The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: milesdividendmd on June 15, 2014, 12:03:49 PM
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I came across this article today on SeekingAlpha.
http://m.seekingalpha.com/article/2269453-why-buying-a-house-is-a-terrible-investment?source=email_rt_article_readmore&app=1
The central thesis is that renting eclipses homeownership because it allows you to invest more heavily in the investment class with the best odds of success; passive Equity index funds.
I think that the one factor ignored this article which is perhaps the most important factor in wealth building for non-mustachians is the behavioral aspect.
Principal payments are often the lions share of savings for average Americans. And forced savings are a wonderful thing.
I do tend to believe that even after all of the tax breaks etc. most people would be financially better off if they just rented and put the difference in their monthly expenses of lodging into simple equity index funds.
Not that I've taken my own advice. I love being a homeowner. But my point of view is very different today from the time when I made the decision to purchase my home.
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I wonder how this author will feel after he's moved to new rentals a dozen times or so.
Owning a home keeps a homeowner from doing even dumber things with their money-- that's always good. Of course we all know people who shouldn't have bought the homes that they felt they were entitled to buy.
But owning a home also gives the owner a long-term perspective on caring for their property. It gives them a sense of control and stability (illusory though it may be) that adds to emotional comfort. It helps lock in more certainty that their kids will be able to stay in their chosen school. It lets them experiment with living situations that a landlord might or might not tolerate, like running a home-based business or painting the walls black or xeriscaping the yard.
In other words it's a long-term commitment that doesn't always appear to make financial sense-- especially in the short term of 1-20 years-- even though it may actually be better than the alternative.
It reminds me of the decision about whether to start a family...
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I agree Nords. Life is not a Spreadsheet. We are not perfectly rational economic actors. And we derive value from many factors other than the bottom line.
I do tend to buy the spreadsheet logic though.
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The central thesis is that renting eclipses homeownership because it allows you to invest more heavily in the investment class with the best odds of success; passive Equity index funds.
Well, taking this logic to it's conclusion, you should invest in 100% stocks. Don't diversify with bonds; they have lower expected returns, so you're losing money like a sucker.
If you own your home, a stock market crash can't take it away from you. Diversification is extremely important, that's why we use index funds in the first place instead of just picking a few stocks.
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Could not agree more that life is not a spreadsheet. There are other many factors that go into home ownership vs. renting and I think it's impossible to state which one is better financially for everyone.
From my perspective, I would gladly borrow money at rate close to the historical rate of inflation and lever up on an asset that has historically kept pace with inflation. Especially when the cost of purchase is lower than the rental equivalent. Also, the math makes more sense to me this way: 8% on 100k or 4% on 500k?
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This is not necessarily the case.
The 2008 financial crisis is a good example of a time when real estate ownership was highly correlated with the market. In fact it is very likely that your wealth would've recovered much more quickly if you were invested in a well diversified equity portfolio rather than having significant wealth tied up in a single property.
Besides if you want diversification benefits you're arguably better off owning A low-cost REIT index with rental properties diversified over multiple types and locales.
Owning a home is akin to owning a single stock there is a load of uncompensated risk that is inescapable.
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This is not necessarily the case.
The 2008 financial crisis is a good example of a time when real estate ownership was highly correlated with the market. In fact it is very likely that your wealth would've recovered much more quickly if you were invested in a well diversified equity portfolio rather than having significant wealth tied up in a single property.
Your house price may be correlated with the stock market, but you don't lose your house just because the price goes down. Those oiks across the street are yelling lower numbers than they used to, that's all.
In fact, despite the risks of homeownership (some of which, you insure against), your house is far less volatile than the stock market. Whatever crazy thing is going on in the stock market, your home still pays that same exact dividend - one day of housing per day.
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Perfect timing for this post. I have saved for a good down payment for a home (50,000) but wonder if buying a home is a good idea due to the fact that the place would only be for me and my son and I have no experience repairing anything. Now, I heard on the radio that if you are past 40 years old and don't own your own place, you are pretty much a loser (silly statement in my opinion) . Putting this as a down payment would only leave me with $20,000 (for emergencies or anything else) also it would take away any er or FI leaving me with only $20,000 before mentioned. For me so far, I don't think is a good idea. Also, i don't own a lot of stuff (keeps me away from being a consumer) and can move fairly easy .. draw back so far is rent Increasing in the area and I would like to keep my son in one place through his next 4 years of high school. What would you do?
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This is not necessarily the case.
The 2008 financial crisis is a good example of a time when real estate ownership was highly correlated with the market. In fact it is very likely that your wealth would've recovered much more quickly if you were invested in a well diversified equity portfolio rather than having significant wealth tied up in a single property.
Your house price may be correlated with the stock market, but you don't lose your house just because the price goes down. Those oiks across the street are yelling lower numbers than they used to, that's all.
In fact, despite the risks of homeownership (some of which, you insure against), your house is far less volatile than the stock market. Whatever crazy thing is going on in the stock market, your home still pays that same exact dividend - one day of housing per day.
Right,
But you still owe upkeep, property taxes, insurance, etc.
And there is also the added issue of concentrated liability that you have with owning a property but not with owning index funds.
And I have a hard time coming up with a scenario where you get kicked out of your rental because the stock market collapses.
AZ
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Perfect timing for this post. I have saved for a good down payment for a home (50,000) but wonder if buying a home is a good idea due to the fact that the place would only be for me and my son and I have no experience repairing anything. Now, I heard on the radio that if you are past 40 years old and don't own your own place, you are pretty much a loser (silly statement in my opinion) . Putting this as a down payment would only leave me with $20,000 (for emergencies or anything else) also it would take away any er or FI leaving me with only $20,000 before mentioned. For me so far, I don't think is a good idea. Also, i don't own a lot of stuff (keeps me away from being a consumer) and can move fairly easy .. draw back so far is rent Increasing in the area and I would like to keep my son in one place through his next 4 years of high school. What would you do?
As Nords writes above there are a lot of great reasons to own property aside from the economic benefits.
I guess what I would recommend is to look around for a property that is both a great value economically and one that will bring you happiness.
