Looking at the model I guess the nearest factor is Annual Costs (maintenance). But it doesn't feel properly measured.

I note that for someone on Hacker News, it needs charging at the day rate for a programmer. Or even as an opportunity cost - charging with a risk-based possibility of the reward of starting a successful technology startup. Or of spending more time with family or in sunlight, amongst trees. At peace.

The only people who ask this question are people who haven’t been landlords. Every single one of my friends who has, can commiserate with me as a former landlord.

Maybe buy a vacation home to rent, or an apartment complex. And of course being a part- or full-time landlord is a perfectly reasonable job.

But if you think that being a landlord just means having someone else pay your mortgage, I guarantee you will think differently after a year with even exemplary tenants. And most tenants are far from exemplary.

(still shaking head)

If having to fix a clogged toilet at midnight once a year is the sacrifice I have to make to retire early, so be it.

I've been thinking a lot about buy an investment property, but the mixed workload reviews makes me hesitant

Most people are afraid of rental properties because it's out of their comfort zone.

Working a W2 job, socking money away in a 401k, and retiring at 65 = normal, safe, responsible, respectable.

Working a W2 job, slowing accumulating rental properties, fixing a toilet once in a while, and retiring at 45 or younger = deviant, risky, naughty.

I haven't been to my property in 2 years(probably not the greatest idea though)

My partner had been renting her house out for about 5 years with the usual annoyances, when the newest tenants left a cabinet on a cord that after a few months started an electrical fire that torched the place. No one was injured and it was (mostly) covered by insurance, but it was still 6+ months of dealing with all the claims and repairs and getting it back into shape. And to top it off, the tenants took her to small claims court for the security deposit! (They lost.)

And forget about evicting an unwieldy tenant on any reasonable schedule in California. I have friends who’ve been foreclosed upon while trying to get unpaid tenants evicted.

If you’re willing to do this as a second job, go for it! Personally I would (with the benefit of hindsight) invest in a multi-unit income property or a vacation home with rental potential if I were going to buy investment properties, but that’s just me.

8% off the top depending on your particular scenario could get you pretty close to the same net returns at the end of the day. If you went with a few REITs, management would take maybe a few hours a month even for a massive portfolio. This also has the benefit of being much more diversified than a single investor directly owning various properties could possibly manage.

Granted, using REITs is a tradeoff in granularity of asset allocation and potential upside, so there is always that zone of opportunity to exploit. It just takes a delicate evaluation of the value of your time vs the opportunity itself relative to other competing strategies.

Because REITs don't allow you to invest in one house via improvements at your discretion.

At least in the Bay Area, buying a somewhat run-down / older property, renting it out for a number of years, then renovating/upgrading it right before you sell has been a very profitable strategy for homeowners who have some project management skill.

Los Angeles (where we were) is a bit more volatile (ie it actually goes down now and then). If I had bought property in the Bay Area in, say, 1999-2000, I’m quite certain I’d be more willing to put up with tenant bullshit in exchange for nearly endless appreciation.

YMMV!

8% is not bad if the goal is income properties. However I would invest in a multi unit property if I were going to be a landlord again. Less concern about one bad tenant potentially leading to foreclosure if you get crunched from all sides. (Which seems to be how it usually happens)

X% of tenants are reasonable and handle the repairs they are contractually required to handle smoothly.

(1-X)% of tenants are a massive headache, and call the landlord for every lightbulb that needs changing, threaten to sue you all the time, smash your property to pieces etc etc.

Compute the expected value, and compare with other forms of investment. In my experience, renting out a single property is not worth the expected reward, vis-a-vis other forms of investment. This changes if you can reap economies of scale from renting out multiple properties. (Cut-off point depends on ambient legal system, tax, your own background (e.g. if you are a lawyer, you can handle legal disputes yourself) etc.)

Excellent exposition!

You mean (100-X)% ?

Of course the best is to make it clear at the moment you rent, not when the issue arise.

Edit: I find it insane that most people in the US don’t see the advantages of renting. When you rent here, your housing cost is fixed for at least a year. Anything breaks, you call the landlord or leasing office and it gets fixed at zero cost to you.

I really miss renting. Now that I own a condo, I keep having to deal with unexpected expenses - fridge breaks, something comes off the drywall, microwave breaks, plumbing issues, etc. Plus, I don’t have the option anymore of moving closer to my kid’s school when she transitions to middle and high school (and those are quite far compared to her elementary school). I mean, I do, but selling a place and buying a new one is a monumental hassle compared to switching apartment leases.

I would go back to renting if I could.

The obvious downside is you'll never get any ROI beyond having a place to live like you may with property ownership. Homes are great when you have financial stability and freedom but can become a big shackle if you don't.

Therefore rental price to purchase price ratios have historically been lower, as well as home ownership rates. Rents in desirable cities are going up faster than they had been, though, and Berlin has quickly gone from being one of the cheapest cities in the country to one of the most expensive.

Anyway, point being, this is like any other investment, you have to do the work up front to ensure the risk and payout are balanced. In their case, it was a no-brainer to keep the house when they moved into something larger. Almost zero chance of the home being unoccupied, better than average chance at a good tenant, etc. But, they're also financial well-off and could afford to keep a relatively expensive house in a nice area - obviously not an option for many in the middle-class.

