Friday Entrepreneurs: John Knox and Matt Landry, Take Cover

August 18th, 2006 - 13 Comments

This is part of a series called Friday Entrepreneurs.

I can’t count the number of times I’ve heard people say, “If you rent a house, you’re just throwing money out the window.” This is complete nonsense and it always makes me want to throw something heavy and crystal-based gainst the wall, so I was interested when I heard from John Knox and Matt Landry. These guys have written a 53-page e-book comparing the costs of renting vs. buying in which they try to lay out the choice in detail. When you read the interview, notice a few things:

  • These guys refuse to be a part of the let’s-give-a-simplistic-answer-to-a-difficult-question party. Instead, they wrote a 53-page e-book! I love this. In fact, I intentionally asked them, “What should I do, invest in stocks or buy a house?” When I hear something like this, I always roll my eyes because there are no easy answers to such a broad-ass question. John and Matt answer it admirably by refusing to give a simplistic response, clarifying some of the things we should think about, and then recommending where to do further research for our specific situations.
  • Their positions challenge the conventional belief that rent money is wasted money. They’re not saying that it’s better or worse than buying a house, but they are trying to clarify the reasons people choose one over the other. Their view reminds me of my post on buying a new car, which contradicted a lot of what we’ve been told for years. A lot of people didn’t like my position. Whether you agree with them or not, John and Matt give you some interesting things to think about.
  • I love their points about the hidden costs of buying a house. This is true of everything having to do with money, whether it’s transaction fees, buying a loaded fund, or taxes. Think total value and total price, not 1-time cost.
  • They haven’t made much money and they’re ok with that. But now they’re trying to figure out how.
  • I really like how they learned about something–and then took it one step further by sharing it with other people. To me, this is a key component of an entrepreneur, instead of just learning something and hoarding it. What’s the point? After you read the interview, you can visit their site at http://takecover.movingavg.com.

Aren’t people who rent just wasting money?
“Good question to start. This is exactly what we tackle in ‘Take Cover.’ Its just not an easy topic to address in a word or two.

If you can buy a house and the total monthly expenses are less than rent, then staying in the apartment anyway probably makes you a sucker. On the other extreme, if your costs for owning a home are twice as high as renting an equivalent place, renting becomes a perfectly feasible economic choice.

Anyone who doesn’t pay cash for a house (um, most of us) will likely find themselves staring down the long barrel of a 30 year mortgage. At an interest rate of 6% it takes something like nineteen years before the interest portion of a mortgage payment is less than the part that goes towards the principal you owe. You might get a tax break for that interest you pay, but you’re still paying.

And for that interest you’re paying, your lender won’t send Bubba over to fix the AC, kill bugs, or fish a spoon out of the kitchen garbage disposal. Toilet leak? Better get a plumber over to find the crack.”

Then why do so many people say that?
“Realtors, lenders, appraisers, title companies, and home inspectors all see dollar signs when homes are sold. Home owners are psychologically committed to saying it to the tune of hundreds of thousands of dollars. There’s a silent ‘right?’ that they are mentally suffixing to it.

The saying seems obvious, but the situation actually has some real complexity. Who thinks of the cost of mowing and watering the lawn? What about needing to move every five years—selling a home doesn’t cost $10 like a stock trade might. Six percent goes to the realtors, and another huge chunk of cash goes to closing costs.

Folks buy clothes, electronics, and cars on a whim. Why not houses? By the time you are getting estimates on interest rates, closing costs, insurance costs, taxes, and so on, you’re committed. You’ve put so much effort into finding the house that looks exactly like the haunted mansion, so much time thinking of what goes into what room. It’s like planning a war.

Think about someone buying a car. They agree on a price with the dealer, and then they get shoved into some hot little room where they are sold all sorts of extras nobody in their right mind would want or pay for. When that person finally gets done draining their wallet, when he shows off the car at work, he doesn’t want to tell anyone about the high-pressure extras. He won’t share the cost of the floor-mat sealer and roadside window washing plan with the five dollar deductible he got talked into. When is the last time your buddy drove up with a sweet new ride and said, “Dude, I just totally got reamed on this baby!”

The same thing happens with houses: expenses build up, but everyone sort of intentionally forgets them—especially when they only cost an extra $20 a month. Thirty year loans are sneaky that way. Why let a complicated reality destroy a simple elegant saying that feels so good?”

