
Show HN: Should you buy a house and rent it out? - Lukas1994
https://causal.app/buy-to-rent/
======
frabcus
Owning a property is work - sudden repairs at an otherwise busy time in your
life. Phone calls and customer service for tenants. New tenants. Paperwork.
It's partly the time actually worked, but also the unpredictability and out-
of-hours nature of the work.

Looking at the model I guess the nearest factor is Annual Costs (maintenance).
But it doesn't feel properly measured.

I note that for someone on Hacker News, it needs charging at the day rate for
a programmer. Or even as an opportunity cost - charging with a risk-based
possibility of the reward of starting a successful technology startup. Or of
spending more time with family or in sunlight, amongst trees. At peace.

~~~
apathy
This 1000x. I reflexively said (out loud) “god no!” in answer to the title
question.

The only people who ask this question are people who haven’t been landlords.
Every single one of my friends who has, can commiserate with me as a former
landlord.

Maybe buy a vacation home to rent, or an apartment complex. And of course
being a part- or full-time landlord is a perfectly reasonable job.

But if you think that being a landlord just means having someone else pay your
mortgage, I guarantee you will think differently after a year with even
exemplary tenants. And most tenants are far from exemplary.

(still shaking head)

~~~
bufferoverflow
It really depends on where you are. In many european countries it's
traditional for the tenant to fix the problems. Washing machine broke? Get a
replacement yourself. Pipes clogged? Call a plumber.

~~~
YorkshireSeason
I recommend thinking about this probabilistically:

X% of tenants are reasonable and handle the repairs they are contractually
required to handle smoothly.

(1-X)% of tenants are a massive headache, and call the landlord for every
lightbulb that needs changing, threaten to sue you all the time, smash your
property to pieces etc etc.

Compute the expected value, and compare with other forms of investment. In my
experience, renting out a single property is not worth the _expected_ reward,
vis-a-vis other forms of investment. This changes if you can reap economies of
scale from renting out multiple properties. (Cut-off point depends on ambient
legal system, tax, your own background (e.g. if you are a lawyer, you can
handle legal disputes yourself) etc.)

~~~
apathy
Hello fellow statistician (whether by training or habit). For everyone else,
note that this approach is not limited to landlording.

Excellent exposition!

------
anm89
This is pretty cool.

One thing that feels like a serious oversight though is that it isn't
factoring in taxes. Rental income is taxable income. If you depreciate the
property to avoid or reduce your taxable income you'll end up taking a big hit
on the eventual sale as it will all be capital gains.

Another issue I'd take with this is that it's a lot smarter to focus on
cashflow then gross income because odds are you aren't going to last 30 years
to watch your net worth grow if you are losing cash on a monthly basis, even
if you are technically building equity.

I'm currently getting out of being a landlord because while it was overall
profitable, the margins are alot tighter after factoring in taxes and it's
also a massive headache. That income certainly does not feel passive.

~~~
refrigerator
Thanks!

Yeah you're totally right about taxes — it does make a big difference. We had
to make simplifications somewhere, and taxes are quite country-specific so we
didn't want to be too prescriptive. We hoped you could increase "Annual Costs"
as a very rough proxy for taxes.

Cashflow is a really good point, and something we hadn't considered much. You
can get a rough idea of cashflow in the "Net monthly earnings" section of the
output, but it probably deserves more focus for sure.

Operational headache is interesting to account for haha — we'll add these
things to the model explanation :)

~~~
propogandist
>We hoped you could...

Given you're positioning this app and article as a means to answer the
question on buying a home and renting it out, you should disclose these items
(liabilities) to the reader and let them figure out the scenario for their
local market, rather than hoping for the reader to do something.

Property tax is a large expense, and insurance is also a required expense if
you have a mortgage (in the US). Finally, income you generate from the house
(Rental Income) is taxed at your effective tax rate, and this will be a Large
Liability at the end of each year.

Although there may be deductions you can take to minimize some of the expenses
(in the US), you will be required to pay taxes on the income you generate and
I suspect that's the case across all countries.

------
raviolo
Calculations of this model are misleading. One hugely important parameter
missing: inflation rate. This would tell us what part of that 2.1 million in
30 years is real return and what part is simply inflation, i.e. depreciated
money. Put it differently, it’s important to know what the investment will
yield in terms of _today’s dollars_ \- not depreciated dollars.

For such a long horizon of 30 years modeling without accounting for inflation
makes little sense. For instance that 7% stock market return used by the model
as a default, which perhaps may be used as proxy for inflation, would return
661% over 30 years.

Default values for other parameters and their _distributions_ also look very
optimistic to me. Like 4% annual appreciation which maybe drops to 2% annual
appreciation. How about 40% annual _depreciation_ , your mortgage being 30%
underwater, and foreclosure? How about the bank that issued your mortgage
going bust, then the bank which bought that bank going bust, and then you
30-story building being shut off from public utilities? What am I smoking?
Neh, I just bought investment properties in Miami and other places in Florida
in 2007. Anyone too young to know what I’m talking about: I urge you read up
on the 2008 crisis before you start buying up investment real estate, after 10
years of unprecedented growth of both real estate and stock market.

~~~
zenkat
Try using the model with a very high down payment. At 50% of property value,
your gains are equivalent to the 7% baseline. Beyond that, the property makes
significantly less than the stock market. If you pay 100% up front, you end up
making half what the stock market does.

In other words, the gains shown by this model are coming from leverage, not
from the underlying asset. Leveraged investments always return more, but with
higher risk. That's true in the housing market as well as the stock market.

