I’ve been thinking about this awhile now. Clearly “good” can mean different things to different people. I’ve always heard growing up how a house is the greatest asset you can own but I don’t think that’s the case. My thinking is that if you put what would amount to a down payment into an S&P 500 index fund you’d get much better R0I over the same time period when you’d be paying mortgage, save for maybe those who sold at the top in 06-07. Effective allocation of capital, right? So what do you think? Is buying a house good investment? Better to rent?
Time horizon might be relevant here.
i would buy if your looking for a home… not to make money…
There used to be a ‘golden rule’ that people should now go back to. This could have saved a lof of the mess we got in to. The house you live in is NOT AN INVESTMENT. PERIOD. The house(s) you rent out IS AN INVESTMENT.
With a house your monthly payments will build equity and you should receive a lot of the money you put into the house back when you sell. With rent, when you move out you don’t get back a dime. To compare owning to investing the downpayment into a index and renting, you need to subtract the annual rent payments from your annual index return. It’s also logical to assume that whoever is renting you the property will require some return for the risk he is bearing. Therefore, the monthly rent payment will be higher than the monthly costs of owning a home (includes mortgage payment, insurance, taxes, etc.). Interest paid on mortgages are also tax deductible. IMO the return seems to be better if you own (assuming you are on a long term time horizon). Then again, you bear a lot more risk if you own.
I agree with DanLieb. You need to split your principal private residence from any other real estate investments. If you find a house that you love and you are happy to live there for the rest of your life, then you don’t really care how much its price appreciates over time. For all other property transactions, I think you need to look at it in the same way as you would investing in any other asset class. Buying a one bed apartment in Beijing for 100x the annual rent roll strikes me as a bad investment for instance. However, If I can buy an apartment today that pays out $20k per annum in rent (with a reasonable expectation that this will continue) and secure a 20 year mortgage costing $18k per annum with maintenance costs of $2k, then in 20 years I will own a property outright at no cost to myself which I can either sell on or continue to enjoy the revenue stream. That is not a purely hypothetical example by the way. I have seen properties recently where the rental income can cover the cost of a 20 year mortgage with only a 10% down payment required (and rents should increase over a 20 year time horizon). What makes this sort of investment attractive to me is the easy use of leverage. No bank will give you a 20 year loan to buy $500k worth of shares at a 5% interest rate. In fact, I doubt an individual investor will get such cheap funding for any other kind of investment. Also property often comes with various tax deductions depending on the jurisdiction which can make it an unusually attractive investment.
There are so many variables that one cannot really make a clear statement that covers all situations. I moved from Cali to Texas and things are night and day. Knowing I want to move back reasonably soon I ran every home we looked at into a rental CF spreadsheet I made taking into account the local idiosyncrasies. 1. In some areas renting is cheaper- even taking into account the tax benefits of ownership. My sisters neighbor rents a home for 2700/month- the owner has a 4900 mortgage. Thats an extreme example, but in many areas you can rent for less than buying. 2. Taxes are different in different areas. In cali you buy and your tax stays pretty flat for EVER. Max increase of 2% a year (nice for those who had their home values double in a couple years right?). This makes tax risk quite low. In dallas taxes can grow 20-40% a year if there is a increase in valuation, and the rate is 3x higher to begin with. 3. Interest rate deduction benefits are also tricky as if the home is inexpensive/ your state has no income tax, you may not exceed the min deduction. This is my situation- so I see no benefit here. If I were in cali it would be different since my state income tax would push it over the min. 4. comparing returns of a residence vs index are not comparable since one will typically have very large leverage on their home. I have a 10/1 debt to equity and pay 4.5% for it. Its hard to get such leverage on a equity portfolio, furthermore homeowners pay no capgains tax on a private residence- even if you rent it out after owning or having to move for work related reasons. There is a cap- but is very high (400k for a couple I believe)
Unless we’re in a bubble, prices are temporarily depressed or there are specific reasons to believe the value of the property you are evaluating should rise significantly, I would consider a home only as a place that provides shelter and ancillary benefits. Its a relatively illiquid asset which requires more time and money to maintain than people anticipate. You only begin to build equity after a few years so your investment horizon is also longer than other options. A lot of people move within the 5-7 year mark further depressing the opportunity to time the exit. You have a fixed cost/obligation that you have to be willing to meet. Ofcourse, people differ in their approach to ‘walking away’. That said, if you are looking to rent out units then there is merit in evaluating an opportunity. Still need to put in time and money.
akanska Wrote: ------------------------------------------------------- > I moved from Cali to Texas and things are night > and day. Yeah no kidding. Like 2 different countries.
I am in houston… 1900 sf 3 bedroom and paid 103k
I have a 3,000 square foot home and my mortgage payment (PTI) is approximately $1,600 a month. If I was lucky, I could rent a similar place for $1,700 to $1,800 so I elected to buy.
goldenboy09 Wrote: ------------------------------------------------------- > I am in houston… 1900 sf 3 bedroom and paid 103k Haha. I’m in Los Angeles. 780 sf 1 bed - 225k
I generally agree that you shouldn’t consider the house you live in as an “investment”. But I think the point of this topic, is what is better for your wealth, to rent or to own? Holding everything else constant, I would say owning is better for your wealth (most of the time).
