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Wednesday, June 3, 2009

Is Real Estate a Good Investment?

Real estate should underperform gold and silver for several reasons.

The biggest reason is property taxes. Property taxes are a drag on the return from a real estate investment. If there's 10% inflation, then your property taxes will probably also rise by 10%.

When you buy real estate, you don't actually own it. You merely have a perpetual transferable lease. The only exception would be someplace like California, where there's a law that limits the rate of property tax increase per property per year. The cap is less than true inflation, which means that your inflation-adjusted property tax burden decreases every year. However, people in California pay higher other taxes to compensate. Fortunately, these other taxes are easier for an agorist to dodge. Avoiding property taxes is only practical if you can violently resist the State police who come to kick you off your land.

Another problem is zoning laws. A few blocks away, someone is buddies with the zoning board, gets a zoning variance, and builds a big apartment building. That decreases the value of your house.

Another problem is tax breaks for new construction. New construction frequently is exempt from property taxes for a certain number of years. To compensate, other properties pay higher taxes.

Another problem is that housing wears out. You have to spend money on repairs.

Another problem is rent control laws. Even if your rental property isn't subject to rent control, the regulation could be changed later. For example, in NYC, a bunch of apartments were about to go above the rent threshold for rent stabilization. The rent control law was changed, and the rent threshold for deregulation was increased.

One advantage of real estate is that, in times of hyperinflation, your mortgage gets wiped out. You can repay the loan with devalued money. "Maximize your leverage!" is a risky strategy, because you'll get wiped out during the next deflationary recession/depression. If you aren't "too big to fail" and you aren't an insider, leverage will cause you to lose everything during the next bust.

If you have the spare resources, buying a house and maybe some farmland is probably a good idea. Once the State collapses, you won't have to pay property taxes anymore. It might make sense to take a mortgage when you initially buy the property. You should repay it and not refinance as property values rise. If you refinance every time property values rise, then you'll get wiped out during the next deflationary recession/depression. Further, you pay a fee every time you refinance.

I do agree with the conventional wisdom. "Owning" is superior to renting if you plan to stay for 7+ years.

The most important point to remember regarding land "ownership" is that you don't actually own it. Due to property taxes, the State has a greater claim to the property than you. You don't actually "own" land. You merely have a perpetual transferable lease, with the rent (property taxes) chosen arbitrarily via State enforcers. There is a limit to how much property taxes can be raised each year, lest the cattle complain and start noticing the scam.


Anonymous said...

And gold has storage costs, who knew.

Robin Smith said...

Over the long term and across housing bubbles/credit crunches, Land is the only asset that "always" increases in value

Due to rising rent without having to work for that rent. The ultimate free lunch, granted by the state.

For the economists to say that credit boom investment in Land was irrational is absurd. Land always rises in value. That makes it a perfectly rational investment surely?

Cheapo Groovo said...

I just bought a Chinese Real Estate Fund - TAO.

Don't know if it will outperform oil or shorting treasuries, but it should outperform USA real estate.

m said...

Real estate can be a good investment. The thing about investments is, if you're betting on the price going up, it's not a true asset, it's a speculative bet. It's a investment of "hope" which is only a step up from despari because you're living in an illusion wishing for a better reality and admitting your reality isn't good.

If you bet on it beating inflation, it's even more speculative. Banks in some sense are being sligthly speculative because they're speculating that things won't get so bad that the fed limits new money printing so much that they can no longer print money, or that it will be worth the costs to play the game.
If you buy a rental property, and secure cashflow, you technically have people playing musical chairs for you. If the music stops and a tennent loses his job and can't pay, then someone else has to fill in his place, but if you can't find anyone, you face the dangers of being forced into the musical chairs game.

Fortunately, you can also find a new player, who was previously playing a game of musical chairs. When their music stopped and they lost their houses and got demoted, they suddenly decide to move into your game of musical chairs and play for you. If eventually things get bad and the amount of money in circulation slows down enough, then you yourself have to play a game of musical chairs with other apartement owners, a reasonable amount of the people actually understand the game.

This is the state of the economy we're in. Unemployment has shot up, people have been forced into early retirement, forced out of homes and into rentals, home owners lose their homes, and now it is the apartement owners who must play their game. Many of the banks get to stay one step ahead, but as all these apartment owners start to default, the banks will play in a massive game of musical chairs at an epic level. The next step is governments as they try to bailout the banks, and keep people/corperations playing for them, because they know if they do no, they will play musical chairs.
Countries will go to war and take over each other, and eventually all countries will be in trouble...Soon their country is soon 100% owned by the federal reserve, rather then just a partnership where the secretary of treasury actually has a say in the economy.
When this game stops, the federal reserves around the world play musical chairs, and when that game stops, the master of humanity can choose who he wants to keep.

If nothing else, real estate is a good investment because you can stay one step ahead of the rest of the world. But getting into real estate is like getting into a car. It doesn't matter the safty rating of the vehicle, if the driver is bad and inexperienced.

Anonymous said...

actually chapo groovo, china's problems not much better. they continue to lose millions of jobs that are outsourced just like us. They don't owe 60% of their debt to another country like we do, but if you think inflation is coming, oweing people money at least temporarily is a good thing, because you can pay them back with dollars that aren't worth nearly as much. China could sell all of their treasuries, and this would just cause HUGE inflation.

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