Two ways to look at this I suppose:

1) Your tenets are saving a lot of money by renting over buying and have more disposable income.

2) You tenets are careless with their money - blowing it on TVs when they could be buying a home.

Posted by Jim Greco | August 2, 2009 5:32 PM

Yeah ... not sure I see the irony here unless tenants are viewed as subordinate somehow, or perhaps judged to be financially inferior. You provide a service, they pay for a service - that's it.

Posted by Brad | August 3, 2009 9:33 AM

I agree with Brad. Given how much real estate has suffered in the past 3 years, chances are, the tenants may have avoided the worst of the real estate crash by renting...

Posted by Michael | August 3, 2009 5:38 PM

short term sacrifice leads to long term success. what is really ironic is how angry people become when you point that out.

Posted by Toby | August 3, 2009 5:42 PM

Yes I guess I probably have a little bit more information about my tenants (such as income, credit history) than I shared to just I find it a bit ironic.

I guess my point was more about why do people put so much of their income into these depreciating assets when they clearly don't have an accumulation of appreciating assets (such as real estate, etc) yet?

Posted by 2million | August 4, 2009 8:47 AM

2million,

Real Estate is a depreciating liability these days, not an asset. In fact, for most of the 20th century it's been that way, such that you could accumulate more money by investing in bonds and CDs than you could via real estate. Only the beginning of the 21st century bucked that trend but now regressing back to the mean. Income means very little. What means a lot is saving. How much you save and how much you invest. Housing is a horrible investment in my opinion. I make more money by renting and your renters probably are too.

Posted by Steve | August 4, 2009 10:43 PM

Real estate hasn't been a depreciating asset for 3 years running now. The seasonal case-shiller numbers are still negative and will likely remain so for another year.

In Japan, real estate hasn't appreciated in 20 years. The Nikkei is 25% of it's peak value.

Posted by Jim Greco | August 5, 2009 8:27 AM

It seems like all everyone does is attack 2 million. When have any of you ever sold a tv for a profit, hence the depreciation. Some places necessitate renting due to high home values, but otherwise owning can be a great savings building tool. For the most part all of you seem very petty about his observation.

Posted by superthan | August 5, 2009 10:48 PM

Agree that people spend a lot on depreciating assets (heck, look at the high number of luxury cars sold out there - that Honda Accord will get you from point A to point B just as well as that Lexus will!).

But, people do tend to incorrectly assume that real estate always appreciates and is always a good investment. In the long term, real estate as an asset tends to appreciate at the rate of inflation (giving you a 0% real return). You can get similar performance with a lot less risk buying TIPS. How people make money on real estate is through the leverage, not the actual asset itself. You put 20% down on an investment, but get to keep 100% of the upside. So, if you initiate a mortgage with 20% down, the leverage is multiplying your return on real estate by a factor of five. If you were always buying homes for cash (0 leverage), you wouldn't make nearly as much return. Of course, one thing we now all know about leverage is that when things are up, it's great, but when things are down, your capital gets wiped out really quickly.

Here's an interesting though - as you pay off your mortgage, the loan balance amortizes down. That means you have more equity and less debt. This effectively reduces your leverage. The conclusion here is that for an asset that has a long term appreciation of about 3-5%, the more you pay your mortgage, the more you're reducing the leverage, and the more you're dampening your return. Of course, this needs to be considered in the context of the cost of capital...

Posted by yfactor | August 6, 2009 12:30 PM

Steve:

Real estate is not a depreciating asset. But even if it were, you would still be wrong because real estate pays you 4 ways: cash flow, tax shelter, principal reduction and appreciation. You have to look at all 4 to get the whole picture. Why do you think that 1 out of 4 self made millionaires made their money in real estate?

2Million:

Your observation is right on. Pouring your money into assets that appreciate in value is not as fun as big screen TVs but much more rewarding over time.

