RESIDENTIAL REAL ESTATE RENTAL
At Fast Forward Investments, LLC we believe that people should be able to live in a nice home at a reasonable monthly rate. Not only is home ownership not for everyone, for many people, it is actually cost prohibitive. A fair and reasonable trade-off occurs when responsible people can live in a nicely maintained home in exchange for paying rent on time when it is due. As managers of many residential real estate properties, we believe that if something is broken, it should be fixed as soon as is reasonably possible.
THE NEW AMERICAN DREAM
Home ownership has been an American dream since the country was formed. Given an ideal world, who wouldn’t want to have a place that one could call their own? Land--countless people have been killed for it, have died fighting to keep it and have based political careers on trying to control it. For most of the past 100 years, many individual retirement plans were based largely on home ownership. Realtors across the United States would tell young home buyers that the secret to their retirement was to buy the largest home they could afford, because it would only appreciate in value and then when it came time for them to retire, they could sell it for a huge windfall and buy a smaller home somewhere else. The difference between the value of their large home and the smaller one that they would presumable retire in, would be what they would live off of in their golden years. Another “carrot” relative to this scheme, was the tax rule that allowed a seller of a home occupied as a primary residence to shield up to $250K per individual and up to $500K per married couple from capital gains tax.
There were a few problems with the home ownership
retirement plan, however. First, many
people grow up in the homes they live in and don’t want to move out of the area. Their friends and family live in close
proximity and the thought of moving across the country so they can pocket some
of their home equity is not attractive.
Many people have older parents that will one day need supervised care
and many of them end up relocating to their children’s “large” home. Second, the capital gains tax rules have been
known to change during various political administrations. As of this writing, the Occupy Wall Street
movement is condemning so-called “rich” people and demanding that they be taxed
at a higher rate than they already are. Currently
under consideration, is the elimination of the capital gains tax
exemption on
the sale of one’s home, as well as a substantial increase in the
capital gains
tax rates. Another problem, is that while real estate values tend
to go up over long periods of time, many homeowners have gotten caught
in negative equity situations caused by market down turns.
The recent real estate market crash that began toward the end of 2007
is a prime example. In the years leading up to the crash, many
homebuyers had taken out variable interest rate loans with monthly
payments that were increasing while their home values plummeted.
SAD FACT OF LIFE: Home ownership is not for everyone.
Americans tend to have short memories when it comes to negative events in history. Only a short time ago, it was early 2007. Many people thought that real estate prices would never come down. Friends, neighbors, grocery clerks, bartenders—the average person on the street—all chanted the same mantra: “You’d better get in now, while you still can.” Some people earning minimum wage were buying homes that were selling for $500K or more in California, with little or no money down. This buying frenzy was fueled by easy credit--stated income loans (otherwise known as “liar’s loans”). Many people took out 2nd or 3rd mortgages or refinanced to extract equity to purchase cars, boats, big screen TV’s, computers, and anything else they felt they had to have. Meanwhile, many of these same people had opted for adjustable rate mortgages and were caught by surprise when their monthly payments became unafordable overnight. When the bottom dropped out of the housing market and the construction industry tanked, it put thousands of people out of work. With many homeowners now facing negative equity situations and having reduced income, home ownership became a nightmare, rather than a dream.
If falling home prices and rates on adjustable rate mortgage payments ratcheting up weren’t enough, consider the huge property tax bills associated with a home that was valued at more than $500K. Add insurance, utilities—water, electricity, gas, cable/Internet, maintenance and repairs, landscaping and gardening and many people can suddenly see that for the average individual, home ownership is actually much more costly than renting.
THE MANY ADVANTAGES OF RENTING
Imagine living in a beautiful home with a sparkling clean swimming pool, large back yard, new carpeting and paint throughout, your kids attend the best schools in the area, your friends and neighbors are the nicest people, and your monthly cost for this life of luxury is less than $2000 per month. Don’t think this is possible? Think again. Guess who pays the real costs of making this reality available to some lucky person for less than $2000 or even less than $1500 per month? That’s right, it is the landlords—the same individuals who are constantly being vilified by the OWS crowd. If it was not for people like landlords, rental properties would not be available and people would be forced to pay many times what most rentals cost on a monthly basis.
What happens when you are offered that dream job in another city that comes with a huge pay increase? If you are a renter, you get to take the job immediately and in many cases your property management company can find you another home in your new city for a comparable rent. On the other hand, if you are a home owner, you may be stuck where you are, unable to find a buyer for your home, perhaps having to rent it out for less money than you will have to pay your mortgage company to avoid foreclosure.
NEIGHBORS FROM HELL
Imagine that you just went out on a limb and bought your dream home. You managed to barely scrape together a down payment. Your kids might have to go without candy or video games for awhile, or your daughter may not be able to afford that prom dress she has been wanting, but you did it—you bought a home in what looks like a nice neighborhood. Making the mortgage payments each month are going to be tough, but you figured out a way to scratch and save so you can keep the foreclosure wolves away, even if it means doing so without a phone or cable TV. Then, the unthinkable happens. The beautiful quiet neighborhood that you just moved into erupts in a cacophony of hellish noise. The teenagers a couple doors down are home from school and they are throwing a wild party with some of the loudest amplifiers and sub woofers that can be purchased. Cars are parked on neighbor’s lawns, beer bottles are thrown over your fence, cars with uncorked mufflers scream down the street at midnight. You mention your irritation to your next door neighbor and it turns out that he is best friends with the occupants of the “party house”. Now, you become what your neighbors believe might be the “narc” that called the cops on them and broke up their party. Since, unfortunately, you bought this “home of your dreams”, you are now stuck. You can try to sell it in a down market for less than what you paid, or you can wait many months or even years for the market to rebound. On the other hand, if you had rented this home, you promptly give your landlord 30 days notice and count your blessings that you weren’t stuck there any longer. As a renter, you can easily find another home in a much nicer neighborhood right away. Perhaps next time, you will check it out a little more thoroughly before you sign a lease.
OTHER COST BENEFITS OF BEING A RENTER
In addition to having much lower monthly payments for housing, if you are a renter, you can also pocket the $3000, $6000, or more, in property taxes that you don’t have to pay each and every year like the property owner does. If you are a renter and the stove goes out, the landlord pays to have it repaired. If the sprinklers get broken by neighborhood kids, the landlord pays to have them fixed. If the water heater fails, the landlord takes care of it. Leaky roof? It’s the landlord to the rescue again. Swimming pool filter cartridges need replacement? Your hero the landlord pays his pool guy $200 to buy new ones. With all of the other costs involved in just living life--school expenses, sports expenses, clothing, furniture, linens, insurance, taxes, and many others, why wouldn’t you want to lower your cost for housing by renting a nicer place in a nicer neighborhood than you could otherwise possibly afford?
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for information purposes only. Fast
Forward Investments, LLC does not provide any legal, financial or other
advice. We do not recommend or endorse
any investment, service, or product.
Fast Forward Investments, LLC does not offer any advice regarding the suitability
of any particular investment, product, service, or investment strategy. If you have any questions about investing or
investment strategies you should contact an independent financial advisor. The
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