Author Topic: Home is not an investment?  (Read 6052 times)

Mr. Boh

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Re: Home is not an investment?
« Reply #100 on: April 29, 2019, 10:58:31 AM »
Im sure some smartass here will say this is untrue since x stock crashed and is now worth 0$ and my RE agents girlfriends brother in laws house appreciated 10000% in one year.

I feel that this comment is directed at me. I was not being a smart ass I was asking a serious question. Here is what I wrote upthread: "There are plenty of public companies trading today that lose money every quarter and pay no dividend. If you buy shares in one of these companies are you not investing?" I'm referring to companies like Lyft and Pinterest and Tesla. These are loss making companies. Are the people buying shares of these companies making an investment? Serious question. A company like Amazon took a long time to make a profit. The "investors" who bought Amazon eighteen years ago had a long enough time horizon that they thought that profits would eventually materialize. How is that different from someone who buys a house with the knowledge that in fifteen or thirty years the expense to live there will be greatly reduced.

Here is the Cambridge dictionary definition of investment: the act of putting money or effort into something to make a profit or achieve a result. A house is clearly an investment. It is silly to say it is not. The only question is if it is a good investment.

maizeman

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Re: Home is not an investment?
« Reply #101 on: April 29, 2019, 11:07:24 AM »
Here is the Cambridge dictionary definition of investment: the act of putting money or effort into something to make a profit or achieve a result. A house is clearly an investment. It is silly to say it is not. The only question is if it is a good investment.

That's an interesting definition. If we followed that definition, what matters isn't the thing money is being spent on but the intent of the person spending the money.

Since I did not spend money on my house in order to make more money later, my house would not an investment.

If you decided to buy a house because you wanted to make more money by selling it later, then your house would be an investment (regardless of whether you actually clear a profit or not).

Just as an aside, adopting this definition would also mean many people did "invest" in bitcoin, since during the run up in prices in 2017 a lot of people sucked in surely did intend to make a profit. ;-)

dougules

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Re: Home is not an investment?
« Reply #102 on: April 29, 2019, 11:08:34 AM »
He's a brain exercise. In a closed system, with a stable population, what should the price of RE do, and why? Or food or gas for that matter? The same people go to the same jobs, and generate the same value for society each day for a decade. As a group, the produce the same quantiy of goods and services, and it's balanced by what the group consumes, each getting a slice of the pie according to the relative worth of what they contribute. This would be a zero growth society, but everyone fills a role, and everyone has the housing, food, and transport they need. I would argue in such a system all prices would remain the stable, subject to the vagaries of material changes to items such as depreciation, in which case you would pay a fixed about to repair it, and maintain your home at the same value. 

Throw in some instabilities, such as technological improvements, and you'd actually either expect prices to drop, or goods generated to increase (bigger homes). Throw in a hurricane that wipes out a third of the homes, or a 10% influx of immigrants, and you'd expect homes to go up, due to higher demand. But after that initial shock to the system, you once again would expect it to find a stability point.

Well, we don't live in a closed system . . . and populations have never been stable, so we're going from incorrect assumptions here . . . but sure.  As long as supply is infinitely increasing that's exactly what you would expect . . . a price drop.  Most cities do not have an infinite supply of land however.  As that land is used up, it's completely natural that the price of houses should rise near economic centers.  Technological improvements have allowed us to fit more people into smaller areas (through stuff like condos), but actual land is still the limiting factor that you keep running into.


You're still speculating on all those external factors and not making any actual return.


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If what you're positing continues unabated where home prices increase faster than wages and inflation forever, what's the ad infinitum result? Basically what you have in Toronto now. Requiring 200% of the average Canadian income to buy a property which most would consider the absolute bottom of ownership -  (ie a 300 sq ft condo) that costs 400k.

Take a look at an average 3br home, a 45 minute commute from Toronto, and you have to be a 1%er if you want to buy and maintain a historically sensible price/income ratio. So the situation is that you have to either be a 1%er, or over extend yourself to the gills to buy an average house. Neither bodes well for a stable society.

But, the fact remains, many people have made a lot money in the last decade of Canadian RE, and I fear it blinds them to a fierce and honest evaluation of the facts because they're so busy patting themselves on the back for being so brilliant. I saw the same thing in 99 with tech stocks, with gold and particularly silver in the late 2000s, and the same thing 18 months ago with bitcoin. It literally *is* on it's way to the moon. Until it isn't.

How do you feel about the price of real estate in New York?  Paris?  Hong Kong?  London?  Las Angeles?  When do you expect prices to return to normal in these cities?  When the land starts to get used up around a major economic center, prices go up . . . and never come down to those enjoyed by people living in more rural areas.  That seems to be the nature of things.

I'm not a 1%er (have never even made six figures in a year), but bought and completely paid off my freehold detached home in Toronto.  I don't expect prices to continue to rise at the pace they have for the last while . . . but I'd be quite surprised to see a crash down to price/income ratios that you seem to be expecting.  There is a lot of demand, there is constant immigration into the city for economic reasons, and there isn't more land to build on.

Try Birmingham, Cleveland, Detroit, rural Nebraska, etc.  They were once places that had a really bright future, too. 

And then more than not, places are like my hometown.  The economy is doing well, but real estate generally just more or less keeps up with inflation. 

Also, we're in a period where interest rates have been low for a really long time historically.  If interest rates go back up, it will cut off some of the money that's going into these places. 

GuitarStv

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Re: Home is not an investment?
« Reply #103 on: April 29, 2019, 11:16:02 AM »
OK.  So a house isn't an investment . . . but the land that it's sitting on absolutely is.  But land is effectively inseparable from a house in most cases, so I'm not sure why we're artificially separating them in this discussion.  Is there anyone in this conversation who expects to be able to realize a return selling a house, but not the land it sits on?

Land is not an investment in and of itself.  An investment produces a return, and land doesn't produce that if it's just sitting there.  You get a return by renting it, improving it, farming it, running a business on it, etc.  Just holding land to sell it for more later is speculation, not investment.  It's probably a good bet that land in Toronto will go up in value, but it's still just a bet with no actual return.

(Sorry to go back a bit, but I don't think the point was made)

Non-dividend paying stock are not an investment either then, right?  Because you're just holding them in speculation.

There's a difference between an asset just sitting there and stocks that makes for some confusion.  You think of a non-dividend paying stock as just sitting there in your account the same way as a chunk of gold does.  That's not accurate, though.  That share is a share of something different from what you originally bought.  The company you own has made money (hopefully), so now it's got more assets.   You have a share of something that has grown in scope while you've held it.  It's more like owning a share of a growing apple tree than owning something that is static.  Another analogy would be buying a house that is busy flipping itself.

The home you buy isn't static though.  The value rises and falls based on a variety of factors, from development in the area, to improvements done, to changes in property tax, to changes in neighbourhood composition, to change in nearby employers, crime rate, etc.

Stock value is only loosely tied to company health and earnings.  It's very easy to find examples of stocks valued quite highly purely on speculation (remember all those crypto stocks?).  It's also not that hard to find samples of companies with good fundamentals that have lost significant value for stretches of time.  I don't think the tree analogy is very good.

Except for improvements all those factors you list aren't things you or a manager is actively doing to make the house worth more.  If it's not something you or a manager is doing, you're just speculating that you'll get lucky on property taxes, neighborhood desirability, local economy, etc. 

Improvements are an investment if you're doing it to sell the house.  If not they're just consumption. 

In the short term stock value is only loosely tied to company health and earnings, but in the long term they are quite closely related.  Long term is what matters.  Some investments don't do well, but there is still something being actively done to pursue a real return. 

The tree analogy is decent because an apple tree can wither and die or run into bad years, but it's still trying to grow and make apples to whatever amount of success.

