[andrepd]

This is a mantra often repeated on hn when anythig related to housing comes up, but is it true? Many cities around the world have experienced the airbnb effect or similar: demand from tourists which can pay better means higher demand and lower supply as houses are converted into tourism accommodation. This is also also the mechanism of gentrification in general, so it's not just tourism.

[onlyrealcuzzo]

Most AirBNBs - like most rentals - in desirable places are actually heavily cash-flow negative.

This only works because you can count on the Fed constantly lowering interest rates and pumping up your investment on 5:1 leverage.

[sudosysgen]

Nominally cash flow negative doesn't mean shit. For starters many people own the property outright, making it cash flow positive, and beyond that what matters is your change of equity.

If you start with 50 000$ then loan against 30 000$ of that, but your equity increases by 70 000$ as you make payments, and then sell the house at the same price, you're still up 40 000$, even though your cash flow was -30 000$.

[onlyrealcuzzo]

A cash-flow negative house that doesn't appreciate and become ever more cash-flow negative is a TERRIBLE investment compared to the S&P 500.

In the simplest terms, take a $100k house. 20% down = $20k downpayment + $3k closing costs. Generally, this is a house that would rent for at least $800/m.

Your payment is $337/m. Of that, only $143 is principal. If the house is even 5% cash-flow negative - that means you're only getting ~$100/m in principal.

You'd get ~$145 on your $23k downpayment in the S&P 500. And instead of being cash-flow negative and taking money OUT of your investments, you could instead ADD to it.

Add to that the fact that you'll pay an additional ~6%+ transaction costs at closing -> And even a 5% cash-flow negative house with 0% appreciation is likely to come out negative.

This only works because the Fed pretty much guarantees that house prices will appreciate >3% per year for the last 20 years.

3%*5:1 leverage => Crushes the S&P 500 average. Even if you're 10% cash-flow negative, it usually beats the S&P.

Add to that the fact that $250k of the capital gains are tax free -> And that pretty much eliminates the 10% transaction fee and makes it better tax-wise than the S&P 500.

[sudosysgen]

I think we're talking past each other. You're not describing a house that's cashflow negative, you're describing a cashflow positive house, with 337+mainrenance expenses and >800/m revenue

Generally a cashflow negative house will have a much higher payment over a shorter term with much more principal, and much more in rent.

You also forgot inflation of the house price. You have to take into account 2% increase in house prices even without the fed doing anything, and leverage that. When you do that you find out that almost all of your interest payments disappear and much more goes towards you principal, thus increasing your equity gain.

[onlyrealcuzzo]

Cash-flow negative is a simple term. It means your cash out is more than your cash in.

You can't hand wave expenses and pretend you're cash-flow positive. You can do that with profitablity, though.

I did not forget inflation. I literally said a "a cash-flow negative house that does not appreciate and become even more cash-flow negative"!

You are taking appreciation for granted (which is fine, the Fed literally guarantees it now).

[sudosysgen]

Inflation essentially guarantees appreciation at the rate of inflation for hard assets.

If you have a house with a 20 year mortgage at 3% interest where maintenance is 50% of the mortgage payment, with no appreciation in real terms and 2% inflation, 50% of what rent is becomes profit. (1/((1.03-1.02)^20))*0.66 = 54.5%

If you put down as down-payment 100 000$ for a property worth 1800$ in rent, which is realistic, you get 11 000$ in profit per year from a 100 000$ investment, which is great.

That's assuming no appreciation in real terms, ie, the cost of the house exactly matches inflation.

Therefore, renting is profitable even without appreciation of real estate in real terms.*