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Buying a home is usually a bad investment
2022 Jun 17, 1:16pm 3,394 views 35 comments
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1
HeadSet
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2022 Jun 17, 1:32pm
HeadSet
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2022 Jun 17, 1:32pm
ad says
Of course a certified financial planner would say that. The more money you have in the house, the less you have to buy the planner's products.
a certified financial planner and president of wealth management firm Creative Planning.
Of course a certified financial planner would say that. The more money you have in the house, the less you have to buy the planner's products.
2
clambo
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2022 Jun 17, 1:42pm
I concur, a house has good attributes but as an investment it’s less than ideal.
But, the concept of borrowed money to own an increasingly valuable house sounds good.
I think you are able to invest $1000 or so per month in stock mutual funds then anything else you can swing financially isn’t too bad.
I did a calculation on our summer house in Martha’s Vineyard built in 1964; if you had invested the cost and added the property taxes you would have over $18 million today. Actually probably much more since I don’t know how fast they raised the property tax since the 80’s when it was sold.
Of course you could have rented it out to recover the taxes, but then you are not enjoying it.
You also owe taxes on the rental income.
I lived in Santa Cruz California since 1982 and I bought mutual funds while my friends bought houses; they struggled and two had to pay off wives to get the house in the divorce.
I forgot: you can reverse mortgage it later on.
But, the concept of borrowed money to own an increasingly valuable house sounds good.
I think you are able to invest $1000 or so per month in stock mutual funds then anything else you can swing financially isn’t too bad.
I did a calculation on our summer house in Martha’s Vineyard built in 1964; if you had invested the cost and added the property taxes you would have over $18 million today. Actually probably much more since I don’t know how fast they raised the property tax since the 80’s when it was sold.
Of course you could have rented it out to recover the taxes, but then you are not enjoying it.
You also owe taxes on the rental income.
I lived in Santa Cruz California since 1982 and I bought mutual funds while my friends bought houses; they struggled and two had to pay off wives to get the house in the divorce.
I forgot: you can reverse mortgage it later on.
3
porkchopXpress
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2022 Jun 17, 2:21pm
porkchopXpress
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2022 Jun 17, 2:21pm
I used to believe this more but now not as much. I've rented my entire adult life with my wife and kids, and we're about to close on a house in TN. From my own personal experience as a long-time renter, here are the reasons that owning makes sense for us:
- Renting makes you feel very insecure. We have been kicked out of three rentals because the owners wanted to move back in or sell. This kind of event is very disruptive and stressful on a family, and it makes the children feel unsettled as well.
- In a rental you can't (or even want) to make any substantive changes, so you're stuck with their shitty appliances, carpet, etc.
- Getting a landlord to fix stuff can be a pain in the ass. I had a situation where it was blistering hot and our AC had a refrigerant leak, so the air wasn't very cold. The landlord kept telling us it was working fine but we knew it wasn't. It took so much pestering to get him to fix it because he is so damn cheap.
- I HATE feeling like a child who is submissive to a landlord. I'm a grown man making more than these landlords, but renting from them makes you feel beneath them.
- The annual dread of a rental increase arriving in the mail sucks ass. Every year, I get royally pissed because my rent goes up more than I want or expect, and I'm completely helpless unless I uproot my entire family and scramble to find a new place.
- Now regarding my buying situation, my new house payment (all in with everything) will be ~$5,000/month in TN. To rent a similar place in the same high school or area would be $4,500-$5,000/month. Now consider the tax deduction will save me about $1,000/month, but I assume that will be applied for maintenance. But, consider that ~$1,200 of my monthly house payment (for the 1st year) will be applied toward principal/equity in my house, whereas I lose ALL of the rent I pay....no equity. If you do the math, that means I'm paying tax deductible rent to the bank of $3,800/month vs rent of $4,500 or $5,000 per month.
- To stay in my MUCH shittier CA rental, my rent would've been $4,200 (up from $3,650 currently). State income taxes in CA would be at least $2,300 per month based on my base salary alone, so that's the equivalent of a $6,500 ($4,200 + $2,300) rental or house payment in TN without state income taxes.
So, these were my options. I know I'll be spending a buttload to upgrade my new house and make it the way I want, and also repair it. But, the security of owning a home, never being kicked out, doing what I want with it, etc., it seems way too worth it for me without even counting any long-term value appreciation ESPECIALLY if you buy within your means so you have the cash to upgrade/fix stuff.
My two cents.
- Renting makes you feel very insecure. We have been kicked out of three rentals because the owners wanted to move back in or sell. This kind of event is very disruptive and stressful on a family, and it makes the children feel unsettled as well.