Nothing that you do is actively improving a stock you hold either . . . but if we're talking about abstract managers, the city you live in has a variety of managers in various levels of government.  From the mayor to city Councillors, to the Prime Minister/President there are a lot of people who are working for your betterment all the time.

I really think that this line of reasoning is a stretch to pursue . . . there's little difference between holding a very expensive non-dividend paying stock in a company and the deed to a home.

dougules

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Re: Home is not an investment?
« Reply #104 on: April 29, 2019, 11:56:29 AM »
Nothing that you do is actively improving a stock you hold either . . . but if we're talking about abstract managers, the city you live in has a variety of managers in various levels of government.  From the mayor to city Councillors, to the Prime Minister/President there are a lot of people who are working for your betterment all the time.

I really think that this line of reasoning is a stretch to pursue . . . there's little difference between holding a very expensive non-dividend paying stock in a company and the deed to a home.


I think this line of reasoning is accurate, and you're just trying to dismiss it. 

There's not really a comparison between the executives managing your company and the government that manages your city in general.  The executives are managing assets that belong to you.  Just because you don't see Berkshire Hathaway's cash flowing into your own bank account doesn't mean it's not yours.   The city government, on the other hand, is not actively trying to make you a direct monetary profit.

afox

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Re: Home is not an investment?
« Reply #105 on: April 29, 2019, 12:12:51 PM »
there's little difference between holding a very expensive non-dividend paying stock in a company and the deed to a home.

Huge differences between a stock in a company a deed to a home. For starters the home has large and continual expenses that whos costs are not recovered till you sell the home and may never be recovered.  I think you may be confusing rental real estate with primary residences.

Whoever used the example of NY, SF, etc as an example of home prices appreciating should try picking the next NY, or SF. Or buy property in NY or SF now at any price since you seem to believe it will continue to appreciate forever.

This thread is about primary residence real estate. Primary residence is the home you live in. Each person only has one primary residence. Once you buy a new primary residence and turn the old one into a rental, the old building becomes an investment (and very often a good one). Again, some of you are confusing rental real estate with primary residences. No one doubts that rental real estate whether it be single family homes or apartment buildings or commercial real estate is an investment.

Im still waiting for someone to tell me how I make my primary residence an investment with returns competitive to other investments. The fact that your real estate agents brothers sister in law bought a cottage in silicon valley when it was an orange grove in the 70s for $100k and sold it last year for $2.5m doesn't convince me that primary residences make good investments.


Mr. Boh

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Re: Home is not an investment?
« Reply #106 on: April 29, 2019, 12:15:49 PM »
Here is the Cambridge dictionary definition of investment: the act of putting money or effort into something to make a profit or achieve a result. A house is clearly an investment. It is silly to say it is not. The only question is if it is a good investment.

That's an interesting definition. If we followed that definition, what matters isn't the thing money is being spent on but the intent of the person spending the money.

Since I did not spend money on my house in order to make more money later, my house would not an investment.

If you decided to buy a house because you wanted to make more money by selling it later, then your house would be an investment (regardless of whether you actually clear a profit or not).

Just as an aside, adopting this definition would also mean many people did "invest" in bitcoin, since during the run up in prices in 2017 a lot of people sucked in surely did intend to make a profit. ;-)

You are ignoring the last part of the definition. If you did not spend money on your house in order to make more money later you must have been trying to "achieve a result". I bought my house so that I could provide a nice place to raise my family. I didn't want to be subject to the whims and needs of a landlord and I wanted to live exactly where I wanted. I felt that this was important enough to me that I should make an investment toward that end.

I feel like intent is clearly the most important aspect. Of course people were investing in bitcoin. What else would you call it. It just happened to be a bad investment if you bought at the top. If you bought at $100 a bitcoin it was a good investment. Simple as that. Why the confusion?


GuitarStv

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Re: Home is not an investment?
« Reply #107 on: April 29, 2019, 12:24:17 PM »
Nothing that you do is actively improving a stock you hold either . . . but if we're talking about abstract managers, the city you live in has a variety of managers in various levels of government.  From the mayor to city Councillors, to the Prime Minister/President there are a lot of people who are working for your betterment all the time.

I really think that this line of reasoning is a stretch to pursue . . . there's little difference between holding a very expensive non-dividend paying stock in a company and the deed to a home.


I think this line of reasoning is accurate, and you're just trying to dismiss it. 

There's not really a comparison between the executives managing your company and the government that manages your city in general.  The executives are managing assets that belong to you.  Just because you don't see Berkshire Hathaway's cash flowing into your own bank account doesn't mean it's not yours.   The city government, on the other hand, is not actively trying to make you a direct monetary profit.

I don't agree.  A public company that has issued stock but does not pay dividends isn't trying to make you (shareholder of two stocks) any direct monetary profit.  They're doing what they think is best for their business, and using your money to do that. . . if they make good decisions it's likely to improve the value of your stock, but they don't give a crap about you or your personal profits.  Which is in the same level of care that I'd expect from a mayor of a city . . . he wants to keep the city functioning smoothly, crime down, and property taxes to a level where he'll get re-elected . . . which is likely (in the long run) to increase the value of your home.  He doesn't give a crap about the value of your home though.




Im still waiting for someone to tell me how I make my primary residence an investment with returns competitive to other investments. The fact that your real estate agents brothers sister in law bought a cottage in silicon valley when it was an orange grove in the 70s for $100k and sold it last year for $2.5m doesn't convince me that primary residences make good investments.

You realize the investment when you sell the property . . . just as you don't actually have any gains from holding a stock, only when you sell it.  The returns you get for the residence will depend on how good a home picker you were . . . just as the returns on an individual stock will depend on how good a stock picker you were.

My home has appreciated more than my index funds over the past ten years.  I doubt that I could pick another home that did the same . . . just as I have little faith that I could pick an individual stock that will beat the market.  But that doesn't mean that a home isn't an investment.

Telecaster

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Re: Home is not an investment?
« Reply #108 on: April 29, 2019, 12:30:57 PM »
I was going to comment earlier and perhaps I should have, but the issue is that the word "investment" (like many words) has several different meanings.  The hang up here is people are using the same word to mean different things.   If you say "I invested in a good pair of shoes" that's a little different meaning than saying "I invested in 100 shares of Exxonmobile."  Similar, but not the same.   

When people talk about a home as an investment, they are usually thinking "it will make money for me over time."   And that can be true.  For a lot of Americans the majority of their net worth is tied up in their home.   Hence many people thing they should buy a home as an investment because that's the path to wealth.

However, that's not necessarily true.  The rent vs. buy calculation shows the path to wealth could be greater through renting.   For that reason, even though it is technically correct to say a house is an investment in some contexts, I prefer to refer to it as an expense.   And like all expenses, it is wise to minimize it.


   


Mr. Boh

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Re: Home is not an investment?
« Reply #109 on: April 29, 2019, 12:34:59 PM »
there's little difference between holding a very expensive non-dividend paying stock in a company and the deed to a home.

Huge differences between a stock in a company a deed to a home. For starters the home has large and continual expenses that whos costs are not recovered till you sell the home and may never be recovered.  I think you may be confusing rental real estate with primary residences.

Whoever used the example of NY, SF, etc as an example of home prices appreciating should try picking the next NY, or SF. Or buy property in NY or SF now at any price since you seem to believe it will continue to appreciate forever.

This thread is about primary residence real estate. Primary residence is the home you live in. Each person only has one primary residence. Once you buy a new primary residence and turn the old one into a rental, the old building becomes an investment (and very often a good one). Again, some of you are confusing rental real estate with primary residences. No one doubts that rental real estate whether it be single family homes or apartment buildings or commercial real estate is an investment.

Im still waiting for someone to tell me how I make my primary residence an investment with returns competitive to other investments. The fact that your real estate agents brothers sister in law bought a cottage in silicon valley when it was an orange grove in the 70s for $100k and sold it last year for $2.5m doesn't convince me that primary residences make good investments.

