Don’t build your own prison and call it a home

November 20, 2013
krauserpua

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Charles Dickens, David Copperfield.

The essence of a bachelor’s life is that he maintains control of his time and his freedom to maneouver. This is how you feel in control of your life and avoid the sense of being harried, put-upon and trapped. We are quite aware that getting married-up (the old “ball & chain”) and having children are the two major ways in which a man can surrender his time and freedom to maneouver. If that’s what you want in life, by all means go for it. This post is written for bachelors who have chosen to remain free of such entanglements for the foreseeable future. The two key principles are:

  1. Get a secure high top-line income, preferably scaleable
  2. Get a low fixed cost base. Convert fixed costs to variable costs.

This is talk from business financial planning so I ought to unpack it a little for non-bankers, beginning with considering a man who has it all wrong per Dickens. Imagine a caricatured cubicle-jockey who works full-time 48 weeks a year on a permanent-employee contract. He owns a suburban three-bedroomed house and both he and his wife have a lease car each, perhaps a couple of years old. They have a sky sports / entertainment subscription, 24-month 4G mobile phone contracts for both adults and both children. The mortgage has ten years paid and fifteen years remaining plus there are a few unsecured loans to cover big ticket expenses like the recent kitchen remodelling. What is the risk profile of this man’s finances?

  • Income is not scaleable – He is already working at his full capacity of 48 weeks a year of full-time working weeks.
  • Income is all from one source, his salaried employment.
  • Expenses are all high, fixed amounts with long duration. There is significant debt which is subject to (probably) floating interest rates.

What this means is the man has a very narrow margin of error. When expenses rise he had few options to absorb the change – does he try to get overtime at work or does he trade-off another expense? If his income drops (his hours are cut, he is fired) he has a huge monthly payment to meet and no means to do so. Not only that but by having equity in his home he has alot to lose in a home repossession. The man has no time and no freedom to maneouver. This is why bachelors should be very wary of owning a home. The things you own end up owning you.

One thing investment managers quickly adopt is the idea of asset classes. Everything is an investment and allocating funds to one asset class (e.g. equity) means less funds for another asset class (e.g. bonds). This is simple opportunity cost. Investment managers will take a strategic view on the likely performance of different asset classes and make their bets accordingly. You should be doing the same.

Property is not an emotion. It’s not a symbol of success. It’s not a part of your identity as a man. It’s just an asset class. Depending on your life situation and the economy it’s wise to be either long or short property. Usually it’s better to be short (i.e. renting not buying), here’s why.

Freedom

Buying a house locks you into one place and a high monthly fixed expense. For no reason other than that it is usually smart for the bachelor to avoid buying a house. When you tell your boss you have a mortgage you are telling him “I can’t walk away from this job so please fuck me over with limitless demands, pressure and shitty projects. I’ll take it all while wearing a shit-eating grin because I know I don’t have the option to walk away”.

A man with a huge income-expense margin can accumulate a large pile of fuck-you money in his savings account. He can take time off work. A man on a six-month rental apartment can very easily trade down to a cheaper place if money is tight, trade up when he’s flush or just go move to another country/city to follow a good job opportunity. As Robert De Niro advises in Heat: “Don’t let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner…. Now, if you’re on me and you gotta move when I move, how do you expect to keep a… a marriage?”

On the lam

On the lam

Taxation

The golden rule of taxation is that the burden falls heaviest on those least able to avoid it. The poor don’t pay tax because they have little income to tax and little to lose by refusing to work. The rich don’t pay tax because they can restructure their affairs to minimise it. Tax falls disproportionately upon the middle class for three simple reasons:

  1. They earn high enough incomes to make their life significantly more comfortable from working than not working.
  2. They have assets (housing, savings, pensions) that can be plundered and are too large to comfortably walk away from.
  3. They own property. It is fixed in one location and cannot be moved offshore. Nor can they.

Buying a house positions yourself squarely into the cross-hairs of a thieving government whether overtly (property taxes, stamp duty, rates) or covertly (you are locked into place for all the personal taxes)

Asset bubbles

Property is just an asset class. Nobody buys a house outright in cash. Under periods of stable banking families will typically provide a 20% cash deposit and borrow the remaining 80% which any investment manager will tell you is 4x leverage. You have £4 of debt for every £1 of equity but still control (carry risk and rewards of) 100% of the investment. Let’s consider a contrived example to clarify the maths:

Your capital: £20k. Your mortagage: £80k. Your house price £100k.

Scenario 1: House prices rise 10%. Your house is worth £110k. You now have £30k in equity (the debt didn’t increase) This is £10k profit on an investment of £20k = 50% return.

