3
0

Wealth manager: Buying a home is 'usually a terrible investment'—here's why


 invite response                
2019 Apr 20, 2:54pm   3,001 views  36 comments

by Patrick   ➕follow (55)   💰tip   ignore  

https://www.cnbc.com/2019/04/18/wealth-manager-buying-a-home-is-usually-a-terrible-investment.html

A lot of people will tell you that buying a home is a good investment, but "that couldn't be further from the truth," says Peter Mallouk, a certified financial planner and president of wealth management firm Creative Planning.

"In reality, it's usually a terrible investment," he says. That's because, at the end of the day, owning a home takes money out of your pocket: "You're paying property taxes, you're paying maintenance, you're paying insurance. There are all of these other things that happen with your home that you've got to pay for." ...

Over time, your home might increase in value, Mallouk says, but it probably won't appreciate enough to offset all of the costs. Instead, if you took what you'd save from not buying a house and invested it in something that's likely to grow in value, such as stocks and bonds, chances are you'd end up with more money in the long term.

Say you live in Brooklyn, New York, and pay $2,500 a month to rent. If you buy your own place, you might pay $5,000 a month between your mortgage, taxes and other maintenance costs, Mallouk gives as an example. (Other financial experts estimate that, thanks to home ownership costs, buying could cost you about 40% more than renting.)

"If you take the difference and you save it, that extra $2,500 you're saving in a diversified portfolio is almost certainly, over a long period of time, going to grow to be worth more than what your home equity would have been worth if you had just put the money into a home," he says.

Comments 1 - 36 of 36        Search these comments

1   BayArea   2019 Apr 20, 3:14pm  

Although parts of this are true, it’s largely disingenuous.

#1.) When you invest $100k in the stock market, and the market goes up 20%, you make $20k (minus taxes on gains)

When you invest $100k downpayment (20%) into a house, and housing goes up 20%, you make $100k in equity (minus taxes on gains above $250k as a single person or $500k for married).

There in lies the power of housing as an investment.

#2.) Most of us are in CA. In this state, property tax assessments are protected by prop13.

For most people, housing is the best investment they will ever make because it takes far more know how and far more discipline to make it any other way.
2   porkchopXpress   2019 Apr 20, 6:30pm  

BayArea says
For most people, housing is the best investment they will ever make because it takes far more know how and far more discipline to make it any other way.
Only if you buy low. Your discipline comment doesn't apply to us who have it a la most regulars on Pat.net
3   Booger   2019 Apr 20, 7:57pm  

BayArea says
When you invest $100k downpayment (20%) into a house, and housing goes up 20%, you make $100k in equity


Not a fair comparison!
A fair comparison would have you buying the stock on margin!
4   SunnyvaleCA   2019 Apr 20, 8:09pm  

The money wasted on rent verses the money wasted on the house is difficult to compare. In my area, rents are "only" about $4k/month for a $2M house. I think you would be insane to buy a house right now and be on the hook for more than $10k/month, $6k of which is taxes, maintenance, and interest.
5   Reality   2019 Apr 20, 8:27pm  

Well, if the rent is $2500/mo, and the 30yr mortgage PITI payment is $5000/mo, then it of course makes sense to rent unless massive inflation is coming.

BTW, these two numbers indicate that the landlords are in effect subsidizing the tenants by digging into their hoped-for future capital gains and giving some of that money to the tenant. The Principle portion of a 30yr mortgage in the first couple decades is far less than 50% of PITI total, less than 20% at the beginning, so the landlord is literally losing thousands of dollars every month on accounting (unrealized capital gain is not an income).
6   clambo   2019 Apr 20, 10:27pm  

The reasons a house seems like a good investment are: 1. you have leverage; the value of the house may increase a large % in proportion to your actual cash down payment 2. you are likely to pay your mortgage while investing may seem optional 3. some tax breaks may seem good 4. in a dire situation you can seek a roommate and collect rent to pay your costs.

