Real estate is NOT a great investment

OK, but who the hell wants to live in something that has “rotted”?

I could save a lot of money by living in a mobile home far outside the city limits. Or by renting a room in a flophouse somewhere. If I lived like this and came out ahead of a conventional homeowner, I suppose I’d have the right to gloat. But why?

I mispoke when I said a house that is paid for is “worthless”. But neither is rent that you pay a landloard (the whole “you’re throwing away money” argument that I personally despise). A renter pays for a place to live, the same as a homeowner. They just don’t pay for the 1) the cost of borrowing money and 2) the privilege of building equity. Or the costs associated with maintaining that property. These aren’t trivial costs.

They may want to make a profit, but they don’t always. A landlord is subject to the same market forces as anyone else. If your mortgage payment is $900, but you can only find renters who are willing to pay $750, guess what? You’re going to have to eat the difference.

My mother is in this situation right now. She’d like to charge enough rent to cover the mortgage and give her a little profit. But the folks who are able to pay that amount don’t want to live in that neighborhood. So she has to “settle” for a tenant who can only pay 80% of her mortgage payment. Not only is she not making a profit, she’s losing money.

As with any investment, it depends on your situation. I didn’t buy my first home until 2010, because there were amazing deals everywhere what with all the people who bought at the height of the boom getting foreclosed on. If you move a lot, or real estate is overpriced, you’re better off renting. Which is what I did in my 20s and then through the housing bubble.

The real estate bubble did some good though, because prior to it a lot of people were telling me that housing prices never go down, unlike stocks. Glad that’s been put to rest.

There really are two separate questions here and you do seem to be persistent in conflating them.

Primary residence planning to live there for a good long while compared to renting a similar place vs. speculating for the sole purpose of making money.

I am embarrassed to admit that I made a major goof in my running the numbers but it was one that only hurt my case. I was neglecting the part of the mortgage payment, increasing over time, that is going into principal, also increasing the functional return on the 20% down.

So add in that in addition to the appreciation on my “investment” portion ($42K) to the tune of $478K, add in an extra $165K of increased principal by 25 years (I used an amortization table), plus re-investing the “dividend” of less paid out in costs each year compared to renting the same home (in most cases, exceptions like your mother’s case existing duly noted, although I wonder if she could refi, or if she expects the neighborhood to become a place that the more well-heeled want to live). Of course even more if the hold time goes up, and if it goes beyond the term of the mortgage even more.

Of course a house can actually decrease in value, a neighborhood can become less attractive … and the stock market could crash. And both can lose value at the same time. All investments have risk.

As a primary residence renting is a monthly cost that provides a place to live. You are correct there. That is not worthless or throwing money away but it is an amount that is likely to increase over time. Owning a home also provides you a place to live. For less per month (most of the time, and usually increasingly so over time) you also however are using that money out (mortgage, taxes, maintenance expenses) to build equity and make an investment that (most of the time) appreciates. The costs of maintaining the property are part of what you pay in rent as well.

A way to get “rich”, no. But compared to renting owning usually builds some wealth over time.

I didn’t count property taxes because we’ve always had enough equity so that we paid them directly, not as part of the mortgage. (Except for our first house in Louisiana, where the property tax was $50 a year.) Now I live in California where my property taxes have gone up about 40% in 15 years while the value of the house has more than doubled.
But property tax increases and repairs go into rent also, so unless you move out ahead of them you’ll pay also.

Buying property as an investment as opposed to a residence is a totally different kettle of fish. You don’t have to worry about finding renters when you live there. Plenty of house flippers lost their shirts in the crash. The people I know who own property like to do it themselves and spend a good bit of time on it. I’ll take a REIT if I was into real estate or regular investments any day.

I’ve owned three houses, and none of them have had these problems. You must be thinking of the house in the Arkansas Traveler. If you can’t do it you pay someone.
On the other hand while I’ve always had good landlords when we rented, the problems were just as big or bigger since we had to wait for them to make the repairs.
Some basic study of the zoning ordinances makes you pretty immune from WalMart. And renovation can be done for yourself, not the neighbors. We redid our lighting and our floors, which was worth every penny. If we rented we’d be stuck with the old stuff. Our house is ours, not someplace we’re dealing with since we don’t want to move.