~~~
evancox100
Leveraged assets are not necessarily always more risk than unleveraged ones.
You also have to look at the underlying risk/volatility.

That said, I agree with your point in this case that the leverage is the main
component of the return, and greatly increases "risk", for some definition of
that word. In a non-recourse state where you can default on the mortgage
without losing other assets, the risk calculation must also take that into
account.

~~~
tyxodiwktis
In addition to your point about leverage and underlying asset volatility,
certain assets are not regularly marked to market (real estate being a prime
example) and so you don't experience the true volatility of the asset unless
you attempt to sell it.

As a concrete example, a number of commercial real estate investors were
technically insolvent in 2008-2009, with assets worth less than the balances
of the loans used to buy them. They just pursued the 'hear no evil/see no
evil/speak no evil' approach and marked to book (what they paid for the asset)
until the market recovered. This approach is aided by the multi-year nature of
commercial leases, which protects the cash flows needed for debt service (as
long as your tenants stay in business).

In aggregate these factors allow professional real estate investors to
consistently earn return by taking on a ton of leverage and with it huge but
disguised risk. Back to the original point of the article (buying to rent),
most retail investors don't necessarily have the float/access to debt to
weather that volatility, and their cash flows are more sensitive which
compounds that risk.

------
jaabe
I live in a 3 room 90m^2 apartment in central Aarhus in the middle of the
university. It’s worth $350,000, but and you can rent out each room for
$700-$800 a month, to an endless stream of students.

The guy who was elected head of our ownership organisation/community (might be
a danish construct) bought two apartments when he moved in. He did have
$150,000 to make both loans not-bank loans (again this might be a Danish
thing, but we have special loan institutions that cover 70-80% of personal
house loans at really low rates). Anyway, the one he rents out pays for both
loans, taxes and added expenses and after 20 years those loans will both be
paid out.

It’s really kind of silly how easy life can be if you start out with a little
money and use them wisely.

~~~
benj111
"It’s really kind of silly how easy life can be if you start out with a little
money and use them wisely."

Could you clarify? Is it a comment on the randomness of life? Because at the
moment it doesn't read like that at all.

~~~
tluyben2
I read it as, but I could be wrong, that if you start out in life with money
(parents/inheritance/...) and you decide wisely, like buying a house close to
uni and putting in a shitload of students, then you have it easy.

I owned a student home which I bought from partly smart and mostly lucky stock
investing (I had savings from strawberry picking (yes, really; that made money
faster than coding in those days for me) and I put it on Borland before 2000;
they went up big time, I sold at the right time and student me could buy a
house suddenly); it was in a city with high student housing prices and it was
a really good house for it; it was big and could house 8 (to 16 if pairs)
students paying 8*400 euros/mo. It was not easy money though; I lived there
too for a while and the constant maintenance drove me up the wall. I am
(always was) mostly someone who lives in his head and thinking about code and
leaking toilets, pipes, flooding etc really is something I cannot deal with.
So I sold it after 4 years of getting stressed.

I definitely wouldn't do real estate again; I like virtual assets and the
stock market & starting + selling companies treated me a lot better than real
estate ever can do. Without the worries of brick & mortar.

~~~
benj111
Possibly, I read it as an ultra free market, right wing, if you've had a
little money its your fault if you haven't made a success of yourself.

That's more dots than I'm willing to connect from one passing comment from
someone whose first language I don't think is English, so I'm asking for
clarification.

~~~
grey-area
I think they meant that money begets money, so if you have some to start with,
life is easy by default. Not a right wing sentiment.

~~~
benj111
Right wing ideology would say that's a good thing, or at least not bad,
whereas left wing ideology would say that's a bad thing.

So as a neutral statement of fact no it isn't either ideology. Its the opinion
that goes with it.

~~~
jaabe
Oh, I think it’s unfair. I probably could have added a little context, but I
was stating a fact, not my opinion on it.

The guy I mentioned is 30, and in 20 years when both apartments are paid out,
he’ll be a multimillionaire (in Danish kroner), as well as having a passive
monthly income that exceeds most lower class jobs. Just by having some
starting capital from his rich parents.

I’m not particularly against having rich parents helping you, but because real
estate taxes are so low and prices so high, it’s just extremely hard to catch
up if you don’t, and I think that’s unhealthy for society in general.

------
tonywe64
This definitely is missing property tax and insurance, as well as a bucket for
maintenance cost, ex, property management (8-10% monthly estimate), vacancy
(5-10% monthly estimate), and repairs (5-10% monthly estimate). These are all
coming out of the bottom line. Especially if the assumption is that the
property will be held for 30 years. For a lot of states, Texas for example,
the property tax inflates with property prices, assessed every 2 years, so you
can build in some calculation assumption with that.

Cash on cash yield from rent may not be great for the most part. But with
leverage and tax savings, that is where real money is made in the long run in
the rental game.

------
refrigerator
Hey HN, I’m one of the makers. Enjoying the discussion about buying to rent!

We’re building a tool to let anyone create models like this one — models that
incorporate uncertainty in their variables and outputs. This is the kinda
stuff people do in Excel right now, with much difficulty.

We’re working on a couple more demo models — let us know if you have any
suggestions. And if this kind of tool resonates with you, then we’d love to
chat — hi@causal.app. Thanks!