DanLieb Wrote: ------------------------------------------------------- > > The house you live in is NOT AN INVESTMENT. > PERIOD. > The house(s) you rent out IS AN INVESTMENT. I like this way of thinking. Also keep in mind, nearly 60% of all US millionaires were built on real estate. Here’s my situation, and why I bought my condo last year April 2009. Down-payment I put down $42,000 cash Now, a couple things that really made it worthwhile: 1. I get $8000 back from the government instantly 2. I get the interest tax deduction, think: interest tax shield 3. My bank offered me a no-closing-cost deal. Didn’t pay a dime for closing costs. 4. I got a 4.875% 30year (rates are much higher now) So, my first 3 years of living in the home, the government is giving me (free $$): year 1: $8,000 + $2,800 year 2: $2,700 year 3: $2,600 So, on my original cash of $42,000, I made $16,100 in my pocket. 38% NET RETURN over the 3 years. In comparison, let’s say I invested it: Don’t forget, I have to pay capital gains tax! I would have to make $24,769 in capital gains (in the 3 years) to pocket the same $16,100. Which would you choose? 1. Guaranteed $16,100 cash over 3 years. RISKLESS 2. Trying to make $24,769 using $42,000 in 3 years in the stock market. The only 2 things you have to be wary of is 1. holding onto your job and 2. property values. If your job is good and you plan to stay put for at least 4-5 years, the route I went is pretty much bullet-proof.
Lots to consider here, just to touch on a few things… Expecting holding period is essential to this analysis. For starters typically you will have to pay fees up front. The shorter the hold the higher the effective rate of your mortgage due to these fees. A previous poster stated that you would have to deduct rent expense from an index return when making the comparison. I would argue you have to deduct the difference between the interest expense on the mortgage and rent expense when making the comparison which will obviously be much less in earlier years (again why the holding period is important). Let’s not forget property taxes, homeoweners insurance, maintanence, condo fees if you live in a condo, snow removal, trash removal, landscaping, etc. All of these things have a large impact on the results of a rent vs. buy analysis.
“Also keep in mind, nearly 60% of all US millionaires were built on real estate.” ^^ assuming this figure is accurate, it is scary and tells you something about the long-term expected performance from real estate. for example, what happens when we start working 4 day work weeks and 3/4 of those days are from home? i could live in dearborn michigan and hold a job in toronto if i wanted because i’d only have to travel once a week. plus travel would be cheap because i only do it once a week. getting rich off of real estate is a thing of the past. when buying and renting homes becomes something that every nitwit with a gr. 6 education starts to do, its destined to fail and lose to new technology… like the internet. and i would expect this to happen within our lifetimes… basically when Gen Y-ers become management.
MattLikesAnalysis Wrote: ------------------------------------------------------- > “Also keep in mind, nearly 60% of all US > millionaires were built on real estate.” > > ^^ assuming this figure is accurate, it is scary > and tells you something about the long-term > expected performance from real estate. > > for example, what happens when we start working 4 > day work weeks and 3/4 of those days are from > home? i could live in dearborn michigan and hold a > job in toronto if i wanted because i’d only have > to travel once a week. plus travel would be cheap > because i only do it once a week. getting rich off > of real estate is a thing of the past. when buying > and renting homes becomes something that every > nitwit with a gr. 6 education starts to do, its > destined to fail and lose to new technology… > like the internet. > > and i would expect this to happen within our > lifetimes… basically when Gen Y-ers become > management. While you do make a good point about technology and yes it is always getting better. There are some things that will never change, and there are arguments fighting your logic that you can’t win. Population. The chart for population is still very much exponential growth even today. You can’t grow land. Now imagine in 30 years… Location. Let’s say in the future telecommunication becomes ridiculously good, and you can work from home. Would you want to live in a deserted place because it’s cheap? Or in a nice city or town where access to everything is easy? Two people, 1 buys, 1 rents. After 20-30 years, person 1 owns a house. Person 2 just has another rent check to pay. There are huge tax incentives to own as well
If you are staying in one area for 20 years, OF COURSE IT MAKES SENSE TO BUY. Just not your whole damn paycheck.
iteracom Wrote: ------------------------------------------------------- > DanLieb Wrote: > -------------------------------------------------- > ----- > > > > The house you live in is NOT AN INVESTMENT. > > PERIOD. > > The house(s) you rent out IS AN INVESTMENT. > > > I like this way of thinking. Also keep in mind, > nearly 60% of all US millionaires were built on > real estate. Here’s my situation, and why I bought > my condo last year April 2009. > Where did you read that 60% of millionaires were built on real estate? This sounds bogus to me.
^^^ It’s a bad statistic, like those on every page of the millionaire mind.