Historically house prices have risen enormously and a whole lot of people have made money, so everyone believes this will continue forever despite a huge political movement behind building more houses and other (good) policies that will reduce prices. On the linked page I typed in "-20%" into the annual appreciation field and lost $717,000.

Interestingly though 30% of people buying houses now in the UK are not getting mortgages (in some areas much more than that [1]) and I assume most of these will be the types of investors who are looking to buy a second home to rent out.

[1] https://www.thisismoney.co.uk/money/mortgageshome/article-63...

Borrowing to buy a house at 4.5% you might think, "Not much risk, will likely appreciate faster." Borrowing to buy stocks at 10% and you're almost certainly not going to come out ahead.

(Maybe my broker has terrible rates, others could be more reasonable.)

Though maybe LEAPS (and for indexes, futures) are a still cheaper way to get leverage.

Edit: goodness, the rates on some of those currencies is less than the dividend yield of those countries' indexes... If I don't expect New Zealand to sink into the sea, is it stupid not to borrow NZD and invest in the NZ top 50?

IIRC, last time I looked at margin out of curiosity with my brokerage firm (schwabs/2014), I also remember to be around 10%.

I can’t help but think we are living in a unattainable economic environment...

My subjetive experience in the USA (Seattle and NYC) is that you can get 4-5% with a steady job and 20% down for primary residence. Anything out of ordinary, like 2nd mortgage (since we are talking about real state as investment), the interest rate goes up (6-7% last time I applied for one).

Also, while the margin rates can be higher, there is more liquidity, smaller transaction costs, and much smaller fees.

Transaction costs are a big one. In some countries there's stamp duty, in the US there are unusually high closing costs (6%?). That said, the bigger the investment the longer I want to hold it, and those transaction fees aren't as steep when amortised over the home-onwership term.

You know the same thing applies to stocks and shares. And in fact stocks and shares have risen more historically [1]

Shares also have liquidity, you can easily sell them in part or whole. You can diversify. One incident could easily destroy a house, if it destroys your well diversified stock investments you've probably got other problems.

So agreed the stock market is the better investment, but as we can't see the future, both are based on past performance. Yes there are headwinds, there always are, I can think of many many reasons why stocks could fall, that doesn't really change what has happened historically though.

Of course the beauty of investing is that if you disagree you can put your money where your mouth is :)

[1] https://www.investopedia.com/ask/answers/052015/which-has-pe...

buying a house to live is not an investment, and i should think that people ought not to treat it as such. Buying a house gives you stability and security for shelter. It's quite possible that renting is cheaper, but you also can't do certain things while renting - such as small renovations (some places don't even let you nail a painting on to the wall).

Investments in real estate is a different ballgame to buying your home.

I'm happier living in a house than an apartment but my house is a place to live, and an item of value, but not an investment I expect to make profit from.

(according to random site on the internet, it's a little below inflation: https://www.in2013dollars.com/2002-dollars-in-2018?amount=30... )

That said, buying a house is basically buying an index linked annuity that covers your rent on a property you have to maintain. So it is an investment, albeit one tied up with a lot of other baggage.

1 - It does not imply that much work. Not even close. For instance, my uncle and aunt rented a flat for 6 years to the same family, and in that time my uncle had to go there about 1-2 times for minor problems, and I don't think it's an exception. There is a bit of work at the time of finding new tenants, but in the case of the people I know, it's like an average of 4 hours of work a year at the very, very most.

2 - (and most importantly): middle class people who invest in real estate are keen on having a rent. Stocks don't necessarily give you that. They see buying a house and renting it out as a way of having a monthly recurrent source of income.

https://fred.stlouisfed.org/series/ERENTUSQ176N

https://fred.stlouisfed.org/series/CUURA422SEHA

(Look at what happens after the dot-com boom.)

https://fred.stlouisfed.org/series/HOUST?utm_source=series_p...

Also it's not only about work, but cost of maintenance.

I don't want to belittle the $500, but if we had good tenants and dealt with them directly we'd be getting double that.

Now is an extra grand a month worth the hassle with GOOD tenants? Maybe. But all it takes is one bad one to be in the hole and full of stress.

Which kind are you talking about? I'd be surprised if the discrepancy between countries was as large as 6% to 15% for the same contract.

One thing that feels like a serious oversight though is that it isn't factoring in taxes. Rental income is taxable income. If you depreciate the property to avoid or reduce your taxable income you'll end up taking a big hit on the eventual sale as it will all be capital gains.

Another issue I'd take with this is that it's a lot smarter to focus on cashflow then gross income because odds are you aren't going to last 30 years to watch your net worth grow if you are losing cash on a monthly basis, even if you are technically building equity.

I'm currently getting out of being a landlord because while it was overall profitable, the margins are alot tighter after factoring in taxes and it's also a massive headache. That income certainly does not feel passive.

Yeah you're totally right about taxes — it does make a big difference. We had to make simplifications somewhere, and taxes are quite country-specific so we didn't want to be too prescriptive. We hoped you could increase "Annual Costs" as a very rough proxy for taxes.