I'm not confusing my primary residence with my rental houses. I have one primary and three rentals. They are all investments. You are the one who is confused that there has to be an equivalence between all investments. There are gradations. Some investments are good and some are not as good. That doesn't mean the less good investments cease to be investments.

Your time horizon seems strange to me. To use your example, say you buy a little house. You intend to live there for some time period (which also helps with cheaper financing) and then you will turn it into a rental later. Is it only a good investment when you get the first rent check? Or the one hundredth? What if after a few years of renting it you decide to move back in because the loan is paid off and you could save a lot of money on rent? Would it still be a good investment? What if you skipped the step of moving out and turning it into a rental?


afox

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Re: Home is not an investment?
« Reply #110 on: April 29, 2019, 12:40:57 PM »
Guitar Stv: For starters the stock is ownership in an organization whos purpose is to create a profit and grow the business. The primary residence is a physically depreciating building on a piece of land. The primary residence has large ownership costs while the stock has 0 ownership costs. local government affects on home prices is a bit of a stretch, i could say the same about governments affects on a business that i own stock in.

The problem isn't that you realize the returns when you sell the property. that is not the defining factor that makes the primary residence an asset and the stock an investment. There are many reasons but the main one of importance to me is that the returns for the primary residence are expected to be very low (around the rate of inflation) for a multitude of reasons. Read my posts in 3 pages for reasons why only a fool would expect similar returns from a profit motivated company vs their primary residence.

I bought my first house in 2008 and sold it in 2016 for 240% of what I purchased it for. Like you im not stupid enough to think that that I can repeat that performance. There are exceptions to everything but the data support my argument and destroy your argument.




 

Mr. Boh

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Re: Home is not an investment?
« Reply #111 on: April 29, 2019, 12:42:20 PM »
I was going to comment earlier and perhaps I should have, but the issue is that the word "investment" (like many words) has several different meanings.  The hang up here is people are using the same word to mean different things.   If you say "I invested in a good pair of shoes" that's a little different meaning than saying "I invested in 100 shares of Exxonmobile."  Similar, but not the same.   

When people talk about a home as an investment, they are usually thinking "it will make money for me over time."   And that can be true.  For a lot of Americans the majority of their net worth is tied up in their home.   Hence many people thing they should buy a home as an investment because that's the path to wealth.

However, that's not necessarily true.  The rent vs. buy calculation shows the path to wealth could be greater through renting.   For that reason, even though it is technically correct to say a house is an investment in some contexts, I prefer to refer to it as an expense.   And like all expenses, it is wise to minimize it.


 

I agree.

This forum seems to be filled with smart people trying to make smart decisions. That's why it leaves me cold when people make blanket dogmatic statements. There's more than one way to skin a cat. Every situation is different. Every real estate market is different. No one rule is going to be right for everyone.

afox

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Re: Home is not an investment?
« Reply #112 on: April 29, 2019, 12:44:51 PM »
If we just agree to state that the primary residence is an investment but a terrible one compared to the alternatives, will that make everyone happy?

GuitarStv

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Re: Home is not an investment?
« Reply #113 on: April 29, 2019, 12:47:40 PM »
If we just agree to state that the primary residence is an investment but a terrible one compared to the alternatives, will that make everyone happy?

Completely through luck my primary residence has been a better investment for me than the alternatives.  It's a good thing I didn't listen to this advice ten years ago, or I would be much poorer . . . between the cost of rent and the under-performance of equity over that period.

:P
« Last Edit: April 29, 2019, 12:51:02 PM by GuitarStv »

afox

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Re: Home is not an investment?
« Reply #114 on: April 29, 2019, 12:50:33 PM »
For a lot of Americans the majority of their net worth is tied up in their home. 

But that fact doesn't mean the home was a good investment. In most cases it was a more like a form of forced savings. Calculating the return on an investment for a property is much more complicated than stating the amount of equity one has in the property.

afox

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Re: Home is not an investment?
« Reply #115 on: April 29, 2019, 12:55:55 PM »
If we just agree to state that the primary residence is an investment but a terrible one compared to the alternatives, will that make everyone happy?

Completely through luck my primary residence has been a better investment for me than the alternatives.  It's a good thing I didn't listen to this advice ten years ago, or I would be much poorer . . . between the cost of rent and the under-performance of equity over that period.

:P

I bet it wasn't completely luck but when we say the home is not a good investment we are speaking in broad terms and the data support the fact that homes are not good investments compared to the alternatives. This thread is not about you and your home. Homes are not good investments not because people are bad at picking them but because of large scale economic factors that limit their appreciation like affordability and technology. 

afox

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Re: Home is not an investment?
« Reply #116 on: April 29, 2019, 01:05:07 PM »


Completely through luck my primary residence has been a better investment for me than the alternatives.  It's a good thing I didn't listen to this advice ten years ago, or I would be much poorer . . . between the cost of rent and the under-performance of equity over that period.

:P

No, you wouldn't be poorer because this is your primary residence and you needed a place to live. Assuming that like me you bought the house because you wanted to own your own home and have a nice place to live you would not have done anything differently. Its not like you would not have bought the house if you thought it would not have appreciated as much. Also, hindsight is 20/20, just because you made more money via the home purchase does not mean it was the wise purchase given the information you had at the time of purchase.

Also, home prices trends are in line with stock price trends so you might be surprised at what might have happened if you had invested your downpayment and home prices above the cost to rent in the market.
 

maizeman

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Re: Home is not an investment?
« Reply #117 on: April 29, 2019, 01:18:56 PM »
Here is the Cambridge dictionary definition of investment: the act of putting money or effort into something to make a profit or achieve a result. A house is clearly an investment. It is silly to say it is not. The only question is if it is a good investment.

That's an interesting definition. If we followed that definition, what matters isn't the thing money is being spent on but the intent of the person spending the money.

Since I did not spend money on my house in order to make more money later, my house would not an investment.

If you decided to buy a house because you wanted to make more money by selling it later, then your house would be an investment (regardless of whether you actually clear a profit or not).

Just as an aside, adopting this definition would also mean many people did "invest" in bitcoin, since during the run up in prices in 2017 a lot of people sucked in surely did intend to make a profit. ;-)

You are ignoring the last part of the definition. If you did not spend money on your house in order to make more money later you must have been trying to "achieve a result". I bought my house so that I could provide a nice place to raise my family. I didn't want to be subject to the whims and needs of a landlord and I wanted to live exactly where I wanted. I felt that this was important enough to me that I should make an investment toward that end.

I feel like intent is clearly the most important aspect. Of course people were investing in bitcoin. What else would you call it. It just happened to be a bad investment if you bought at the top. If you bought at $100 a bitcoin it was a good investment. Simple as that. Why the confusion?

Okay, if your assertion is that a primary residence is as much of an investment as is bitcoin or a new pair of shoes* then I don't believe there is any disagreement about facts, just disagreement about what different words mean.

As long as we agree on the former, the latter argument is a boring one.



Peace.

*Bought to achieve the goal of having your feet hurt less.

GuitarStv

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Re: Home is not an investment?
« Reply #118 on: April 29, 2019, 01:32:29 PM »


Completely through luck my primary residence has been a better investment for me than the alternatives.  It's a good thing I didn't listen to this advice ten years ago, or I would be much poorer . . . between the cost of rent and the under-performance of equity over that period.

:P

No, you wouldn't be poorer because this is your primary residence and you needed a place to live. Assuming that like me you bought the house because you wanted to own your own home and have a nice place to live you would not have done anything differently. Its not like you would not have bought the house if you thought it would not have appreciated as much. Also, hindsight is 20/20, just because you made more money via the home purchase does not mean it was the wise purchase given the information you had at the time of purchase.

