Monday, December 26, 2016

Mind & Spirit–> “Where Do I Live?”

If you have watched my personal blog at all, you might notice that we have moved back to the Silicon Valley.  Now in many, many ways, this has been a spiritual trip.  I really felt that this is where the Lord wanted to place us.  However, at the same time, you do not disengage your Spirit, and the following shows some of the thinking that can point to this being the right move. 

I would like to say that I thought of this before hand, but it is only looking back over time that you can see where the Lord directed you.  I would suggest that there are 3 areas that you should look for, considering that you feel the Lord is open to having you buy a house:

1. How reasonable is the mortgage interest rates?

2. Is you local area going up or going down?

3. What do you have in terms of options for money?

Cheap money is one of the biggest reason to buy a house.  The thought process is that if somebody will lend money to you very cheaply, you can take this money and buy something worth money that might appreciate in value. 

mortgage_thumb[1]

If you can see the chart above, we locked in our mortgage at basically what was the lowest rate seen in American for decades.  Now, I’m 54 years old, and I have a 30 year mortgage.  This means that I’ll be paying until the wife and I are 84, but if we see any inflation at all, this means that this should become less and less painful.

We bought the house for quite a bit of money, and in some sense, I expect that value of the house to go down.  If you take a look at the Case-Shiller index housing is almost at an all time high.

housing cost_thumb[1]

If we check Trulia, we can pull up what has happened in Los Gatos for the last 16 years for 4 bedroom housing.  You can see the same peak in Los Gatos as what was seen in the top 10 composite.  The difference is that the same percentage for crashing never happened in the local area.  For most of the US, the peak came in 2007 or so.  Doesn’t matter where you are.  However, starting in 2013, the Los Gatos, and the rest of the Bay Area, started a climb not seen in the rest of the country.

los gatos long_thumb[1]

So back in 2012, when Case-Shiller was around an index of 150 for composite 10, pricing in Los Gatos on 4 bedroom houses was $1.25M or so.  Now that the composite 10 is at 200, Los Gatos looks to be around $2M or so.  This means that our area has gone up around 66% versus the national average of 33%.  Not surprising considering that this is the Silicon Valley.  With the amount of wealth in the area, it simply means that people have plenty of money to pay for stuff.  For instance, within 10 minutes of our house is the corporate headquarter for Netflix.  This place has been doing nothing but growing.  This means that they pull in people, and these people buy houses with their growing stock price (which has 10x from 2013).

With interest rates going up, it means that people will be less able to buy a house, and thus the market pricing for housing will most likely come down.  This means that we bought a house, and we are almost guaranteed that we will “lose money” on it.

Although I really did not want to do it, when I bought, the Lord prompted me to buy something that I could rent out.  In a future blog, I need to cover the idea of “rent seeking,” which is all about the idea that you can force illegal rents, but the idea of a rent is a very important idea in terms of wealth.

Adam Smith had the idea that wealth come from three areas:

1. Wages, which money somebody gives you because they need something that you do

2. Profit, which is money that  you got because you sold something for a higher price than what you bought it for, and you might had to put effort into it

3. Economic Rent, which is money that is created when you get paid for something that you are not producing.  When you buy software, you are giving somebody profit.  When you are renting software, you are giving somebody rent.

Once you understand the idea of rent, it is a very powerful idea.  You buy something once, then you can basically just have somebody pay you money for it.  So when we decided to move to the Silicon Valley, I decided that I would look at something that I could rent out.

My Grandfather had apartments.  My father had apartments.  Now, I guess it was my time to have something that I could rent also. Now, you can have all types of different rentals at all times of your life.  When you buy that first house, you can delay gratification and buy a duplex.  Rent out one side of the duplex, and live in the other.  It is not as nice as owning your own place, but it is very fiscally wise if you buy the right place.

In our case, we had the opportunity to buy something with rentals on it.  Two rentals to be exact.  Now the person that owned the property before us had a very, very property bill because they had owned the property forever, and California has Prop 13, which limits property tax.  So, she had both places rented out for a very low price versus the current market. 

I believe as a Christian, we are to be a kind and generous person, so I did not push super hard on these renters, and I allowed them to continue to rent at their current rent.   Their coverage of all of my month mortgage, property tax, and insurance is approximately 17%.  This is a great way to start off the month.  You have basically somebody that pays 17 cents of every dollar that you have to pay out.

With one, I am simply allowing her to rent 30% under the market rate.  She is a very good renter and person, and somebody that I trust.  She is also renting the smaller unit, where even at 30% off, it is a burden that I can live with.  I asked her to pay a nominal increase on January 1st.  With the other renter, they are only 20-25% of market rent.  They really cannot afford a lot more, so we know that eventually know that they will need to move.  However, they are fantastic people, and I am willing to wait until a better moment for them and us.  So, while they will pay a bit more in January, the increase in rent will come up to around 25% of the the monthly expenses.  Again, this really is not bad, however.  For now the property has enough money so that our monthly bill will be lowered by 25%.

However, by June, we’ll rent out the bigger of the two places.  If everything goes correctly, we’ll be pulling in around 45% of our month rent.  If our other legacy renter pulls out for any reason, we’d raise that rent, and we’d have 50% of our mortgage paid for by the renters.

What is really mind blowing: if I lost my job, I probably could figure out how to have and AirBNB our of two rooms in my house, which have external doors, and this would take us to having rentals that cover 75% of my total monthly payments. If I then placed my kids into public schools, I probably could simply retire and live off of my stock market investments, not that I want to do this.  The point is that the current arrangement has some pathways to allow us to make sure that I have the freedom to not be ruled by somebody else, which should allow me to keep an open heart toward God to follow his leading.

I believe that the Bible strongly teaches us that we are not to be slaves of other men.  Therefore, having and pursuing the ability to figure out someway to be able to leave your job behind is very powerful.  It is also remarkably destressing. 

And while I think the Lord places trials and tribulations in our life to bring us closer to him, I also think that many things we do are often brought on ourselves because we simply don’t listen to him.  And picking your manner and place of living is one area where you can do a favor for yourself.