Cashflow is a really good point, and something we hadn't considered much. You can get a rough idea of cashflow in the "Net monthly earnings" section of the output, but it probably deserves more focus for sure.

Operational headache is interesting to account for haha — we'll add these things to the model explanation :)

Given you're positioning this app and article as a means to answer the question on buying a home and renting it out, you should disclose these items (liabilities) to the reader and let them figure out the scenario for their local market, rather than hoping for the reader to do something.

Property tax is a large expense, and insurance is also a required expense if you have a mortgage (in the US). Finally, income you generate from the house (Rental Income) is taxed at your effective tax rate, and this will be a Large Liability at the end of each year.

Although there may be deductions you can take to minimize some of the expenses (in the US), you will be required to pay taxes on the income you generate and I suspect that's the case across all countries.

Anything that draws attention to that field, as 1% doesn’t draw attention.

In my case, taxes are roughly 2.5% alone. Then while a given year maintenance doesn’t feel like 5%, over 30 years you have to peanut butter the big expenses such as roof replacement, or kitchen renovation, and those really do add up.

By and large, all fields should be a bit pessimistic, let people bias them back down, or simply add a “risk” field that can fold in pessimistic outliers into the simulations.

Surely it depends on your aims? If its your pension you may not mind adding money in every month, as long as you get that lump sum/ steady income at the end.

For such a long horizon of 30 years modeling without accounting for inflation makes little sense. For instance that 7% stock market return used by the model as a default, which perhaps may be used as proxy for inflation, would return 661% over 30 years.

Default values for other parameters and their distributions also look very optimistic to me. Like 4% annual appreciation which maybe drops to 2% annual appreciation. How about 40% annual depreciation, your mortgage being 30% underwater, and foreclosure? How about the bank that issued your mortgage going bust, then the bank which bought that bank going bust, and then you 30-story building being shut off from public utilities? What am I smoking? Neh, I just bought investment properties in Miami and other places in Florida in 2007. Anyone too young to know what I’m talking about: I urge you read up on the 2008 crisis before you start buying up investment real estate, after 10 years of unprecedented growth of both real estate and stock market.

In other words, the gains shown by this model are coming from leverage, not from the underlying asset. Leveraged investments always return more, but with higher risk. That's true in the housing market as well as the stock market.

That said, I agree with your point in this case that the leverage is the main component of the return, and greatly increases "risk", for some definition of that word. In a non-recourse state where you can default on the mortgage without losing other assets, the risk calculation must also take that into account.

As a concrete example, a number of commercial real estate investors were technically insolvent in 2008-2009, with assets worth less than the balances of the loans used to buy them. They just pursued the 'hear no evil/see no evil/speak no evil' approach and marked to book (what they paid for the asset) until the market recovered. This approach is aided by the multi-year nature of commercial leases, which protects the cash flows needed for debt service (as long as your tenants stay in business).

In aggregate these factors allow professional real estate investors to consistently earn return by taking on a ton of leverage and with it huge but disguised risk. Back to the original point of the article (buying to rent), most retail investors don't necessarily have the float/access to debt to weather that volatility, and their cash flows are more sensitive which compounds that risk.

Other parameters missing: - Vacancy rate! - Leasing costs (or value of your own time)

Annual cost should include: "normal" maintenance, repairs, insurances, renovation sinking fund, taxes, rates, strata fees if applicable.

The guy who was elected head of our ownership organisation/community (might be a danish construct) bought two apartments when he moved in. He did have $150,000 to make both loans not-bank loans (again this might be a Danish thing, but we have special loan institutions that cover 70-80% of personal house loans at really low rates). Anyway, the one he rents out pays for both loans, taxes and added expenses and after 20 years those loans will both be paid out.

It’s really kind of silly how easy life can be if you start out with a little money and use them wisely.

Well, at least in København there are so many rules that it is hard to navigate even as a tenant.

I owned a student home which I bought from partly smart and mostly lucky stock investing (I had savings from strawberry picking (yes, really; that made money faster than coding in those days for me) and I put it on Borland before 2000; they went up big time, I sold at the right time and student me could buy a house suddenly); it was in a city with high student housing prices and it was a really good house for it; it was big and could house 8 (to 16 if pairs) students paying 8*400 euros/mo. It was not easy money though; I lived there too for a while and the constant maintenance drove me up the wall. I am (always was) mostly someone who lives in his head and thinking about code and leaking toilets, pipes, flooding etc really is something I cannot deal with. So I sold it after 4 years of getting stressed.

I definitely wouldn't do real estate again; I like virtual assets and the stock market & starting + selling companies treated me a lot better than real estate ever can do. Without the worries of brick & mortar.

So as a neutral statement of fact no it isn't either ideology. Its the opinion that goes with it.

The guy I mentioned is 30, and in 20 years when both apartments are paid out, he’ll be a multimillionaire (in Danish kroner), as well as having a passive monthly income that exceeds most lower class jobs. Just by having some starting capital from his rich parents.

I’m not particularly against having rich parents helping you, but because real estate taxes are so low and prices so high, it’s just extremely hard to catch up if you don’t, and I think that’s unhealthy for society in general.

There are great opportunities to set yourself up for life, but many of those require a chunk of money to begin with.