And what I would recommend against is putting any pressure on yourself to buy.
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Right,
But you still owe upkeep, property taxes, insurance, etc.
And there is also the added issue of concentrated liability that you have with owning a property but not with owning index funds.
And I have a hard time coming up with a scenario where you get kicked out of your rental because the stock market collapses.
Either way you'll owe upkeep, property taxes and insurance. When you rent, these costs are factored into the rental price. There is certainly concentrated liability in owning a single property, but there is also risk with renting that rents will rise with inflation. There are many factors & assumptions involved, that it's difficult to make a generalization about what is the best decision for each individual.
The NYT has a great calculator that can help walk through some of the assumptions:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
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I agree Nords. Life is not a Spreadsheet. We are not perfectly rational economic actors. And we derive value from many factors other than the bottom line.
I do tend to buy the spreadsheet logic though.
If we derive value from a non-monetary factor, like our living environment and our control over it, and then were to ignore that value in making decisions (as the author would have us do, leaving aside the fact that his financial "analysis" is also incomplete and vague), then we would be behaving irrationally. There's nothing irrational about considering non-monetary values. If one were really financially worse off by buying a house, one could still calculate that cost and compare it to the benefits to decide whether it is worth it. If non-monetary values are ignored, there's really no purpose for this site ....
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Right. No argument from me there. Happiness is the name of the game.
It's still worth discussing the monetary values though, I think. If for no other reason than its interesting to do so.
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Couldn't agree more on both points.
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My home's mortgage and taxes are probably $400 less than rent for a similar property in this area. I bought the house for $275,000 3 years ago and comps are going for $315,000-$330,000 in this area. I don't really put that much into the house in terms of maintenance, maybe $1000 a year on the outside. I don't think staying in a rental would have been a better financial decision.
Investing over buying a ridiculously expensive house is probably a good idea. Or if rents are considerably lower than mortgages in your area. Otherwise, without locking into a home you'll always be paying for your housing. You'll also have to pay the inflationary rate that comes along with renting housing off the open market. While I'm paying $1600 for my mortgage in 10 years, someone else might be paying $2500 in rent because of inflation.
It's a gamble, but buying a home at the right time can be a good investment.
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Right. No argument from me there. Happiness is the name of the game.
It's still worth discussing the monetary values though, I think. If for no other reason than its interesting to do so.
Ok, but I just went back through the NY Times calculator to check what I recalled from when I bought my house two years ago, and confirmed that the math was in favor of buying if we intended to stay more than three years, based on our assumptions at the time. As it's turned out,our investment return since than had been much greater than anticipated, but real estate and rent increases in our market have been even more radically above long-term expectations over that short period (we've probably see 35% increase in real estate prices and 25% increase in rents). I'm not sure I understand the point of a non-specific article when it is a calculation with many factors that vary by location, investment strategy and person.
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This ideas seems to discount any potential for appreciation. My apartment has appreciated about 50% in the two years since I bought it. Of course it could go back down again, but that doesn't seem imminent.
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The New York Times Calculator is fantastic, by the way. Thanks for linking it dude abides.
The reason why I found this article interesting personally, is because it takes a position counter to the prevailing cultural wisdom which is that homeownership is a no-brainer.
The real calculus is not so cut and dried.
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Buying a house seems to me to be an enabler on the path to mustashianism. With your own home you can start to learn to repair things, use any land that comes with it in ways that save more (eg. growing food) or develop side hustles (eg. MMMs house building/repairing). These are quantifiable, spreadsheet sorts of things (maybe only after the event). they generally make you more independent of the consumer culture around you.
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It can obviously be bad for some people, especially if they're buying more house than they can afford...
But leveraged real estate can easily be the best investment you make, if you do it right.
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I think for people who are financially unstable (i.e. just starting out, heavy student loan debt, may move frequently, don't have a lot saved/invested overall), then they would probably be better off with the flexibility of renting. It's probably not a great idea to have your equity in the primary residence be more than half of your NW, which for some people, even after just putting in the down payment, may be the case.
For people who are financially stable (i.e. several years into career, low/no other debt, may stay for 4+ years OR the house would be cash flow positive as a rental, have solid savings and investments in retirement vehicles), then they may be better off buying as this will allow the home to be a hedge against both inflation (property will likely maintain value, though most of the big gains are probably gone) and rising rent over time. The leverage factor, low borrowing rates, and overall NW diversification will probably outweigh the marginal benefit of having more invested in the market.
For me, buying in 2012 was partially such a good deal because I was able to buy on a foreclosure ~$100k which has significantly appreciated, so even if I needed to get out of the property quickly I could do so without taking a loss (probably make a nice 30%+ gain). However, at today's price of $140k (Zillow), the reward would be considerably smaller, and it wouldn't be such an obvious choice to buy.
I think ignoring the housing crisis in '08-'12 where you could fairly easily get a home at a discount, the advantage for buying is reduced overall.
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Right,
But you still owe upkeep, property taxes, insurance, etc.
And there is also the added issue of concentrated liability that you have with owning a property but not with owning index funds.
And I have a hard time coming up with a scenario where you get kicked out of your rental because the stock market collapses.
AZ
As mentioned above, upkeep/property taxes/insurance are all included in what you would otherwise have to pay for rent (unless you have a generous or innumerate landlord), so they aren't costs specific to ownership.
The scenario where you get kicked out because the stock market collapses: you followed the article's advice and invested the money you would have used to buy a house (because the returns should exceed your rent). But then the stock market collapses and you still have to keep withdrawing, your portfolio never recovers, you go broke, and hence homeless.
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Right,
But you still owe upkeep, property taxes, insurance, etc.
And there is also the added issue of concentrated liability that you have with owning a property but not with owning index funds.
And I have a hard time coming up with a scenario where you get kicked out of your rental because the stock market collapses.
AZ
As mentioned above, upkeep/property taxes/insurance are all included in what you would otherwise have to pay for rent (unless you have a generous or innumerate landlord), so they aren't costs specific to ownership.
The scenario where you get kicked out because the stock market collapses: you followed the article's advice and invested the money you would have used to buy a house (because the returns should exceed your rent). But then the stock market collapses and you still have to keep withdrawing, your portfolio never recovers, you go broke, and hence homeless.