Scenario 2: House prices fall 10%. Your house is worth £90k. You now have £10k in equity. This is £10k loss on an investment of £20k = 50% loss.

The key characteristic of leverage is it magnifies the impact of asset price movements. A change of just 10% in house prices creates a 50% change in your wealth. We are so used to hearing risk-takers extoll the virtues of leverage in rising markets that we can forget leverage also works on the way down. As many a leveraged hedge fund found out to their cost. The main point for the bachelor to process is this:

Buying a house is a highly leveraged bet on the direction of the housing market.

You are not reducing risk by buying a house. You are increasing it. This is before taking into account another factor: housing is a depreciating asset. Houses fall apart and become delapidated without regular maintenance and repairs. This truth is hidden in fast-rising markets because the net amount of house price rise minus maintenance costs will be positive. Thus accepting that buying a house is an investment decision, and in particular a speculative investment decision, we must understand how a house is valued. If your natural thought is “look in the estate agent’s window for similar houses” you are a moron. There are three ways to price a house over the long term – all are ways to determine if the housing market in a given area is over- or under-valued at the time you are considering purchase.

1. Median house price to median salary ratio

It’s an obvious truism that if the average person cannot afford the average home then house prices are going to drop. You can find long-term historical data (for example Case-Schiller) that gives a clear pattern for any region. Generally speaking in the US house prices will cost 3 times the salary of whoever lives in it. Pull up the graphs. Any time prices deviate there is a bubble or crash and eventual reversion to the mean. It’s simple (effective) supply and (effective) demand. What can’t happen won’t and therefore when median house prices outstrip the median earner’s capacity to pay they don’t pay. There’ll be a period of market breakdown as delusional sellers refuse to drop prices (the first sign of a house price crash is sharply reduced transaction volume – buyers and sellers can’t agree a price) but then as the 3Ds come into effect (divorce, death, reDundancy) the forced sales pull the market down.

Find this for your region

Find this for your region

2. Median salary to median mortage payment ratio

People have a comfort zone for how much of their monthly income they are willing to allocate to housing. Long term statistics show that to be about 33% of take-home pay. The rest goes on food, entertainment, clothes, car whatever. Banks consider this ratio in making loans because as the % rises the borrower’s wiggle room to deal with external shocks reduces as does their willingness to meet payments in times of duress. When you read stories of young couples paying 60% of take-home pay to meet mortgage payments then its a sure sign the market is overpriced and headed down.

3. Bank optimism

There are long-accepted rules in the banking industry and long-accepted ratios in determining loans. Put simply your banker assesses you on the three Cs

  • Collateral – How much of a deposit or how valuable is the asset the loan is secured on. This is why they require a cash deposit. If you pay 20% deposit then the house value can drop 20% before the bank takes a loss. Your skin in the game is 20% and thus you are far less likely to walk away from your loan. Reduce that to 5% and the game has changed.
  • Cover – How many times over can your take home pay cover your mortgage payment? If that number is low you will struggle when interest rates rise or your income takes a knock. You are fragile.
  • Credit – What is your historical creditworthiness? Do you have a history of repaying your debts or welching on them?

House prices are determined by the availability of credit because it’s the size of the mortgage the bank will give you that determines your effective demand to bid on a house. Thus when lending standards are lax (i.e. banks are optimistic) borrowers can get larger loans and thus bid up prices. When banks are aggressively marketing loans with 5% deposits or ALT-A interest-only repayment schedules, or the central bank is forcing down interest rates it is all pointing in one direction: houses are overpriced. Lax lending leads to high rates of bad debts and an inevitable banking contraction. Lending standards over-correct to the strict side and suddenly borrowers can no longer bid so high. House prices drop.

This is what a banking crisis looks like

This is what a banking crisis looks like

There are many additional factors that impact house prices that I won’t go into. For example consider how these sociological changes affect prices:

– Expansion of public sector jobs in a particular region: Wages rise in that region leading to increased ability to bid-up house prices. When government contracts and fires those workers prices come back down.

– Mass immigration: Large numbers of wealth-destroying third world immigrants flood a country. For their housing demand to become “effective demand” (backed by the ability to pay) they must receive government housing benefit. This can only be funded by taxation (national debt is merely deferred taxation) which means the increase in effective demand by the colonists is offset by the decreased effective demand of the wealth-creators (when taxes rise, median salaries and interest cover falls – see above ratios).

