A guy who can’t afford more than 6100 monthly payment shouldn’t be buying a 1million home.
Monthly payment on mortgage shouldn’t exceed 30% of ones monthly earnings. Considering 6100 is 30% then his salary is ~21k a month which translates into 252k a year. The rule of easily affordable mortgage tells that one shouldn’t buy a home that costs more than twice his yearly income which is only half of the price this guy is willing to pay for his house. So he is already lookign for trouble buying a house that he can’t really afford.
next if he can’t afford to allocate more than 6100 a month he will first need to go homeless for 2 years because he will need to save for 15% down payment which is 150k
closing costs are roughly 3-4% which will make him go homeless for another 5-months to save up for.
the insurance is roughly 1.5% a year and property taxes are usually the same. So he will need to allocate additional 30k per year or 2500per month from the money he doesn’t have.
There is no one right answer. in some cases it makes sense to buy , in some – to rent. My point is that it’s impossible to say that renting is always bad and buying is good. it’s more like 50-50 with several benefits in each situation.
Anyway. this whole thing is an offtopic. If you decide to buy a house one day – shoot me your numbers. i’d love to look at your deal and give advice if i can.
From the surface it might seam no brainer that buying is always better than renting, but not for everyone. Owning real estate costs much more than the purchase price. Most ignore insurance, property taxes, maintenance, interest rate, closing costs. For example for a 30year 100k $ loan with a 5% rate buyer will pay roughly 95k in interest alone. If you can get rent below that 1% rate and the difference put aside in savings – after 30 Years of renting you’ll be able to buy a better house with all cash than someone who bought house 30 years ago with a loan and never rented.If you invest those saving with the same 5% return – in 30years you’ll be able to buy house twice the value with all cash. Besides average person moves once in 5-8 years. If you have to change your rental – it’s as easy as moving your stuff – if you need to sell your place every 8 years and buy a new one you’ll most likely loose several thousand on sale/purchase process and closing costs.
From someone who owns several real estate units this might seam that I’m not practicing what i preach. In fact next year i’m planing to move to a rented place and rent out my house as well.
Here’s the trick – only scenario when this doesn’t work is if the market is absolutely at the bottom, then purchasing now will give you the benefit of value rise. Also if you rent – try to find someone who is renting out the spare place because it just sits empty. Don’t rent from someone who is a professional investor landlord.More on this here: https://youtu.be/IomfI_iF4EM
Is the person who has paid 40 years of rent and never bought something because of the fear of dropping prices (and maybe the hope of dropping rents), who is now homeless because he cannot afford the rent anymore, smarter than the person who has bought a house for itself that is now only worth a tiny bit of it’s original price but he can live in it until he dies?
Both scenarios would never happen in the same time. if the property values drops so significantly so does rents and it shouldn’t be hard to afford renting. Because if prices as low everyone is buying instead of renting and landlords have to lower the rent to find tenants. if prices are high everyone is renting because they can’t afford to buy and rents goes up.
If the 40year renter is under a high risk of loosing his income and not being able to afford to rent then it’s much better to be homeless as previous tenant than homeless and owing bank a big money in mortgage after your home goes to foreclosure.
Investors tend to make bad decisions, homeowners happen to get good deals, things can go wrong for both of them. The reason is that smart investor would be ready for worst case scenarios. For the regular homeowner is never bad to buy his place as an investment. There is lot of information about this in book “The millionaire mind” by Thomas J Stenley. in chapter 8 – The home.
But you are again ignoring the fact that (hopefully) your apple investment is far more sustainable and keeps his value far better than your eggs, which are molded after 1 day (Let’s assume they are already cooked, else it doesn’t make sense and I need to find other fruits etc )
i start to like our examples
Agree, but since my fragile egg business is paying for my apples business i choose to value my eggs much more because without them there wouldn’t be any apples either.
To put this in real words – I literally invest 100% of my VH earnings in my other business with an idea to retire in next 5-10years on solid assets that brings in steady income unlike VH that could dry out in 3-5years. Meanwhile keeping the VH as additional income after retirement wouldn’t be bad either.
Before i can afford the egg business to dry out (should that happens) I need to accumulate quite a lot in apples. Since i now know that current eggs gives me income equal of 1/2mil of investment in apples I realize i need to cherish my eggs.
So you are saying nobody in my city should ever consider buying something?
Smart investor with buy and hold strategy should never buy a rental in your city. Investor who is hoping for value appreciation should buy if the risk is worth the return and he might as well rent out the place while waiting for value rise.
Regular people who doesn’t understand anything about the investment and just wants to desperately own a posh property should buy it because investors need uneducated consumers who help them become richer.
you are comparing eggs with apples and multiply them with a random number.
Will use you own example to explain.
I am comparing eggs with apples and my VH portfolio is not worth half million and I could never sell it for such amount. Even though it might earn me that amount one day.
What this calculation tells me is if my egg business goes bust – how many apples i need to get the same return. And since it tells me that I need way more apples that i have – I’ll better be gentle with my eggs
The only thing where local prices comes in play is the fact that after a year my property is paid in full and i own it outright. If property costs 100k and more – obviously it’s very hard to dedicate more than 10k a month to cover interest+principal of the whole amount in one year.
However the 1% rule applies almost any time. Except when you don’t know what you’re doing. the rule states that monthly rent should be aprox 1% of the purchase price. It doesn’t matter if the property costs 10k or 100k unless you buy into a really bad deal- your rent should be 1% of the purchase price. which means 100k property should rent for ~1000$ a month. If it doesn’t – it’s a bad deal unless you can have a really quick appreciation of value and then sell it for profit after a year or so.