What should I do, invest in stocks or buy a house?
“Wow, what a dilemma! If we’re talking about investing, we’re really skeptical about living in an investment. You might be better off by building an igloo out of stacks of penny-stock certificates. Or not. If you’re talking about buying rental properties and becoming a land lord, there are some good books on the subject that you should read—see the book list at the end of ‘Take Cover.’ If you’re talking about flipping homes, neither of us has had enough experience to form an educated opinion.

We’ll talk our way out of this one by saying that neither is necessarily a good investment choice. In both cases, investor psychology usually defeats the investor. For homes, people are always chasing bigger and better, or sinking lots of money into home improvement projects. For stocks, folks tend to buy yesterday’s winners, always sell low, and so on.

More practically, it’s easier to set up an investment plan in stocks or other funds so that emotions don’t burn up all your money. For stocks there is lots of data available to use as a basis for your decisions, and you can set up accounts to buy and sell stocks automatically. For a home though, you’ll have a really hard time avoiding emotions in your decision making process—you live there. Objectivity is out the window, so to speak.

Another big issue with treating your home as an investment is that you’ll find it really difficult to figure out your rate of return.

Even in insanely hot markets, looks can be deceiving. There is actually a really good article related to the subject right on your site.

But, if you’re looking to invest your money, please don’t follow the advice from a short interview like this. Instead, do some serious research. Consumer Reports has some interesting articles where they measure the impact home improvements have on sales price. If memory serves, all of the upgrades they looked at raised the value of the home by less than their cost. You can find all sorts of interesting texts on what to do with stocks.

‘Take Cover’ can help someone at least figure out what a home might cost to own in the long run. But again, you’re trying to balance two competing interests when you treat your home as an investment.”

You say that Take Cover is not free, and you ask that people donate. Do they?
“We prefer not to call them donations, for obvious reasons. We aren’t running a charity car wash—although I bet the washes have pretty low non-donation rates. How can you say no to a bunch of cheerleaders or whoever after they wash your car?

But practically, you’re right, it is a donation. Dishonest people don’t have to pay. So far we have had a handful of payments. We just started offering our product a week and a half ago, so we aren’t surprised that we only have a handful—only a few copies of our book have been downloaded.”

What could you do to improve your donation rate?
“Ah! Well, first we need more people visiting our site. Then more of those people that do visit will need to download our book. Finally, those that do read the book will need to pay for it. We need to optimize each of those steps.

We’ve found that the wording of our ads has a large impact on click-through rates. We might find a similar impact if we try different ways of asking for payment. These experiments sound just like grade-school science projects without all the cardboard, double-stick tape, and 3-D graphs.

Although we’re hopeful that the honor system will work we may find that giving folks the product before accepting payment is a bad idea. It is nice not to have to worry about setting up online stores and things—they tend to be painful and a bit more expensive. Also, unless you grow your own, you’re limited in customization of the look and feel. It is also nice to see that people are paying because they like the product, not because they had to pay to read it first.

Ultimately if we don’t get high payment vs. download rates we’ll have to try a store where you pay first. It’s either that, or follow the lead of the charity car wash and have a cheerleader in a small bathing suit asking for payment.”

Tell me a little bit about yourselves.
“Both of us are Electrical Engineers. We graduated from the University of Florida with Bachelor’s degrees. Today we work in two different giant, faceless engineering companies in Austin, Texas. Matt is an analog circuit designer, and John is a silicon verification engineer.

We’ve both became a bit disillusioned about our engineering jobs. Working as an engineer isn’t bad—far from it. I think we just dislike the notion of a 9 to 5 job—especially when it so often becomes 9 to 9, or later. Commuting, cubicles, tedious meetings, and office blowhards all make us a bit dissatisfied with the status quo.”

How much did it cost you to do this?
“Maybe two thousand dollars. Most of that went to the cost of incorporating and getting some legal help to do so. We spent some money on office supplies, some lunch meetings. If we used legalzoom.com or another service to incorporate, you could probably do everything for less than a thousand dollars, maybe even around $500.

There were a few unexpected costs. To use Google Checkout, we needed to provide customers a phone number and physical address. We certainly didn’t want to use our home addresses and cell phones. For around $40 bucks we got a SkypeIn phone number with voice mail for a year. For something like $60 we got a box at a UPS store for a year as a mailing address.