– Debasement of the currency: Prolonged periods of quantitative easing artificially suppress interest rates which has the effect of (i) reducing monthly payments for borrowers on floating rates (ii) destroying yield on investments for savers. It’s a direct transfer of wealth from savers to borrowers. Effective demand is transfered from one group to another but not increased overall. When currency is debased house prices have the illusion of increasing because they are measured in a unit that loses it’s real-world value. For example in the UK the pound was devalued 25% in 2008-09 but house prices remained flat. The economic effect is house prices dropped 25%.

These are complex factors but I raise them to solidify the key point: Property is just an asset class and it’s a leveraged investment. It’s not an emotional decision or a rite of passage to becoming an adult. For most bachelors most of the time buying a house is suicide. It takes away your time and freedom to maneouvre. It will also very likely lose you money if you buy now.

* Anyone retarded enough to say “rent is just throwing your money away” will be sent to the spam queue.

51 Comments

  1. I have frequent arguments about Britain’s insane property market and have concluded that for most men and 99 per cent of women it is simply beyond rational debate. Their experience tells them that housing always gains or holds its value, unaware that this has been the case only due to massive government interference. Much of our banking system should have gone broke in 2007/8.

    The refusal to let market forces prevails causes a massive misallocation of resources and stifles innovation. The latest wheeze is the help to buy scheme which addresses the symptom of high prices but not the root cause, which is the planning system. When I was 17 I could have spotted that it is flawed. This latest boom in lending will end very badly. And when it does it will be those who did not buy who have to bail out the idiots who did. [One of the reasons I have changed my mind towards saving (I am against saving above a fuck-you fund) is because the government response to financial crisis has been to steal from savers to bail out borrowers. This is likely to happen over and over again. Government and central banks will always side with the borrower even though it ends in collapse – but not until savers are wiped out too. K.]

    • That is why my investment strategy is to lend to those who will be bailed out. Low risk, high yield. Unethical from a libertarian point of view, but I have to adjust to the bleak reality our governments have created.

  2. > Debasement of the currency: Prolonged periods of quantitative easing artificially suppress interest rates which has the effect of (i) reducing monthly payments for borrowers on floating rates (ii) destroying yield on investments for savers. It’s a direct transfer of wealth from borrowers to savers.

    From savers to borrowers. [Corrected. Thanks. K.]

  3. My response to anyone who tells me that renting is throwing money away: “stop paying your mortgage before it’s done and let me know how much money you’ve made on your property investment”

  4. Renting is especially good if you are collecting the rent. [That comment is just on the right side of the retarded line. Rent is only good if it exceeds the cost of capital and maintenance / mgt expenses. K.]

  5. I work in property for my sins, and it really frustrates me how many people see it as a one way bet, not understanding the real fundamentals driving the market. London is a law to itself, but up north a lot of people are still in negative equity. The mania driving the london residential market has bubble written all over it, but when it pops is another matter… The latest Tory scheme is sickening, foolish and just an attempted vote winner. What’s going to happen in 3 years time when it ends? The market now is propped up by foreigners and wealthy parents (money from the top supporting the bottom = pyramid scheme). It actually pisses me off seeing the money financially illiterate people are making just from owning london property. If we had a true free market and proper interest rates, they would be losing their homes and then property would be cheap and worth a punt. Long term, how are people going to afford to live with squeezed incomes, rising petrol costs, no money for pensions, due to debt slavery to get a foot on the housing ladder. basically about to leave london due to the ridiculous costs of living here, no chance of being able to afford to buy or rent on my own, to old to share…… I try and live life as a contrarian, if everyone else is doing it, it’s probably not the best investment… but we are being punished in all other asset classes right now, everything’s a bubble. Ok rant over. You summed up the freedom in not owning a property spot on. Ask anyone in negative equity how they feel about it, as my mate who owns a city centre flat up north said, it’s a noose around his neck.

  6. This is an impressive post, and I’m glad to see you branching out with some good commentary on financial matters

    If a Man’s power is largely tied into his “ability to generate resources… “Then it’s a very good thing for a bachelor to become “expert ” in what constitutes resources . Sooner or later, “resources” comes down to cold hard cash.

    “Cash” is much maligned in the man-o-sphere, but its a fact that a man’s Confidence to girls can’t consist solely in the ” shirt on his back”. It must come from something real – namely, Mastery and Competence in some real world domain that commands respect from other high value Men, that you can trade in return for payment via Greenbacks

    The best way to buy a house , or buy anything, is when you can pay for it free and clear. There are geographic areas where your house will never go down in value – look for areas where you have demand from other Upper Class Urban Professionals who would want to move there if you want to sell

    A good sign, unfailingly, is whenever you hear there are “bidding wars” for a certain neighborhood, or that ” the houses or condos go fast.” This is telling you this is an “in demand” real estate location. You will sell at a profit if you know what you’re doing.