~~~
georgespencer
Hey! I'm a really big fan of this idea! Well done on tackling something really
important.

I think the examples you've chosen are good but not great examples of where
you can add significant value. A house being rented where there are a few
variables and a good/better/best outcome is not especially gnarly Excel for
the Hacker News audience. I think marketing and sales forecasts and stock
option pricing and DCF might be more impactful, if more esoteric, in showing
the power of what you're building.

BTW, it'd be cool to be able to anchor a variable to a historical base or
average. So maybe if you have seven or eight forecasts of CAGR, Casual could
accept 'citations' and in its output show a user of the model that this isn't
totally speculative.

Love what you're doing and have signed up. Well done again.

~~~
refrigerator
Thanks - glad you like the idea!

You’re totally right that these aren’t the best examples to show the real
value of the approach. We wanted to keep things super simple to start getting
feedback, but are working on a more involved example now. DCF valuations and
options pricing sound like great ideas – will look into them!

What do you mean re: citations? Validating Causal models using forecasts from
other means?

~~~
somberi
Taimur - Congrats and I signed up as well.

To me, one of the advantages of representing the story in a probabilistic way,
similar to how you have shown it, is that I am able to sell an idea to my
audience.

If you are looking for use cases to build for a demo, in addition to DCF, as
someone suggested before, you might want to consider currency movements and
also IRR calculations.

One feature request, if I may, is the ability to manipulate the end result
(time horizon in the demo of rent vs buy) and see how it impacts one of the
features (rent, market return, etc).

All the best and glad to discuss.

~~~
refrigerator
Thanks, will email you!

------
le-mark
I did this back in 2010 or so. I wanted to diversify out of the stock market
so I put some money into 20% down on a single family home. My sister was a
single mom at the time renting an apartment in a good school district for her
daughter. I told her "go find a house you'd like to live in", bought and
rented to her. She was agreeable. Our plan has been for her to buy the house
at a discount when she's able (a little rent to own) but that hasn't happened
yet.

Financially, from principal paydown I estimate about $400 a month profit from
the deal. Last year the house required a new roof, which was $5000 after
insurance covered less than half, and broken pipe flooded a bathroom and
adjoining bedrooms. So that was my profit for the year.

Overall it's been a net gain, but my money would've performed much better in
stocks during the this period.

------
achenatx
The huge advantage of housing is that the government essentially supports
infrastructure to get massive leverage. With 1:5 or 1:10 leverage, 10%
appreciation with 1:10 leverage means you double your money. The downside is
that with a 10% decrease you lose all your money.

Otherwise real estate is not liquid, annoying to manage, and constantly incurs
real costs.

The stock market is relatively competitive as an investment and includes REITS
which let you get some of the returns of real estate without the hassles.

I had vacation rentals that cost about 50K each and returned about 8K/year
after costs (each). But in the end when there was a problem and the
maintenance company wasnt available, I was the one that had to drive 3 hours.
I really needed to own at least 5 to make them worth owning. But then there
would be the hassle of people constantly coming and going.

------
kyrieeschaton
It's a nice app and all, but the rigorous calculation for these kinds of
things really needs to consider tax implications (both depreciation deduction
& property taxes), liquidity value, and expected outside returns. It's not a
simple thing to simulate even without getting into exotic scenarios.

~~~
Aeolun
On the whole, I think those other factors you named adjust the result a little
bit up or down, but don’t make a significant difference.

At least as far is house value is concerned (deducting depreciation raises
your wealth, but it hardly increases the value of the house).

~~~
kyrieeschaton
They make a _huge_ difference. Depreciation in a low land-value area gives you
an extra (tax bracket * house value / 27.5) per year. For a 200K house that's
easily 2900/y extra return, more if you split out internal components of the
house - an extra 1.45% return, when your cap rate might be only a bit higher
than 4%! Even when it's fully depreciated, you never actually take the hit
from the lowered basis on sale if you keep doing 1031 exchanges.

------
ww520
It seems the simulation just gives the upper bound and lower bound based on
the input ranges. A spreadsheet model can do the same thing by running the
model with different input ranges. In fact, that's what a spreadsheet model is
for, trying different input to run what-if scenarios.

On the rental investment example itself, it would really help to have a
finance person to go over the model. A rental investment needs to be modeled
like running a business, not like buying a house to live. Its analysis is
usually done using net operating income, CAP rate, cashflow, ROI, and IRR.

BTW there's no magic 1% to 4% annual appreciation in rental investment.
Appreciation is purely based on increasing net operating income faster than
market rate, or in simpler term improving CAP vs the market CAP rate. Let's
say you buy a property with 4% CAP rate and the market CAP rate is 4% now. 10
years from now your NOI still produces the same 4% CAP but the market CAP rate
has risen to 6%, your property will depreciate! Market CAP rate is affected by
different things that're out of your control and it's hard to model.

------
areyouseriousxx
No. The literal definition of the economic drag on value creation is "rent
seeking".

Be a part of the solution and build something. Do not be a part of the problem
and become a landlord.

~~~
fbonetti
> No. The literal definition of the economic drag on value creation is "rent
> seeking".