In my country the rental yields are about 6% and interest rates on commercial loans about 3.5%, and you can get commercial loans financed to about 70%.

In other words, with 300k down you can invest $1m. You gain about $60k a year. You pay about 25k.

The remaining $35k you use to maintain and, if you want, pay down the loan.

Average 3% long-term price inflation after 30 years means your asset grew in nominal terms by 2.5x, while your debt didn't inflate. So even if you never paid down debt but only paid the interest, you could still sell the asset for $2.5m and pay back the $700k you borrowed, leaving you with about $1.8m. The present value of that would still be double what you started with.

Of course, the $60k annual rent inflates, too. After 30 years it's about $145k. And of course, your interest of $25k doesn't inflate.

In other words, suppose you inherit this like my friends at age 20. You make an investment. By the time you're 50 years old, you've got a $2m retirement fund that cashflows >$100k a year. Yes, in nominal terms, but it's still a pretty sweet deal.

And don't forget, that is without ever paying down debt. Over the course of the 30 years, you cashflow $1-2m. If you actually use that to pay down debt and keep reinvesting the money, you'll end up quite rich.

To put the initial investment in perspective, if you get a 6% rental yield, a modest 3% appreciation, you get 9% total gross returns on $1m. You pay about 1% in costs on the $1m, and 3.5% in interest on the $0.7m, or about 3.5%. In short, you net about 5.5% on the $1m, or $55k, but you only invested $300k. So you're looking at a leveraged return of about 18% on your cash.

Suppose instead you have more modest assumptions, say 15%. If you take $300k for 30 years at that rate, you're looking at $20m, and a multi-million dollar income.

Hell even if you put it in the stock market, inflation-adjusted, at 7%, you're still looking at >2m by age 50, at which point you're looking at a >150k income, inflation-adjusted. Just from inheritance.

In other words, this person never has to save. He can spend every dime he earns, and still retire decades before most Americans. Or he could take that money and enjoy a far greater lifestyle, doubling a normal person's salary for the rest of his life and spend that, too.

And $300k isn't even an amount where you'd say 'damn, his parents were filthy rich'. It's the kind of money that a lot of upper-middle class people will inherit, when their parents pass away and leave them and their sibling a $500k paid off house, some stocks and some cash.

I've got a lot of my friends who go through life on such an easy-mode, while others literally have $300 in the bank, go into lots of college debt, and are struggling their way through life. The difference is pretty huge.

Inheriting a bunch of money and making basic smart decisions with it, is like a super generous form of welfare. Like playing the Sims with a $2k a month bonus-salary cheat, which grows into a $4k a month cheat and eventually a -20 year retirement cheat.

And I know because I grew up poor and got such a small cheat a little later in life myself, approaching 30 years old. I was already doing well and 'getting there', but the cheat made everything so much easier. It's kind of sad because as much as I respect the idea of building something, and passing it on to your children (inheritance)... it generates a society that's the opposite of a meritocracy and is dictated to a very large (inordinate) degree according to a socioeconomic birth lottery if you ask me.

Excuse the rant!

Cash on cash yield from rent may not be great for the most part. But with leverage and tax savings, that is where real money is made in the long run in the rental game.

We’re building a tool to let anyone create models like this one — models that incorporate uncertainty in their variables and outputs. This is the kinda stuff people do in Excel right now, with much difficulty.

We’re working on a couple more demo models — let us know if you have any suggestions. And if this kind of tool resonates with you, then we’d love to chat — hi@causal.app. Thanks!

I think the examples you've chosen are good but not great examples of where you can add significant value. A house being rented where there are a few variables and a good/better/best outcome is not especially gnarly Excel for the Hacker News audience. I think marketing and sales forecasts and stock option pricing and DCF might be more impactful, if more esoteric, in showing the power of what you're building.

BTW, it'd be cool to be able to anchor a variable to a historical base or average. So maybe if you have seven or eight forecasts of CAGR, Casual could accept 'citations' and in its output show a user of the model that this isn't totally speculative.

Love what you're doing and have signed up. Well done again.

You’re totally right that these aren’t the best examples to show the real value of the approach. We wanted to keep things super simple to start getting feedback, but are working on a more involved example now. DCF valuations and options pricing sound like great ideas – will look into them!

What do you mean re: citations? Validating Causal models using forecasts from other means?

To me, one of the advantages of representing the story in a probabilistic way, similar to how you have shown it, is that I am able to sell an idea to my audience.

If you are looking for use cases to build for a demo, in addition to DCF, as someone suggested before, you might want to consider currency movements and also IRR calculations.

One feature request, if I may, is the ability to manipulate the end result (time horizon in the demo of rent vs buy) and see how it impacts one of the features (rent, market return, etc).

All the best and glad to discuss.

Signed up, curious to see how the sausage is made.

Example scenario: should I pay off my mortgage, which is in a foreign currency?

The bottom line isn't clear because there's too much information. I'm expecting a single number in 60-point font like "You'll save X amount of money by renting instead of buying". Some information can be hidden behind progressive disclosure.

Also, it's US-specific. Let me choose a currency, and format numbers accordingly, like "₹2 crore", not "$20m". In India, we use lacs and crores, not millions.