Also, home prices trends are in line with stock price trends so you might be surprised at what might have happened if you had invested your downpayment and home prices above the cost to rent in the market.

With respect, you don't know anything about me.  No, stock prices have not outpaced our home appreciation.

Yes, if I had followed the advice commonly given out here I would be poorer because we never would have purchased our home.  Sure we needed a place to live, but could have rented as is commonly suggested.

I guess that my point is . . . it's important to remember that while historical averages can give you a lot of data that can help shape guidance, your life isn't lived on average.  You're an individual dot moving through the world in your own unique way.  Sometimes commonly accepted wisdom is wrong for you.

afox

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Re: Home is not an investment?
« Reply #119 on: April 29, 2019, 01:46:16 PM »
Yeah but as thoughtful investors we ought to make the best decisions we can based on the information we have available to us. Did you have information available to you that supported your decision to buy your house vs rent and invest or was that a hail mary? 

Im not suggesting that anyone rent vs buy. Im just saying if you decide to buy a home, buy it for the right reasons and with expectations that are based on facts.

If anything the "commonly accepted wisdom" is to buy houses.  Commonly accepted wisdom is'nt always right.

theoverlook

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Re: Home is not an investment?
« Reply #120 on: April 29, 2019, 03:13:53 PM »
No, stock prices have not outpaced our home appreciation.
Do you know this for sure? Have you tracked all the money you spent maintaining and/or improving your home? I have, and my home has appreciated a lot, but I'm not so sure it's outpaced equities. The 10 year total return for VTSAX is 343% as of 3/31/2019. I put 120k down on our house, so just the down payment would be $411,600 right now if I'd invested it instead. I've also spent a couple hundred thousand dollars in upgrades, repairs, and taxes that I would not have spent had I rented. All told I've put $319,623 in cash into my house and the only return on investment so far is a place to live. If I sold it today, I'd probably walk away with $344,000 or so in cash net of selling costs. If I'd invested all that money spread over the same period I'd be at about $460,000 in cash now.

The difficulty lies in trying to figure out what a comparable rental would have cost all in for the same period, and I'm not sure how to find that. Obviously rent could take the net below what the house return has been, but by how much I don't know.

My point is that it's easy to see a big number of house appreciation and make assumptions - but have you actually done the math?


afox

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Re: Home is not an investment?
« Reply #121 on: April 29, 2019, 04:03:29 PM »
I thought the same thing as overlook but sounds like GuitarSrv is confident that his home had better appreciation than the markets and he seemed to get mad when I brought this up. Id add that the transaction costs to sell the home are around 7% although that may be balanced out by the capital gains exclusion on primary residences in the US vs capital gains on investment income.  The thing is virtually noone tracks their primary residence expenses, and I dont blame them.

Mr. Boh

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Re: Home is not an investment?
« Reply #122 on: April 29, 2019, 04:39:44 PM »
Here is the Cambridge dictionary definition of investment: the act of putting money or effort into something to make a profit or achieve a result. A house is clearly an investment. It is silly to say it is not. The only question is if it is a good investment.

That's an interesting definition. If we followed that definition, what matters isn't the thing money is being spent on but the intent of the person spending the money.

Since I did not spend money on my house in order to make more money later, my house would not an investment.

If you decided to buy a house because you wanted to make more money by selling it later, then your house would be an investment (regardless of whether you actually clear a profit or not).

Just as an aside, adopting this definition would also mean many people did "invest" in bitcoin, since during the run up in prices in 2017 a lot of people sucked in surely did intend to make a profit. ;-)

You are ignoring the last part of the definition. If you did not spend money on your house in order to make more money later you must have been trying to "achieve a result". I bought my house so that I could provide a nice place to raise my family. I didn't want to be subject to the whims and needs of a landlord and I wanted to live exactly where I wanted. I felt that this was important enough to me that I should make an investment toward that end.

I feel like intent is clearly the most important aspect. Of course people were investing in bitcoin. What else would you call it. It just happened to be a bad investment if you bought at the top. If you bought at $100 a bitcoin it was a good investment. Simple as that. Why the confusion?

Okay, if your assertion is that a primary residence is as much of an investment as is bitcoin or a new pair of shoes* then I don't believe there is any disagreement about facts, just disagreement about what different words mean.

As long as we agree on the former, the latter argument is a boring one.



Peace.

*Bought to achieve the goal of having your feet hurt less.

For the record I'm not the one who suggested that a new pair of shoes is an investment. There are scenarios where they could be though. Say that you got a new high paying job that had a dress code. You might need to buy clothes and shoes so that you could make more money. To me that would be an investment in your future earning potential. 

I don't agree that we don't agree about the meaning the words we are using. If you think that we do, please give me your definition of investment.

To me my primary residence is an investment without a shadow of a doubt. In my opinion, diversity is the only free lunch in the investing world. The bulk of my wealth, about sixty percent, is in equities. About thirty percent is in real estate, including my rentals and my primary. The last ten percent is in fixed income. For me and my risk tolerance this 60/30/10 allocation makes the most sense. Real estate fills the portion of my portfolio that might be allocated to fixed income because I believe it will have superior performance in the long run. If you are skeptical of this check out the Feredal Reserves paper on the rate of return on everything https://www.frbsf.org/economic-research/files/wp2017-25.pdf I've been a serious investor since 1989 and every time the market crashes, and I mean crashes, I thank my lucky stars for my real estate holdings because people still need a place to live, including me and my family. Now would it be better, as some people seem to suggest, if I rented out my primary residence and then rented a house from some one else? Would my house then rise to the level of an almighty investment? Would I be a better investor? Not to me. That makes no sense to me. Please enlighten me to the errors of my ways?

maizeman

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Re: Home is not an investment?
« Reply #123 on: April 29, 2019, 05:08:36 PM »
You are ignoring the last part of the definition. If you did not spend money on your house in order to make more money later you must have been trying to "achieve a result".

Quote
For the record I'm not the one who suggested that a new pair of shoes is an investment. There are scenarios where they could be though. Say that you got a new high paying job that had a dress code. You might need to buy clothes and shoes so that you could make more money. To me that would be an investment in your future earning potential. 

You're the one who proposed a definition of investment that was satisfied as long as your goal is to "achieve a result."

Do you disagree with your own proposed definition or do you disagree that having more comfortable feet is "a result"?

Quote
I don't agree that we don't agree about the meaning the words we are using.

That's certainly your prerogative.

If you chose to believe that I believe the same thing as you, despite my stating that I disagree with you, I don't suppose there is anything else I can do to shake faith/certainty on that level.
« Last Edit: April 29, 2019, 06:37:22 PM by maizeman »

Mr. Boh

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Re: Home is not an investment?
« Reply #124 on: April 29, 2019, 06:35:43 PM »
Maizeman please give me your definition of "investment". I sincerely want to know what the disagreement is.

maizeman

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Re: Home is not an investment?
« Reply #125 on: April 29, 2019, 06:49:06 PM »
Maizeman please give me your definition of "investment". I sincerely want to know what the disagreement is.

My disagreement is that if an investment is any use of money* to "achieve a result" then there is no difference between an investment and simply spending money. Any time a person chooses to spend money they have some goal or another in mind.

By that definition, it would be perfectly reasonable to say "I chose to invest in this cheeseburger so I wouldn't be so hungry."

*Or effort, which was also part of the definition you proposed.

Seadog

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Re: Home is not an investment?
« Reply #126 on: April 30, 2019, 07:13:27 AM »
My disagreement is that if an investment is any use of money* to "achieve a result" then there is no difference between an investment and simply spending money. Any time a person chooses to spend money they have some goal or another in mind.

By that definition, it would be perfectly reasonable to say "I chose to invest in this cheeseburger so I wouldn't be so hungry."

*Or effort, which was also part of the definition you proposed.