- In a rental you can't (or even want) to make any substantive changes, so you're stuck with their shitty appliances, carpet, etc.
- Getting a landlord to fix stuff can be a pain in the ass. I had a situation where it was blistering hot and our AC had a refrigerant leak, so the air wasn't very cold. The landlord kept telling us it was working fine but we knew it wasn't. It took so much pestering to get him to fix it because he is so damn cheap.
- I HATE feeling like a child who is submissive to a landlord. I'm a grown man making more than these landlords, but renting from them makes you feel beneath them.
- The annual dread of a rental increase arriving in the mail sucks ass. Every year, I get royally pissed because my rent goes up more than I want or expect, and I'm completely helpless unless I uproot my entire family and scramble to find a new place.
- Now regarding my buying situation, my new house payment (all in with everything) will be ~$5,000/month in TN. To rent a similar place in the same high school or area would be $4,500-$5,000/month. Now consider the tax deduction will save me about $1,000/month, but I assume that will be applied for maintenance. But, consider that ~$1,200 of my monthly house payment (for the 1st year) will be applied toward principal/equity in my house, whereas I lose ALL of the rent I pay....no equity. If you do the math, that means I'm paying tax deductible rent to the bank of $3,800/month vs rent of $4,500 or $5,000 per month.
- To stay in my MUCH shittier CA rental, my rent would've been $4,200 (up from $3,650 currently). State income taxes in CA would be at least $2,300 per month based on my base salary alone, so that's the equivalent of a $6,500 ($4,200 + $2,300) rental or house payment in TN without state income taxes.
So, these were my options. I know I'll be spending a buttload to upgrade my new house and make it the way I want, and also repair it. But, the security of owning a home, never being kicked out, doing what I want with it, etc., it seems way too worth it for me without even counting any long-term value appreciation ESPECIALLY if you buy within your means so you have the cash to upgrade/fix stuff.
My two cents.
4
1337irr
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2022 Jun 17, 2:22pm
1337irr
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2022 Jun 17, 2:22pm
porkchopexpress says
Leverage is also good from owning a house...very underestimated part of homeownership if done correctly. Most people don't get leverage.
I used to believe this more but now not as much. I've rented my entire adult life with my wife and kids, and we're about to close on a house in TN. From my own personal experience as a long-time renter, here are the reasons that owning makes sense for us:
- Renting makes you feel very insecure. We have been kicked out of three rentals because the owners wanted to move back in or sell. This kind of event is very disruptive and stressful on a family, and it makes the children feel unsettled as well.
- In a rental you can't (or even want) to make any substantive changes, so you're stuck with their shitty appliances, carpet, etc.
- Getting a landlord to fix stuff can be a pain in the ass. I had a situation where it was blistering hot and our AC had a refrigerant leak, so the air wasn't very cold. The landlord kept telling us it was working fine but we knew it wasn't. It took so much pestering to get him to fix it because it was expensive.
- I HATE feeling like ...
Leverage is also good from owning a house...very underestimated part of homeownership if done correctly. Most people don't get leverage.
6
Patrick
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2022 Jun 17, 2:33pm
Patrick
@
2022 Jun 17, 2:33pm
ad says
I met up with Ramit once in San Francisco. I'm on the same page as him with respect to stocks vs houses. Even now, with the market down.
You have to make some guesses about the future and do the calculations with your guesses. It might make sense to buy, depending on the details.
I don't like the NY Times anymore, but their rent-vs-buy calculator is still very good:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Ramit Sethi, self-made millionaire and author of “I Will Teach You to be Rich,” has made the same argument. Think about it this way, Sethi suggests: “Generally we can assume that over the long term, if we invest in a low-cost diversified index fund, we get about 7%” in terms of annualized returns.
I met up with Ramit once in San Francisco. I'm on the same page as him with respect to stocks vs houses. Even now, with the market down.
You have to make some guesses about the future and do the calculations with your guesses. It might make sense to buy, depending on the details.
I don't like the NY Times anymore, but their rent-vs-buy calculator is still very good:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Comments 1 - 6 of 35 Next » Last » Search these comments
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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.”
Young homeowners in particular have figured that out the hard way: Underestimating the hidden costs is the No. 1 reason millennials who do own homes have regrets.
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.
Ramit Sethi, self-made millionaire and author of “I Will Teach You to be Rich,” has made the same argument. Think about it this way, Sethi suggests: “Generally we can assume that over the long term, if we invest in a low-cost diversified index fund, we get about 7%” in terms of annualized returns. “Can you beat that in your area, over time, with real estate appreciation?”