Firstly: Anecdote is not data. Likewise, someone really did win the lottery and the guy who won it will tell you that you should get out there buying tickets. Nevertheless, buying a lottery ticket is a bad idea compared to almost everything else.
In terms of real estate, there are assuredly people out there who can see a building, in a particular location, at a certain price and discern that it’s wildly underpriced given X, Y, and Z. Maybe they know that the local government has certain plans, maybe they have been watching trends and can tell that the region is just about to have a giant in-swell of new residents, or whatever. They can make a buy and be guaranteed a healthy turnaround within a few years, consistently.
Likewise, any random person can look at the housing market at average and see whether it’s in a boom or bust cycle, think about their timeline, and make a decision for whether they’re probably going to be able to achieve something like “buy low, sell high” and - unless they’re living in West Virginia or somewhere like that - probably be right.
Real estate isn’t just playing the lottery but unless you’re one of the previous people, who made a reasoned and evidence-based good decision, you’re just someone who did get a lucky result.
There’s nothing wrong with getting lucky, but it’s not a basis for giving advice.
Secondly: If you invested in QQQ ten years ago, you would have had a 6.8x return, not a 3x return.
I’m not giving advice, I’m recounting lived experience. Additionally, I will say that “luck” entered into it only to the extent that I didn’t expect the overall real estate market to take off as dramatically as it did, nor did I expect this particular neighbourhood to become as hot as it did (although there were objective reasons I thought it was a solid value). But my experience with real estate as a wise investment has been consistent my entire life, and for that matter, that of my parents before me. It wasn’t “luck” that made me ignore all the “expert” advice after I sold my previous place that renting was financially the best option, it was my lived experience that told me to ignore it and remain invested in the real estate market.
It doesn’t look quite that dramatic to me just eyeballing the chart, but I’ll take your word for it, and will make the following remarks:
How about the prior ten-year period, from about 1999 to around 2009-2010? Answer: it was flat, generating basically a negative inflation-adjusted return, and it included many points at which, if sold, you would have taken a significant loss. Meanwhile, my real estate experience in the prior ten years still generated very significant appreciation – not a tripling in ten years like this one, but approximately doubling.
What performance would I have got from this fund if I was constantly withdrawing from it to pay my rent? You can live in a house. You can’t live in an ETF.
Look, I’m not arguing against the general wisdom of index funds as an investment. I would prefer something indexed to the S&P 500 rather than NASDAQ, but I’m conservative that way. My argument is with the assertion that the real return on real estate is “somewhere between zero and negative”. My net worth says otherwise, and it didn’t come from the stock market.
Not true - the money I have in the savings account allows me to cover things like auto repairs without needing to pay interest to someone else, and likewise cover unexpected expenses.
That said, after I accumulated what I consider a sufficient emergency fund I put the rest into an investment fund. After a few more years (barring a zombie apocalypse) I’ll have sufficient money for a substantial down payment on real estate if I choose to go that way. Or maybe I’ll do something else with the money.
Of course you need some cash on hand (in a bank-like place). But I need very little. Don’t own a car, am insured for most of what can go wrong, If I had more than $4000 in a bank I would feel it was wasted money that could be earning me 10+% pa in the stonkmarket (accrual in value plus dividends). If I need a big chunk of cash for something I can sell shares and have the cash in 3 working days. If I need it sooner than that I can get a free loan from friends/family who know I’m good for it.
All cash in a bank isn’t a great idea, for me. Maybe it works for you.
Ah. I carry minimal vehicle insurance so I probably keep a bit more in the bank for that as a form of self-insurance. My coverage is only for liability, not repairs, so I have to keep a reserve for that. Given that my vehicles are both over 20 years old insurance companies would total them if you sneezed on one. It’s how I do it, there are arguments for doing otherwise. If you don’t own a car you simply don’t have to worry about it. Obviously, everyone’s situation will differ.
Oh, I get it - my bank threshold is a bit higher, for my own reasons, but it’s currently $8000 as the target, anything above that I’m investing at present. The time/money I spent with an actual professional financial advisor this year I felt was well spent and I feel a lot better about my future old age.
Ah, you see, I have very, very little family left, I’ve already outlived most of them so I can’t rely on that for help as you can. I’m also financially better off than the vast majority of my friends. They ask me for loans. Thus, I keep a bit more in reserve. As I said, individual situations vary.
Also as I said, I don’t keep all my money in a savings account, I do have investments. How much to keep in cash is going to vary by person.
We all make tradeoffs based on cost and perceived value, which is different for each of us and depends also on advertising and marketing. My biggest optional expense is a paper copy of the NY Times every day. Yeah, I could get an online subscription for much less, but I’d have to get an iPad or something to read it on, do the puzzle online, and generally have a worse - for me - experience. I log in too much screen time anyway.
I buy name brand soda because I find store brand ones crap. But I do buy in bulk, and on sale.
The answers to these questions may not be obvious. Payday loans are always stupid, right? But they may not be if they keep someone from maxing out a credit card so they have flexibility to meet emergencies. So there may be good reasons for purchasing choices that seem bad.