Posted by Pizpo | August 6, 2009 12:44 PM

My intial reading (sans comments) left me feeling that perhaps 2 Million was casting judgment on renters and after reading the comments and realizing that he knows more about his tenant's financial status that we do, it would seem he still casts judgment on them. Whether you run a financial blog or not, rather than judge people who don't adhere to your methods of money management, realize what's a priority for some is not a priority for others. Other than this post, I like reading your blog and realize if it wasn't for this post, I wouldn't have commented. You win.

Posted by jfas | August 6, 2009 12:52 PM

keen observation jfas - thanks for commenting!!

Posted by 2million | August 6, 2009 1:39 PM

As a fellow landlord, I always see tenants make decisions that are based in the here and now with little regard for the future. What's even better is when they rent their big screen tv and have furniture from the Salvation Army. Or better than that, Section 8 tenants that drive nicer cars than me, have Wii and 50 games.

Posted by Corey | August 6, 2009 2:41 PM

I don't see why people are getting so upset about this post. I currently rent an apartment, drive an old car and have one of those "antique" TV's before HD came out. My wife and I are buying our first house right now. If we had been frivilous over the past few years and bought TV's and new cars, then we wouldn't have the savings to buy a house now. Clearly these people are making bad financial choices that will negatively affect what they can buy in the future.

Posted by Nick | August 6, 2009 11:18 PM

Funny Corey, because I always see home "buyers" and landlords make decisions based on the here and now and on the propaganda fed them by the National Association of Realtors. It's the renters I see today that are actually making the more rational decisions now and have been the past 5 years. Pizpo, real estate does not pay you in terms of "cash flow, tax shelter, nor principal reduction" as you posted. In fact, with real estate you actually reduce your cash flow because your cash flow is tied up in paying the enormous mortgages of real estate today, most of which is still overpriced by 25%. Moreover, real estate is a horrible shelter of taxes when you have to pay $3K- 7K per year in property tax alone along with all the repair costs. Principal reduction?? Most of your money is going towards interest on that mortgage and even the money that is going toward principle reduction is being used to deleverage your potential future return. Not to mention that a house makes you immobile and unable to move across state or country for that better paying job or opportunity. The greatness of real estate is THE single biggest myth propagated on AMericans by the NAR and they do a very good job of it.

Posted by Steve | August 7, 2009 12:11 AM

I also found 2milion's comment rather smug.

Let us not forget that 2million's strategy relies on on appreciating assets in the future, but appreciating assets are neither a right nor a guarantee.

Should the stock market refuse to, hmmm... "cooperate" for the long-term I'm sure he would feel he wouldn't be the smart one if he had lost all his money in investing instead of enjoying some of it.

I'm also a heavy saver but the crisis has taught to not be so confident about it being the "true and only way". I have friends with similar income as I do that drive Ferraris and other high-end cars - they also work very hard, as I do. Although I would never feel comfortable making the choices they do, I respect their choices and in some ways I salute their desire to live in the moment.

2million, please don't start down this path of believing you're some part of the elite because you're thinking long term. Sorry if that's not what you meant, it certainly felt that way.

Posted by Muzie | August 7, 2009 3:47 AM

@Steve
You make alot of generaliztions about landlords and homeowners. Maybe you are hanging with the wrong crowd. Real Estate has been very kind to me and my portfolio.
It sounds like you have been burned in the past.

Posted by Corey | August 7, 2009 10:00 AM

That is one of the big issue 2million has.... As much as I enjoy reading his blog, his blog normally gives the sense that he believes he is the smartest person in the world, and the remaining are all dumbos....May he should learn to be modest...

Posted by Brad | August 7, 2009 10:19 AM

I understand 2Million's smile.

Debt is the money of slaves & he knows that he has slaves working for him.

Posted by jhl | August 7, 2009 10:56 AM

I guess as long as they pay the rent on time, they can buy and spend whatever, whenever. Good for them.

Posted by Corey | August 7, 2009 12:56 PM

Funny that you mention it, 2million, because when I see a man with 500k$ in the bank that is so insecure with himself that he's still clipping coupons and obsessed with saving 10$ when his portfolio fluctuates by 5000$ every day, and who considers a 100$ purchase a "big ticket item" when the man has 5000 times that amount, that makes ME pause and smile.