I can buy a house that is a lot cheaper than the $900 than I pay now.

But they are all kinda broken-down and scary. Or they are located in broken-down and scary neighborhoods.

I don’t want to buy a broken-down scary place. So that’s why I’m saving as much as I possibly can so that one day I can buy a nice place in a nice area.

But if I never hit my savings goal, I’m not going to feel too bad. Maybe I will “lose” something in the end, but I don’t think I will.

I dunno. Perhaps if I had a lot more money, the risks of homeownership wouldn’t seem too high, and I’d feel exactly as you do. But I know what I can afford, and right now it’s NOT a property that will be a good investment. All I can afford is headache and worry. No thanks.

In most cases, renting an equivalent sized house versus owning it, yes rent will be more expensive. Most renters I know live in a much smaller house than they would want if they were to own (this includes families as well). I currently live in a 1 BR, 1 BA that is much, much cheaper than ANY house I could buy in this area. So it is not as a simple tradeoff as many are trying to make it out. Renting can be significantly cheaper than monthly housing costs and certainly it can be more expensive as well.

In all reality, yes, in most cases the home owner is going to come out ahead, especially if you look at a 30 year time frame and you stay in a single place (Definitely don’t buy a home if you won’t be in it for at least 5 years). Most renters are not taking the equivalent of a down payment and putting it into the stock market, so for most people out there this is a meaningless argument anyways. These things don’t necessarily mean it is a good investment. It certainly has a role as a very likely inflation protected asset with relatively low risk (especially if you have a favorable interest rate). There are much better ways to make money than to buy a house, though. Having said that, there are a lot of really good reasons to buy a house as your primary residence; I am currently saving up a down payment for one right now.

What are you living in now? A rental house or an apartment?

You live by yourself I think. If you are renting a whole house, why? And boy, what a market to get a house rental for $900 a month. If not then you are making an unfair comparison.

Why do you want a house? Why are you saving to be able to buy a nice place in a nice area? Living by myself I’d probably rent a one bedroom.

I readily admit that I do virtually no repair or renovation work myself. Fist condo some demolition work but that’s it. I still love looking for the beat up house in the location I want because I get it at a discount that more than makes up hiring the people to do the work to fix it up and then I get it fixed up how we want it. Yes other buyers like you see it as scary because the kitchen needs renovaion and the paint is ugly and there is shag carpeting on the floor (covering pristine quartersawn oak though!) I cook and I don’t want to pay for the kitchen someone else put in; I’d rather pay less and have put in the kitchen I want. Just me. YMMV.

It’s a 700 sq ft house. It’s perfect size for me. Any larger and it would be wasted space (and bigger utility bills). Any smaller, and the cats would kill me.

So space is another big consideration for. To me “too much house” is not just the an excessive mortgage payment, but also unused square footage that will only accumulate junk and dustballs.

I rent a house because I did the apartment thing for years, and I got tired of it. I really like not sharing walls and floors with someone and being able to sit out on the front porch. I also like that I can let my cats go outside and play. (Also, I kept falling down the stairs of my last walk-up. I knew it was just a matter of time before I really hurt myself.)

My rent is below-average for my zip code. So I do think I’m getting a pretty good deal, though I know it won’t last forever. I’m really conscientious about staying appraised of the market so I’ll know when to bail.

I want a house for the same reason that most people do. I grew up in a house with a front porch and a big back yard. The image connects with me on an emotional level. And socially, too. I want something to show off to family when they come visit. I also want a garden.

Right, but you can likely afford to make all the renovations you want. Me? I wouldn’t be able to afford to renovate something AND keep a solid emergency fund. Even if I bought a crack den for $100. Knowing my luck, I’d shell out a ton of money to make the kitchen exactly the way I want, and the next month that’s when the pipes decide to burst. Out comes the credit card and suddenly I’m no longer feeling all that proud of myself for buying a house. I’m risk averse and don’t want to be caught in a situation where I am full of bitter regrets.