    The prime directive for men: focus on being liquid. Then decide what you can afford. You can only “afford” in life as a Man what you can buy outright .

    You really want , like Gene Simmons, an ” apex Alpha” cited on this blog, to be able, as he said in his autobiography, to “not buy anything you can’t pay for in full with a check. No payments, I hand over the check, I sleep easy at night.”

    As Old Amschel Rothschild told his sons, “The debtor is slave to the lender.” If its good enough for them, it’s good enough for you [You want to be the seller in a bidding war, not the buyer. That’s how smart speculators cash out and leave the suckers holding the baby. K.]

    • “There are geographic areas where your house will never go down in value – look for areas where you have demand from other Upper Class Urban Professionals who would want to move there if you want to sell

      A good sign, unfailingly, is whenever you hear there are “bidding wars” for a certain neighborhood, or that ” the houses or condos go fast.” This is telling you this is an “in demand” real estate location. You will sell at a profit if you know what you’re doing.”

      1. Bullshit, any asset can go up or down if it is too over valued in the first place.

      2. Sounds like you’re buying in with everyone else (The storeys already out). The real savvy investor gets in there long before there is even a story to talk about, when demand is poor and the price is cheap, he then sells to Johnny come lately speculators riding a bubble of rising prices. [Agreed. Once the bidding wars are on it’s the “shoeshine boy tip”. The fact he knows it means everyone knows it so the profit has been arbitraged away. See this for the psychology of bubbles. People always miss the logically deductable key point that the peak of the bubble is precisely the point when everyone thinks that asset class is a great investment. It means everyone who can be invested is invested. There’s no more money left to come in. The greater fool has been found. K.]

      • Not following. Ex: a White Picket Fence neighborhood with a NYC Direct train into Wall Street is placed on gold, not dirt. Houses selling at profit for 25 years and counting. These are de facto GS towns

      • This is in response to white lucky male who said:

        “Not following. Ex: a White Picket Fence neighborhood with a NYC Direct train into Wall Street is placed on gold, not dirt. Houses selling at profit for 25 years and counting. These are de facto GS towns”.

        I see where you’re coming from, but it’s all relative to the price that is paid originally, sometimes that can get out of kilter with the fundamentals krauser described above. The more people start believing something is a one way bet as you’ve described, the more out of line with fundamentals something will get, as people buy out of fear and greed and the more prone to correction something is. Hong Kong and Tokyo are perhaps bigger cities than New York and London, driven by similar factors, look how their markets perform over time. I understand Hong Kong is in the midst of a correction, and in Tokyo prices have been falling for 20 odd years. The nuclear uncertainty aside, Tokyo is probably a. Good buy in comparison to london/ New York, prices are far cheaper on a rate per sq ft basis.

  7. Nick: you should google Michael Rowbotham’s book entitled ‘Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics.’

    This was a real game-changer for me when it came to understanding how the money supply is inextricably linked with mortages (or ‘death pledges’, which is where the word ‘mortgage’ is derived from). Good stuff. [Thanks. I see lots of potentially good economic discussion totally destroyed by a misunderstanding of the theory of money and credit. 95% of economics profession has it wrong. I recommend inquisitive minds read this for an intro. I’d like to recommend Mises but I haven’t read him in detail on this point. K.]

  8. krauser, you may recall I met you briefly a few months back near selfridges with betatopua, and was asking your views on mish/ peter Schiff. Would be interested to know where you do put your money to store value? And what do you see as the endgame to our broken debt/fiat money system? [The problem is government and central banks – they actively try to prevent markets clearing and instead try to pick winners. It’s pissed me off for a long time knowing where markets are going but not knowing how long governments can continue to kick cans down the street and transfer wealth from the prudent to the profligate. My basic mid-term thesis is that we are in a deflation that will be resisted every step of the way by central banks. Stocks have also peaked in real terms, or close to it. The risk of equities is mostly to the downside. BRIC countries will collapse spectacularly and Japan will have a currency crisis within 5 years. I don’t really know where to put my money because the government will steal it if it’s prudently held in cash. So my basic plan is to not save. Buy my freedom now and protect my future earnings/costs curve so that once the path is clearer I have the time and freedom to maneouver. I wrote a long time ago that your pension is your health, your market skills, your cost base and your “pension” in that order. I still believe that. But never underestimate freedom and Game. That’s worth way more than $1m in a pension fund. Oh, and Schiff is wrong because he doesn’t understand the theory of money and (particularly) credit and thus makes insane hyperinflation calls and overrates emerging markets. K.]