I was just about to make that exact point, except use the example of "investing" in drugs. In total terms of financial loss vs non-financial gain, it's a net win for me otherwise I wouldn't have spent money. The difference between the financial outlay, and the non-financial return is my "profit".

Obviously putting money into shares of XOM are an investment as it generates cash returns. "Investing" in a car vs taxis has a return via money *not* spent. Penny saved is a penny earned etc etc. A primary residence is similar, but in addition you have a far greater chance of appreciation, but also far more expenses which most people conveniently ignore. Next up might be shoes, who's returns are wholly non-cash, and not even quantifiable. Then finally fleeting things like food and drugs.

All of those things provide a return for money out. One could argue all are investments. But if everything is an investment than nothing is. You need to draw an arbitrary line somewhere, and ultimately to each their own I guess? I kind of like the idea of the intent taking a front and center role. After all that's the difference between negligence causing death and 1st degree murder. Turns out Jack *did* invest in magic beans.

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Re: Home is not an investment?
« Reply #127 on: April 30, 2019, 07:34:13 AM »
I'm not a 1%er (have never even made six figures in a year), but bought and completely paid off my freehold detached home in Toronto.  I don't expect prices to continue to rise at the pace they have for the last while . . . but I'd be quite surprised to see a crash down to price/income ratios that you seem to be expecting.  There is a lot of demand, there is constant immigration into the city for economic reasons, and there isn't more land to build on.

I'm not doubting you, but that likely means you got in years ago. Here's some real numbers for today. Average home in Toronto is $914k.

https://www.zolo.ca/toronto-real-estate/trends

A quick mortgage search shows about 3.5%, historically low. Since we're being responsible and can't lock in for 30 years like the US, we can assume a buffer of 2%, or to be truly responsible something like the historical average of 7.5%.

With your typical responsible 20% down, 25 yr terms, and assuming a historically responsible mortgage to income ratio of 30%, here are the numbers for payment and income:

3.5%- 3645 / 12150/mth
5.5%- 4456 / 14853/mth
7.5%- 5340 / 17800/mth

To buy an average home, with any semblance of prudence you need an income of close to 200k a year.

Take a look at average incomes: https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110019301

Top decile (2017) was 123k. To buy the average home, even assuming the most rosy terms possible and assuming they never change (20% down, 3% promotional rate, 30 year term), your payment is *still* 3k, so basically on par for someone at the cusp of the top 10% income earners.

Enigma

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Re: Home is not an investment?
« Reply #128 on: April 30, 2019, 08:30:11 AM »
I do consider my 'Home' as an investment.

My ‘Home’ is a long-term investment in a commodity (like gold) that hedges me against rises in mortgage interest rates, rental increases, salary increases, price fluctuations, rising material costs, and location.  I threw salary increases because I believe there is a correlation in the % that individuals earn to what can be afforded by mortgage or rent.  US salaries have slowly been on the rise.  Mortgage interest rates have been historically low.

It may NOT be a better investment than the stock market or another Vanguard fund.  However, I did have to live somewhere.  Because of that I made the best choice for me depending on my location and monthly expenses of living in a ‘Home’.  I personally believe that I came out ahead of a renter because I have equity in something that has a financial value if I go to sell the ‘Home’.

talltexan

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Re: Home is not an investment?
« Reply #129 on: April 30, 2019, 09:20:02 AM »
What if we change the choice slightly:

You're going to own a home. But will you buy a home that costs 2*your annual income or 7*your income?

Some of this may be out of your control based on the area you live.

But most people probably are in a situation in which they can change the price of their house by 10%, buying more house or less. And that choice affects the ability to engage in other investing. Should you upgrade from a $440,000 house to a $500,000 house? That upgrade may not be a wise investment compared to the rest of the house.

GuitarStv

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Re: Home is not an investment?
« Reply #130 on: April 30, 2019, 09:25:30 AM »
I'm not a 1%er (have never even made six figures in a year), but bought and completely paid off my freehold detached home in Toronto.  I don't expect prices to continue to rise at the pace they have for the last while . . . but I'd be quite surprised to see a crash down to price/income ratios that you seem to be expecting.  There is a lot of demand, there is constant immigration into the city for economic reasons, and there isn't more land to build on.

I'm not doubting you, but that likely means you got in years ago. Here's some real numbers for today. Average home in Toronto is $914k.

https://www.zolo.ca/toronto-real-estate/trends

A quick mortgage search shows about 3.5%, historically low. Since we're being responsible and can't lock in for 30 years like the US, we can assume a buffer of 2%, or to be truly responsible something like the historical average of 7.5%.

With your typical responsible 20% down, 25 yr terms, and assuming a historically responsible mortgage to income ratio of 30%, here are the numbers for payment and income:

3.5%- 3645 / 12150/mth
5.5%- 4456 / 14853/mth
7.5%- 5340 / 17800/mth

To buy an average home, with any semblance of prudence you need an income of close to 200k a year.

Take a look at average incomes: https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110019301

Top decile (2017) was 123k. To buy the average home, even assuming the most rosy terms possible and assuming they never change (20% down, 3% promotional rate, 30 year term), your payment is *still* 3k, so basically on par for someone at the cusp of the top 10% income earners.

Yes, we purchased our home ten years ago.  Toronto is a large area, with quite a diverse offering of homes.  Looking at averages skews things quite a bit as there are a lot of luxury houses and expensive homes located further down town that raise the average an awful lot.
 (For example, there are four detached 3/4 bedroom 2/3 bath homes with OK sized yards within walking distance of my home currently listed between 599 and 688k.)

If you want to be truly responsible with the mortgage interest, you should assume a much larger down payment . . . rather than the bare minimum needed to avoid CMHC insurance.  It's very easy to accumulate a huge down payment while making less than 200k a year.  Our family has certainly never made even close to 200k a year.

dougules

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Re: Home is not an investment?
« Reply #131 on: April 30, 2019, 11:43:34 AM »
I don't agree.  A public company that has issued stock but does not pay dividends isn't trying to make you (shareholder of two stocks) any direct monetary profit.  They're doing what they think is best for their business, and using your money to do that. . . if they make good decisions it's likely to improve the value of your stock, but they don't give a crap about you or your personal profits.  Which is in the same level of care that I'd expect from a mayor of a city . . . he wants to keep the city functioning smoothly, crime down, and property taxes to a level where he'll get re-elected . . . which is likely (in the long run) to increase the value of your home.  He doesn't give a crap about the value of your home though.

It's not their business; it's the shareholders'.  They have to give a certain amount of a crap about the shareholders because that's who can fire them.  Just like any employee, top executives can get away with a certain amount of shenanigans, but at a certain point we will ask them to leave.

And they are trying to make you a direct monetary profit. If we the shareholders collectively thought that the company didn't have any good reason to retain earnings, we'd demand they all be paid out as dividends.  The money in the company's account belongs to the shareholders, and just because we are collectively fine with the company holding on to it doesn't make that any different. 

If we just agree to state that the primary residence is an investment but a terrible one compared to the alternatives, will that make everyone happy?

I'm standing by my guns.  A primary residence is not an investment. The argument is semantics to some extent, but semantics effects the way people think which effects the way people act.  Semantics can have real-world consequences. People equating unsustainable rises in house prices with sustainable rises in the value of growing companies is one of the main causes of the housing bubble a decade ago.  Making some kind of clear linguistic distinction between the two is important to keep us from repeating history. 


I do consider my 'Home' as an investment.

My ‘Home’ is a long-term investment in a commodity (like gold) that hedges me against rises in mortgage interest rates, rental increases, salary increases, price fluctuations, rising material costs, and location.  I threw salary increases because I believe there is a correlation in the % that individuals earn to what can be afforded by mortgage or rent.  US salaries have slowly been on the rise.  Mortgage interest rates have been historically low.

