patrick.net

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.

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

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!

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.

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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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!

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/

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?

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.

Yes paper, yes can disappear tomorrow, it still shows how everything is relative.

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. .

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?