I also like that you're using Monte Carlo simulations. Though it would be good to augment that with real-world data from the user's country. If I'm in India, which Indian city has had the worst-case real-estate investment performance? The worst-case is useful information to consider when making an investment.

Financially, from principal paydown I estimate about $400 a month profit from the deal. Last year the house required a new roof, which was $5000 after insurance covered less than half, and broken pipe flooded a bathroom and adjoining bedrooms. So that was my profit for the year.

Overall it's been a net gain, but my money would've performed much better in stocks during the this period.

Otherwise real estate is not liquid, annoying to manage, and constantly incurs real costs.

The stock market is relatively competitive as an investment and includes REITS which let you get some of the returns of real estate without the hassles.

I had vacation rentals that cost about 50K each and returned about 8K/year after costs (each). But in the end when there was a problem and the maintenance company wasnt available, I was the one that had to drive 3 hours. I really needed to own at least 5 to make them worth owning. But then there would be the hassle of people constantly coming and going.

At least as far is house value is concerned (deducting depreciation raises your wealth, but it hardly increases the value of the house).

Most of the "advantage" of home buying comes from the ability to borrow money at (e.g.) 4% and hope the home appreciates at (e.g.) 5%. Small taxes and write offs can double or negate profitability.

(The down payment part of the investment might also be good diversification, but it is unlikely to appreciate as fast as the same cash would in stocks.)

On the rental investment example itself, it would really help to have a finance person to go over the model. A rental investment needs to be modeled like running a business, not like buying a house to live. Its analysis is usually done using net operating income, CAP rate, cashflow, ROI, and IRR.

BTW there's no magic 1% to 4% annual appreciation in rental investment. Appreciation is purely based on increasing net operating income faster than market rate, or in simpler term improving CAP vs the market CAP rate. Let's say you buy a property with 4% CAP rate and the market CAP rate is 4% now. 10 years from now your NOI still produces the same 4% CAP but the market CAP rate has risen to 6%, your property will depreciate! Market CAP rate is affected by different things that're out of your control and it's hard to model.

Be a part of the solution and build something. Do not be a part of the problem and become a landlord.

No, that's not the literal definition of "rent-seeking", not even close. I really wish this term had a different name because I see people on HN misusing it on a daily basis. "rent-seeking" is a specific term in economics that refers to entities colluding with the government to distort the market in their favor. The taxi medallion system is a classic example of rent-seeking. Owning property and leasing it out, whether it's land, vehicles, apartments, or machinery, is NOT rent-seeking.

> Be a part of the solution and build something. Do not be a part of the problem and become a landlord.

Would you prefer a world in which people are not allowed to rent apartments?

I find this mis-use of the term a useful and unambiguous signal that the commenter is not fully versed on the topic. (cf. https://news.ycombinator.com/item?id=19707924 )

If you dig a canal and charge for passage, that is equivalent to renting a house (and is not "rent seeking" either per economics/public policy discussion).

Most landlords simply purchase, or very often inherit, their property, not unlike feudal lords, and then charge rent to live there. We are drawing some very small lines to separate those two.

I should add that I consider it much different if someone builds a structure and then rents it out. I, and most, would not consider that rend seeking, as they created new value in the creation of the house. Simply purchasing land and then renting it out, creates no new value.

Normal investments, stocks, bonds, etc help to create value in that the things they support need capital to be built. Land itself, will exist with or without capital resources. So the things that make capital markets work, do not apply to land.

> The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. [1]

https://en.wikipedia.org/wiki/Rent-seeking

Well, presumably he built something, and then exchanged that something for a home - the exact sequance being:

1. Do some work for someone.

2. Get paid money for results of that work.

3. Use that money to buy a house.

For example, I was able to easily craft a model where my expected monthly income was negative. (Just bump the expected annual costs to 2.0%, which is actually more realistic since 1.0% = tax and 1.0% = maintenance.)

Surely the couple hundred dollars a month could also be continuously invested and producing returns if they weren’t being driven into the real estate asset.

My takeaway: bubbles rule. As long as you're in a region eating the rest of the world, owning property will let you share in that windfall. As soon as that economic engine sputters, they will be ruined, and so will you. Better watch for that next big thing, and then hop on something else once it's no longer the next big thing.

Also, it seems wrong to assume 4% annual appreciation of an asset whose discounted cash flows are negative. At some point that gets unsustainable, and nobody will bother to buy the asset.

It's not just home appreciation, it's down also the down payment.

Say the housing market increases at 5%/year. If you buy a house in all cash, you will get 5% returns.

However, if you use that same money for a 20% down-payment to take out a loan (say 3% interest) to buy a house that's 5X more expensive, your returns will be 13%/year (=5% * 5X leverage - 3% interest on 4X of the cost). Huge difference.

Of course, these are fake numbers, and fail to account for a variety of other factors (taxes, closing costs, maintenance, etc.). However, the point is that housing market increase is not at all the full story.

Although if all the net worth was due to house price appreciation, stock options don't seem to be making up much of net worth, or weren't included, either of which seems to undermine your argument?

We did kinda assume that the buyer would set the rent to at least cover her ongoing costs. In the UK, for example, you can only get a “buy to let” mortgage if you can prove that you can reasonably charge enough rent to cover your mortgage payments.