You may know a lot about saving money, but you sure as hell don't seem to know much when it comes to happiness.

Posted by Anon | August 7, 2009 3:32 PM

Corey, interesting that you didn't bother to address the logic and the argument, only the person. Talk about being burned...at least I deal in facts. Real estate in general (and I say in general in BOLD) is not a good longterm investment because it GENERALLY does not appreciate faster than other better assets like bonds or stocks. This is just a statistical fact. ONLY during rare periods of time, say the early 00s, did real estate outpace other investment classes but this is extremely rare. I have accumulated more money than 2million and I'm about the same age (early 30s) and I did it by staying OUT of the real estate market. Houses are good for living in but that's it. They are money DRAINERS.

Posted by Steve | August 7, 2009 7:00 PM

I personally read this post and thought nothing of it. I am actually shocked that it created so much anger in the comments. There is a general sense of attacking 2million for having accumulated wealth and saving for the future. Unfortunely, I think this is the way the most Americans views are going these days. People have been burned by declining in housing and stocks, and they want someone to blame. A lot of anger is being directed at the people who still have something left. In the long run, 2million will be better off then his tenants. Yes, real estate has gone through a correction for the past 3 years, but over the long term it will be a better investment then flushing a rent payment down the toilet. I'm not talking 3 or 5 years, I'm talking 20 -30 years. Given similar incomes, a person who buys a Honda over a BMW, or a 32" TV versus a 52" TV will be better off. The comment above that "You may know a lot about saving money, but you sure as hell don't seem to know much when it comes to happiness" is comical to me. So buying a BMW or 52" TV buys happiness? Ha, that is the probably the same person who is living paycheck to paycheck, stressing on when the foreclosure notice will come. Does that make you happy?

Posted by sox28 | August 8, 2009 10:11 AM

where is the 70000+ Parked making 8%?

Posted by David Lopez | August 8, 2009 11:23 AM

sox28, you will be far better renting the next 3 years than you will buying a home. If you buy you are simply flushing your money down the toilet. House prices STILL have not corrected down to the longterm Case-Shiller average. Note that this is in GENERAL though there are pockets of homes that are fairly or even undervalued, say in Detroit. But in general across the US, the average house price is still about 25% overpriced. Don't flush your money down the toilet. REnt instead until prices come down to normal levels. In fact, most investments tend to overcorrect. That means we could very well see real estate overcorrect to the downside and fall even more than 25%.

Posted by Steve | August 8, 2009 11:32 AM

steve, the entire point of my comment was that people shouldn't be looking at the next 3 years, but rather, the next 20 years. Sure, prices could decrease further. But who will be in better shape 20 years from now. Someone who purchased a home that could afford and paid down the principle, or someone who dumps the same payment into rent? Renters will have no asset to show for their 20 yrs of rent payments. A buyer will have the home owned outright. Now, I am not comparing the "investment" of a home to other assets classes (ie. stocks, bonds, etc). There is simply no comparison since a home will appreciate at slightly higher rates then inflation, versus much higher rates for stocks or bonds. All I am doing is comparing buying versus renting a home over long periods of time. IMO, there is no comparison between the two. As a general disclosure, I have actually put my money where my mouth is on this point. I sold my home in August 2005 when I saw the market getting overheated, making approximately 80% gains in a little over 3 years. I rented for about 3.5 years, but have recently purchased.

Posted by sox28 | August 8, 2009 4:17 PM

One additional point on buying versus renting....there is a lot of speculation on increased inflation once the economy shows any signs of life. I personally believe that inflation rates will rise to much higher levels. In this scenario, buyers will come out much better then renters, as the mortgage payments remain the same while the asset increases with inflation. This versus renting where the payment could increase at rates of 5+% / year

Posted by sox28 | August 8, 2009 4:21 PM

It's funny - your house appreciates 4% per year and you pay 5% and more mortgage. And no, even tax deduction is not going to save you.
To another poster about RE millionaires - leverage. Again - leverage.

