This is probably unusual advice. Maybe even bad advice. Seems silly to get out of home ownership into renting. The American Dream is just the opposite: getting out of renting into home ownership.
Renting has a lot of disadvantages compared to home ownership, and under most circumstances it's better in the long run to try to buy a home. Rent checks are not tax-deductible and they are gone each month — there's no return on these payments. Although you can move, rent increases are mostly out of your control.
Renting, however, is a great idea if you think the real estate market is going to tank.
The amount of real estate wealth that the past few years has created is almost beyond comprehension, especially in hot-spot areas. Just a little north of here most people who bought the same time I did (2001) have experienced six-figure gains in their homes. Mine has gone up “only” five figures.
It makes me nervous how fast my home's value has gone up. It reminds me of how fast all of the tech stocks went up in the late 1990s, and subsequently tanked. I think the price of my house has stopped going up quite so fast, and the thought of watching some of the easiest money I've made in my life evaporate before my eyes is not pleasant.
This sudden real estate wealth is tied to the home. Most of the ways that people “get it out” are by borrowing against it, but that's not getting it out of the home, really. That's just taking on more secured debt.
The only way really to get that money out is to sell. And not buy again until you can buy low. Really low. Blood-in-the-streets low.
Any number of things could precipitate a tank in the real estate market (just like a China sell-off precipitated a 400-point loss on the Dow yesterday). A lot of foreclosures due to rising interest rates, oversupply of housing, general recession, rising oil prices, tightening Fed policy, a sell-off in the bond market, etc., etc.
Rather than having your home's value tank with with everyone else's, it's your landlord's home that's tanking.
I'm the first to admit that it's risky to do this, because there are other factors to consider besides economic ones, like demographics; if people are moving into an area for reasons unrelated to the real estate market, this will support a rising supply of housing in that area, and prices won't go down quite as much as they would otherwise.
But separating my money from my house sure is appealing. It's gone up too much. I probably don't have the guts to do it, though, so I'll watch my equity vanish along with most other people's. I'm just thankful that I'm not needing, or wanting, to borrow against my equity, because if the home's value tanks then, I'm in really bad trouble.
Do you know anyone who's “sold high,” banked their equity, and rented?
Selling and renting strikes me as being a lot like market timing: it's great if you get it right but a losing strategy if you get it wrong. My personal take is that I would consider selling investment properties if there was a bubble, but would keep my home and ride out the downturn to ensure that I do not get priced out of the market if things do not go as expected.
Yes, I know several who did it around 2002. At this point, they've been creamed to the point where it'll cost them a couple hundred K or more to get back into the houses they sold, and they forfeited their Prop 13 tax lock-in. And that's accounting for the 10% drop that's already happened. They'd need at least another 30-40% drop to get to where they sold + the RE expenses they paid by selling.
As traineeinvestor says, this is market timing. If it works, you're a genius. If not, you're skrewd.
Take a look at this graph in the NYTimes, adapted from Robert Schiller's book: http://tinyurl.com/e4so5
If we exclude everything after 1996, the past one-hundred years shows that housing isn't a particularly good investment, and that it has a strong reversion to the mean inflation rate. I repeatedly hear people tell me "we bought this house for so-and-so in [year], and now it's worth [amount]!" and when you do the math, even including the post-1996 boom, the annual real return is somewhere around 3-6%. Better than nothing, but, when risk-adjusted using that past one-hundred years, the return goes negative.
The critical point is: don't rely on your house as an investment that will consistently appreciate. Don't plan your finances around your home appreciating at 5-15% annually or you risk ruin in the future.
My own view of renting is that you should rent if you plan on moving in less than five years. If you buy a house, then move in five years, the miscellaneous costs and the fluctuations (even in good times) in value will likely wipe out any appreciation in value.
Under the right circumstances (appreciated home value, 'excess' equity, favorable rates w/low fees) a cash-out refinance could also be a viable alternative if you believe you're at a market top.
I know exactly where you're coming from MBH. I've thought the same thing myself but don't know if I could ever pull the trigger. The fact that I really hate moving doesn't help the situation.
Renting is way under-rated in this country. For some reason people place way too little value on the flexibility renting affords you.
However, from my perspective a house is a place to live, not an investment (unless of course it's a rental property). Most people do not cash out of their housing "investment". They may sell it, but then they move to a new house – which in all liklihood is more expensive as well… The only time people actually "cash-out" is when they move to a smaller home, e.g. a retirement community.
I have been having this idea as well– that is to sell my house.
The fact of the matter is that the Baby Boomers, the largest cohort of the American population ever are going to be retiring from this year until 2024, there is been an enormous increase of housing supply, we will be in a bear market for a long time (the baby boomers will be cashing out of their mutual funds for income investment vehicles, and the Mutual funds will have to sell a lot of their holdings in order to pay out the distributions needed to accommodate this, and the population cohort following the Boomers is much, much more smaller, and much, much poorer) will all contribute to the fact that there will simply bee a lot of houses, many more than there will be a demand for them.
So I am going to be the brave soul that will be doing it — I am selling my house in late spring of 2007, and buying Euros with these dollars, as the dollar is headed for a dive for many reasons (some of which, because I doubt we will be able to hold onto to the our PetroDollar status — people do not ask why we are in Iraq — they should — Sadaham decided to sell his oil in Euros; The president of Iran has an even worst WEAPON OF MASS DESTRUCTION planned for us, — an oil Exchange tor rival ours and the one in London, which really is also, especially, ours as well, where the oil would be sold in any currency; I do not have to spell this out to you, — the dollar is the most devalued currency on earth, as there is no other currency with as a wide circulation, and if OIL is no longer backing it, then we will suffer in the short-term hyperinflation, and in the med-term, deflation — aka–depression; and then, cash, particularly Euro cash, will be king)
That is what I am going to do. I would advise all of you to take all these macroeconomic trends into consideration when you plan your economic futures.
Great insight! I knew it I should not have planned for a long term renting.
The principles of any investment market is to buy low, wait for an appreciation of value and then sell high. The complication with your own house is if you sell, then you have no where to live.
It may not necessarily be that much cheaper to rent. Rental values depend on the circumstances of the local rental market.
One possible way of releasing some of the equity that you have built up in your home could be to increase the mortgage on your current home, and use the funds as a deposit to buy another house to rent out.
You would have to ensure that the financial calculations worked out, and that you had enough spare cash to potentially pay to mortgage for a time, but the basic idea is sound.