Broke and homeless, lol. Sad, but probably true.
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Right,
But you still owe upkeep, property taxes, insurance, etc.
And there is also the added issue of concentrated liability that you have with owning a property but not with owning index funds.
And I have a hard time coming up with a scenario where you get kicked out of your rental because the stock market collapses.
AZ
As mentioned above, upkeep/property taxes/insurance are all included in what you would otherwise have to pay for rent (unless you have a generous or innumerate landlord), so they aren't costs specific to ownership.
The scenario where you get kicked out because the stock market collapses: you followed the article's advice and invested the money you would have used to buy a house (because the returns should exceed your rent). But then the stock market collapses and you still have to keep withdrawing, your portfolio never recovers, you go broke, and hence homeless.
Even though property taxes, upkeep, repairs, insurance, etc. are baked into the cost of your rental, The point is that owning your home outright does not mean that you have no expenses.
In other words if you have no money to pay These costs you're just as likely to become homeless as if you don't have money for rent. Your situation is even worse compared to being broke and renting, if you're underwater on your mortgage.
A final point is that the illiquidity of your investment in a home works against you at times of financial crisis. and selling your home when it's value is depreciated is no better than selling your Stocks when their value is depreciated.
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Even though property taxes, upkeep, repairs, insurance, etc. are baked into the cost of your rental, The point is that owning your home outright does not mean that you have no expenses.
In other words if you have no money to pay These costs you're just as likely to become homeless as if you don't have money for rent. Your situation is even worse compared to being broke and renting, if you're underwater on your mortgage.
A final point is that the illiquidity of your investment in a home works against you at times of financial crisis. and selling your home when it's value is depreciated is no better than selling your Stocks when their value is depreciated.
Growing up, I had a keen interest in money and finance. I remember asking my mom which was better, renting or buying. I'll never forget what she told me, "whether you rent or whether you buy, you pay for the space you occupy". <-- Always sounds much better from my mom's mouth :D
So true, if you have a roof over your head, you'll always have expenses in either case.
The point I would disagree with is this one, "In other words if you have no money to pay These costs you're just as likely to become homeless as if you don't have money for rent." which is not true. If you own a home, you have plenty of options for paying these costs even if you don't have any income. If you had a pre-existing HELOC, you could tap into that, you could do a reverse mortgage, you could rent out the house and move somewhere else, you could rent rooms out of the house. So on and so forth. With renting, you have two options: rent out extra rooms, sublease, or break your lease and move.
Yeah, homes are illiquid, but that's OK. If lack of liquidity would present a problem, then it was probably a bad decision purchasing the home in the first place.
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Even though property taxes, upkeep, repairs, insurance, etc. are baked into the cost of your rental, The point is that owning your home outright does not mean that you have no expenses.
In other words if you have no money to pay These costs you're just as likely to become homeless as if you don't have money for rent. Your situation is even worse compared to being broke and renting, if you're underwater on your mortgage.
A final point is that the illiquidity of your investment in a home works against you at times of financial crisis. and selling your home when it's value is depreciated is no better than selling your Stocks when their value is depreciated.
Growing up, I had a keen interest in money and finance. I remember asking my mom which was better, renting or buying. I'll never forget what she told me, "whether you rent or whether you buy, you pay for the space you occupy". <-- Always sounds much better from my mom's mouth :D
So true, if you have a roof over your head, you'll always have expenses in either case.
The point I would disagree with is this one, "In other words if you have no money to pay These costs you're just as likely to become homeless as if you don't have money for rent." which is not true. If you own a home, you have plenty of options for paying these costs even if you don't have any income. If you had a pre-existing HELOC, you could tap into that, you could do a reverse mortgage, you could rent out the house and move somewhere else, you could rent rooms out of the house. So on and so forth. With renting, you have two options: rent out extra rooms, sublease, or break your lease and move.
Yeah, homes are illiquid, but that's OK. If lack of liquidity would present a problem, then it was probably a bad decision purchasing the home in the first place.
The problem that I have with this comparison is that you are comparing owning a home outright to having no assets.
Why not compare owning index funds to being underwater on your mortgage ?
The correct comparison is owning a $100,000 home to owning an equivalent amount of index funds that have been purchased with all of the principle and interest you have invested in the home (minus your equivalent rent) plus the dividends and growth of your funds.
So the reverse mortgage could be equated to slowly selling equities as the need arises.
And renting your property out can be quite a challenge in depreciated markets.
Try renting out your house in a blighted section of Detroit right about now. I'd rather just sell some index funds, harvest my losses and move to a cheaper locale.
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Exactly. It's not a fair comparison which was the point I was trying to make. I may have misunderstood you when you said, "in other words if you have no money to pay these costs you're just as likely to become homeless as if you don't have money for rent". I thought that you meant that if you owned a home outright and couldn't pay property taxes, upkeep, etc. then you'd risk being homeless.
Yes, if you purchased a home outright with $100k vs. invested in $100k in index funds, assuming historical market returns you'd almost always be better off investing the lump sum in index funds because the expected value of the index funds will be higher (8% vs 4%). For example over a ten year period:
Home purchase
100,000 * (1.04)^10 = $149k
Stocks
100,000 * (1.08)^10 = $222k
However, using the same assumptions (8% vs 4%) you'd be even better off from a net worth perspective if you took the initial 100k lump sum, took $20k for a down payment on the house, invest the $80k in the stock market. Over 10 years you would be much better off in this scenario because:
Home purchase + Invest:
100,000 * (1.04)^10 = $149,000
80,000 * (1.08)^10 = $177,000
total assets = $326,000
Liabilities = $64,000
Net = $262,000
vs. $222,000 in stocks
And surely renting in a downturn can be a problem. If you lay roots, you're betting forward on a locale for your hold period.
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Oh, the other difference beside leverage would be tax treatment.