American dream to own a house is government propaganda to force people to borrow and pay since spending is 70% of our economy...

Posted by Anon 1 | August 9, 2009 12:03 AM

Anon is correct. Sox28 you still fail to understand the key concepts were are discussing. When you buy a home you end up paying a higher monthly mortgage rate AND interest on top of that. If you rent, you have EXTRA disposable income that could be investment in higher returning assets. It matters not one bit that home prices will appreciate over the next 20 years. The simple fact is they won't appreciate enough to offset all the costs and lost income you will get from it. Renting is not throwing money down the toilet, it's throwing a little bit of money down in exchange for using a lot more money to make interest. Buying is throwing a lot of money down the drain with the "hope" of making a return. There is no comparison that renting over the next few decades is better than buying. How will your house appreciate by the way? Who's going to buy it? Take a look around at Generation X and Y. They're living with mom and dad and wages have not risen nor will they. If you don't believe me read "The World is Flat". Stop parroting the line of the National Association of Realtors. It's all propaganda to get you to spend.

Posted by Steve | August 9, 2009 1:45 PM

And I forgot to mentioned (agree with one of the posters above) - I earned more money in the last 9 months then ever. It's simple - instead of investing in illiquid investment vehicles like RE where you can play only one side (appreciation hope) other LIQUID vehicles offer you both sides (long nad short side) of an investment you can profit from.

And that's a huge difference...

Posted by Anon 1 | August 9, 2009 7:12 PM

steve - I understand the concepts that are being discussed, I just don't agree with them. There is a big difference between the two. Your arguement that the cost to own is significantly more then renting might have held between 2003 and 2008, but in many cases, is just not true today. In many markets (not the bubble areas such as CA, NYC, Florida, Phoenix) there is no material difference in price between renting and owning an equivalent home. In these markets, there is no "additional savings" by renting. In these cases, the situation I outline above just makes more sense. Again, only talking about areas that are reasonability prices. I agree that areas such as CA and Miami probably have ways to do on the downside. Fortunitely, I am not in one of these markets. And please do not associate me with the National Association of Realtors. If we agree on one thing, its that NAR has done a lot more harm to the industry then not. Only in real estate can someone spend a few hours listing a home, yet make a 3% commission. It is pure robbery

Posted by sox28 | August 10, 2009 2:22 PM

I live in the bay area where rents are substantially less than the cost to own. To make up for not owing the 'appreciating' asset I invest the difference between a theoretical mortgage and our rent - nearly a 3x difference. Best to just accept that there are multiple personal and financial variables that will determine an individual's 'best' outcome from the rent vs own decision and call it a day.

Posted by Bear-ly | August 16, 2009 11:25 AM

2 million, I think you read too much 'Millionaires Mind' book. To be a millionaire, you need to be humble, not arrogant, including about your frugal living style. The millionaire people mentioned in the book 'Millionaires Mind' do not choose to live frugally so that they can feel good comparing themselves to other people who live more lavishly. They just chose to do so because they enjoy that living style, period.

Posted by 10 million dollar millionaire | August 16, 2009 7:17 PM

I see this type of irony play itself out in my day to day life. It seems some of the people I know are more concerned with spending for fancy toys, than with any real 'assets' or safty net. When you look at me, I own very little and am concerned with saving/ growing money. A stark contrast can be made with friends who are obsessed with buying new garbage, than wondering why they can barely cover rent. Worse, some wonder why they can't have the dream of a house - thats kind of tough when you work for a year and aren't able to put away more than 200 dollars to savings.

We have an epidemic where people readily accept handouts, and expect them, yet are unable/ unwilling to shoulder responsibility for their own actions. They would just assume buy a new car they don't need rather than take time to invest, or act rational with their money. Its sad, but these people would rather appease others than focus on their own well being.

Posted by DJ | March 3, 2012 7:09 AM