It may NOT be a better investment than the stock market or another Vanguard fund.  However, I did have to live somewhere.  Because of that I made the best choice for me depending on my location and monthly expenses of living in a ‘Home’.  I personally believe that I came out ahead of a renter because I have equity in something that has a financial value if I go to sell the ‘Home’.

Gold isn't an investment either; it's an asset.


Mr. Boh

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Re: Home is not an investment?
« Reply #132 on: April 30, 2019, 02:05:57 PM »
Suppose my neighbor and I each buy an identical house on the same street for the same price. Only then we learn that we're schmoes and we wasted our money. Instead, we decide to rent each other our houses for identical rents. Now we're investors! Clearly there are tax consequences to this strategy but they seem to be largely offsetting.

This seems to be the argument that is being made here. Am I getting something wrong?

dougules

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Re: Home is not an investment?
« Reply #133 on: April 30, 2019, 03:22:12 PM »
Suppose my neighbor and I each buy an identical house on the same street for the same price. Only then we learn that we're schmoes and we wasted our money. Instead, we decide to rent each other our houses for identical rents. Now we're investors! Clearly there are tax consequences to this strategy but they seem to be largely offsetting.

This seems to be the argument that is being made here. Am I getting something wrong?

Well, I guess that they would technically be investors, but that sounds like it would fall under the category of bad investors.  This sounds kind of similar to somebody with 0 net worth going and taking out a loan then investing it.  They became an investor, but it may not have been the best idea. 

Enigma

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Re: Home is not an investment?
« Reply #134 on: May 01, 2019, 09:48:26 AM »
I do consider my 'Home' as an investment.
My ‘Home’ is a long-term investment in a commodity (like gold)....
Gold isn't an investment either; it's an asset.
There is no logic in stating gold is not an investment it's ONLY an asset.  GOLD is an investment.  A quick search for ‘Invest in Gold’ will result in millions of sites.  Gold is a precious metal whereas even currency paper-based money has shown by every civilization in the past to become worthless.  Gold is often a way to invest against inflation and the uncertainty of wars.

The definitions online vary but an investment is •a thing that is worth buying because it MAY be profitable or useful in the future. (Oxford Dictionary)

As a homeowner, I purchased a home with the hope that it becomes profitable and if I go to sell it in the future my hope is that the home appreciates in value.  Having a home presents MANY additional investment paths.

For one, it has helped me borrow hundreds of thousands of dollars from the bank as I have more leverage in that investment.  For two, it has increase by buying power.  For three, it has increased my credit score (810+).  For four, it has fixed my cost of living.  For five, it has deeded me property that no one else owns.

Synonyms searches online to investments results in assets…  Synonyms searches for asset online results in investment.  It is not my fault that your definition of assets doesn’t equate to investments.

dougules

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Re: Home is not an investment?
« Reply #135 on: May 01, 2019, 10:35:48 AM »
I do consider my 'Home' as an investment.
My ‘Home’ is a long-term investment in a commodity (like gold)....
Gold isn't an investment either; it's an asset.
There is no logic in stating gold is not an investment it's ONLY an asset.  GOLD is an investment.  A quick search for ‘Invest in Gold’ will result in millions of sites.  Gold is a precious metal whereas even currency paper-based money has shown by every civilization in the past to become worthless.  Gold is often a way to invest against inflation and the uncertainty of wars.

The definitions online vary but an investment is •a thing that is worth buying because it MAY be profitable or useful in the future. (Oxford Dictionary)

As a homeowner, I purchased a home with the hope that it becomes profitable and if I go to sell it in the future my hope is that the home appreciates in value.  Having a home presents MANY additional investment paths.

For one, it has helped me borrow hundreds of thousands of dollars from the bank as I have more leverage in that investment.  For two, it has increase by buying power.  For three, it has increased my credit score (810+).  For four, it has fixed my cost of living.  For five, it has deeded me property that no one else owns.

Synonyms searches online to investments results in assets…  Synonyms searches for asset online results in investment.  It is not my fault that your definition of assets doesn’t equate to investments.

Yes, gold is an asset that has been good at holding its value.  However, it does not produce any kind of revenue stream or profit from some kind of value added.  If you want to safely store value, it's good for that.  If you want to make money off of it, you're just hoping somebody else will pay more for the same exact thing you bought.   "Invest in Gold" is just better marketing than "Store value in gold."

From Wiktionary:

"(finance) A placement of capital in expectation of deriving income or profit from its use or appreciation."

You could say that you're investing in gold or real estate because you expect it to appreciate.  That's just based on hope, and nothing real, though.  If there's nothing to actually driving any appreciation like reinvestment, renovation, R&D, etc., there shouldn't be any expectation of appreciation.  If there's no realistic expectation of appreciation, it's not an investment. 

GuitarStv

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Re: Home is not an investment?
« Reply #136 on: May 01, 2019, 12:04:24 PM »
You believe that there should be no realistic expectation of appreciation for real estate/property?  Historically, I'd say that this is usually wrong.

afox

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Re: Home is not an investment?
« Reply #137 on: May 01, 2019, 01:58:14 PM »
Historically long term home price appreciation in the US is similar to inflation (3ish percent). Correct me if im wrong but if your costs of ownership (interest, tax, insurance, maintenance, upgrades, etc) are more that there should be no realistic expectation for real estate appreciation.  However these are macro trends and the expert house pickers here on the MMM forum living in special cities with spectacular growth should have no reason to think that their home price appreciation wont be forever spectacular. Unfortunately i'm not special so im not expecting a return from my housing expenses, just savings in the form of very non-liquid equity and a nice place to call home with no landlords to deal with. Fortunately there are other investments with better long term track records

dougules

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Re: Home is not an investment?
« Reply #138 on: May 01, 2019, 02:40:36 PM »
You believe that there should be no realistic expectation of appreciation for real estate/property?  Historically, I'd say that this is usually wrong.

You're in Toronto?  Take a trip to Buffalo.  It once had a bright future like Toronto. 

GuitarStv

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Re: Home is not an investment?
« Reply #139 on: May 01, 2019, 03:39:44 PM »
Historically long term home price appreciation in the US is similar to inflation (3ish percent). Correct me if im wrong but if your costs of ownership (interest, tax, insurance, maintenance, upgrades, etc) are more that there should be no realistic expectation for real estate appreciation.  However these are macro trends and the expert house pickers here on the MMM forum living in special cities with spectacular growth should have no reason to think that their home price appreciation wont be forever spectacular. Unfortunately i'm not special so im not expecting a return from my housing expenses, just savings in the form of very non-liquid equity and a nice place to call home with no landlords to deal with. Fortunately there are other investments with better long term track records


Assumption - Cost of home ownership is correlated with the price of your home at the rate of inflation.  Let's look at that for a minute.

If I own a 10 year old 1800 square foot home in the middle of nowhere that I bought for 60,000$, my costs of home ownership should be about 1,800$ a year.  Seems a bit low, but OK.

If I own a 10 year old 1800 square foot home near downtown Las Angeles that I bought for 2 million dollars, my costs of home ownership should be 60,000$ a year?  Wait . . . what?  How the fuck am I spending 33 times as much maintaining exactly the same home?

Obviously there is something badly wrong with this assumption.


Now, I'm a pretty fancy guy.  I enjoy having a roof over my head rather than living in a cardboard box in the alley . . . so would need to spend money on rent if I didn't own my home.  Rent isn't cheap in this city (the average cost of renting a one bedroom apartment in Toronto is more than 27k a year - https://www.blogto.com/real-estate-toronto/2018/12/average-cost-one-bedroom-rental-toronto-hits-2260/).