    • Krauser, what are your thoughts on keeping cash in Switzerland? Taleb calls it the most “antifragile” country on the planet when it comes to economic upheaveals and foreign meddling. They will protect you come hell or high water

    • Timing is easy, the powers that be are not stupid, but they are bound to the whims of politics, as opposed to economics. You can expect the major economic ‘surprises’ to be timed with political events in the US and possibly europe.

      The easiest way to run things is to own a house, rent it so that rental income pays the mortgage payment, be willing to take a haircut (or profit, this number should be ‘whatever’) on the sale when you’re ready to leave the region, and use game to live off chicks renting apartments near your place of work, doing the ‘invasive landlord’ thing when between girlfriends. Keep ‘fuck you’ fund, look for potential windfalls, work jobs you enjoy, pay remainder on lifestyle/education/self-improvement. Derp.

      Thanks for not posting about deep conversion, would hate for other people to have the confidence to try this.

    • Hey K,

      Great post. Why do you feel BRIC economies would collapse? Would it be due to a slow down in China or the real estate bubble popping over there? Or do you see it collapsing due to a capital flight when QE finally stops? A collapse of BRIC economies would definitely lead the global economy into a depression. A matter of great concern to be honest.

      Cheers

    • Interesting, profound point about game as well. Schiff, I agree, but his videos predictions pre the crash are entertaining, he was right, but is beginning to sound like a broken clock. You should check the website http://www.greenenergyinvestors.com, some good chat on that. Also the podcast frisby’s bulls and bears is worth a listen, he’s had mish, Jim Rogers, Marc Faber and a load of others on there a few times.

      You can get a bit too caught up worrying about it all though, perhaps better not to give a fuck and go game some birds!

  9. Mortgage = liability , Rent = freedom. Gotcha.

  10. I think every man should invest wisely, and generally that means not going with the crowd.
    The money/credit system is a ponzi scheme, but it aint going away any time soon so we have to adapt and take advantage of it and the only way is to use debt.
    Holding cash is non event.
    The volatility and exposure of being invested scares most people away, but there is not much other choice in the western/anglo world if you want to live/retire comfortably.
    But beware buy/hold/pray is not a good strategy. It is all about timing, though it doesn’t have to be all that precise.
    The real estate market in the US was hit hard, but this also creates opportunities.
    Volatility always creates opportunities, just have to be there ready.
    I myself own multiple dwellings, it’s a long drawn out slow process that requires patience and a long term outlook of 10-20 yrs. But its a nice feeling to be 40 and never set an alarm clock without living in a third world country.
    Financial freedom is even more important than game for a man these days imo Mr K.

  11. Another solid article that’s giving me lots to think about.
    Can I ask Krauser, how many months should a ‘fuck you fund’ be able to sustain you for? Do you take an educated guess on how long it would take to get another [main] job and keep the ‘fuck you fund’ at a level that just gets you through that time?

    • I assumed this post only applies to owner occupied properties rather than investors. I jointly own 4 properties with my brother under a company structure and shortly will be buying one under my name to negative gear.

      I love the concept of money while you sleep and I always buy old low rise unit with mininium expenses . I.e no internal gym or pool. The properties are strategically located near supermarkets and good transport and aimed at middle class.
      The rental income funds the next property when its a surplus.
      Touch wood ! So far so good. I plan to live off it one day as superannuation in Australia is a joke and the laws are constantly changing.

      The problem with buyers is they get caught up emotionally and fall in love with the house or unit way before reality checks in.

      Great post as always.

  12. Really nice post! Simply comparing home price comparaisons may deceive you. When you understand how currencies are being destroyed as we speak, you’re bettor off with a true currency like gold (different asset class) which has, btw, dropped price significantly. It’s now a freaking bargain. it doesn’t generate a flow of income though. But the way i see it, gold and silver might rise significantly (20%~50%) in the next 2 years when the LBMA will have no more gold in their vaults.

  13. Krauser, have you done the analysis correlating an increase in monetary base with say the London housing price index? I suspect that for certain areas like London and Manhattan, it’s a liquidity driven game as opposed to a local fundamentals based one. The reason being the buyers for those markets are the global rich.

    • You are right, foreign buyers treat London property as a safe haven, it’s been described as gold with interest. But if the foreign money led to the boom in the first place, what happens when the flow of money reverses? The money originally flooded in from rich Greeks and other Southern European States, once the euro crisis is resolved (by breaking up), that money will be repatriated back home. Granted, there is always some other country in crisis whose rich criminals/citizens may be looking to get there money out….

