Wednesday, June 29, 2022

Rent Vs Buy? | Why the math is changing | LGI Homes Stock Analysis

Is it cheaper to rent or buy in the u.s well the wall street journal did run the numbers but as i was reading this article i realized that this was a perfect article to support the purchase of lgi homes a home builder that i do own in my portfolio so that's what we're gonna go over in this video so guys smash that like button and if you're new.

To the channel please consider hitting that subscribe button you're watching more money let's get it what's up guys and welcome back to the channel where the goal here is to help at least a thousand people achieve financial independence much sooner and let's dive right into it so you can see here that the wall street journal just.

Put out this article saying is it better to rent or buy and what to do in a hot housing market and essentially what they're trying to get at here is that with surging rent and home prices it's worth doing the math again and i think what they're trying to get across here is that in some cities the break even time to buy is a lot longer due to the.

Surge in home prices and so moving into the article they say here that the increased cost to buy a home means that the time it takes to break even compared with what one would pay to rent a comparable house has gotten longer and so moving to the next slide here you can see that cities like honolulu hawaii philadelphia los angeles austin.

Charlotte the break-even time has increased by years the one that i'm really not surprised with is austin texas that's becoming a new tech hub and so you're getting a lot of high net worth high income type people moving into the city and thus driving up the home prices and so austin not a surprise at all prior to.

The pandemic the typical home buyer would take 3.7 years to break even versus renting now it's closer to that six year time frame now what i did want to point out to you guys is as i was reading this i was sort of reading in between the lines here because look at the names highlighted below in red in those red boxes the names are orlando.

Phoenix dallas houston tucson arizona and miami and the reason why i highlighted those names is that those are the places that people have been migrating to during the pandemic or subsequent to the pandemic and what it's really showing here is that these areas have had the highest percentage increases in terms of.

Home prices but notice that their rent prices have also gone up significantly and so the math still sort of remains relatively the same in these areas so it still makes a lot of sense to buy homes in orlando or in arizona or even in certain parts of texas like the dallas fort worth area or houston and i'm sure san antonio is.

Somewhat in the same area as well so that was a big surprise to me but diving deeper into it they provide this really great illustration where they're saying that the break even is between two and a half to three years and property is still relatively inexpensive compared to the major u.s city centers if you're going to decide to move to miami phoenix.

Or arizona notice that i didn't highlight other cities like boston or chicago we're seeing high levels of net worth grow after 10 years and the reason why i didn't highlight those areas is because the price of the properties are so high or there's just a significant amount of property tax that you have to pay on those properties for example.

Chicago has some of the highest property tax in the country but note that texas also does have high levels of property tax but they give it back to you from the perspective of lower income taxes so there's a little bit of a tax fairness thing going on there but what does this really mean here well you're seeing a bit of a trend here with florida texas.

And phoenix it makes a lot of sense to still buy homes in these locations and so if you're looking to purchase a home builder lgi homes is a really good builder because they're perfectly situated here because as you can see from here they primarily focus on states such as texas arizona and florida those are the three major ones that they focus.

On and so this article to me ended up becoming a bull case for purchasing lgi home now just getting into the valuation for lgi homes just a little bit you can see here that here's my valuation for lgi homes that you can get in the tracker that the patreons get access to i'm valuing the company at approximately 190 per share but note i'm actually.

Giving the company zero credit for excess capital for conservative purposes in fact the company in my opinion has around 11 or 12 dollars of excess capital so the valuation could reasonably be over 200 per share just around that 201 or 202 dollars per share so effectively it would say that the price.

To intrinsic value is much less than 50 or you can say that the current share price is trading at 5.8 times my fiscal year 2022 eps estimate and my 2022 eps estimate for lgi homes is below what the market believes so the market actually believes that the multiple for this name is much lower than what i do but that being said 98 per share is not as.

Exciting to me in this environment because the premiums on the cash secured puts are still pretty high and so i'll just point one out for you so you can see here the december 16 2022 cash secured puts with patience you may get lucky and sell that 65 cash secure put four five dollars and 50 cents per share right now it's out of the range you see.

How the range is between 1.2 and 5.10 and the last trade was around 4.2 but with patience and a little bit of a downturn you probably could get that and so if you could get that it would reflect an annualized yield of fifteen point three percent and a net purchase price of fifty nine dollars and fifty cents per share if you're exercised.

Which is a forward p e ratio of 3.5 times so instead of paying 98 per share for lgi homes you could enter into a csp where you could have a win-win situation where worst case scenario you make a 15 return on the security or just to park that capital and best case scenario you're buying this great home builder for three and a half times forward.

Earnings and that's sort of the math that i've been doing when i've been buying up these home builders now i just want to quickly show you something one thing that the patreons get access to is this cash secured put analysis tool so you can see here that we put in the strike date we put in the price put amount of 65 dollars we put in the.

Premium of 550 and it gave you a net purchase price of 59.50 a straight put yield of 8.5 but an annualized put yield of 15.3 so it's important to delineate between those two figures and you can see that it gives you a forward p e ratio of 3.5 times earnings now the other thing that the patreons do get access to just as an fyi.

Is this full model for lgi homes so you can see here that i've broken out all of their key performance indicators including their backlog data how their debt looks where are they generating their revenues from like what location cities areas what the cost structure is et cetera et cetera and so i forecast all of that out in the most granular.

Data and what you can do by being a part of the patreon you can actually download that model and change around those estimates at the most granular level to see what valuation works for you and of course you can get access to all of that at the five dollar a month patreon level and like i always say there's never any risk to you because if you decide to.

Join and within the first month you think that it's not for you no problem just message me in the patreon and i'll completely refund that first one so once again no risk to you now this weekend i'm actually going to release a new video called are we on the path to a mortgage crisis and in order for you to not miss out on that video i highly.

Encourage you to hit that red subscribe button and ring that notification bell to be notified when that video comes out and it looks like china is about to end their lockdowns which is really good news for alibaba and i recently put out a video on that which you can get to right here


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