Even assuming that I was just as happy with a 1 bedroom apartment as I am with a whole house, and ignoring the money that my solar panels reliably generate thousands of dollars each year, and ignoring the fact that I could easily rent out a room in my home (apparently for thousands more), I still don't spend remotely close to 27 grand a year maintaining our home . . . so I'm still coming out way ahead with my terrible non-investment.  Throw an extra 3% a year on there and that sounds alright to me.


afox

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Re: Home is not an investment?
« Reply #140 on: May 01, 2019, 03:52:59 PM »

Wow, your examples are extremes.

Where can you buy a 10 year old 1800 square foot home for $60k?

Where does $2M only get you 1800 sq. feet?

Okay, im sure you can find examples of each somewhere if you look hard enough but these are hardly typical situations!

The problem is that your extrapolating your experiences in toronto onto the rest of the continent (i cant say the US anymore). Im talking about macro trends in the US, the 3rd most populated country in the world, and your counterargument is that this cant be true because of whats happening in my neighborhood in toronto. And have you thought about what home prices would be in toronto if they continued at current rates of appreciation. I mean, anything is possible, toronto could become the most expensive city in the world, is that your point?

wgrdle

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Re: Home is not an investment?
« Reply #141 on: May 01, 2019, 05:40:46 PM »
not black and white.  it's a scale. 

investment property eg. 4plex > home > rental unit.

before the trump tax changes, mortgage interest was tax deductible, rent was not.  This makes a huge difference when your marginal tax rate was 25% fed + 9%  California state = 34%. 

depends on price. in 2015, mortgages were actually cheaper than, here were the real life numbers i was looking at for a single family home.  i could choose to pay $3100 rent, or have a  $3100 mortgage.
https://www.mortgagecalculator.org/?q=AjQrD-4KQ
600k house now worth 950k.  approx 100k down payment.  approximate 350% rate of return on the 100k down payment over 4 years, much better than index funds. Also about 25k/year in intrerest + property tax.  that deduction is worth 8.5k. so true mortgage cost was $2370/month.  vs paying $3100 rent. 

Now let’s jump into additional benefits.  I can sell if i want, and 500k of profit is zero tax for married couples.  I can also equity tap the house if I want money out.  You can’t do this with with the small dollar index funds.  If the property was investment, then selling would trigger taxable event.  However, i can still refinance or equity tap it without triggering a sale, no taxes on appreciation.  This is what wealthy people do to not pay taxes.  Elon Musk isn’t selling his equity which would be a taxable event, he’s borrowing money against it to build his next company. 

Real estate is subsidized in the US with overly generous tax breaks, and government backed low % loans. 

GuitarStv

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Re: Home is not an investment?
« Reply #142 on: May 01, 2019, 06:21:01 PM »

Wow, your examples are extremes.

Where can you buy a 10 year old 1800 square foot home for $60k?

Where does $2M only get you 1800 sq. feet?

Okay, im sure you can find examples of each somewhere if you look hard enough but these are hardly typical situations!

Granted.  My point was simply that you can't say that cost of ownership is 3% of the price of a house.  You need to actually look at what the home is, and how much of the home price is simply due to location.  You can have two identical houses in different places worth vastly different amounts . . . but with comparable cost of upkeep.  When comparing similar square footage and build quality (ie. like for like), the cheaper your home is the higher the percentage fees you will pay.  The more expensive your home, the lower.



The problem is that your extrapolating your experiences in toronto onto the rest of the continent (i cant say the US anymore). Im talking about macro trends in the US, the 3rd most populated country in the world, and your counterargument is that this cant be true because of whats happening in my neighborhood in toronto. And have you thought about what home prices would be in toronto if they continued at current rates of appreciation. I mean, anything is possible, toronto could become the most expensive city in the world, is that your point?

Macro trends don't matter much when you as an individual live on a micro level.  I'm giving examples from my life because I'm familiar with them.  Maybe you're right . . . and there's nobody else in North America who should buy a house.  But you appear to be ignoring a lot of factors (like the cost of rent, like the fact that a home owner can bring money in with their property in a variety of ways, etc.) to make home-ownership sound more expensive than it really is to come to that conclusion.
« Last Edit: May 02, 2019, 07:22:02 AM by GuitarStv »

Mr. Boh

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Re: Home is not an investment?
« Reply #143 on: May 01, 2019, 07:13:42 PM »
Historically long term home price appreciation in the US is similar to inflation (3ish percent). Correct me if im wrong but if your costs of ownership (interest, tax, insurance, maintenance, upgrades, etc) are more that there should be no realistic expectation for real estate appreciation.  However these are macro trends and the expert house pickers here on the MMM forum living in special cities with spectacular growth should have no reason to think that their home price appreciation wont be forever spectacular. Unfortunately i'm not special so im not expecting a return from my housing expenses, just savings in the form of very non-liquid equity and a nice place to call home with no landlords to deal with. Fortunately there are other investments with better long term track records

You keep mentioning the data but you have not provided any. Please show me where your 3 percent home appreciation comes from. Here is a quote from the federal reserve paper (the rate of return on everything) that I linked in post 122.

"In terms of total returns, residential real estate and equities have shown very similar and
high real total gains, on average about 7% per year. Housing outperformed equity before
WW2. Since WW2, equities have outperformed housing on average, but only at the cost of
much higher volatility and higher synchronicity with the business cycle."

Residential real estate and equities have shown very similar total gains yet only equities are an investment (unless you rent your residential real estate to someone else). Yeah right. Read the paper and get back to me.

afox

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Re: Home is not an investment?
« Reply #144 on: May 01, 2019, 08:36:08 PM »
lots of versions of this data all over the web:
http://visualizingeconomics.com/blog/2011/03/23/real-vs-nominal-housing-prices-united-states1890-2010

For background and explanation from a reliable source you could check out some of Shillers peer reviewed papers:
http://www.econ.yale.edu/~shiller/publications.htm

I posted a search result to a dozen or so articles with this info a few pages ago.

I checked out the "real return of everything" paper. Its actually attempting to calculate a rate of return (including expenses) not home price appreciation. Some good notes on the real estate returns numbers in the paper here: https://www.mymoneyblog.com/long-term-returns-residential-real-estate-vs-stocks.html  The paper uses a different method for calculatoring home price appreciation than Shiller. Both use an index to account for changes in house quality. Noone uses median home prices like you see in your local paper since houses have tended to get larger and better over time so you end up measuring the change in home quality not the change in price of the same home.

Ill admit that I was surprised by the results in the paper. Home price returns were higher than I would have thought. The thing is though, they are saying that real estate returns are about the same as equities (stocks) but the amount of effort that goes into investing in real estate and stocks is not the same. I think we can all agree that it is far easier to manage stock investments than real estate and you can do it from anywhere. The paper does not take into account anything like management fees. So, given the choice of hitting the buy button from anywhere in the world every so often (stocks) and dealingf with all that goes along with real estate for the same returns which would you choose?  Volatility is higher for stocks and this is the only advantage I can see to real estate.

I never said noone should own a home. I own two of them. There are lots of reasons to own a home even if we dont think that it is the best investment. We should have realistic expectations about home price appreciation and real returns.




« Last Edit: May 01, 2019, 09:26:56 PM by afox »

afox

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Re: Home is not an investment?
« Reply #145 on: May 01, 2019, 09:57:06 PM »
not black and white.  it's a scale. 

investment property eg. 4plex > home > rental unit.

before the trump tax changes, mortgage interest was tax deductible, rent was not.  This makes a huge difference when your marginal tax rate was 25% fed + 9%  California state = 34%. 

depends on price. in 2015, mortgages were actually cheaper than, here were the real life numbers i was looking at for a single family home.  i could choose to pay $3100 rent, or have a  $3100 mortgage.
https://www.mortgagecalculator.org/?q=AjQrD-4KQ
600k house now worth 950k.  approx 100k down payment.  approximate 350% rate of return on the 100k down payment over 4 years, much better than index funds. Also about 25k/year in intrerest + property tax.  that deduction is worth 8.5k. so true mortgage cost was $2370/month.  vs paying $3100 rent. 