If 1% rule applies – it means this property gives you 12% return. (1% of 100 000=1000| 1000*12months = 12 000 | 12 000/100 000=0.12 or 12%) Of course you have to factor in closing costs, financing costs (bank loan costs and interest), vacancy rate, potential repairs etc. So let’s say this brings down the return to 10% a year.
now there is another rule. the rule of 72. Take the 72 and divide by your yearly return rate to find out the approximate time that is required for your investment to double. so 72/10=7.2 years.
If you’re currently renting and estimate that purchase price of that place is so high that 25+ years of rental income wouldn’t cover it – then you should be lucky and your landlord is having a bad business. Stick to that place and never consider buying.
You are comparing work wage with interest here. That is a bad comparison to start with. Let’s say in year 2018 you have your last sale, just lets assume that. And lets say you have earned $150,000 in total from your portfolio since your start here in 2010. So that was the money you got for your work, and earned that over 8 years.
You know how much money I would need to equal $150,000? Answer: $150,000.The reason why people invest in things like real estate or financial investments / stocks is because there is a chance that they can both earn on rent/interest as well as not lose their investment when they sell it one day. So they have a steady stream of income as well as the investment. Otherwise it would make no sense to pay for a real estate as you won’t earn that much in rent in half a lifetime.
Wage vs interest earnings from VideoHiveI see where confusion comes from. Indeed it’s a bit hard to determine whether VH income is a wage or interest. I bet it depends on how you look at it and how you approach the situation. If one is dedicating a continuous work to the portfolio – it is his wage. If you enjoy the fruits from previously invested work then it’s more like a passive income from investment rather than a wage. I haven’t uploaded anything for 6 months now, but my portfolio is still earning me steady income. Dividing my yearly income by hours i spent creating those few submissions i did this year – would make my hourly rate ridiculously high. Besides in some years I’ve devoted more time than other years and this hourly rate is highly fluctuating over time, while average yearly income been steady for 4 years now. For me looking at this as an investment makes more sense than as wage. Meanwhile for someone who is releasing new product every second or third week this is definitely a wage, because his income is rising each month and investment calculations would not make much sense.
Continuous work doesn’t necessarily make your interest earnings a “wage”95% of a time investment doesn’t happen from a heritage or a lottery prize. The investor is working and then allocating part of his wage to investment every month. Comparing this to VH – you never get paid to reinvest the earning, but instead your time spent on your next project is an investment. Besides when you invest your money you have to work on your investment as well. To be 100% sure that you will get back your initial investment and interest without spending extra time on this – your only choice is to invest in bank deposit which gives you return that doesn’t even cover an inflation. If you invest in stocks (which tend to go bust and you loose part or all of your initial investment) and want to get return that is market’s average or more – then you have to spend time studying and analyzing the trends and markets. So financial investment does require some degree of continuous work and it doesn’t necessarily make interest payments a “wage”.
Why the initial investment is less important than return it givesThere is a difference between investors. Seasoned investors are more concerned about the cash flow and steady income than initial investment amount. They consider it in Net Worth calculations, but otherwise why would you need to withdraw the initial investment if it gives you steady return? For example investment in real estate. It has low liquidity because it’s pretty hard to sell and you can’t just sell off part of your real estate anyway. I just hired a licensed appraiser to estimate the value of our rental property and he estimated it to be less than what we invested in initial purchase price and rehab because the market is so low that this is the time to buy not sell a property. Everyone is looking to rent because no one can get a loan even though sellers struggle to sell for cheap. We found tenants in 24hours and if they leave i know that we’ll replace them very quickly. If i consider to get my initial investment back I would struggle to do it and why should I? To put it in bank deposit for a less than 1% return? The rental we have gives us 14% yearly return which means I’ll earn my investment back in full amount in less than 6 years without selling the property.
How it all relates to VideoHive’s portfolio value?I don’t care if I’m never able to get the mystical 1/2 million of “initial investment” back. I’m more concerned about the regular return it gives. I’m well aware that this investment will not run forever without my attendance. That’s why I need to occasionally update the old files and create some new submissions. Where the calculation comes in? It tells me – if I don’t do a good job keeping my VH portfolio up to date and the revenue drops – I better find a spare 500k $ to invest in stocks (7% return) or 250k in rentals (14% return) to sustain the same income amount. In other words – it helps me determine the amount of alternative investments I need to get the same return and encourages me to do the maintenance unless i want to spare that half million. Appreciate your portfolio, because it’s worth more than you thought – that’s the initial theme of this forum post.
Pretty nonsense to me, sorry.
[..]If I had to pick now between a pile of money that brings me 50% of the yearly videohive income in interests/stock investment earnings, and the actual videohive portfolio, guess what I would pick? The money of course, because that is most probably more money than will ever come out of the portfolio.
I guess you have to have a solid knowledge on personal finance and investment in general for this to make sense, but even if you miss the juice of geeky finance stuff consider this:
Regarding your comment – I would pick the same, but chances are you will never be presented with such opportunity. You said yourself: “because that is most probably more money than will ever come out of the portfolio.” And this was exactly my point for this calculation. Appreciate your Portfolio because to earn equal amount from alternative investments – would require to invest more money than you’ll ever have in spare.
And the thing about 7% and 107% only applies if you reinvest the interest earned. the same would apply if you take all your VH earning and reinvest by hiring additional designers who work for you, to buy ads etc. You don’t reinvest all of your VH earnings so don’t factor this in comparative equation either.