But, in many cases the money you would have after a few decades of investing for capital appreciation may exceed the value of your house or condo.

Further, the problem of getting your capital out of the house to spend during your retirement may be complicated. You have to reverse mortgage it to get your money back so you can actually spend your equity.

While trying to convince my younger friends to follow my example and invest for their future I calculated $500 per month invested for capital appreciation (stock mutual fund) will become $1 million (assume 8.5% return)

Of course, people will argue; a. 8.5% is an optimistic assumption b. $1 million in 33 years isn't worth so much.

By the way; 1/2 the people buying expensive houses in San Francisco and Santa Cruz are using stock gains from their high tech employers in the first place.
7   BayArea   2019 Apr 20, 10:28pm  

SunnyvaleCA says
The money wasted on rent verses the money wasted on the house is difficult to compare. In my area, rents are "only" about $4k/month for a $2M house. I think you would be insane to buy a house right now and be on the hook for more than $10k/month, $6k of which is taxes, maintenance, and interest.


No, $2M houses are not renting for $4k/mo in Sunnyvale. That’s a gross exaggeration.
8   BayArea   2019 Apr 21, 12:06am  

Booger says
BayArea says
When you invest $100k downpayment (20%) into a house, and housing goes up 20%, you make $100k in equity


Not a fair comparison!
A fair comparison would have you buying the stock on margin!


Take your typical brokerage account... You cannot buy on enough margin to equate a 20% DP on a house.
9   Booger   2019 Apr 21, 7:01am  

BayArea says
Take your typical brokerage account... You cannot buy on enough margin to equate a 20% DP on a house.


Then you should be comparing paying cash for a house vs owning stock outright.
10   B.A.C.A.H.   2019 Apr 21, 9:19am  

There's other stuff to "invest" for besides building asset-value wealth.

There's intangible value, some ®ealtors might even say tangible value, in paying a bit of the ownership premium to "buy" some degree of control over your living situation and your own personal "rent control", and also some stability in your kids' lives if you have kids.
11   BayArea   2019 Apr 21, 9:19am  

Booger says
BayArea says
Take your typical brokerage account... You cannot buy on enough margin to equate a 20% DP on a house.


Then you should be comparing paying cash for a house vs owning stock outright.


I can buy a house with 20% down and enjoy equity gain on the full appreciation of the house that I don’t own 80% of.

I can’t buy stocks with 20% down.

You’re asking me to do an apples to apples comparison between two things when one of them provides a massive investment upside over the other. I can’t ignore that.
12   Tenpoundbass   2019 Apr 21, 9:23am  

I bought in 2010 at $160K the last 4 years have been doubling up my mortgage payment. At this rate it will be paid off in July of next year. Just in time for after the Primaries and the General election race begins.
Zillow says my house is worth $350K now.
I have avoided paying well over $100K in interest.

Before I started paying off the mortgage like this, about 85% my monthly Mortgage payment was being consumed by Interest.
Now it's down to less than 10%. I owe about $48K and at this point even I started just paying the regular schedule. I only owe them about $4800 in interest.
But I'll end up paying a lot less as I keep knocking it down. They'll probably only end up getting another $2100 out of me if that.
13   clambo   2019 Apr 21, 12:25pm  

I don't have a link, but there was an article in the Dailymail and someone did a comparison of buying a house in Sydney Australia vs. investing in financial products.

I think it was over 60% of the cases the investors "won".

The problem with having your net worth tied up in a house is; how do you eventually spend it? You must either 1. sell and rent someplace else 2. sell and buy someplace else. 3. reverse mortgage 4. let your kids move in and they can pay you some $$ and in return you bequeath them the house.
14   HeadSet   2019 Apr 21, 2:28pm  

Wealth manager: Buying a home is 'usually a terrible investment'

A home as a main residence is not an investment at all, good or bad. A home, like a car, is a necessary expense. And just like with a car, you decide between "purchasing" and "leasing" based on needs and cost. The idea is to get the most for your money.
15   Booger   2019 Apr 21, 2:34pm  

BayArea says
I can’t buy stocks with 20% down.