For the website, we pay about $4 per month—which sounds like crazy talk to us. We use a raft of free software tools for the Mac and Windows to do graphics and write text. For our online advertising we basically set our monthly budget and pay for clicks—about $0.20 per click at $30 per month.”

How much have you made? (Approx is fine, or whatever you’re comfortable with.)
“We haven’t made any profit yet. We have revenue, but no profit. We’ve received like $20 in payments so far. We just started selling last week, so we aren’t entirely shocked. Obviously we want to do better in the future.”

John KnoxDan Landry

Visit their site at http://takecover.movingavg.com.

Also, see the previous Friday Entrepreneurs entry or email me to be featured.

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13 Comments

 

Comments

  1. Amen to that. I’ve been in arguments with so many people about the hidden costs of housing that I refuse to even bring the subject up any more. Now I can tell them to go read a book. Thanks for putting this together.

  2. Anyone who doesn’t pay cash for a house (um, most of us) will likely find themselves staring down the long barrel of a 30 year mortgage. At an interest rate of 6% it takes something like nineteen years before the interest portion of a mortgage payment is less than the part that goes towards the principal you owe. You might get a tax break for that interest you pay, but you’re still paying.

    You save loads of interest by going with a 15-year fixed vs. a 30. 30 year mortgages were designed to benefit the bank, not the consumer. Much like the new 50-year mortgages. And if you are going to be renting and looking to buy later, then why not rent as cheaply as possible? Pile up cash for a few years and then pay cash for a house. True, very few do it. It is also true the if you are willing to sacrifice for a short period of time, a lot more Americans toady would be able to do this or something else crazy like put 50% down.

    Also – the intrest to principle illustration is nice, but do you think that your car loan is different? Small business loan, signature loan? This is the way its done. Make no mistake that the bank will get their cut, and they’ll get it first. “Sophisticated investors” think they are smart by taking out loans to invest in properties, then pay them off 6-months later and do it all over again. My friend with the Building and Loan says otherwise. After all the fees, they are paying around 20% on thier money, since those fees are not ammortorized over the entire length of the loan. They would be much better off to build up cash and use… cash.

  3. I’ve said that renting isn’t wasting money for a long time. You have to pay money to live somewhere so how is it a waste? Besides, apartments come with things that you would have to buy in your own house–window treatments, flooring, refrigerator, stove, washer/dryer. People don’t figure those things when they say buying is better.

  4. Renting is throwing money away if you pay extreme amounts for very little. Right now, my rent is 835 a month for a two bedroom one bath, 890sqft apartment in ann arbor, MI. it’s going up to 850 for a 920 square foot two-bedroom townhouse with a full basement. Is that a ripoff? Not at all – the management is so awesome it’s worth it. Similar pricing can be found for apartments run by companies that will violate your personal orifices for fun and profit.

    It’s all about being smart.

  5. I think it is telling that most businesses rent their office space instead of buying it. However in the housing market there are other reasons to rent v. buy besides pure cost analysis.

    Freestanding houses for rent are not very common, so if you want to live in one, you better expect to buy.

  6. You have my respect for using an honor system. Great job in general, keep up the good work! :)

  7. Unless you are a master of self discipline you must buy a house rather than rent long term. The reason is the appreciation and forced savings. 10 years down the road when all your friends who bought a house all have a hundred or two hundred thousand in equity that you don’t you’ll be pretty sad with all the money you saved.

    If you own, your house apprecaites. If you rent, your rent inceases. The benefits of owning only increase over time.

    The only way it’s better is if you take the differential between owning versus renting and get a good return with it. Trouble is, most of you won’t. You’ll be peacocking around about how smart you are while your equity growth will be marginal.

    They real key is to buy the right house. You need to buy a house or condo that is of a similar standard to the one you would rent. Unless there are rent controls or the market is so overheated that rents haven’t kept up then the price of owning is comparable to the price of renting.

  8. DON’T LISTEN TO THESE GUYS! The authors of this blog don’t know much about real estate. Ever heard of a thing called equity? Yes it’s true that home owners need to hire plumbers once in a while but that cost doesn’t even compare to the value you gain from ownership. Allow me to explain my point. I purchased my 2 bedroom, 1.5 bathroom, southern California condo in March of 1999 for $125,000.00 with 10,000.00 of my own money as a down payment. Over the last 6.5 years, my monthly payments have added up to a total of $73,000. All together, I might have spent a maximum of $1,000 to fix little plumbing and carpet maintainence problems with my condo. Today my condo is worth $450,000. Now, let’s do a little math: 73 + 10 + 1 = 84. 450 – 84 = 366. $366,000.00 – selling costs is what I’d be able to pocket if I sold it today. If I chose to follow these guys advice (and rent) instead of buying my condo 6.5 years ago, I’d have nothing to show for the money I used to pay for someone else’s equity (rent).

