million today... That house is not worth $42 million...

Another fallacious strawman argument PL. He has to live somewhere and the total costs associated with owning his home were lower over time than the total costs associated with renting an equivalent property over the same period. This freed up more cash to invest wisely in Berkshire.

So unless your mom is willing to take care of your housing by giving your old room back, buying beats renting long term. Renting beats buying short term. It really is that simple. Only the time window changes based on market fluctuations.

[stephen wilson]

Also, the odds of an investor picking a stock with that kind or return, except in hindsite, is about nil.

[Perfectlap]

Originally Posted by Topless

Another fallacious strawman argument PL. He has to live somewhere and the total costs associated with owning his home were lower over time than the total costs associated with renting an equivalent property over the same period. This freed up more cash to invest wisely in Berkshire.
.

...an equivalent property. That's right. There is no rule that says you can only rent the equivalent property you intend to buy. I'm not sure why folks in the rent vs. buy debate always frame the comparison in this way, 'equivalent property' is the only situation where costs are lower. There is such a thing called down-sizing: In all other situations you can rent a dwelling that is 2/3's the cost of the home you intend to purchase. And often, that's still renting a much bigger property than the one you would be living in as a home ower err I mean home owner, usually when the rental owner has long paid off the property or simply inherited it -- they aren't passing down all the costs straight to the renter. Or in other more recent cases, the rental owner purchased a foreclosure, paid it off in barely 10 years (or less) and can charge below market to secure a good, reliable, well-employed tennant.

Also, the total costs to rent was indeed higher in the long term for Mr. Buffett.
Now what about the return Mr. Buffett would have made had he simply rented a less-expensive-to-live-in property and invested the savings over 30 years into the S&P if not Berkshire? Since '65 he would have made 38X's as much with that savings in the S&P or 10,300x's as much in Berkshire. The point is what you saved on renting in being a home owner (and only in the 'equivalent home context') has cost you dearly as saver/investor in that time horizon. Home ownership forces too many to divert far too much of their income into their bank's coffers and not into their own net-worth. You will will always have more time under the belts of your investments if you rent because you'll have more wiggle room after expenses. And time is the the crucial make or break for maximum performance in most asset classes.

[Perfectlap]

Originally Posted by stephen wilson

Also, the odds of an investor picking a stock with that kind or return, except in hindsite, is about nil.

Agreed. On matching Berkshire.... But I used Berkshire because it just happens to be his company! Even if Buffett invested in a simple index fund he's still up massively since that home purchase was made. And that's even with a bear market that lasted well over a decade until the high flying 80's and 90's.

And I don't know anyone who advocates stock-picking for 99% of the country...

From John Bogle to the Hedge Fund manager of the month, they all beg the average income investor to buy the total stock market through an index. Why? Because the data is more than ample that over any extended period the total stock market beats owning real estate or any other asset class. 99.6% of multi-millionaire mutual fund managers can't beat you the S&P 500 investor sitting at home in his lounge chair and slippers. Yet the average U.S. worker passes up more of this oppourtunity than they should for the privilege of being a home owner/owing the bank. The major benefit of investing in different asset classes comes from doing so over a long period. You can't expect a good result if you wait until your in your 50's because most of your money was tied up keeping up with home-related expenses.

You should not base your decision to buy RE just on how much you saved vs. renting, you should also factor in what owning is costing your investment portfolio over the course of 30 years. That's my point.

[Perfectlap]

I remembered this thread when I saw this pop up yesterday.

Warren Buffett picks simple index fund for his inheritance to wife - Barrons.com

Talk about putting your money where your mouth is. If Buffett's old lady inherits the world he's instructed the lawyers that 90% of the cash, (his Berkshire shares are all going to charity), simply go into one of Vanguard's index funds. 10% will go into bonds. Not surprising to those who
know of his long-standing bet against anyone on Wall Street who thinks they beat that fund over 10 years. The point of the bet was to show that inverstors are needlessly over-paying for performance at virtually every income level.

Either way this is Buffett's rubbishing of any actively managed mutual fund, any hedge fund or whatever kind of fund. Yet people still choose or are forced (via pre-selected 401K funds) to needlessly waste their finite capital in actively managed investments that can not beat a simple S&P index fund and can suck away at your annual returns, which they cleverly disguise by trying to have you believe that the expense ratio is the only signifcant management cost.