You’re totally right about reinvesting the earnings into stocks etc — we excluded this in the model to simplify things and not be too prescriptive. But if I were thinking of doing this, I’d definitely want to take that into account :)

There are _lots_ of people owning to rent that don’t cover their actual carrying costs. They just justify it by thinking about the equity growth.

In fact, even the default example has negative carry costs. The initial interest on $480k plus $6k isn’t covered by $2k monthly rent, let alone principle payments and a more realistic maintenance amount.

The tool looks like a copy of getguesstimate.com. What's new or different?

- We’re moving away from a spreadsheet-y UI (e.g separate sections for inputs, model, output vs all homogenous cells/nodes). UI might seem like a trivial differentiator, but I think it significantly affects use-cases for the product. - Guesstimate doesn’t handle certain things very well, like time dependent models, conditioning on variables, etc - Building for enterprises requires certain bells and whistles (e.g integrations with data sources)

The first version of Causal won’t be a million miles away from Guesstimate, but the vision is to build a general tool that lets non technical people work seriously with data. Specifically, right now we’re working on letting models learn from data (“machine learning”) via Bayesian inference, and letting people build causal models.

Probability and random variables are a great unifying framework for dealing with data. We’re trying to make this more accessible, so there’s a lot to do beyond what the demo model shows :)

Buy-to-let is causing immense social and economic problems in the UK.

It's a nice way for the rich to tax the poor.

Atlas shrugged.

Technology and efficiencies of scale obviating many jobs and concentrating them in small regions, causing an increase in demand without a correspondingly large enough increase in supply of housing is causing social and economic problems.

The solution to pricing problems is adjusting the demand or the supply curves.

In the UK a mortgage is generally cheaper than rent.

You "choose" to rent when you have no other choice.

The other side of this coin is also the lack of income (or sufficient income), due to the reduced value of human labor due to the aforementioned automation and also the 3 billion other people in the world wanting to share in the dream of having the luxuries of the developed nations.

My point is that offering a residence for rent isn't inherently bad, and that attacking that isn't going to solve anything. Although, I think there are other problems caused by private ownership of land.

However, renting out an asset (which generally isn’t depreciating) is only going to increase the inequity between the renter and the landlord. If their relationship is based entirely on who can afford a deposit then I don’t see what excess of demand and supply has to do with it.

If you’re talking about building so many houses that they loose their value as a commodity entirely, the problem there is an entire generation who have staked their pensions on property.

I don’t have any answers.

Again, I am not advocating either way as I am not in real state industry to have perspective on it.

I haven't read that book in a while, but it really feels like you're misconstruing this.

Are you sure it is not the other way round: increasing attractiveness of the city (change of character) has lead to increased housing costs?

https://www.bloomberg.com/news/articles/2019-04-13/berlin-ho...

The reality is probably that it is an investment like any other, with risks. People who buy houses to let take that risk and provide people with living space to rent. Which has advantages as well as disadvantages.

You usually need a deposit for a loan. Poor people generally don't have huge amounts of savings.

Also, isn't that an argument for providing housing to rent. If poor people can't afford to buy houses, where would they live, if there weren't houses to rent?

A quick Google showed that the median savings account balance across American households is $4,830. And when you have a median that's considerably lower than the average, it means that the poor people are doing worse. The likelihood is they're in debt.

And as an aside, seeing as this is the UK, $100k wouldn't buy a house in an area that is desirable or has jobs, so you'd struggle to live there or rent it out.

If the average household has 5k in savings, pool with your parents to get to 10k.

Or take on some night time job once per week, to earn an extra 400$ per month, and save for 2 years.

And you don't have to buy a whole house, a small flat can be a sufficient start.

I have to say I have never done this, but I was recently in talks with people who propose doing that and help people who do it. It sounded plausible - why not? You can buy a rented flat (that already has tenants who pay rent). So the numbers are pretty much clear.

They told me the bank doesn't count the rent as your income, though. That is the catch. So for your first investment like that, you have to be creditworthy on your own. However, after a while you can build trust with the bank (they see the rent from the tenants keeps coming on a regular basis), and get more credit. Then you can start the next project.

You don't have to invest in a desirable area, as you don't want to live there yourself.

Nevertheless, I am still not convinced it is for me. I worry too much about bad tenants, things breaking on the property and so on. I have almost no knowledge about housing properties (like to how do you recognize damage to the property before buying it, how much do repairs cost, and so on).

My experience is that it is a significant percentage (i.e. more than 10%)... And about your point about home owners being poor - not everybody owns their own home (stats show it's about 2/3rds). I just don't see BTL as realistic for people struggling to make ends meet.

Probably sounds quite abstract! If you leave your email on the site then I'll drop you a line as soon as we're ready to show the product :)

Of course, you need a good source of credit or great people skills to get that started (or wealthy parents to loan you a million or so).

:P

Another point in actual real estate proformas is expected vacancy and leasing costs. Ie. you will have tenants leave and when you do it isn’t always easy or fast to find good tenants to replace them.

There’s also the significant consideration of transaction costs missing. Conservatively you should budget 8% to sell and 4% to buy.