  9. Thats a great point, Julia. You also need to note that you are talking about an artificially inflated market and your results are not typical. But congratulations on your potential windfall. It also appears to be the beginning of the end for the real estate bubble. IF you can get $450k, its probably better to take it, run, and thank your lucky stars. Its also good that you ahven’t been cashing out your equity like so many others have. Their bubble will truely burst.

  10. I don’t understand the logic behind these guys comments. In many cases this is true but its a little to in the moment for me to really trust. It’s too easy to look at the history of people we actually know to see who benifits more, renters or owners. Thsi is completelly dependent on the specific housing market. I live in an area where the housing market is still good here. I can buy a large house for $200-$250,000 in a good neighborhood close to town. Prices are not skyrocketing overnight like the were the past few years, but they are still rising at a stable right.

    I can see where in LA it might not be a good idea to pay $1,000,000 for a two bedroom flat.

    Land is one of the only things there will never be more of. If it’s paid for properly it’s an easy investment to pass on to former generations. Homes have historically been a great investent. Take my grandmother for example. She just bought a brand new $170,000 home and she pays $300/mo for her mortgage. She could never afford to live in something equivalent renting. Plus it’s an actual house.

    Then there is my dad. He paid $110,000 in 1990. It’s now worth around $450,000 and paid for.

    The argument that one commenter made about businesses renting is crazy. Businesses are scared to buy their spaces because commercial properties can take years to sell and are far more expensive. However, stable businesses often buy their properties. A recent employeer of mine was working on restoring a historical building for our office just before I left the company. For what the building costs (2 million) v.s. what were paying in rent (around 300k/year) It’s easy to see that in just a few years the building will pay for itself.

    My dad has owned his own company for 25 years and kicks himself often for not owning a building. Ofcourse, now its not worth the costs at his age. But it would have been a great investment 20 years ago and he would have no rent.

    Then, I can draw from my own experience. I purchased my home 2 years ago. It’s already appreciated far more than enough to justify the purchase, but more importantly (and relevant to this article) I’m now around $150/mo less that it would costs to rent a less apartment in the same neighborhood.

    The other thing you have to look at is that since housing prices historically rise, your buying power is decreasing the longer you wait (given you don’t take out 2nd and 3rd mortgages on your home)

    So far in two years, buying has saved me around $40,000. (or more if you tack on the interest it would cost me to borrow that money later)

    My home is also new, well built, and I’ve had little to shell out in maintenance.

    And they don’t even mention the tax benifits of home ownership.

    These guys just makes far to many assumptions and the advice is far to broad.

  11. Come on, you don’t have to spend a ton of money to have a house of your own or get trapped in an ungodly mortage. You take your time, save a decent down payment so your monthly mortage payments are reasonable. I’ve got a 15-year loan and at this point am making double payments so will have it paid off rather quickly. And you don’t have to constantly pour money into a house if you do your homework ahead of time. I’m even willing to never buy another car as I live so close to a bus stop (should it ever come to that), that’s how much I’d rather have the house than the vehicle though mine is paid for at this point. Again, you have to do your homework ahead of time and be real honest with yourself. And most importantly, forget about keeping up with the Jones’, it ain’t worth it and don’t play around with credit cards. I feel sorry for people who think they have to live their lives that way. I hated apartment living, to me it was a total waste of hard-earned money no matter how I looked at it.

  12. If I owned the place I rent now, I would have to pay a $75,000 down payment, my mortgage payments would be 50% more than my rent payments, I’d pay another $1000 a month in property tax and insurance, I’d handle all the maintenance, I’d be on the hook for any property declines, and if I ever missed a couple payments I could be forced into bankruptcy. How is that a good deal exactly?

  13. If you find a great deal on a house and if the location is great, go for it. I got on the property ladder about 6 months ago. Found a house with great potential. It needs some work, but now I can probably sell the house for 50k more.

    I don’t pay much more than I would if I were still renting – I only pay $120 more now and it’s well worth it. More freedom and no landlord who can increase costs every year.