You’re asking me to do an apples to apples comparison between two things when one of them provides a massive investment upside over the other. I can’t ignore that.


I will have to research if there are any highly leveraged ETF's that one could invest in.
16   HeadSet   2019 Apr 21, 3:03pm  

Booger says
BayArea says
I can’t buy stocks with 20% down.

You’re asking me to do an apples to apples comparison between two things when one of them provides a massive investment upside over the other. I can’t ignore that.


I will have to research if there are any highly leveraged ETF's that one could invest in.



You mean one cannot use the stocks as collateral. One can still take out a loan to buy stocks, just like one can take out a loan to buy a house. Want "leveraged" ETFs? Get a cash advance on the credit cards or take out an Credit Union loan to buy all you like.
17   Dholliday126   2019 Apr 21, 3:05pm  

Yeah it's a horrible idea, the 500K in equity I've made in the last 5 years sucks.....
18   BayArea   2019 Apr 21, 3:06pm  

Dholliday126 says
Yeah it's a horrible idea, the 500K in equity I've made in the last 5 years sucks.....


Oh really? Why not buy another today and do it again!
19   SunnyvaleCA   2019 Apr 21, 3:14pm  

BayArea says
No, $2M houses are not renting for $4k/mo in Sunnyvale. That’s a gross exaggeration.

In certain areas, I assure you that it is true. I have seen actual purchase transaction prices in my area and I've asked neighbors (who just moved in 1 year ago) what they pay for rent.

Here's one with zestimate of $1.9MM and rent zestimate of $4150. You'll note from the Zillow price estimate history that it was $2.1MM a year ago; at that time the rent zestimate wasn't any different than now. You can search around 94087 zip and find examples that are even more far out.
https://www.zillow.com/homes/for_sale/Sunnyvale-CA-94087/house_type/19615019_zpid/97549_rid/700000-_price/2805-_mp/37.398119,-121.945668,37.308467,-122.115441_rect/12_zm/1_rs/
20   RWSGFY   2019 Apr 21, 3:15pm  

Dholliday126 says
Yeah it's a horrible idea, the 500K in equity I've made in the last 5 years sucks.....


"Made" how? Sold and pocketed or just staring at paper gains on Zillow?
21   RWSGFY   2019 Apr 21, 3:27pm  

SunnyvaleCA says
Here's one with zestimate of $1.9MM and rent zestimate of $4150.


This pays for about half of PITI. Clearly subsidized by the landlord.
22   Dholliday126   2019 Apr 21, 3:46pm  

Yes paper, yes can disappear tomorrow, it still shows how everything is relative.
23   MrMagic   2019 Apr 21, 7:16pm  

Patrick says
"In reality, it's usually a terrible investment," he says. That's because, at the end of the day, owning a home takes money out of your pocket: "You're paying property taxes, you're paying maintenance, you're paying insurance. There are all of these other things that happen with your home that you've got to pay for." ...


Firstly, a home should NEVER be bought as a investment. It's shelter to be lived in for the family. Anyone who thinks they are buying a house as an investment and not a place to live in, needs some education.

Also, all those "costs" as listed are paid by renters too. Landlords have bills to pay, and their tenants pay all those for them. For the author to be dishonest and make it sound like only homeowners pay those costs, just shows his bias.

Patrick says
Say you live in Brooklyn, New York, and pay $2,500 a month to rent. If you buy your own place, you might pay $5,000 a month between your mortgage, taxes and other maintenance costs, Mallouk gives as an example.


Another crappy example to show bias. Finding a landlord that will eat $2,500 a month and not covering his carry costs, is rarer than hen's teeth. A landlord, in most cases will cover his costs to own the place, or he'll dump it. Very few landlords are in business to lose money every month.