The asset is also highly illiquid compared to stocks, and also has ups and downs just like the stock market but in slow motion. If you happen to want to cash out your equity during a downturn it can be years before you get back to where you’d be with your “long term expected appreciation.”

And one last bit: since a house isn’t fungible you need to accumulate the entire downpayment all at once, and to liquidate you must sell it all at once, whereas stocks you can accumulate and release incrementally.

TLDR; this model makes it look a lot more attractive than it really is to be a single-property landlord.

This seems socially much more acceptable to taking a loan and then invest the money in stocks for example, but to me is not that different.

True the volatility is much lower, but so is the liquidity if you have to dispose of the propery in a short time due to life circumstances.

If this is a single property and plan is to be the bulk of one's net worth it seems risky to me.

Then there's the "dealing with tenants" variable which can be none to a ton of work/hassle.

REITs are imho an interesting way to get rental income with less hassle and much more diversification if you can stomach the stock price moving up and down.

Look at Vanguard VNQ for example.

Feedback on the framework itself:

* I found the interface to widen/narrow the variance of ranges painful to use. Why not just let me plug in an exact number?

* I assume the output for the variance is 95% interval? This should be stated.

* There's major math problems with respect to how you are handling variance on compounding rates and reporting it. Most importantly, the distribution should almost certainly not be normal (lognormal makes more sense). If you don't use lognormal distributions, your confidence interval after N years makes no sense as the product of two normal distributions is not normal (nor even symmetric) - I'm actually not even sure how to interpret your confidence interval after 30 years because of this fact!

* The line becomes impossible to see if it has no variance!

Feedback on the calculation:

* I'm guessing all these numbers are real rates, as there is no inflation?

* Monthly rent is really "rent realized" as you are ignoring vacancy.

* I'm not following how you are calculating accumulated rental earnings. It is more than the sum of historical rental earnings, but less than your rental earnings being re-invested in the market

* "We assume that these cover at least the cost of your monthly mortgage payment" -> including interest + principal? I'm not sure if your calculator per se relies on this assumption, but this would not hold in many markets (e.g. SF Bay Area)

BTW, for those who want to do a simple buy/rent trade-off: I have a google sheet here:

https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul...

* Yeah the "scrubbing" interface is a little experimental. We originally had it for the mean values too, but that was a bit too crazy so we got rid of it. May well get rid of it altogether.

* It's a 2 standard deviation range, so a little more than 95%, but you're right - we should be clear about this!

* The entire model runs via simulation, so we're not analytically calculating products of distributions etc. I don't think we're reporting the distribution of compounded returns after N years anywhere, but there may well be something misleading somewhere — what specifically are you referring to?

* Thanks for raising the invisible line issue!

---

* Yup

* Yup

* I believe we are just taking the sum of historical earnings! What suggests otherwise?

* Yeah including interest and principal. And fair point! In the UK I think it's a reasonable assumption but probably not so in other places.

Thanks again — really appreciate your feedback. Happy to chat more here or via email: hi@causal.app :)

The output, e.g. after 21 years. You'll write something like property value is X +/- Y. The problem is that the distribution isn't symmetric. In particular, being at X - Y is far likelier than X + Y, at least if I interpret X as a mean. In addition, the median is less than the mean, which is X?

> I believe we are just taking the sum of historical earnings! What suggests otherwise?

As I scroll over years, the net rental earnings are clearly not linearly proportionate to the year.

We moved into a three bedroom apartment (1652 square feet) in 2012 and we were paying $1200 a month. When we left in 2016, rent was $1700. Now rent is $1925.

Our mortgage three exits up is less than $2100 for a 3000 square foot house. Besides slight changes in property taxes and insurance, our house payments are not going to increase. This is in the suburbs of Atlanta.

But in general I agree with your point. Buying a place is about stability and control. Especially no one can kick you out as long as you make your payments. I don't think it's a better investment option out there but it's safer for most people than investing in things they don't understand. And if you happen to buy a place in an area that is booming in the next few years then it can really be worth it. But that's the same like buying early a stock of a company that makes it big.

If you go by the popularly accepted rule of thumb, you should put 1% of your house’s value in savings for unexpected home repairs per year. Feels a little high to me.

[0] https://docs.google.com/spreadsheets/d/1i6xNZiNVn53_bnibfEvK...

For example, if you assumed 3 +/- 3% appreciation, then the calculator applies that range to every single future year, whether 1 year or 20 years, e.g. 20 years later, the realized appreciation seems to be 3% +/- 3%.

However the normal way this is done in economics and finance is to assume independent increments of return volatility (let's say 3% per annum). This gets you:

- 1 year out: 3% +/- 3%

- 10 years out: 3% +/- 3% / sqrt(10)

- N years out: 3% +/- 3% / sqrt(N)

Intuitively, imagine if having a 'good year' were simply a coin flip, e.g. either you get 6% in a year or 0%. Over N years, the sum of your total return is a binomial distribution with standard deviation that grows with sqrt(N). Since your annualized return is approximately total / N, the standard deviation of realized annualized return scales at total / sqrt(N).

Probability cones should always look like sideways parabolas:

https://sixfigureinvesting.com/wp-content/uploads/2018/11/Mo...

More here:

https://sixfigureinvesting.com/2018/11/predicting-price-rang...