If you sold all assets after a 10 year period you would have the following:
Home purchase + invest
Home: $149,000 - ($149,000 * 0.06) - $64,000 = $76,060
Stocks: $177,000 - ($177,000 * 0.15) = $150,450
Net: $150,450 + $76,060 = $226,510
Stocks
Stocks: $222,000 - ($222,000 * 0.15) = $188,700
Difference: $37,810 ahead in the housing scenario. Mostly due to leverage and tax advantages since you would owe zero taxes on cap gains up to $250k.
All of this is not to say that you're always going to come out ahead with leverage and tax advantages, but it's more to illustrate that it's just not a simple comparison. Not at all.
In some cases, you'll come out ahead with owning, in others renting. On paper. Because who knows how things will fare.
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The auther of the linked article doesn't really seem to understand home ownership very well, and I think the article is way too simplistic.
His comparison is basically comparing putting $100k in stocks and putting $100k into an unoccupied, unrented house... When you put $100k in stocks, you still have to pay for a place to live. Depending on the price to rent ratio where you live, that could push very heavily toward renting and investing your cash elsewhere, or very heavily toward purchasing a home (with or without a mortgage depending on interest rates, etc). This varies considerably by location, so generalizing that renting is better than buying fails to acknowledge that the costs of renting relative to buying cn vary by 300% among major metro areas. (e.g. in 2009, Price to Rent Ratio in Honolulu was about 35, and in Pittsburgh about 12, and the US as a whole was a bit under 11 (http://money.cnn.com/real_estate/storysupplement/price_to_rent/)- that makes a HUGE difference).
Other mistakes/ommissions by the author:
- claims that the buyer pays 7-10% in transaction costs at the time of purchase, and 7-10% again at closing... Actually transaction costs for the buyer are generally much lower than for the seller. Most of the buyer's costs are downpayment, not transaction costs.
- forgets the current low-cost borrowing, effect of leverage on price appreciation and the pro-home-ownership tax treatment as Thedudeabides mentions in prior posts
-ignores cost of renting entirely, and also that rent will increase with inflation over the long term, while mortgage principal/interest payments on fixed-rate loans will remain constant, so they effectively decrease over the long term when adjusted for inflation.
All of us who invest in (cash-flow-positive) real estate rentals make our money off the fact that people are paying more in rent than it is costing us to purchase, maintain, insure, pay taxes, etc on our properties.
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I just think its not a one size fits all and think a person can make a strong case either way based on so many variables be it financial or the pride of ownership and what comes with it. Housing markets vary so much as do renting markets. I find myself playing with the numbers and the trade-offs a lot as I get older and know people in both scenarios that there decisions are right for them. I enjoy mainlining our home but also could see myself having a place with no maintenance an spending time doing more things. In addition or housing market moves up a lot slower but dropped pretty fast. My taxes are brutal and doubt anytime soon my house will worth more than I paid and I bought it during the drop. So I will continue this struggle with in until something clicks one way or the other!
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We continue to own our home for non-financial reasons. We're here because our kids have lived here their whole lives and love the house and the neighborhood. (We, the adults, love the neighborhood but not the house.) When our kids are on their own in five years, we'll be reevaluating whether to stay or go.
Reasons to move:
4% withdrawal rate from the sales proceeds of our house would enable us to have a luxury rental, pay our utilities, and probably most of our groceries.
No maintenance.
No constant, "Should we remodel X?" Very much a time-suck of mental energy when you live in an older home.
Pleasure in downsizing.
Ability to move as the mood strikes simply by giving notice.
Reasons not to move:
Hmmm. (Can you tell which way I'm leaning?)
Stability?
Taking comfort in the longevity of our living experience?
Wow, this is interesting. In answering the "Is homeownership a sucker's ploy," I say no, because of the many intangible benefits we've experienced in raising our kids here. One they've moved on, though, I don't think we will have a similar intangible benefit, and at that point from a money perspective, it makes complete sense to move.
However, it's not all about the money.
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I did not read the article, but anyone who claims investing in stocks is ALWAYS better than buying a house, or that buying a house is ALWAYS better than investing in stocks, is full of nonsense.
I have a similar (but slightly less) reaction when people say your house is definitely NOT an investment. Tell that to the millions of people who have practically stumbled into being rich just by virtue of their house appreciating in value in a hot market.
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If you own your home, a stock market crash can't take it away from you. Diversification is extremely important, that's why we use index funds in the first place instead of just picking a few stocks.
Excellent point.
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Anytime someone tries to boil down a very complex issue to black and white, there's going to be plenty wrong with the argument.
For me, I think the big thing is a matter of mentality -- you should never think of your primary residence as an investment, but understanding that you have to live somewhere and it's probably gonna cost you money to do that, whether you rent or own. Once you get into that frame of mind, it makes the rent or buy decision much easier. It will also make you much less likely to spend way too much money on buying a new house because you are thinking of it as a purchase, not as an investment.
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Having a great home of your own is way more awesome than making an extra million in the stock market so long as you aren't eating cat food to maintain it.
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If my employer fails or I get downsized or the economy collapses or
the economy collapses AND my employer fails,
I don't have to worry about mortgage ( or rent if we didn't own ).
Investing the purchase price might have been a better choice on purely
financial terms but stability, quality of life and building something
for our family trumps the possibility of little more money in the distant future.
We have lived in the same house since we got married and we will be here
until they wheel us out on a gurney.
Our kids have never had to move.
That kind of stability in a childs life is worth a lot.
Our kids have friends whose parents move frequently, sometimes twice a year.
Those kids sometimes have to change schools because of moving.
Those families have never known stability.
Our older kids, who are out on their own, still experience the
warm-and-fuzzy stability of coming home for holidays, BBQs, birthdays, etc.
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It depends is the obvious answer, both on the person and the place. As other have said it makes a lot more sense for somebody with a stable career, who is unlikely to be forced to move, to own than rent. A person just starting out or with a job that requires moving around the country would be foolish. There are huge transactions cost to buying and selling real estate and not all of them are financial. I have yet to met the first person who was selling their old home and buying a new one who wasn't a least somewhat stressed out. On the other renters end up moving more frequently than home owners and it isn't always of their choosing.