SunnyvaleCA says
The money wasted on rent verses the money wasted on the house is difficult to compare.


Not really. Pay rent for 5 years, what do you have to show for it? Nothing but pissed away money. Pay a mortgage for 5 years, you built up some equity, which is a forced savings account (and hopefully some value appreciation too). Plus, you might have been able to use the MID and property tax deductions, which saved you some money on taxes too. And lastly, it's a lot harder to be thrown out of your house when you own it versus rent it, so what's that stability to your family worth?

clambo says
Further, the problem of getting your capital out of the house to spend during your retirement may be complicated.


And that's why I still carry a mortgage. As long as I can make more (or at least break even) on the interest keeping the money invested and liquid, I'm not paying off the mortgage. Considering like half the payment (principal portion) is just moving money from one pocket to the other, not having my money tied up in the house, which is difficult to get out if needed, makes more sense. .
24   WookieMan   2019 Apr 22, 1:05am  

MrMagic says
Firstly, a home should NEVER be bought as a investment.


Look at this, MrMagic (and various different name over the years) and I 100% agree on something. Not being sarcastic either. Probably only needed to type what I quoted, but the other points are good too (look, I still found a way to criticize).

I get the lure to compare owning versus renting, but the variables between both situations can never be apples to apples. Honestly, live for the cheapest amount possible and that's all that really matters. Ultimately a high percentage of people whether they rent or own are always going to need more than what they actually do and end up broke at the end of their lifetime. What's the difference if it was with their own mortgage or the landlords?
25   SunnyvaleCA   2019 Apr 22, 1:48am  

MrMagic says

Patrick says
Say you live in Brooklyn, New York, and pay $2,500 a month to rent. If you buy your own place, you might pay $5,000 a month between your mortgage, taxes and other maintenance costs, Mallouk gives as an example.


Another crappy example to show bias. Finding a landlord that will eat $2,500 a month and not covering his carry costs, is rarer than hen's teeth. A landlord, in most cases will cover his costs to own the place, or he'll dump it. Very few landlords are in business to lose money every month.

The landlord might own the place outright, so carry costs are fairly low. I'll grant that the landlord might do better by selling and investing elsewhere, but perhaps the landlord prefers the steady income stream and doesn't want to sell and lose an enormous amount on taxes.

Here in silicon valley, if someone bought a shack 30 years ago, selling will result in $400k capital gains tax bill. Plus, the landlord pays almost nothing for property tax (because of Prop 13) whereas a potential buyer needs to remember a $25k/year tax payment.

Come on out to Silicon Valley. There are houses that cost $2MM and rent for barely $4k/month. Admittedly, those figures were from a year ago and the difference has shrunk a little. But still, a new buyer of a $2MM house is looking at $10k/month PITI. You can rent $2MM houses very easily for $5k/month or less.
26   WookieMan   2019 Apr 22, 2:13am  

SunnyvaleCA says
Come on out to Silicon Valley. There are houses that cost $2MM and rent for barely $4k/month. Admittedly, those figures were from a year ago and the difference has shrunk a little. But still, a new buyer of a $2MM house is looking at $10k/month PITI. You can rent $2MM houses very easily for $5k/month or less.


You'd rent then for sure. Or move to IL, have $1k PITI in my house, quarter mil in income and live like a king. But $30-$80k/yr for weather is important. Sarcasm off.

Ultimately this topic is annoying. The ONLY way to compare the two is to have two neighboring homes. One person rents, the other owns for 30 years. Both of them have the same income and work for the same employer. They then both have the same repairs and maintenance costs. Taxes are the same. Insurance the same (some of these items would be on the landlord of course). They have the same car and/or car payments. Same investments, but could be different amounts in the renters case. The owner can't refi and cash out anything. Same utility costs. They both have to continue living, cannot die or this test goes out the window. Same number of kids. Same everything, y'all get it. There's fucking a couple dozen variables that have to be similar to even start the discussion between the two.

