This morning I was walking to my office. Yes, I live close enough to my place of work to be able to walk. Driving my 5L, V8, 2-seater roadster contributes to global warming, or climate change, and that’s despite 2 newly replaced catalytic converters. Guilt!
A few months ago I passed by the little Cape Cod-style house above. It was in a state of disrepair. When I took the picture, a woman dressed in her nightgown, wearing curlers in her hair, stormed towards me in a threatening manner from across the street. It’s was around 3 p.m. in the afternoon.
She claimed that it had been her house, and that a bank had repossessed it. She had probably since moved in with a neighbor or something. She wanted to know why I was taking pictures. Maybe she thought that I worked for that evil bank. I said, “It’s a cute house”. This was the extent of our short relationship. We went our separate ways. I’m sure she’s still angry, at the bank, at me… life in general.
A few days later, a demolition crew flattened that house, in one day. Then, earlier this morning, a sign had been erected. New, exciting, progress, victims required!
“Three New Homes [priced] from the High $600’s” - Cool huh?
A developer buys a broken-down, bank-repossessed house for $100,000 (guessing), demos it, builds one new 3-home-building for around $300,000… and sells individual homes to 3 victims for a cool gross price of around $2,000,000.
Well yes. Owning a house. An aspiration. A symbol demonstrating some progress toward achieving The American Dream. The Shrinking American Middle-Class Dream. A poverty trap aka household debt. The latter for sure, rather than ownership of a house itself, per se.
I’m going to skip the psychology of homeownership, a desire to impress, rent vs. buy, etc. Instead, I’ll concentrate only on the math.
$600,000 will buy you - oh - five or ten 2-bedroom condos in the suburbs of West Palm Beach, Florida. I know this for a fact, because we own a couple. They rent for around $1,200/month. I’ll use $1,000/month net for simplicity of illustration (after HOA fees and property taxes).
Let’s assume the buyer either has $600,000 in liquid cash, or otherwise qualifies for a $600,000 bank loan or mortgage.
Buyers of these new homes in King County, WA - where the old house was located - will pay around $8,400 annually in property tax. That’s a fixed cost that will increase every year, guaranteed. For the sake of rounding, let’s assume ongoing maintenance and upkeep is only $300 per month, representing a minimum total cost of $1,000/month (property tax + maintenance).
Assets are things that make you money… not things that cost you money!
So, the guy who bought e.g. 6 condos in Florida at $100,000 each (the same $600,000 investment) can generate income of $6,000/month (6 condos rented out at $1,000/month, each). The homebuyer is spending $1,000/month from his or her after-tax income.
But, you say, a person who lives in WA State, e.g. working at Microsoft in Redmond, has to live in or around Redmond WA, not Florida. So what? That same person can rent a 2-bedroom apartment located in the East-side Seattle suburbs for $1,500/month. I know this also to be a fact, because I’m currently doing this myself.
Therefore, the guy who owns 6 condos in paradise* (aka West Palm Beach) will net $4,500/month ($6,000 rent received - $1,500 rent payable). And, he can holiday in Florida for free whenever he has a condo vacant, and available for rent.
Oh yeah, and he still works at Microsoft in Redmond, supplementing his very generous corporate compensation package (this I don't know for a fact), with passive income of around $4,500/month.
Next time you think of the shrinking middle-class, ponder the above. Then, go buy a new house.
* Disclaimer: I realize people's definition of paradise differs