  14. The other side of your bid for freedom is in the way you are bringing cash in. I appreciate you wouldn’t want to disclose your job title, from the sounds of it you do some sort of consultancy/short term contract work – presumably this required a considerable investment of cubicle chode time in the years building up to where you are now so that you would be taken seriously in this role. I’d be interested to know what kind of career path you would have taken had you had these realisations at an earlier age? Accept the time investment and live the bachelor life later? (I’m 23 with an excellent degree in a potentially useless subject – psychology – and finishing my masters now)

  15. Hey,

    Where would you suggest someone to put their money? I have a small ‘fuck you’ fund (6 months) and the rest of my cash is in the bank at 4% interest. I just don’t have a clue where to begin with investing.

  16. Good application of Taleb’s antifragility.

  17. I want the bachelor PUA no strings attached lilifestyle. The we ysonly thing is children. forget the nagging wife and the once a year BJ, your relationship with your child can be one of the best more fulfilling relationships you can have. Starting that out relationship sooner means more activities and experiences while you are in good health. no daughter wants an 80 year old waking then down the aisle. A son wants a father who is physically active to support with him.

    this is the only thing I can’t reconcile with the George Clooney’s. Everything else I am 100% behind.

  18. This article has come 25 years too late for me. I got sucked into the house-buying frenzy a long time ago.

    Long term personal experience puts my views firmly on your side of the fence.

    What I must do now is make sure my kids understand this.

    As for Wilson, try renting out a property. When your tenant fucks off having racked up big bills it’s not much fun.

    • Buying a piece of property can be a good move sometimes.

      1.) It can be rented out when your situation changes. Renting out a property: There are risks and disasters in every business and in every investment except certain Soveriegn debt obligations (Hecklers keep quiet for a moment on that point). Renting out a property is no different. The problem is that if you just have one property when things go south with that one tenant then it looks like a fu$%ed up business model. It’s not – there are obvious ways to minimize that risk. First and foremost try to deal with white collar people with good credit and landlord histories: people who have something to lose by stiffing you. I recommend professional/yuppie women in that respect.

      2.) It usually appreciates in value in most economic conditions. That means that you will probably win rather than lose depending on local conditions and overall economic conditions. Things are lousy now economically but on the other hand 4% or so 30year mortgages are available. That’s cheap money. When inflation comes back (not if: those thing don’t seem to go away forever) you’ll feel very smart having gotten a 3-5% mortgage ‘back in ’14) when your asset is appreciating due to inflation (if for no other reason) but your debt payment remains constant.

      3.) Look for something whereby your monthly rent equals at least 1% of the value of the building – you’ll usually be in good shape then especially if interest rates are reasonable and the expenses for operating it are also reasonable. It’s an excellent rule of thumb – they are hard to find but available.

  19. Out of curiosity, why was this not on the Count Cervantes site? Is that site still a going concern?

  20. Surely you can use ‘bear baiting’ in game to manipulate the woman to get her to follow you. Since there is no audience, it would be a case of herself feeling guilty about her view/opinion/action. And thereby giving player the upper hand.

  21. Solid post. Those looking for alternatives, check out Harry Browne’s Permanent Portfolio… try crawlingroad. You could build this in your 20s on a minimum wage job & be free free free. Only reason to buy a house is cos you want to live in it, as Warren Buffet says.

  22. This post was great as it clearly elucidated what I had been suspecting for quite some time – that when older people tell me ‘you need to buy! Rent is money down the drain!’ they are telling porkies.

    I’d love to see more finance posts. This stuff helps us younger men out. Are there any books you’d recommend on either personal finance or economics? Hazlitt’s ‘Economics in One Lesson’ is on my list but that is more to do with global economics rather than personal finance.

  23. This post is excellent advice that benefits landlords and landowners such as myself. Thanks for the (future) business!

    Being the generous guy that I am, I would advise young men just starting out to work hard, accumulate savings, and invest in properties. You can buy an SFR or even multi-family units for well under $100K in some locations. While these areas may not resemble London or Laguna Beach, your immediate goal is to make some serious money while you can. Buy a few properties and rent them out. It’s all about cash flow. Cash flow, cash flow, cash flow. Over time the income from rents will help fund your lifestyle.

    And then do what you like.

    I say all of this from first-hand experience. I know numerous people who have become multi-millionaires through owning real estate. I know some men whose real estate investments have allowed them to live abroad (Colombia, Mexico, Argentina, Thailand, Indonesia) for most of the year. They live the life of Roosh–except that they have money.

    Investing in real estate has usually been a solid path to wealth, and remains so today.