Place matters also, financially I'm hard press to envision a scenario where somebody who lives in a part of the country where the mortgage payments+insurance+taxes is roughly equal to rent won't come out ahead after 5 or 10 years at the most. Sure there is the occasional disaster like Detroit, but for the most part the opportunity cost you are giving up by using a down payment is small compared to amount of money you'll save from taxes, and from future rent increases.
I think it is harder to justify buying vs renting in most places on the coast where rents are much lower than mortgage payments even in today low interest rate environment. Looking at the Case-Shiller city data the prices for most place on the coast, and some sunbelt cities are 4-7 times higher than 1980 and . In contrast most places in the middle of the country are closer to 2-3x.
Coming out ahead in those cities requires continued how rates of appreciations and it is considerable more risking IMO.
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If you can buy a home without lifestyle creep then you make money. You lose money buying the really nice furniture, extra rooms etc. that make life nicer.
If home ownership is so lousy why are all the landlords rich?
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If you can buy a home without lifestyle creep then you make money. You lose money buying the really nice furniture, extra rooms etc. that make life nicer.
If home ownership is so lousy why are all the landlords rich?
My mom has been a "homeowner" for the last 20 years. She's not rich. The bank has really owned her home the entire time. You can't compare retail or regular "home ownership" directly to landlording. The Donald Sterlings, or Trump's of this world do not make up for all the people that think of their home as a forced savings plan.
Note: this is not an attack on homeownership, but I think the middle class has a completely wrong view of it in America.
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If you can buy a home without lifestyle creep then you make money. You lose money buying the really nice furniture, extra rooms etc. that make life nicer.
If home ownership is so lousy why are all the landlords rich?
My mom has been a "homeowner" for the last 20 years. She's not rich. The bank has really owned her home the entire time. You can't compare retail or regular "home ownership" directly to landlording. The Donald Sterlings, or Trump's of this world do not make up for all the people that think of their home as a forced savings plan.
Note: this is not an attack on homeownership, but I think the middle class has a completely wrong view of it in America.
Would she have been richer renting? Or she could rent out her house and move into a cheaper apartment, if that's better financially. Or she could sell at any time and invest.
If those 2 options (move or sell) sound silly, which I think they do, then I'm guessing home ownership wasn't just about investing. Perhaps there's another more important reason for home ownership.
She's not a landlord unless she's got a renter. Landlords get rich by viewing home ownership as an investment. If she wanted to be a landlord she could charge her kids rent as soon as they turn 18, or fill their bedrooms with tenants. I think an investor would take that approach.
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There's a behavioral aspect to home ownership that I don't often see mentioned in these discussions, and that's dealing with tracking error.
William Bernstein writes about this when he talks about tilting your investment portfolio. If you have a lot of crazy tilts, then there will be times when the S&P500 is doing great and you will "feel" like you have fallen behind your peers. You have to tough it out during those times and wait for the tilts to come through.
With home ownership, I suspect the effect can be even stronger. If you are renting and prices in your neighborhood start skyrocketing, you are going to feel like crap if you plan on living there a long time. And home values are generally visible now thanks to Zillow, so you can see how others' houses are actually doing, and you are comparing yourself to your actual physical neighbors. It cuts both ways, of course, with all the renters feeling great in 2008.
I'd like to think that I can do the mathematically correct thing and ignore what's going on with my neighbors, but the lack of tracking error v. your neighbors is a nice behavioral bonus to home ownership.
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But if you don't own your own home you cannot do this: https://www.youtube.com/watch?v=twuiF2Ft8bk
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Place matters also, financially I'm hard press to envision a scenario where somebody who lives in a part of the country where the mortgage payments+insurance+taxes is roughly equal to rent won't come out ahead after 5 or 10 years at the most.
Bingo! It took us about 10 years, but we could now easily net 10% if we rented out our home.
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Obviously it's personal preference over anything. I stumbled into home ownership at 21 and haven't looked back. The strategy that has worked for me is having a place with enough bedrooms (i.e. more than one) that I can rent out the other bedrooms. My current rental is a cash cow (have rented out 3 bedrooms which has more than covered expenses and throws off cash every month). I'm moving soon and about to duplicate that with another place, though I'm looking more at this new place as a personal residence rather than "rental" because I want to actually enjoy living there. Prices are low enough for 2 bed/2 bath condos that rent from my potential roommate would cover the monthly HOA fee & PITI. I live for free again, while my roommate builds my equity. This reduces my monthly expenses and allows me to max all my retirement accounts. Works for me.
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I do tend to believe that even after all of the tax breaks etc. most people would be financially better off if they just rented and put the difference in their monthly expenses of lodging into simple equity index funds.
The mortgage, taxes, and insurance on our new house is actually cheaper than renting a nice place where we live. Otherwise I'd be all about paying rent and putting more money into savings.
Of course we all know people who shouldn't have bought the homes that they felt they were entitled to buy.
Funny you should say that...last summer/fall, my 55 year old (at the time) mom sold her paid off house to my sister for about 2/3 what it was worth and built a brand new house. She used up all of her savings as a down payment and now has a 10 year mortgage on top of that. Her reason? Because she thinks if she would have been married, she would have been able to build a brand new house long ago and she deserves it. Guess who my mom will be living with when she retires and cannot afford to live on her own? Certainly not me...
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If the value of my house stays where it is and I take a $40K bath on it, I'll be behind renting comparable by $200 a month over 15 years. This includes all repairs and renovations we've done, and an estimate on what we will be spending
Not insignificant money, but now that I'm into gardening in a big way, I'd gladly exchange $200 a month for a house that I own, control, and can modify.
Of course, if the value recovers even to the original purchase price, I'd be roughly even.
The numbers would look far better if I wasn't stuck in a high interest loan.
But there are tons of areas where the reverse is true.
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As an investment, yes, home ownership is a suckers play.
Owning a home is like picking an individual stock. You may luck out and hit the next Apple (example buying a house at the bottom of the market in an area that rises rapidly over the next few years) or you may end up buying the next Kodak (buying house in Detroit any time before 2006 or so).
The big problem with owning is the expense ratio is variable. A new roof, higher real estate taxes to pay for that new wing at the local school and those public pensions and your expense ratio can jump to 5% of the purchase value during a year. If I had an investment with a E.R. of 5% I would be sick to my stomach.