No, that's not the literal definition of "rent-seeking", not even close. I
really wish this term had a different name because I see people on HN misusing
it on a daily basis. "rent-seeking" is a specific term in economics that
refers to entities colluding with the government to distort the market in
their favor. The taxi medallion system is a classic example of rent-seeking.
Owning property and leasing it out, whether it's land, vehicles, apartments,
or machinery, is NOT rent-seeking.

> Be a part of the solution and build something. Do not be a part of the
> problem and become a landlord.

Would you prefer a world in which people are not allowed to rent apartments?

~~~
sokoloff
> I really wish this term had a different name because I see people on HN
> misusing it on a daily basis.

I find this mis-use of the term a useful and unambiguous signal that the
commenter is not fully versed on the topic. (cf.
[https://news.ycombinator.com/item?id=19707924](https://news.ycombinator.com/item?id=19707924)
)

~~~
areyouseriousxx
So Robert Shiller is not fully versed on the topic, in your opinion?

 _> The classic example of rent-seeking, according to Robert Shiller, is that
of a feudal lord who installs a chain across a river that flows through his
land and then hires a collector to charge passing boats a fee (or rent of the
section of the river for a few minutes) to lower the chain._ [1]

[https://en.wikipedia.org/wiki/Rent-
seeking](https://en.wikipedia.org/wiki/Rent-seeking)

~~~
sokoloff
That's not the same thing as building/buying a house and renting it out, in my
opinion (and is backed by the introductory paragraph on the URL you cited).

If you dig a canal and charge for passage, _that_ is equivalent to renting a
house (and is not "rent seeking" either per economics/public policy
discussion).

~~~
imtringued
You're twisting the situation now. It's not a canal. It's a free waterway that
the land owner has no rights over.

~~~
sokoloff
I'm updating the situation to _match_ the case of an improvement to land being
rented (to wit, a house). I agree that a chain across a natural waterway is
rent-seeking. A chain across a man-made canal is not (as the creator of that
canal is seeking to increase their own wealth while creating additional wealth
in total).

------
amscanne
This compares against the opportunity cost of investing the initial down
payment, but does not seem to factor the opportunity cost of ongoing carry
costs.

For example, I was able to easily craft a model where my expected monthly
income was negative. (Just bump the expected annual costs to 2.0%, which is
actually more realistic since 1.0% = tax and 1.0% = maintenance.)

Surely the couple hundred dollars a month could also be continuously invested
and producing returns if they weren’t being driven into the real estate asset.

~~~
nostrademons
I plugged in some reasonable numbers for rent & home prices in my area and
found that basically all of the net worth was due to home price appreciation.
While houses here are appreciating at rates far higher than the 4% of the
model, that's because the stock options of the buyers have been going up at
~25% annually.

My takeaway: bubbles rule. As long as you're in a region eating the rest of
the world, owning property will let you share in that windfall. As soon as
that economic engine sputters, they will be ruined, and so will you. Better
watch for that next big thing, and then hop on something else once it's no
longer the next big thing.

Also, it seems wrong to assume 4% annual appreciation of an asset whose
discounted cash flows are negative. At some point that gets unsustainable, and
nobody will bother to buy the asset.

~~~
benj111
So your investment is basically a proxy for stock prices? Why not invest in
those stocks directly?

Although if all the net worth was due to house price appreciation, stock
options don't seem to be making up much of net worth, or weren't included,
either of which seems to undermine your argument?

~~~
sokoloff
It's impossible to get the same amount of leverage and the same low interest
rates on the loan in equities that is commonplace on real estate.

~~~
benj111
Perhaps, but there are plenty of downsides also. Lower liquidity, having to
find tenants, the possibility that your investment may burn down.

------
zestyping
I think this is supposed to be more about demonstrating the simulation
modelling tool than about houses and rent.

The tool looks like a copy of getguesstimate.com. What's new or different?

~~~
refrigerator
We’re big fans of Guesstimate, and chatted to those guys a fair bit about
this! They’ve sadly stopped working on it but there’s a few differences:

\- We’re moving away from a spreadsheet-y UI (e.g separate sections for
inputs, model, output vs all homogenous cells/nodes). UI might seem like a
trivial differentiator, but I think it significantly affects use-cases for the
product. \- Guesstimate doesn’t handle certain things very well, like time
dependent models, conditioning on variables, etc \- Building for enterprises
requires certain bells and whistles (e.g integrations with data sources)

The first version of Causal won’t be a million miles away from Guesstimate,
but the vision is to build a general tool that lets non technical people work
seriously with data. Specifically, right now we’re working on letting models
learn from data (“machine learning”) via Bayesian inference, and letting
people build causal models.

Probability and random variables are a great unifying framework for dealing
with data. We’re trying to make this more accessible, so there’s a lot to do
beyond what the demo model shows :)

------
time4tea
What a horrible idea

Buy-to-let is causing immense social and economic problems in the UK.

It's a nice way for the rich to tax the poor.

Atlas shrugged.

~~~
bufferoverflow
Who are renters supposed to rent from then?

~~~
retiredcoder
Corporations (while I don’t think it is necessary better or worse) but there
is a professional rental market too.

~~~
bufferoverflow
So if a person incorporates and buys an apartment to rent, then it somehow
changes everything?

~~~
4rtergsedhg
It is different. Corporations can then go and list their holdings as a REIT on
a Stock Exchange, thus allowing the general public to benefit from their
arrangement. When private ownership is renting housing, you have either Banks
(in the case of servicing debt) or individuals profiting at the expense of the
general public.