Speaking as a landlord, I don’t recommend this for most people. It’s not something that you just put money into and get money out of. You need to deal with tenant issues, repairs and maintenance, and repainting and such whenever a unit turns over. You also need to find and screen tenants, and show potential tenants the apartment you want to rent to them. You can hire a management company to do all of this for you, but they tend to be miserable to your tenants (which increases turnover) and they take a big chunk of your income right off the top.
Being a landlord has worked out well for me, but I do most of the maintenance and repair work myself. I expect things like being called out on a weekend to fix a clogged drain or replacing all of the carpet in one unit after a tenant moved out. I have had to do a lot of painting and patching walls, and while I haven’t had to hang any drywall yet I am ready to do that if necessary. I recently had two units become available at the same time and had to do a bunch of work to both of them to get tenants into them on time, which meant a lot of weekend and evening work for that month. Again, I could hire a management company, but that really cuts into your income and I prefer to do the work myself.
You need to be able to handle extended periods where you aren’t collecting rent. Stuff happens, so if you can’t handle folks missing their rent on time and still make your mortgage, then you could end up in a real world of hurt.
If you are considering becoming a landlord, think of it as a business that you have to run, and a business that involves dealing with the public (your tenants). Don’t think of it as just an investment.
I have nothing to add about “buy a house or lose the money”, but one thing you might want have your parents consider is whether there are improvements they could make to their current home which would have good payback.
More efficient appliances (furnace/water heater/refrigerator)?
Better insulation?
Is there something that would reduce the house insurance, like wind-resistant shingles?
Are you in an area where rooftop solar makes sense?
(I’m sure that the community could think of many others.)
If they insist that inflation will be that severe, they might want to put some money in TIPS.
My own ‘windfall story’ basically paid off the mortgage, put aside about 10% of the remainder for fun/house improvement purchases and stuck the rest in a diversified portfolio that included a mix of shares and bonds.
Age, housing market, risk tolerance, family/business/health obligations, etc may all be very different and more important factors in your parents’ calculations, but I’d just echo those who caution against the house purchase route - it’s very much an ‘all eggs in one basket’ approach.
My ‘golden rule’ for investing is that whatever I decide to do with my money shouldn’t keep me awake at night or be needing constant attention.
In their 60s, they are close enough to retirement that they should very seriously be considering investment mix overall; as I understand it, the general advice is to gradually move (some) money from stocks into less volatile vehicles. Age-based mutual funds do this sort of thing.
What they may also want to do is use the windfall to max out their retirement savings, if they are not already doing so. The 401(k) limits for 2021 are 19,500 (plus 6,500 catchup, for a total of 26,000); it goes up by a thousand in 2022. If we had a cash windfall, we would absolutely use it to max those out - we’re likely close to your parents in age. When we had an inheritance some years back, we did just that - which is why I’m not as panicked about our upcoming retirement as I might otherwise be.
Another advantage of stashing the money in retirement accounts: those are largely protected from lawsuits, bankruptcy etc. Obviously nobody plans for that to be an issue, but it’s a valid concern.
As far as buying a house: what would they DO with that house? If it’s intended as a second home (e.g. a summer house or whatever), it’s not necessarily a BAD thing to buy, but I wouldn’t expect it to be a money-maker in the short term, plus you’ve got the taxes, maintenance etc. If it’s intended as rental property: look at the rental prices in the target area - plus, again, the maintenance hassle.
Ohhhh yeah. Ignoring rental returns versus borrowing costs, you also have the bookkeeping associated with maintenance costs (which can, I gather, be deducted) - and then the fact that you can (must?) depreciate the rental property… which then reduces your basis when you sell it. Buy a house for 100K, depreciate it 20K over a few years, and then sell it for 120K - your profit, for tax purposes, is not 20K but 40K.
Yup - in general (e.g. if your house has an insanely low rate, that one may not be top priority as you MIGHT do better investing elsewhere). Where are you going to get a guaranteed 5, 10, 20% return on your money - which is effectively what you’re getting if you get rid of debt at whatever rate.
As far as housing as an investment in general: We bought our townhouse (DC suburbs) for 180K back in the late 1980s. Until about 2000, we would have a hard time selling it for even that much. So, 12 years, with zero return on the investment beyond the tax savings. Then the market went insane and we did sell for a 50% profit. That entire profit was “earned” in the last year or so before we sold, that’s how nuts things were.
The house we bought then - during that same bubble - is worth more than we paid for it, as we luckily bought halfway through the bubble. But it hasn’t escalated that much, in nearly 20 years. We’d probably make about a 50% profit on it now. Since we’ve paid down a bit on the mortgage, we’d still have more cash on hand - moving to a cheaper area, or smaller place locally, would likely leave us better off in terms of housing expenses, but by no means a massive profit especially if you factor in the maintenance etc.
If you’re borrowing at a fixed rate, like a 30-year mortgage, then you’re a winner as inflation goes up. We often think of a 30-year mortgage as an inflation hedge
Wages are going up too which gives you more money to pay down debt. In the case of a mortgage, your monthly payment will be the same but your house will increase in value.