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As an investment, yes, home ownership is a suckers play.
It's also horrible as a way to tell time, but that's not really entirely relevant, either, is it?
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As an investment, yes, home ownership is a suckers play.
It's also horrible as a way to tell time, but that's not really entirely relevant, either, is it?
Well, considering this thread was started in the "Investor Alley" section, one might think talking about investments would be relevant. Just sayin.
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As an investment, yes, home ownership is a suckers play.
It's also horrible as a way to tell time, but that's not really entirely relevant, either, is it?
Completely relevant because that's the general mindset of people (probably not most folks on this blog). When we were looking for our first house a few years ago a guy I was working with at the time said excitedly once "Buying a home is an investment!" Not sure why that memory stuck with me so strongly but I just remember thinking "No, it's not, it's a place to live."
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As an investment, yes, home ownership is a suckers play.
It's also horrible as a way to tell time, but that's not really entirely relevant, either, is it?
Completely relevant because that's the general mindset of people (probably not most folks on this blog). When we were looking for our first house a few years ago a guy I was working with at the time said excitedly once "Buying a home is an investment!" Not sure why that memory stuck with me so strongly but I just remember thinking "No, it's not, it's a place to live."
Well we can get into making the right decisions for the wrong reasons, but the point is, whether it's an investment or not, it's a place to live. Depending on several factors, you may end up with more money renting, or you may end up with more buying. There are also, obviously, emotional factors besides the mathematical ones.
But even if that's the mindset of people, it doesn't make home ownership as an investment relevent. The only relevant question is your opportunity cost.
What would you do if you didn't own? Now compare those options against each other.
Comparing it against investing in, say, stocks, is irrelevant, because you still need a place to live.
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possibly a better out look on the topic
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)
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possibly a better out look on the topic
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)
I agree with Jim on a lot of stuff, but he's way off the mark on that one, for exactly the reason I posted in the post above yours.
Comparing it to another investment (like equities) it can look bad: the transaction fees, the illiquidity, etc.
So he builds a great case as to why it's a bad investment.
Ultimately though, as Undecided pointed out, that's irrelevant. Your house is a horrible way to tell time compared to a watch, but why would we compare it in that metric? We shouldn't be comparing a house as an investment, but as a place to live. Emotionally, or mathematically.
It sometimes makes sense to rent. It sometimes makes sense to buy. Compare those options, and choose. But saying it's a terrible investment .. who cares? It may still be better mathematically versus the only other realistic option.
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possibly a better out look on the topic
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)
I enjoyed the article, and of course agree with a lot of the points, but it's a bit silly. You could easily flip the argument and say: Find me a stock that will provide me a place to sleep every night or a stock that will keep me, my family, and my belongings safe, dry, and warm all year long.
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possibly a better out look on the topic
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)
I enjoyed the article, and of course agree with a lot of the points, but it's a bit silly. You could easily flip the argument and say: Find me a stock that will provide me a place to sleep every night or a stock that will keep me, my family, and my belongings safe, dry, and warm all year long.
And well that's the point. I used to think that your house is a terrible investment (still do if you're going to compare it to an investment), it's just the wrong comparison. It is an apples to oranges comparison. There is nothing I can think of that you can rightfully compare a house to except the alternatives to housing such as renting vs. buying vs. RVing or whatever. So no owning a house isn't a suckers play nor is it a terrible investment. It is just a possible choice amongst others that should be made cost effectively and within your values and what you value.
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possibly a better out look on the topic
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)
I enjoyed the article, and of course agree with a lot of the points, but it's a bit silly. You could easily flip the argument and say: Find me a stock that will provide me a place to sleep every night or a stock that will keep me, my family, and my belongings safe, dry, and warm all year long.
And well that's the point. I used to think that your house is a terrible investment (still do if you're going to compare it to an investment), it's just the wrong comparison. It is an apples to oranges comparison. There is nothing I can think of that you can rightfully compare a house to except the alternatives to housing such as renting vs. buying vs. RVing or whatever. So no owning a house isn't a suckers play nor is it a terrible investment. It is just a possible choice amongst others that should be made cost effectively and within your values and what you value.
Exactly.
(https://i.imgur.com/coUKHxJ.gif)
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possibly a better out look on the topic
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)
I agree with Jim on a lot of stuff, but he's way off the mark on that one, for exactly the reason I posted in the post above yours.
Comparing it to another investment (like equities) it can look bad: the transaction fees, the illiquidity, etc.
So he builds a great case as to why it's a bad investment.
Ultimately though, as Undecided pointed out, that's irrelevant. Your house is a horrible way to tell time compared to a watch, but why would we compare it in that metric? We shouldn't be comparing a house as an investment, but as a place to live. Emotionally, or mathematically.
It sometimes makes sense to rent. It sometimes makes sense to buy. Compare those options, and choose. But saying it's a terrible investment .. who cares? It may still be better mathematically versus the only other realistic option.
Sorry arebelspy, i didn't reread Jim's artical when i posted that, but he agrees with your comment, as shown in this post that he wrote too, and is linked to in the bottom of the first one i sent. The first one primarily argues the fact that people grow up hearing the comment that buying a house is the best invetment you can make, i know i was always told that. He's not saying that buying a house is the wrong decision, it's just not a good investment as people seem to preach. Again, unless as others said, it is a good financial choice if the only way you will ever save money, is by paying a mortgage.
http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/ (http://jlcollinsnh.com/2013/03/20/roots-v-wings-considering-home-ownership/)
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Find me a stock that will provide me a place to sleep every night or a stock that will keep me, my family, and my belongings safe, dry, and warm all year long.
Seadrill would do. Yield is around 11% which would give you $22,000 on a $200,000 investment. $22,000 would get you a nice 2 bd apt. or small house rental at $1800 a month.
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Find me a stock that will provide me a place to sleep every night or a stock that will keep me, my family, and my belongings safe, dry, and warm all year long.
Seadrill would do. Yield is around 11% which would give you $22,000 on a $200,000 investment. $22,000 would get you a nice 2 bd apt. or small house rental at $1800 a month.
