I am sure you guys have debated this many times earlier. But I need some guidance as which is better. As I see it:
Real estate: assuming 20% down payment = you get 5x leverage. Unless it's in Florida or California, housing price is unlikely to go down. The price of renting is also being directed to investment. When you consider FHA loans, it looks even more attractive.
But someone please prove me wrong.
1 - RE is unlikely to go down except in CA/FL. Come on...seriously? Were you in a nuclear bunker insulated from all news between 2007-2012?? There are few markets in the whole country that didn't go down to some extent. Yes those two states were among the hardest hit but many markets even outside of CA/FL dropped substantially...Las Vegas, Phoenix/Tucson metros, Chicago suburbs, etc. Many still haven't recovered to their previous highs.
2 - Even assuming the 'unlikely to drop' thing is true (it's not), leverage is only good if something is moving up (or bad if it's moving down). What if prices are stagnant? Leverage on 0% is still zero. Leverage on 1% is only 5%. The long term appreciation rates for real estate historically have not been great...slightly above inflation.
3 - Why would FHA loans matter if someone is putting 20% down. Ah I see...for MORE LEVERAGE!! All I can say about that is leverage cuts both ways. It COULD make you alot of money, just like buying stocks on margin can. It also COULD make you lose your ass, and quickly. FHA loans require what, 3.5% down? Over 25x Leverage! To each their own depending on your risk profile.
Investing in RE is fine, many people are successful at making money at it. I think it has it's place in a diversified investment portfolio and I do own a rental property, but from personal experience I would focus on the income/cash flow metrics first and foremost. If rental demand is decent and you have good cash flow it's great insulation from what actual prices are doing. If the property appreciates, great, but for RE that's much harder to predict than a steady rent check coming in that covers your expenses and provides some income. During the meltdown the actual value of my property plummeted...and that had zero effect on the cash flow I was receiving. It actually improved it because my prop taxes dropped.
If you are thinking about buying as a personal residence, buying CAN make sense, it can also be less advantageous from a purely monetary perspective. It's very market/situation dependent. I would run a cost comparison between equivalent renting costs and owning and decide from there. Don't fall for the 'renting is just throwing away money' schitick that realtors trot out...it all depends on what rent costs vs what your total buying costs are. You can include some modest RE appreciation and some tax benefits, but you also have to factor in the returns your down payment would generate in another investment, plus if renting is cheaper the savings that generates, plus maintenance when you own, and also the fairly high transaction costs associated with real estate which can have a sizable effect depending on how often you will need/want to move. I ran a fairly detailed analysis of this when we decided to buy our last house and was surprised...buying won but it was far from a landslide.