------
Kip9000
This is not about buying or renting, it's about an alternative to Spreadsheet
for model building. But not much info on the process itself.. can creators
expand on this.

~~~
refrigerator
Haha yes — glad that came across :) It's still very early days for the
product, but the basic "building block" for models will be these nodes that
you see on the demo. They can be fixed constants, inputs, functions of other
nodes, etc. You can create these nodes and define how they related to one-
another — this is the "model". Then you can decide what kind of outputs you
care about and how you want to show them.

Probably sounds quite abstract! If you leave your email on the site then I'll
drop you a line as soon as we're ready to show the product :)

------
blunte
For a single property it usually won't be worth it. But if you can build a
portfolio of properties in a reasonably small geographic area, then you can
gain economic scale benefits (which especially will allow you to outsource
more of the management/maintenance).

Of course, you need a good source of credit or great people skills to get that
started (or wealthy parents to loan you a million or so).

~~~
HeWhoLurksLate
Did I hear a that a million dollars is a small loan?

:P

------
burlesona
As others have pointed out this model is oversimplified and doesn’t break out
maintenance and taxes. 1% is unreasonably low for both considering that 1% is
a low property tax rate first of all and second because rental income itself
is taxable.

Another point in actual real estate proformas is expected vacancy and leasing
costs. Ie. you will have tenants leave and when you do it isn’t always easy or
fast to find good tenants to replace them.

There’s also the significant consideration of transaction costs missing.
Conservatively you should budget 8% to sell and 4% to buy.

The asset is also highly illiquid compared to stocks, and also has ups and
downs just like the stock market but in slow motion. If you happen to want to
cash out your equity during a downturn it can be years before you get back to
where you’d be with your “long term expected appreciation.”

And one last bit: since a house isn’t fungible you need to accumulate the
entire downpayment all at once, and to liquidate you must sell it all at once,
whereas stocks you can accumulate and release incrementally.

TLDR; this model makes it look a lot more attractive than it really is to be a
single-property landlord.

------
jgr447
Any data supporting the appreciation of 4% a year?

This seems socially much more acceptable to taking a loan and then invest the
money in stocks for example, but to me is not _that_ different.

True the volatility is much lower, but so is the liquidity if you have to
dispose of the propery in a short time due to life circumstances.

If this is a single property and plan is to be the bulk of one's net worth it
seems risky to me.

Then there's the "dealing with tenants" variable which can be none to a ton of
work/hassle.

REITs are imho an interesting way to get rental income with less hassle and
much more diversification if you can stomach the stock price moving up and
down.

Look at Vanguard VNQ for example.

------
usaar333
Pretty cool demo for causal.app.

Feedback on the framework itself:

* I found the interface to widen/narrow the variance of ranges painful to use. Why not just let me plug in an exact number?

* I assume the output for the variance is 95% interval? This should be stated.

* There's major math problems with respect to how you are handling variance on compounding rates and reporting it. Most importantly, the distribution should almost certainly not be normal (lognormal makes more sense). If you don't use lognormal distributions, your confidence interval after N years makes no sense as the product of two normal distributions is not normal (nor even symmetric) - I'm actually not even sure how to interpret your confidence interval after 30 years because of this fact!

* The line becomes impossible to see if it has no variance!

Feedback on the calculation:

* I'm guessing all these numbers are real rates, as there is no inflation?

* Monthly rent is really "rent realized" as you are ignoring vacancy.

* I'm not following how you are calculating accumulated rental earnings. It is more than the sum of historical rental earnings, but less than your rental earnings being re-invested in the market

* "We assume that these cover at least the cost of your monthly mortgage payment" -> including interest + principal? I'm not sure if your calculator per se relies on this assumption, but this would not hold in many markets (e.g. SF Bay Area)

BTW, for those who want to do a simple buy/rent trade-off: I have a google
sheet here:

[https://medium.com/@usaar33/an-up-to-date-buy-or-rent-
calcul...](https://medium.com/@usaar33/an-up-to-date-buy-or-rent-
calculator-22d0bf9bbbb5)

~~~
refrigerator
Thanks for the super detailed feedback!

* Yeah the "scrubbing" interface is a little experimental. We originally had it for the mean values too, but that was a bit too crazy so we got rid of it. May well get rid of it altogether.

* It's a 2 standard deviation range, so a little more than 95%, but you're right - we should be clear about this!

* The entire model runs via simulation, so we're not analytically calculating products of distributions etc. I don't think we're reporting the distribution of compounded returns after N years anywhere, but there may well be something misleading somewhere — what specifically are you referring to?

* Thanks for raising the invisible line issue!

\---

* Yup

* Yup

* I believe we are just taking the sum of historical earnings! What suggests otherwise?

* Yeah including interest and principal. And fair point! In the UK I think it's a reasonable assumption but probably not so in other places.

Thanks again — really appreciate your feedback. Happy to chat more here or via
email: hi@causal.app :)

~~~
usaar333
> I don't think we're reporting the distribution of compounded returns after N
> years anywhere, but there may well be something misleading somewhere — what
> specifically are you referring to?

The output, e.g. after 21 years. You'll write something like property value is
X +/\- Y. The problem is that the distribution isn't symmetric. In particular,
being at X - Y is far likelier than X + Y, at least if I interpret X as a
mean. In addition, the median is less than the mean, which is X?