    You’ll thank me later. [You obviously miss the point of the post. Property is simply an investment. At any given time it is either fairly-priced, over-priced or under-priced. There’s no such thing as a Sure Thing asset class. You have the same mentality as all the greater fools who got taken in the 2006 bubble. K.]

    • I get the point. I just don’t agree with it.

      This post is misguided on so many levels. For one, you state that property is an investment, so why not treat it like one? Don’t put unnecessary focus on fluctuating house prices. With real estate investing, it’s all about cash flow. How much income does any given property throw off.

      Over the past decade I’ve done exceptionally well. How? I think about things differently than most people. I sensed trouble ahead. I worked hard, invested in a conservative and contrarian manner, didn’t spend frivolously like everyone else, and pounced when the time was right. I profited from the herd’s mistakes, and benefited from the decline.

      This post is basically telling young men to eschew the one asset class most likely (IMO) to make them millionaires. Instead of telling them to become chancers leading a vagabond life [such an existence inevitably becomes sad and lonely], we should be encouraging them to achieve a life rich in money, power, and freedom. And hot chicks. [You either don’t understand or can’t articulate investment theory. It’s not all about cash flow. It’s about net cash flow applied to the capital outlay, i.e. how much did you pay, what’s your cost of capital and how well does your income stream cover than plus profit. In some cases property is a bad investment, such as 2006, whereas in other times its a good investment. Investing for the long term is what people call it when the short term loses money. All investments are simply purchasing the right to a cash flow. “chancers”, “vagabonds” and “hot chicks” suggests you are an uber-chode of the provider variety. K.]

      • Real estate investing is all about cash flow. “Cash flow is king”, I think the saying goes. It should go without saying that said income must cover expenses, but obviously not with you. [Cash flow is important, but in the simplest possible terms it’s only half of the equation. The other half being how much you pay to purchase the right to that cash flow. K.]

    • One possible route for younger guys in their 20’s: Buy a one or 2 unit building, collect rent from a roomate (and you can include him as an equal or minority equity partner in the building if situation allows), and rent the other unit to some of your (typically) vast network of working friends. Make it party central and have a blast while you gain experience, hopefully appreciation, and pay down principal. Most people underestimate the costs associated with maintenance, VACANCIES, advertising etc., and bad tenants – that’s why the experience of a first purchase is important before your proceed much further.

      Every deal does not strike gold and some go south for awhile or even long term. Most seem to just barely get along and support themselves or increase a little bit. On balance I believe property is a more reliable appreciating asset than most and that slow appreciation is magnified, as Krauser notes, with the debt leverage (mortgage). Let’s not get into a debate that sometimes the values go down: they do, but usually they go up – that’s not the problem. The problem is that the usual rate of appreciation is simply not very much. What seems to happen eventually though is that there are unusual events like inflation (where your debt remains constant) or a period of rapid appreciation and just by having the asset you benefit: as the song goes “Even the losers…..get lucky sometimes” or as they say here “Ya gotta get in it to win it” (also applicable to daygame). An interesting phenomenon when values go south is that rents are often ‘sticky’ – and don’t change much even when values go down – lots of reasons for that but it’s a fact.

      I myself have lots of rental units (in excess of 60) but…..the place i live in, I rent. I made that decision back in 2002 when I read in the Economist that people in London were selling their high priced houses or flats, taking the vast profits, and then renting, so that’s what I did. The equity I had was better deployed elsewhere in a different real estate market than the one I lived in. Even now when evaluating buying a place I try to find a comparable place to the one I rent and:

      Determine the monthly mortgage payment PLUS THE RETURN YOU COULD GET ELSEWHERE ON YOUR DOWNPAYMENT (for example if you buy a $300k building you’re gonna have $60k or so downpayment tied up in the asset not to mention other closing costs so I personally think I can get a 8% return on $60k elsewhere so that means $400mo ($60k x .08/12mos) must be added to the mortgage payment):
      -Less the principal applied to the mortgage every month (yes I know it increases over time but the process is so excrutiatingly slow that it’s almost negligable for these purposes of anyone staying in a building and anyway people including yours truly seem to burn up that principal in the not cheap process of refinaning)
      -Less the tax savings (in USA our mortgage interest is tax deductible)

      AND determine if that number is above what I currently pay for rent (not to mention where I rent I don’t pay for repairs or any utilities except electricity). So far the answer has been no so I continue to rent where I live. [This is much more the mindset I was conveying – property is an asset class so do the maths to decide if its right or not. It’s completely different to the “property always makes you rich” clowns. K.]