I think you missed the point.
I want to sleep in the stock. Not take the yield and get a different place, that's a separate question.
You just cover yourself in stock certificates, from what I understand.
Enron employees perfected the technique, I believe.
The point was that you can't sleep in stocks any more than you invest in a house. They're for separate purposes.
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Find me a stock that will provide me a place to sleep every night or a stock that will keep me, my family, and my belongings safe, dry, and warm all year long.
Seadrill would do. Yield is around 11% which would give you $22,000 on a $200,000 investment. $22,000 would get you a nice 2 bd apt. or small house rental at $1800 a month.
I think you missed the point.
I want to sleep in the stock. Not take the yield and get a different place, that's a separate question.
You just cover yourself in stock certificates, from what I understand.
Enron employees perfected the technique, I believe.
The point was that you can't sleep in stocks any more than you invest in a house. They're for separate purposes.
I guess then you would need to buy a micro cap penny stock, get a controlling share, and appoint yourself to the board then make yourself a position there. Get an office with a sofa and use the company washroom to bath.
I tend to agree though that a stock is not a home and a home is not a stock. Perhaps the thread should not be in the investing category.
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I'm in the process of deciding if I want to rent or buy after I sell my current house this year. I personally love renting much better - the freedom to move, no maintenance, no worries, lock up and go - and hate ownership and all the chores involved and expenses of even a paid for place. Plus I don't like having a lot of my cash tied up in a house. For me, I have found that the expenses of home ownership can be very high even with a paid for house. Costs to buy, to sell, to maintain and repair (plus the value of my time to work on the place), taxes, insurances, etc... If I could rent forever I probably would. But am concerned about the financial/inflationary aspects of long term renting as well as market fluxuations. Probably will rent for awhile and eventually buy again but am wondering if anyone has plans to just rent forever? I'm single with no kids so easy to live very small.
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I'm in the process of deciding if I want to rent or buy after I sell my current house this year.
So here's the thing. You have two conflicting things, one which might make renting better, one which might make owning better:
For me, I have found that the expenses of home ownership can be very high even with a paid for house. Costs to buy, to sell, to maintain and repair (plus the value of my time to work on the place), taxes, insurances, etc...
If I could rent forever I probably would. But am concerned about the financial/inflationary aspects of long term renting as well as market fluxuations.
It's the case that sometimes one will be better financially, and sometimes the other, depending on what it costs to rent and what it costs to buy in the area in which you want to live.
Run the specific numbers.
A calculator like this may help: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
If it's close, maybe you let the emotional side tip it (which is to own for most people, or to rent for you, due to the flexibility). But actually run the numbers for your area, don't just use a generic "it's expensive to own" or "rents go up with inflation but owning you lock in that price" -- see what it looks like under your various assumptions.
:)
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The previous version of the NYTimes calculator was a bit less user friendly. It kept some of the most important input fields, like return on investment, in collapsed hidden "advanced" fields.
However it did have one important feature which the new version does not -- the previous version allowed you to pick the rent value. And then, given all the inputs, and the rent value, it would give you the difference you could expect over time.
You can still sort of fake it in the new version, say by adjusting the home price to a rent value that you can actually get and then subtracting one total from the other manually.
But before it was easy and quite shocking at times to see difference -- especially for my area Brooklyn.
I agree with others in the past few posts -- the difference between the two is really just the difference between different ways of paying for housing.
But in a lot areas, especially large cities, the difference is huge when you assume a rate of return on the difference of 10%. The difference becomes insane with 15% to 20% rate of return. (S&P annual rate of return for the past 5 years is approximately 17.5% now.)
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I'm in the process of deciding if I want to rent or buy after I sell my current house this year. I personally love renting much better - the freedom to move, no maintenance, no worries, lock up and go - and hate ownership and all the chores involved and expenses of even a paid for place. Plus I don't like having a lot of my cash tied up in a house. For me, I have found that the expenses of home ownership can be very high even with a paid for house. Costs to buy, to sell, to maintain and repair (plus the value of my time to work on the place), taxes, insurances, etc... If I could rent forever I probably would. But am concerned about the financial/inflationary aspects of long term renting as well as market fluxuations. Probably will rent for awhile and eventually buy again but am wondering if anyone has plans to just rent forever? I'm single with no kids so easy to live very small.
You could always consider doing both: Rent a place yourself so you have the desired flexibility, and buy a house to rent out long term (or rent out your current home after you move). Then the rental house truly is an investment, you get some positive cash flow from it, and you get the tax advantages of being a landlord. You can outsource everything so you're not doing repairs or other maintenance chores. You'll always have that house as a hedge against inflation, and could move back into it if you ever find that rents become too expensive relative to home ownership. One day, if you don't take cash out along the way, you'll own it free and clear (or maybe you do already).
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I'm in the process of deciding if I want to rent or buy after I sell my current house this year.
So here's the thing. You have two conflicting things, one which might make renting better, one which might make owning better:
For me, I have found that the expenses of home ownership can be very high even with a paid for house. Costs to buy, to sell, to maintain and repair (plus the value of my time to work on the place), taxes, insurances, etc...
If I could rent forever I probably would. But am concerned about the financial/inflationary aspects of long term renting as well as market fluxuations.
It's the case that sometimes one will be better financially, and sometimes the other, depending on what it costs to rent and what it costs to buy in the area in which you want to live.
Run the specific numbers.
A calculator like this may help: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
If it's close, maybe you let the emotional side tip it (which is to own for most people, or to rent for you, due to the flexibility). But actually run the numbers for your area, don't just use a generic "it's expensive to own" or "rents go up with inflation but owning you lock in that price" -- see what it looks like under your various assumptions.