> I believe we are just taking the sum of historical earnings! What suggests
> otherwise?

As I scroll over years, the net rental earnings are clearly not linearly
proportionate to the year.

------
mattrp
It can be a good way to finance a vacation home that you eventually want to
live in. There are other more niche cases such as student housing, corporate
furnished, Airbnb, etc, that can be interesting, but you need to know the
specifics of each case. For ex, in student housing, everything needs to be
thought of in terms of durability and security (steel cased doors, durable
surfaces). It also pays to be handy - when you turnover an apartment plan on a
repaint. You can hire this at $750-$1000 or you can put on your face mask,
rent a sprayer, and knock it out. We’ve been lucky not to have extreme
maintainable issues but there are usually minor issues that you’d expect to
see. In my view, stocks are entirely more liquid and it’s not that difficult
to find high yielding companies where you don’t have the complexities of
tenant relations, marketing, repairs and fixed expenses like property taxes.

------
nodesocket
I've been thinking about buying a house recently (I am in a ultra-fast growing
area Nashville, TN) but not sure the risks and frankly annual returns can beat
the stock market (specifically S&P $SPY). S&P average annual returns are 8%,
it seems unlikely to beat that long term with real-estate.

~~~
scarface74
If you’re buying a house to live in and you plan on living there for awhile,
buying a house, especially in a fast growing area should be considered an
inflation hedge.

We moved into a three bedroom apartment (1652 square feet) in 2012 and we were
paying $1200 a month. When we left in 2016, rent was $1700. Now rent is $1925.

Our mortgage three exits up is less than $2100 for a 3000 square foot house.
Besides slight changes in property taxes and insurance, our house payments are
not going to increase. This is in the suburbs of Atlanta.

~~~
tinyhouse
True but if you need to replace the roof tomorrow you suddenly have an
unexpected expense of $20K+.

But in general I agree with your point. Buying a place is about stability and
control. Especially no one can kick you out as long as you make your payments.
I don't think it's a better investment option out there but it's safer for
most people than investing in things they don't understand. And if you happen
to buy a place in an area that is booming in the next few years then it can
really be worth it. But that's the same like buying early a stock of a company
that makes it big.

~~~
scarface74
I wouldn’t go that far. If that place is “booming” likely so is all the other
places that are similar that you would like to live. Unless you sell and move
to a much lower cost of living area, the equity in your house doesn’t help
you.

If you go by the popularly accepted rule of thumb, you should put 1% of your
house’s value in savings for unexpected home repairs per year. Feels a little
high to me.

------
granto
Great visualizations and simple clean presentation. I tried to use a number of
these simple tools to evaluate investment properties but they were usually too
high level. I ended up building my own very detailed spreadsheet where the
inputs can be tailored very specifically. I know it's not "software" in the HN
since, but I made the Google Sheet available online [0] here if any one wants
to use it. Note that this is a shared demo so your data will be overwritten by
other users.

[0]
[https://docs.google.com/spreadsheets/d/1i6xNZiNVn53_bnibfEvK...](https://docs.google.com/spreadsheets/d/1i6xNZiNVn53_bnibfEvKeMQi52ueFYMWFjUDUTprFqs/edit#gid=1180945299)

------
smallnamespace
The math on appreciation rate is a bit off because of how risk adds up to
itself over time.

For example, if you assumed 3 +/\- 3% appreciation, then the calculator
applies that range to every single future year, whether 1 year or 20 years,
e.g. 20 years later, the realized appreciation seems to be 3% +/\- 3%.

However the normal way this is done in economics and finance is to assume
independent increments of return volatility (let's say 3% per annum). This
gets you:

\- 1 year out: 3% +/\- 3%

\- 10 years out: 3% +/\- 3% / sqrt(10)

\- N years out: 3% +/\- 3% / sqrt(N)

Intuitively, imagine if having a 'good year' were simply a coin flip, e.g.
either you get 6% in a year or 0%. Over N years, the sum of your total return
is a binomial distribution with standard deviation that grows with sqrt(N).
Since your annualized return is approximately total / N, the standard
deviation of realized annualized return scales at total / sqrt(N).

Probability cones should always look like sideways parabolas:

[https://sixfigureinvesting.com/wp-
content/uploads/2018/11/Mo...](https://sixfigureinvesting.com/wp-
content/uploads/2018/11/MonteCarlo-vs-theor-simple.jpg)

More here:

[https://sixfigureinvesting.com/2018/11/predicting-price-
rang...](https://sixfigureinvesting.com/2018/11/predicting-price-ranges-with-
historic-volatility/)

One more thing: the chart has no provision for inputing stock market
volatility, which (historically) is quite a bit higher than real estate
volatility. You're comparing a 'risky' bet to an assumed 7% riskless bet when
stocks are also at an all-time high. The better thing to do would be to model
the volatility of the stock market (historically ~15% per year), then show the
distribution of (real estate return - stock market return) (with some
correlation assumption).

~~~
refrigerator
Hey, thanks for taking the time to write a detailed comment!

Everything in the model runs by simulation, so we don't do any maths on
appreciation rates. Since it's a simulation, I believe the combinatorics sort
themselves out!

However... it's possible that something we are miscommunicating something —
what gave you the impression that the appreciation maths was off?