One more thing: the chart has no provision for inputing stock market volatility, which (historically) is quite a bit higher than real estate volatility. You're comparing a 'risky' bet to an assumed 7% riskless bet when stocks are also at an all-time high. The better thing to do would be to model the volatility of the stock market (historically ~15% per year), then show the distribution of (real estate return - stock market return) (with some correlation assumption).

Everything in the model runs by simulation, so we don't do any maths on appreciation rates. Since it's a simulation, I believe the combinatorics sort themselves out!

However... it's possible that something we are miscommunicating something — what gave you the impression that the appreciation maths was off?

You're right about the chart — we wanted the baseline model to be an extremely rough guide to compare the buy-to-rent scenario with, so didn't want to add volatility there.

That is never a valid inference. At the risk of sounding harsh, you cannot simply throw up your hands and say 'the simulation said so!' without understanding what is actually being simulated, or else you will get nonsense results.

> what gave you the impression that the appreciation maths was off

The 'probability cone' is clearly the wrong shape.

> so didn't want to add volatility there

Many fields the calculator, such as appreciation, have distributions attached to them. The way returns in real life get a distribution is via volatility, so it's highly misleading to both have a distribution width and say that you don't want to add volatility.

This is what your simulation is actually doing:

1. Pick a single normally distributed number

2. Pretend that is the return of your investment, linearly applied over many years. E.g. if the number I drew in step 1 is 4%, then I assume I got 4% return every single year until year N.

3. Repeat a number of times and graph the boundaries

By contrast, this is the norm in finance and financial economics:

1. Actually simulate a financial return process over a number of years. E.g. in year one, I returned between 0-6%, repeat for year 2 ... N, and keep track of the entire history

2. Repeat many times

3. Draw the distribution

Note that the 'correct' simulation procedure draws paths that go up and down, just like asset prices do in real life, while your simulation procedure only ever creates asset price paths that grow or shrink at a constant rate.

I strongly recommend either you give up on simulating returns entirely and make it a single point estimate, or do the simulation properly, otherwise your results are badly misleading. Here's a (very simplified) simulation approach:

https://www.investopedia.com/articles/07/montecarlo.asp

I didn't mean to suggest that simulations are always correct. Just that I believe ours is, in this case :)

Can you help me understand your point about the "probability cone" please?

However, I can't replicate the numbers that you create for a simple test case:

https://imgur.com/a/ogP1ucY https://imgur.com/a/dHQ5WyJ

Here we've basically zeroed out rent, mortgage, and everything else, in order to purely isolate the appreciation factor, and your calculator shows a year-30 range of $1m +/- 285k at 95% confidence.

However, if you take 30 independent draws using a 0% +/- 3.2% range @ 95% confidence, that implies each draw has 1.63% std deviation (3.2% / 1.96).

The 95% CI for the sum of 30 independent draws with 1.63% stddev is given by (1.63% * sqrt(30) * 1.96) = +/- 17.5% return.

Applied to your initial amount, I'd expect to see a $1m +/- $1m * e^(17.5%) = ~$190k range for the 95% CI, not the +/- $285k range that you show.

Note the power of just using basic stats and identifying edge cases to validate whether your simulation is giving reasonable results -- here I think either an input or output might be mislabeled (is the input really 3.2% at 95% CI, or is a different confidence?).

The appreciation math consequently is massively off for any high variance input. I completely distrust the results.

- How are you modeling property tax payments?

- Would be nice to show the annual return for the investment. You have a chart, I can read it so see whether I'd do better than the market, but would be nice to show '13.4% return', vs. a dollar amount after some time period.

- Are you modeling tax benefits at all? Mortgage interest, property taxes, maintenance costs and depreciation all impact the net return for the investor. This would be hard to model since the tax situation changes by individual investor and local tax rates.

- Have you contemplated whether the investor is self-managing or hires a property manager (perhaps included in the annual 1% expenses?)

It's Toronto/Ontario/Canada specific, but you can plug in your own taxes, fees and estimates.

I bought a house one year ago, spent $200k and then another $50k in repairs, and now I'm renting it at $1500 a month ($1200 profit after property taxes and miscellaneous)

On the other hand, I also started a new company about a year ago, spent $0 upfront investment, $50 in monthly hosting costs, and it is earning a monthly profit of $2000 currently.

https://michaelbluejay.com/house/rentvsbuy.html

His other articles are also often worth reading.

Also, the RE market is just lousy for buyers right now all around.

Real Estate is not passive income.

This is pretty opaque and we should have explained where the numbers were coming from. Had intended to add a tooltip there explaining this but looks like we forgot!

By your logic, Uber drivers should be criminals.

The difference is that interest rates on margin accounts are far higher than they are on real-estate. A margin loan may be 8% or more. So you have to invest in something that grows faster than that to make any money. However real estate loans are 3-4%/year, and in addition they generate rental revenue which is also roughly 3-5%/year.

Taking out a loan on real-estate makes far more sense than taking out a margin loan.

Only the 1% have the free cash to just buy upfront, outside of events like inheritance or pension maturity.

The model clearly proves you wrong (even though it's not very realistic in general). If you have cash lying around, you're better off investing in the stock market, or buying houses with loans anyway (just more of them).