:)
Thanks! Of course it would help if I actually knew where I wanted to live (not here for sure). But you're right, the happiness factor should out weight the financial factor IMHO. So if renting forever makes me happier, then that's probably the route I'll go even if financially it isn't the wisest move (will have to calculate the numbers once I see where I want to live permanently - if that ever happens I do like to move around). I do have a government pension of $1400/month that has a 3% COLA every year so am not as dependent on how my stash does in the market compared to others here. So if I can keep my total housing costs (rent or buy) within or under that amount I can get by. I do worry that I'd be priced out of the rental market if rent prices over a 30 or 40 year period (or 50 if I lived that long) rose as much in the future as they have in the past. I remember my parents telling me that when they bought their first house in 1964ish, they were really hesitant because their rent was $80/month for a duplex and they would be taking on a mortgage of $150/month PITI on a house that cost $16K in coastal SoCal. That same duplex would now rent for over $2000/month and the houses value would be in the $500K range. Looking at those numbers make buying far exceed renting even if you include in all the extras. Makes you wonder what the next 40 years will be like. Scary to think of renting long term from that perspective.
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If financially it makes sense to buy, it may make sense to turn into a rental if you want to move, so you aren't "trapped," and then you have the hedge against rising rents of always being able to move back into it.
Of course, you may not want to deal with a rental property, but that's one way to own while still renting. :)
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I'm in the process of deciding if I want to rent or buy after I sell my current house this year. I personally love renting much better - the freedom to move, no maintenance, no worries, lock up and go - and hate ownership and all the chores involved and expenses of even a paid for place. Plus I don't like having a lot of my cash tied up in a house. For me, I have found that the expenses of home ownership can be very high even with a paid for house. Costs to buy, to sell, to maintain and repair (plus the value of my time to work on the place), taxes, insurances, etc... If I could rent forever I probably would. But am concerned about the financial/inflationary aspects of long term renting as well as market fluxuations. Probably will rent for awhile and eventually buy again but am wondering if anyone has plans to just rent forever? I'm single with no kids so easy to live very small.
You could always consider doing both: Rent a place yourself so you have the desired flexibility, and buy a house to rent out long term (or rent out your current home after you move). Then the rental house truly is an investment, you get some positive cash flow from it, and you get the tax advantages of being a landlord. You can outsource everything so you're not doing repairs or other maintenance chores. You'll always have that house as a hedge against inflation, and could move back into it if you ever find that rents become too expensive relative to home ownership. One day, if you don't take cash out along the way, you'll own it free and clear (or maybe you do already).
I had thought of that but I am not landlord material - too much of a worrywart. I do own it free and clear and it is very low cost to me but I like the freedom of being unattached to things and I know that isn't something I'd be interested in. Good financial strategy though as I'm in an expensive rental area so could make around $2500/month renting out the place..
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I'll relieve you of that worrisome home for $150k, and you'll finally be free to make the world your oyster! ;-)
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If you buy early enough in life to make clearing the mortgage a mid-life event you can save quite a bit of money. The trick is that you don't want to move. Or if you do, rent rather than sell.
Then of course you can transfer the property to your posterity, and generational wealth does it's thing.
For a short term play it's almost always a bad move, but if you play the long game I think it can be a wise choice.
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I'll relieve you of that worrisome home for $150k, and you'll finally be free to make the world your oyster! ;-)
Add another $400K to that and it's a deal :-)! I co-own with my sister so would have to give her half if I sold (or buy her out if I kept the place) so kind of makes haggling harder. Another thing, as Chuck pointed out, is most people want to leave their house (as part of their stash) to their heirs. Since I haven't got any heirs (it all goes to charity - or some young hot future DH I sink my cougar claws into who out lives me :-)!) so being house rich and cash poor isn't something I'd like to do. But maybe selling and buying a MUCH less expensive, easy care place that I can rent for income (and live in when I want) and retaining a bulk of my "house-money" in cash would be the way to go. Sort of the best of both worlds.
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I just bought a house, and while I didn't go into the pros and cons very deeply my thoughts in the process were as follows.
I have to pay something for somewhere to live. That's just life. At the moment the actual dollar amount of my mortgage payment and what I would pay in rent is about the same.
In 30 years time, going on past rates, rent around here will be a lot higher. When I first left home about 30 years ago I was paying $85 a week for a house like the one I'm in. Now the standard rent around here is around the $300 mark. So that's a 250% increase. Which makes rent possibly somewhere in the $4,500 a month range in 30 years. Since I'm paying $1,300 a month at the moment, which like I said is set for life bar interest rate rises, even if I had to pay my mortgage for the rest of my life it becomes progressively cheaper in relation to rent to the point where it's, if not exactly negligible, at least really really cheap.
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All real estate is local, so it depends. If you make an emotional decision about a house and call it an investment, I can see the caution.
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I made the decision to buy a house by evaluating it as a potential rental. Since I felt confident it would cashflow from day one and I knew I'd be doing work on it over the years to improve it... it was a no-brainer decision.
Our long term plan is to use it as a rental, but it makes a nice house for us now as we are fixing it up. Both a place to live and an investment!
However, if I was looking today in our neighborhood I probably wouldn't buy. The rents don't support the valuations that sellers are getting. Eventually that pendulum will swing back in the other direction.
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It really depends on the area.
In some areas it is much cheaper to own than rent (and the other benefits of owning are high).
In expensive places like NYC or San Francisco it is probably better to rent than buy.
At the end of the day, there are intangibles to buying and renting.
Keep an open mind.
I myself, haven't rented since 2001. But I probably will rent again when I move to San Diego.
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Yeah, this is something that I am curious about. Right now I am renting a room in my friend's condo (includes utilities, garage space, and shared use of all living areas/kitchen) at $500/month. This is a fairly sweet deal especially as we both get along and this cuts my commute in half and I am starting to bike so that I can avoid driving to work. I was previously living with my parents and using the $500/month as an extra addition to my Vanguard investments.
I am looking for a place of my own, but I think much of it is having pride in my own place. This is a sweet arrangement thus far, and I know that my roommate is paying $300 in associate fees alone, that doesn't account for his mortgage and other expenses. These are expenses that I would have to pay for had I owned my own place. I am toying with staying here unless I find something far better. My roommate is single, if he gets married then I know that I will slowly be asked to find a new place. But the costs of home ownership don't seem like a worthy investment, the mortgage may be cheaper than rent, but to me that is still a ton of money stuck in one place, without much diversity. I would rather have my money in index funds and rent. Plus if I need to move this is far easier than trying to sell a house (esp in a down market).