You're right about the chart — we wanted the baseline model to be an extremely
rough guide to compare the buy-to-rent scenario with, so didn't want to add
volatility there.

~~~
smallnamespace
> we don't do any maths on appreciation rates. Since it's a simulation, I
> believe the combinatorics sort themselves out!

That is never a valid inference. At the risk of sounding harsh, you cannot
simply throw up your hands and say 'the simulation said so!' without
understanding what is actually being simulated, or else you will get nonsense
results.

> what gave you the impression that the appreciation maths was off

The 'probability cone' is clearly the wrong shape.

> so didn't want to add volatility there

Many fields the calculator, such as appreciation, have distributions attached
to them. The way returns in real life get a distribution is via volatility, so
it's highly misleading to both have a distribution width and say that you
don't want to add volatility.

This is what your simulation is actually doing:

1\. Pick a _single_ normally distributed number

2\. Pretend that is the return of your investment, linearly applied over many
years. E.g. if the number I drew in step 1 is 4%, then I assume I got 4%
return every single year until year N.

3\. Repeat a number of times and graph the boundaries

By contrast, this is the norm in finance and financial economics:

1\. Actually simulate a financial return process over a number of years. E.g.
in year one, I returned between 0-6%, repeat for year 2 ... N, and keep track
of the entire history

2\. Repeat many times

3\. Draw the distribution

Note that the 'correct' simulation procedure draws paths that go up and down,
just like asset prices do in real life, while your simulation procedure only
ever creates asset price paths that grow or shrink at a constant rate.

I strongly recommend either you give up on simulating returns entirely and
make it a single point estimate, or do the simulation properly, otherwise your
results are badly misleading. Here's a (very simplified) simulation approach:

[https://www.investopedia.com/articles/07/montecarlo.asp](https://www.investopedia.com/articles/07/montecarlo.asp)

~~~
refrigerator
Hey, maybe we haven't communicated this well, but we are actually doing
exactly what you've described as "the norm in finance and financial
economics". We run 1,000 simulations to produce the model output. In each
simulation, there are 30 years. Each year, we sample a new "Annual
Appreciation" rate. So each simulation does indeed have paths that go up or
down.

I didn't mean to suggest that simulations are always correct. Just that I
believe ours is, in this case :)

Can you help me understand your point about the "probability cone" please?

~~~
smallnamespace
I think you're right, just did some careful testing and it looks like the
'probability cone' (basically, the shape you see if you only look at the shape
drawn out by the 1 std dev / 2 std dev lines) does have the right shape. My
apologies for jumping to conclusions there :)

However, I can't replicate the numbers that you create for a simple test case:

[https://imgur.com/a/ogP1ucY](https://imgur.com/a/ogP1ucY)
[https://imgur.com/a/dHQ5WyJ](https://imgur.com/a/dHQ5WyJ)

Here we've basically zeroed out rent, mortgage, and everything else, in order
to purely isolate the appreciation factor, and your calculator shows a year-30
range of $1m +/\- 285k at 95% confidence.

However, if you take 30 independent draws using a 0% +/\- 3.2% range @ 95%
confidence, that implies each draw has 1.63% std deviation (3.2% / 1.96).

The 95% CI for the sum of 30 independent draws with 1.63% stddev is given by
(1.63% * sqrt(30) * 1.96) = +/\- 17.5% return.

Applied to your initial amount, I'd expect to see a $1m +/\- $1m * e^(17.5%) =
~$190k range for the 95% CI, not the +/\- $285k range that you show.

Note the power of just using basic stats and identifying edge cases to
validate whether your simulation is giving reasonable results -- here I think
either an input or output might be mislabeled (is the input really 3.2% at 95%
CI, or is a different confidence?).

------
frankbreetz
Hey, I really like the app and have signed up. One thing I would add is multi-
family units. Even better would be the concept of "house hacking" or buying a
multi-family and moving into one of the units. This may just be a US thing,
but this allows you to have a low down payment and cash flow and live for
free. This is a pretty popular thing to do in the US, and I haven't seen any
tools that account for it. I am currently doing this and use excel for all my
calculations. Also, maybe add a remodel calculator, I. E. If I do a remodel
for 10,000 and the rent goes up by 500 my yoy roi is like 60%. This number
goes up even more of you get a loan and use leverage.

------
11thEarlOfMar
Nice. Some questions:

\- How are you modeling property tax payments?

\- Would be nice to show the annual return for the investment. You have a
chart, I can read it so see whether I'd do better than the market, but would
be nice to show '13.4% return', vs. a dollar amount after some time period.

\- Are you modeling tax benefits at all? Mortgage interest, property taxes,
maintenance costs and depreciation all impact the net return for the investor.
This would be hard to model since the tax situation changes by individual
investor and local tax rates.

\- Have you contemplated whether the investor is self-managing or hires a
property manager (perhaps included in the annual 1% expenses?)

------
agilebyte
I love scrubbing calculators like these that help make complex decision making
easier. A year ago I was interested in comparing buying vs renting, the other
demo calculator on the Causal app homepage. If anyone is interested in playing
around with real code to produce similar charts here is the source:
[https://github.com/radekstepan/buy-vs-
rent](https://github.com/radekstepan/buy-vs-rent)

It's Toronto/Ontario/Canada specific, but you can plug in your own taxes, fees
and estimates.

------
bertjk
very cool. Please make your next demo about retirement planning.. or kids'
college fund planning...

------
eruci
Buying a rental property a very simple form of startup for the unskilled,
requiring a very high startup cost for a small return.

I bought a house one year ago, spent $200k and then another $50k in repairs,
and now I'm renting it at $1500 a month ($1200 profit after property taxes and
miscellaneous)

On the other hand, I also started a new company about a year ago, spent $0
upfront investment, $50 in monthly hosting costs, and it is earning a monthly
profit of $2000 currently.