Love data, but owning and renting will NEVER realistically comparable in an honest statistical sense. I've lost a lot of money owning a primary residence and I currently sit with six figures of paper equity investing none of my own dollars in my current primary residence (in rural IL). I've rented and at that time it paid off well to not be tied to a mortgage and ownership. Just do what's going to keep the most money in your pocket at the end of the day.
27   Al_Sharpton_for_President   2019 Apr 22, 4:02am  

Nominal prices rise considerably over the very long term.

28   MrMagic   2019 Apr 22, 8:24am  

WookieMan says
Love data, but owning and renting will NEVER realistically comparable in an honest statistical sense. I've lost a lot of money owning a primary residence and I currently sit with six figures of paper equity investing none of my own dollars in my current primary residence (in rural IL). I've rented and at that time it paid off well to not be tied to a mortgage and ownership. Just do what's going to keep the most money in your pocket at the end of the day.


Wow, you're making sense for a change. Congratulations!..
29   MrMagic   2019 Apr 22, 8:31am  

Tim Aurora says
MrMagic says

Not really. Pay rent for 5 years, what do you have to show for it? Nothing but pissed away money.


Once again, it is the numbers game. If the rent is much less than the mortgage, then you have the savings ( or better still if you invested it) to show for it.


It would have to be a LOT less to make it worthwhile. In most areas, rent payment or mortgage payment are usually pretty similar.

Remember, a chunk of your mortgage payment is going to equity, where NONE of the rent pay is. My mortgage payment is split almost 50 - 50, so I'm paying myself back with half that payment. If I was renting, it would be like setting fire to that money each month...

SunnyvaleCA says
Come on out to Silicon Valley. There are houses that cost $2MM and rent for barely $4k/month. Admittedly, those figures were from a year ago and the difference has shrunk a little. But still, a new buyer of a $2MM house is looking at $10k/month PITI. You can rent $2MM houses very easily for $5k/month or less.


The rest of the country (like 98%) isn't Silicon Valley. Come out and visit where the smart people live. Your bank account will appreciate it! That $2MM house in many other parts of the country would be a $400 - $500K house, with a $2K mortgage payment.
30   NuttBoxer   2019 Apr 22, 10:23am  

BayArea says
For most people, housing is the best investment they will ever make because it takes far more know how and far more discipline to make it any other way.


I'm sure a lot of homebuyers here could tell you about knowledge they wished they had before buying. Also, as all assets mentioned are valued in dollars, the same overall risk is inherent in both.
31   SunnyvaleCA   2019 Apr 22, 1:50pm  

MrMagic says
The rest of the country (like 98%) isn't Silicon Valley. Come out and visit where the smart people live. Your bank account will appreciate it! That $2MM house in many other parts of the country would be a $400 - $500K house, with a $2K mortgage payment.

Wrong! The term is "shack" not house. :-)

Believe me, I surf the Zillow and Trulia sites from time to time. My house would be under $150k in most of the rest of the country. Actually, my house would have a negative value equal to however much it would cost to bring in a bulldozer and mitigate the lead paint and asbestos cleanup. An empty lot would be more valuable.

Then again, I was lucky to buy at a pretty good time — early 2000s. I never went below purchase price in the housing downturn and am now nearly 3x purchase price. Before I paid it off, I looked at the house as a highly leveraged and thus highly risky gamble. Now, I can't really believe there are any more gains to be had. Time to retire, sell, and flee the state.
32   clambo   2019 Apr 22, 2:29pm  

Herewith another bit of grist for the mill on the subject.

Whether a house/condo is a good investment or not would largely depend on 1. location of the house/condo 2. how you pay for it in the first place.

Does anyone really believe that you would have made a good investment if you bought a typical house in the Bay Area paying cash out of your pocket right now?