Now let’s jump into additional benefits.  I can sell if i want, and 500k of profit is zero tax for married couples.  I can also equity tap the house if I want money out.  You can’t do this with with the small dollar index funds.  If the property was investment, then selling would trigger taxable event.  However, i can still refinance or equity tap it without triggering a sale, no taxes on appreciation.  This is what wealthy people do to not pay taxes.  Elon Musk isn’t selling his equity which would be a taxable event, he’s borrowing money against it to build his next company. 

Real estate is subsidized in the US with overly generous tax breaks, and government backed low % loans.

the opportunity cost of your 100k down payment is your biggest housing expense and you didnt account for it, nor are you accounting for all the other expenses that are included in the rental payment. Transaction costs to sell are 7%. Owning your own home has still been a wise decision for you but not nearly as good as you make it sound in this oversimplified description and your home is heavily leveraged so if there is a downturn in the market you are at risk of losing a lot of money. We havent even started to talk about disadvantages like the fact that you cant easily move for a higher paying job.  Still a good deal for you all things considered but mostly because of luck with the home price appreciation.  For christs sakes its not as simple as comparing your PITI payment to monthly rent for similar house. Mortgage interest is still tax deductible, the standard deduction is just higher. state and local tax deduction was changed to be capped at 10k to punish those who didn't vote for the current president.
« Last Edit: May 01, 2019, 10:03:28 PM by afox »

wgrdle

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Re: Home is not an investment?
« Reply #146 on: May 02, 2019, 02:57:13 AM »
Your statement is very wrong.

This is not real example of what I was going to buy. Bought something else instead.  Those 600 k properties really are 950 now.

Actually, I under sold it, because principal doesn't count as a cost but growing equity. 

After Trump tax changes , Prop tax is less tax deductible because incomes required to buy the houses typically pay close to 10k in state income tax anyeay

I did account for 100k down payment, it turned in to 350k because or house appreciation over 4 years.

Mortgage interest is still there but much less now.   U used to get itemized deductions plus personal exemption, now u lose personal exp and it was moved in to a larger stand deduction.  U have to choose now between stand and itemized.

Rent vs mortgage of similar monthly were not even close for these reason. All the buy vs rent calcs used to show this, hope they got updated for 2019.  For my income bracket, 2 dollar in mortgage cost the same as $1 in rent In the 2015 calculators

If I get another job, I don't sell , I landlord and rent it, the rent somewhere else.  No more closing costs.  If I need money out, equity or refin. 

80 percent is not very leveraged on a home at low interest rates.  I wish I could borrow 1m at 4 percent to dump in to index funds. 

Rent is a huge risk, u have no insurance vs rising rent, egs apartment rents doubled over 5 years after recession in my area.  U have to pay moving costs at the whims of your landlord.

theoverlook

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Re: Home is not an investment?
« Reply #147 on: May 02, 2019, 07:49:13 AM »
Gold is no more an investment than cash is. It's just a different value store. If you convert US$ to UK pounds or Euros, would you say that's an investment? I would not.

Mr. Boh

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Re: Home is not an investment?
« Reply #148 on: May 02, 2019, 08:53:56 AM »

Ill admit that I was surprised by the results in the paper. Home price returns were higher than I would have thought. The thing is though, they are saying that real estate returns are about the same as equities (stocks) but the amount of effort that goes into investing in real estate and stocks is not the same. I think we can all agree that it is far easier to manage stock investments than real estate and you can do it from anywhere. The paper does not take into account anything like management fees. So, given the choice of hitting the buy button from anywhere in the world every so often (stocks) and dealingf with all that goes along with real estate for the same returns which would you choose?  Volatility is higher for stocks and this is the only advantage I can see to real estate.

I never said noone should own a home. I own two of them. There are lots of reasons to own a home even if we dont think that it is the best investment. We should have realistic expectations about home price appreciation and real returns.

I agree that it can be easy to manage equities if you buy index funds, which is what I would recommend. It can also be a lot of work if you are analyzing individual securities. Many people pay professionals to do this work and manage their equities. However this has nothing to do with what we are talking about here which is whether or not a home is an investment.

Your argument about management fees only applies to rental properties. Most people don't need someone to manage their primary residence. You might be able to buy stocks from anywhere in the world but it's pretty easy to manage your primary residence from home because that's where you live. Earlier in this thread GuitarStv has shown that home maintenance doesn't have to be the onerous task that some here are making it out to be. After all this is the MMM forum where DIY and side hustle are praised.

I do agree with you about lower volatility being an advantage of real estate. Risk adjusted returns are something that all investors should take into account. In my opinion real estate can be a great way to diversify an investment portfolio. It really doesn't matter who the tenant is. It could be a stranger or it could be yourself.

afox

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Re: Home is not an investment?
« Reply #149 on: May 02, 2019, 09:36:08 AM »

Ill admit that I was surprised by the results in the paper. Home price returns were higher than I would have thought. The thing is though, they are saying that real estate returns are about the same as equities (stocks) but the amount of effort that goes into investing in real estate and stocks is not the same. I think we can all agree that it is far easier to manage stock investments than real estate and you can do it from anywhere. The paper does not take into account anything like management fees. So, given the choice of hitting the buy button from anywhere in the world every so often (stocks) and dealingf with all that goes along with real estate for the same returns which would you choose?  Volatility is higher for stocks and this is the only advantage I can see to real estate.

I never said noone should own a home. I own two of them. There are lots of reasons to own a home even if we dont think that it is the best investment. We should have realistic expectations about home price appreciation and real returns.

I agree that it can be easy to manage equities if you buy index funds, which is what I would recommend. It can also be a lot of work if you are analyzing individual securities. Many people pay professionals to do this work and manage their equities. However this has nothing to do with what we are talking about here which is whether or not a home is an investment.

Your argument about management fees only applies to rental properties. Most people don't need someone to manage their primary residence. You might be able to buy stocks from anywhere in the world but it's pretty easy to manage your primary residence from home because that's where you live. Earlier in this thread GuitarStv has shown that home maintenance doesn't have to be the onerous task that some here are making it out to be. After all this is the MMM forum where DIY and side hustle are praised.

I do agree with you about lower volatility being an advantage of real estate. Risk adjusted returns are something that all investors should take into account. In my opinion real estate can be a great way to diversify an investment portfolio. It really doesn't matter who the tenant is. It could be a stranger or it could be yourself.

Actually, if I understand it correctly the returns of everything paper is using rents (either imputed or collected) + home price appreciation minus some basic expenses to calculate the "rate of return" for housing in. Shillers data on home price appreciation is right and they say so in the paper, appreciation is about equal to inflation (3ish percent). The rate of return paper is saying that if you add in rental income OR imputed rent (the amount a homeowner would have spend on rent if they did not own) the returns and subtract out some expenses the rate of return is 7ish percent. It is an interesting finding and one that everyone who owns real estate should consider. Rental management fees are not included in the analysis but basic maintenance is.

I would never invest in individual stocks unless I were an expert in the industry and had intimate knowledge of the company. Investment managers/advisors charge considerably less for their services than rental real estate property managers. True, that you can do it all yourself, and I do and I enjoy a lot of it, but I do recognize that it is work. I don't really care about the semantics, my contention since page 2 of this thread has been that housing is'nt a great investment compared to the alternatives and your paper just reiterated that for me. I do think diversification in real estate is good, unfortunately as the rate of return paper points out it is hard, costly, or impossible to buy an "index" or slice of the pie for US housing. Most home "investors" overall portfolio simply becomes overweight in their house, city, area due to the nature of real estate. Also, for most real estate "investors" the trump corporate tax cuts have made this "investment" less attractive.