~~~
bsdnoob
If you don't mind me asking, what does your company do?

------
wsdfsayy
I've been looking on Redfin for potential investment properties in SF but I
cannot find a single home on the market where rent would remotely cover the
mortgage.

~~~
anbop
That’s because massive expected appreciation is baked into SF prices.

------
orasis
Having a higher end ($350+/night) house on AirBnB was pretty fun. The higher
price plus AirBnB screening kept out the rifraf so we had very few problems.

~~~
sizzle
Still have it or what happened to it?

------
ljsocal
Agree with much of the commentary here. Investment returns on real estate
ownership (whether as primary residence or as income property) often ignore
externalities and the time investment by the owner. Having the freedom to not
worry about or arrange resolution of leaking toilets, gophers in the lawn,
broken fences, etc is a great return on non-ownership!

------
alok-g
Here's the most complete buy vs. rent calculator that I have come across:

[https://michaelbluejay.com/house/rentvsbuy.html](https://michaelbluejay.com/house/rentvsbuy.html)

His other articles are also often worth reading.

------
ianai
I suggest considering REIT stocks that actually own real estate instead. They
push through 90% of their income as dividends and enjoy a tax shelter because
of it. It’s a liquid and passive proxy for real estate investing.

Also, the RE market is just lousy for buyers right now all around.

------
throwaway193855
Four percent and higher residential real estate appreciation over that long of
a period without massive inflation is mind boggling. I don't think I make that
investment just because if it is successful, the inequality in society at the
end of the loan is soul crushing.

------
beejiu
It does not seem to take either inflation or lost growth on the down-payment.
These two factors have a huge impact on evaluating property against other
investments. It would be nice to factor in an interest-only mortgage rather
than a repayment mortgage.

~~~
robertAngst
Its a job to maintain property too.

Real Estate is not passive income.

------
myroon5
See also: [https://www.nytimes.com/interactive/2014/upshot/buy-rent-
cal...](https://www.nytimes.com/interactive/2014/upshot/buy-rent-
calculator.html)

------
cyphunk
Note that these models are created in an era of great inequality. You can
expect that if at any point a correction is made to this disparity these
numbers will also be effected.

------
evrydayhustling
Is it just me or is it automatically doubling the rent you input??

~~~
refrigerator
Hey, sorry for the confusion. The rent you set is at year 0, and your rent
increases each year according to "Annual Appreciation" (in reality this isn't
quite what goes on!). The "net monthly earnings" in the output section tells
you the numbers for the year you selected, so if you're looking 10 years down
the line then the rent number will be significantly more than what you set it
to be.

This is pretty opaque and we should have explained where the numbers were
coming from. Had intended to add a tooltip there explaining this but looks
like we forgot!

------
mfatica
Entering 60 for loan term crashes the whole app

~~~
refrigerator
Thanks for raising - will fix!

------
fouc
No support for not getting a mortgage?

~~~
refrigerator
You could simulate this by setting the down-payment equal to the property
value, so it’s essentially a cash purchase :)

------
lazyjones
Where's inflation in this model?

------
elliotpage
No. Let other people buy it. Buy-to-rent should be a crime.

~~~
bufferoverflow
That doesn't make sense. Renting your property should be a crime? How do you
propose people get housing when they can't buy?

~~~
kd5bjo
I don’t know of any country that does this, but it’s not completely
unreasonable for all tenants to be accumulating equity in their residence, so
that living in the same place continuously for a long time will eventually
result in them owning it.

~~~
4rtergsedhg
The future of housing IMHO. Equity based rental models, modeled on REITs. You
earn shares in the operation as you pay rent, eventually owning your share of
the house in a time period that is similar to a traditional mortgage. End the
inflation of the monetary base caused by property speculation. As time
progresses, and larger housing loans from Banks is required, we are being
robbed of our savings.

~~~
quickthrower2
What’s in it for the landlord? They’d only agree to this scheme if they get a
lot more rent, perhaps double. Also no bank would loan to the landlord for
such an arrangement. Governments could provide such a scheme if they are the
builder.

------
andrewfromx
just take the loan out of the equation. don't borrow money trying to make
money. that's like having a margin account with etrade! You don't pay interest
on a loan and use the money from that loan to buy stocks do you? Just saying,
real estate is a fine thing to buy, with all cash! hashtag
[https://en.m.wikipedia.org/wiki/Dave_Ramsey](https://en.m.wikipedia.org/wiki/Dave_Ramsey)

~~~
speedplane
> don't borrow money trying to make money. that's like having a margin account
> with etrade! You don't pay interest on a loan and use the money from that
> loan to buy stocks do you?

The difference is that interest rates on margin accounts are far higher than
they are on real-estate. A margin loan may be 8% or more. So you have to
invest in something that grows faster than that to make any money. However
real estate loans are 3-4%/year, and in addition they generate rental revenue
which is also roughly 3-5%/year.

Taking out a loan on real-estate makes far more sense than taking out a margin
loan.

