Comment by WalterBright
3 days ago
> Rich investors and companies effectively get to buy homes at a discount vs average joes.
Suppose you had $100,000 in cash, and buy a house for $100,000. You'll not be paying 5% interest on a mortgage. But if you did not buy the house, you would be investing that $100,000 for a 5% return.
So, you're either paying 5% on the mortgage, or foregoing 5% return for investing that money.
The rich person is not getting a discount.
Couple things to add. First, rates are much lower when you’re leveraging 10,000 homes at 3:1. That allows you to purchase 20,000 additional homes, which isn’t something the normal individual can do. Second, most of this borrowing was done during the 0% interest days and when rates went up after Covid, a lot of the operations grinded to a halt. Third, there’s no regulatory environment for rent rates and rate increases.
> First, rates are much lower when you’re leveraging 10,000 homes at 3:1
What interest rate do you think rich people are getting?
As for the Covid interest rates, those were available to everyone.
Third, we're talking about buying houses, not renting.
> What interest rate do you think rich people are getting?
Depends how rich. Banks have long been known to offer below market or even zero interest loans to the richer segments in exchange for/in the hope of securing other business from them.
2 replies →
This is a good point, and I was curious to see exact numbers on the invest vs be a landlord opportunity cost.
The rich person gets to rent the house, while the "newly weds" are living in it. And most importantly - the house itself will appreciate in value at a rate near 5%
Assuming they both buy a $500k house w/ a 20% down payment and a 5% loan. Realistically the young couple would get a worse rate but lets say they both get 5%. Monthly payment is $2,522.29 w/ taxes and insurance lets call it $3000 a month.
The newly weds are just eating that entire cost every month for 30 years, whereas the Rich landlord rents it out. After a quick and dirty Zillow search lets assume $3500 a month rent to start, so he's making $500 a month profit on an asset thats already increasing in value 5% ish per year.
So, with these assumptions: - Home cost increases 2% a year - Rental price increases 3% a year - Home value increases 5% a year
Total rental profit is $537k Final home value is $1.56 M Total Loan cost: $873k
Bringing the landlords return on 100k to be $1.224M in profit over 30 years (Final sell price - total loan cost + rental profit assuming they stuff it under a mattress). Whereas $100k at a 5% yearly return will be ~$430k
disclaimer: Im not the best with Excel and ive never actually bought property so im sure there are flaws in my math.
> And most importantly - the house itself will appreciate in value at a rate near 5%
or 0.7% ... or 20% ... or ... -2.3% ... or ...
An intelligent investor wouldn't buy it outright, they'd get a mortgage with a lower than average interest rate. The appreciation of the home will cover the interest rate over the long run and the interest rate is a small price to pay for keeping most of that $100,000 liquid for other investments.
A finance person will mortgage the house if the mortgage interest rate is less than the investment returns elsewhere. If the mortgage interest is higher, he'll buy it cash.
Aren’t you forgetting something, like hmm, rent and appreciation?
I'm talking about both parties buying a house, not renting it. The appreciation would be the same for both scenarios.
Except they do, as the original comment already said. The rich “person” has cash and access to much cheaper credit, is buying multiple properties, not paying the bills and earning rent, the other will have a mortgage.
> The rich “person” has cash and access to much cheaper credit, is buying multiple properties, not paying the bills and earning rent, the other will have a mortgage
Rich people do not have cash, as they invest it all. (That's how they became rich.) Rich people do not get away with not paying their bills. Rich people do not earn rent on the house they are living in. Rich people do not get better mortgage rates because they are rich. They get credit-scored like everyone else. Bankers want to charge as much interest as possible.
The original comment said “Rich investors and companies” which is why I put “people” in quotes when replying. This is not about homeowners in different income brackets.
This seems to depend an awful lot on your conception of a "rich person".
My wife and I have owned (at separate times) a couple of rental properties over the years due to various life circumstances (we no longer do). Both properties were valued in the mid $200k range. While being even in that situation certainly makes us unusually fortunate, it gave us no access to cheaper credit.
Now, I appreciate that there is a version of a "rich person" who does. But the GP's example wasn't specifically restricted in that way.