      • Sorry, the last sentence should read “AND determine if that number is above what I currently pay for rent (not to mention where I rent I don’t pay for repairs or any utilities except electricity). So far the answer has been YES so I continue to rent where I live”

        FInally: I realize that a big argument for buying is appreciation but I made the judgement that the upside to appreciation in the area where I live is not worth the Premium (per the calculation in the post above) I would pay to own the place. In my case where the place I live in is probably worth $500k if it were sold as a condo, I pay about $2100/mo for rent but I calculated I’d pay $3300 (after the principal, mortgage interest tax deduction BUT PLUS -REPEAT PLUS- THE RETURN I CAN GET ELSEWHERE ON MY DOWN PAYMENT) are taken into account so I save $14,400/year by renting but ‘give up’ the possibility of appreciation. I am willing to make that tradeoff (especially because my heat, water, cooking gas, repairs, and cleaning of public areas are free which probably adds another couple $grand)

        Not everyone can get that kind of reliable return on their down payment money so that 8% isn’t some standard everyone should use but everyone should make that kind of calculation when they think of buying.

  24. I bought my house some years ago and therefore have some substantial equity in it. However it is difficult to get ahead in the savings department.

    With no ties i have often thought of just selling up and renting/moving away. I have a trade that although physical is casual. Reading Krauser and co is inspirational but it’s growing the goolies to have such a life of adventure especially now i’m 34.

    Great post!

  25. Brilliant! This is exactly the sort of red pill economic wisdom that most men will never encounter in today’s overtly blue pill society.
    Looking forward to more nuggets of wisdom.

  26. Absolutely fantastic posts recently, Nick. Best blogger in the “manosphere” right now.

  27. Great article, this was an insta-save. Make money you can sock away. Eat, bang, train jiu-jitsu, live like a minimalist, and improve yourself.

  28. Krauser, slightly off topic, but do you believe the government should have bailed out the banks during the last financial crisis? I’m assuming your answer will be no, that the banks should have been allowed to fail because that’s what would have happened in a capitalist economy without government intervention. Thanks. [Correct. K.]

  29. Nick said: “Cash flow is important, but in the simplest possible terms it’s only half of the equation. The other half being how much you pay to purchase the right to that cash flow.”

    Yes, the second part of the equation is correct. Which is why I explained that I have played the last decade very well, by keeping my powder dry during the boom times and then pulling the trigger when the timing was right at the bottom.

    Last year I managed to acquire two (2) properties at bargain prices, whose mkt value in the last 18 months has rocketed. And I’m getting enormous rents from them that more than cover cost. [Then what are you arguing about? K.]

  30. [One of the reasons I have changed my mind towards saving (I am against saving above a fuck-you fund) is because the government response to financial crisis has been to steal from savers to bail out borrowers. This is likely to happen over and over again. Government and central banks will always side with the borrower even though it ends in collapse – but not until savers are wiped out too. K.]

    I’ve just started a book you wrote about ‘enjoy the decline’ Can they seriously take your savings if things go tits up? if so, how much would you say is the minimum they’d bother coming after?

    Thanks

  31. Pingback: Krauser on financial independence | Freedom for Fenland

  32. Thank god you’ve posted this.

    I’m in a very luck position. I’m mid-20s, working in technology, running a team in a high growth business. I’ve got a home with no mortgage.

    I have so many people asking for advice on getting a mortgage. Most people simply should not do it unless they have very deep pockets. My friends who work in high powered careers are especially at risk (banking, consulting, law etc) because the jobs are volatile and people are let go at any moment.

    If you rent you are in a good position. If you own (and are SMART) you can be in a good position. The issue is people who own do not have any margin for error as the article points out. The HELP TO BUY scheme is a complete joke and is an attempt to buy votes. This will cause a helluva lot more pain in the next 5 years and believe me. At one point in the future, we’ll see a crash and its going to hurt a lot of people.

  33. Southern California

    Circa 2006, house value: 675K
    Dad: “Honey, let’s sell the house.”
    Mom: “No, I’m comfortable right here.”

    Circa 2007, house value: 750K
    Dad: “Honey, let’s sell the house.”
    Me: “Mom, let’s sell the house.”
    Mom: “No, I’m comfortable right here.”

    Circa 2009: house value: 575K

    Moral of the story: Your post, and more importantly, “DON’T LISTEN TO WOMEN.”

  34. You know, it’s thoughts just like those expressed in this post which fed into my (“somehow”!) plan to have a yacht. I’ve seen nice single-hull boats ones for around £12K. It’s just the thing for visiting many of the places mentioned in this blog, for being a floating home, and for being a fantastic pillar in being a renaissance man.

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