I think people really underestimate what they put into maintenence costs for a house. If you live in a house for long enough, you sorta forget about things. We’ve been here 20 years, and we’ve put at least 10k into plumbing, 10k in HVAC, probably $15k into replacing things like carpet, fences, etc. There was a $20k foundation repair. Had a couple big trees taken out. Appliances replaced. Exterior painted. Probably we’ve put $80k into maintenence into the house over the last 20 years, without upgrading anything. To put it on the market, we’d have to do updates: my kitchen and bathrooms are vintage 1960, and the yard is vintage neglect. So that’s what, another $100k? And We’ve paid another 80k in property taxes over 2 decades.
We bought the house for $130 k in 2003. Comps for updated ones in my area are like $330k. Sounds great, but I am not sure that after maintenence, taxes, and inflation that we have made any money at all. But we still have what we paid for: a house we like and a place to live.
Is inflation really that bad? There is a raging debate on this in the US. Every opinion you hear seems to line up 100% with what reality is demanded by the opinion-holder’s politics. (Don’t fight this, you know it’s true).
Is inflation going to increase, decrease, or stay stable?
If we take inflation as a given, what’s the right investment hedge?
I will stay away from questions about the intensity and duration of inflation. There is zero utility in discussing this because all positions are 100% poisoned by partisan politics (yes, you too).
So, that leaves us with the OP question… what’s the best hedge against the version of inflation you expect to happen? Cash and dollar-denominated debt obviously are bad investments right now. Housing has held its value very well, because the US has a housing shortage that nobody’s really addressing, so I don’t think housing is in a bubble.
I personally don’t think this inflation situation is, nor will become, a “spend it before it’s gone” hyperinflation scenario. So I don’t think it would be wise to jump into housing purely as an inflation play. But if they’re already in the market for a house, it’s a perfectly fine place to park some money and take on some strategic debt (depending on the local market).
Important note: if you’re counting on inflation gradually eroding a large debt, this is true, you only see an increase in your actual housing cost if your income tracks with inflation. And it would be very unwise to take on a variable-rate loan right now, not knowing which way things are going to go.
It really depends on the house. A friend of mine who bought a 60s era house about 15 years ago would certainly agree with you. He’s had lots of expensive pool work done, dealt with several leaky basement problems, done roof repairs, installed a new furnace and new A/C, and probably lots of other stuff. I had lesser but similar issues in my previous house.
OTOH, the current house was almost brand new when I bought it, and is currently about ten years old. Aside from exterior gardening and snowplowing, I have literally spent almost nothing on maintenance. I replaced a dimmer switch once, and the door latch on the dishwasher, but did both myself at almost no cost. Had some guys remove a bird’s nest from one of the vents. That’s about it. I did have the roof replaced but that was fully covered by insurance as it was due to storm damage. Which further reinforces my earlier point about the return on investment on this particular property, though it was never intended as an investment per se.
Admittedly the property taxes around here are pretty high on a valuation basis, but it’s still a drop in the bucket relative to average annual appreciation over the past ten years.
[I think the importance of your post *cannot* be overstated]
I’ve posted this elsewhere, as a PDF, but I think this fits here, too:
I originally (on buying our house) included all of this in a spreadsheet, along with likely cost to replace each item (parts and labor) and a provision to index for predicted inflation.
We then created a separate bank account into which the needed amount of money (based on future value calculations and user-defined interest rate) that would ensure we had the money to replace each widget when the need arose.
Anal retentive ? Sure. Why not
Yeah. It’s a lot of coin. More than you might think.
You can always just slap it on the credit card and not worry about it quite so much, but that’s not how I’m wired <grin>.
Well, aren’t you the cheery one? I suppose it’s inevitable. I hope not too soon. I don’t know that I’m going to be here too many more years. With any luck I’ll be out and in a low-maintenance condo just before things start breaking down!
And how is that working out? Some of those numbers look pretty pessimistic to me. According to the first part of that chart, for instance, interior and exterior caulking should all be falling apart by now, exterior paint in need of repainting, sealants becoming unsealed, etc. None of that has happened. Moreover, very little of the exterior is painted anyway – it’s mostly brick, stone, and some aluminum. I think the garage door is painted wood, and it still looks perfectly fine. Moving on, the dishwasher should have failed by now (it hasn’t) and the microwave should have failed a decade ago (it hasn’t). One thing I agree with: the carpet upstairs is beginning to show its age. The downstairs flooring is wood and tile and that should be OK indefinitely.
I’ve owned houses long enough to know that yes, maintenance can be – and eventually is – a significant expense. But I’ve never considered it such a huge deal that I had to have separate savings for it.
I think that non diverse investing is too risky and without knowing all your particulars it would be hard to give any sort of informed opinion. However, if I were to get a windfall, I’d put it into a total stock Vanguard or similar low cost company’s mutual fund.
I suppose it’s inevitable. I hope not too soon. I don’t know that I’m going to be here too many more years. With any luck I’ll be out and in a low-maintenance condo just before things start breaking down!