I don't believe that. The reason is that in a place like Santa Cruz the median property is too expensive compared to the median wage. The people who rent use their wages to pay the rent. Median household annual wage in Santa Cruz (reports vary) let's say $77,000. Gross /12=$6417 per month gross income. After taxes thats going to be about $4400/month take home income. Let's say the "household" spent up to 50% of their take home income=$2200 per month rent is what they can "afford". This is higher than the recommended 25% of take home pay of course, but "Santa Cruz is so beautiful it's worth it!" etc. The rent paid by the median household in Santa Cruz would be $26,400 per year.

The median home in Santa Cruz is $910,000.

So, let's assume you don't want to collect chump change for your place that you just paid $910,000 for in cash. What's a good amount? 9% or 10% ?

How can the workers in Santa Cruz pay you $90,000 per year in rents?

Buying a home in an expensive area with your own money sounds like a bad idea to me. Paying for it over decades with borrowed money may be what everyone commenting is assuming.
33   B.A.C.A.H.   2019 Apr 22, 3:24pm  

clambo says
Whether a house/condo is a good investment or not would largely depend on 1. location of the house/condo 2. how you pay for it in the first place.


If it provided stability and a good environment to raise your kids without stressing out everyone from over-paying / over-borrowing / over-commuting, it would be a good investment. Even if by your figure of merit it's not a good investment.
34   SunnyvaleCA   2019 Apr 22, 9:24pm  

clambo says
Whether a house/condo is a good investment or not would largely depend on ... how you pay for it in the first place.

Not to be too pedantic, but how you pay for a house (outright verses with mortgage) determines your leverage and so determines the magnitude of your investment goodness or badness, not whether the investment is good or bad. The good or bad is determined mostly by appreciation (or lack thereof) and/or ownership costs relative to rental costs. If you have nice appreciation, it's a good investment regardless of how you pay; if you have depreciation, it's a bad investment regardless of how you pay (but mailing in your keys to the mortgage holder might be able to limit your downside on a bad investment).
35   clambo   2019 Apr 22, 11:41pm  

In the scenario of paying cash and not borrowing to buy the place, taking out $910,000 from my investments in stock mutual funds to buy a house that I cannot possibly rent out for $90,000 a year seems very silly.

Of course, to move the computer mouse and sell financial investments to put that $910,000 into a cash account I would owe huge taxes and end up with less in the first place.

Or, maybe I was just oddball enough to have $910,000 sitting in a money market checking account making zero interest. Maybe I found a suitcase of cash, like in "No country for old men."

I know of cases where it was a good investment to buy with cash; those happen at times like the fall of 2008.
36   Hircus   2019 Apr 23, 2:08pm  

1) Every time the "rent vs buy" topic comes up, I'm always amazed at how many people try to reason their position with overly simplistic math that usually only compares 1 or 2 factors (i.e., "my mortgage is X and your rent is Y, and X > Y so ha!"). Cmon, use the damn calculator and get realistic answers: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
2) My rule of thumb for discussions about financial calculations: if they don't consider opportunity cost, it's usually not sophisticated enough to get a realistic result.
3) Many landlords are not mathematically rational decision makers, and they don't charge a rent based on what it would cost someone else to offer the same house if they were to buy it at todays prices paying todays tax rates while considering what a good CAGR would be on their capital. Instead, these landlords happened to own the house somehow, such as an inheritance, and often have very low property tax, and this allows them to rent the house at a very low cost - a cost that another landlord could not duplicate if they had to buy the same home tomorrow. This situation is common, and greatly skews the price to rent ratios of certain regions, and the SF bay is one of these places. Yes, most of them should almost certainly sell the home and reinvest the money elsewhere and enjoy superior returns, but many don't. Some have valid reasons that may not be apparent (sentimentality, wanting to help their tenants, or maybe they're about to die and want to let their heirs enjoy the step up in tax basis that occurs at death - avoiding tax on 1 million of capital gains, etc...), but I think most just don't know better.

Please register to comment:

api   best comments   contact   latest images   memes   one year ago   random   suggestions