Right now, my kitchen is pretty boring and really old. I’m zen about it, though. I know I can’t changed it, so I don’t bother browsing the kitchen section at Home Depot. If I owned it, though, I probably would have already replaced all the cabinets and the tile. Maybe I’d get a red refrigerator and oven to match. So I have a feeling that the savings I’d get out of buying a cheap house would be offset by me living like the people on HDTV. And my mother. I think it’s easier for me to be frugal as a renter than it would be as a homeowner.

I enjoy being creative and giving my own personal flair to my living environment. I personally think it’s good for my mental health.

Claims that housing is a good investment often make some of the following mistakes in evaluating the relative returns of buying and renting:

  1. Failure to consider the opportunity cost of the downpayment.
  2. Failure to consider the opportunity cost of housing inflexibility.
  3. Failure to consider or correctly estimate additional costs like insurance, maintenance, taxes, etc.
  4. Failure to consider the risk of having a significant portion of one’s net worth invested in a single structure/property. Insurance helps, but there are many downside risks that are not insurable.
  5. Failure to understand the difference between nominal and real money, which matters quite a bit on the timescales that people consider buying.
  6. Failure to consider the risk of leverage required for most people to buy a house.
  7. Failure to consider transaction costs.

Every one of these is a bias in favor of buying. There are not really equivalent biases in favor of renting. None of that means that buying can’t be better than renting, but it does mean that you should be careful before concluding that it is.

In addition, you often see claims made that buying must be cheaper than renting, because otherwise owners would not be able to rent out houses and make a profit. I think this claim fails for two reasons. One, there’s no law that says that a business must make a profit, or even that an industry in aggregate must make a profit. Obviously, I’m not claiming that no landlord makes a profit. I’m just saying that it’s not a given that they will. In the long term, the market price for rentals probably has to bend to the costs of landlords, but housing stock is sufficiently durable that the long term could easily outstrip the decade or two that most people buy a house for.

The other reason it fails is that the cost structure for owning and renting can be very different. Two examples: A landlord might have much lower capital costs than you do. If he can borrow at, say, 3% due to his wealth and other investments, but you have to borrow at 4%, it’s quite possible that he could both make a profit and rent to you for less than your cost of ownership would be. In California, property taxes are basically set based on the purchase price, and decline in real terms over time. So, someone who has owned a house for decades could easily be paying a fraction of the taxes a new owner would pay. In this case, it’s incredibly easy to rent a house for less than you would pay to own it, and still have the landlord make a tidy profit, because the state does not tax you equally.

I thgink that some of you guys are beating the living shit out of an argument that has not yet actually made an appearance here - that buying is always better than renting.

As for “bias in favour of renting”, the one you have not mentioned happens to be a doozy - failure to consider that, in reality, few people of average wealth/income are actually capable of investing (and actually do invest) their money rationally in a mixed portfolio of alternative investments as appropriate to their real risk sensitivity, having rented rather than bought.

No doubt some do - but those who do are exactly the same sort of people who would not fall for the “failures” you have listed, when they bought a house. Comparisons like this tend to measure the financially savvy versus the financially unsavvy.

I don’t think I am. I even explicitly point out that nothing I said implies that buying can’t be better than renting. I’m simply frustrated that the discussion is so often poorly focused. It’s like when someone says “renting is just throwing your money away” (which, luckily, no one did in this thread) without apparently comprehending that interest is just paying rent on money.

It is a good point that most people do not have the discipline to invest in a remotely well-planned way, and that buying a house provides a strong commitment effect to keep you on a decent (if perhaps sub-optimal) investment trajectory. “Do I really have the discipline to invest according to a plan if I don’t buy a house” is absolutely a good question for people to ask themselves.

But it’s rare to see someone bring that up when discussing how good an investment buying a house is. They tend to compare mortgage payment to rent, ignoring other costs, or subtract the purchase price from the sale price, ignoring inflation, or any of the other things I listed. If we’re talking about whether buying a house is a better investment than spending your money on fast cars and recreational pharmaceuticals, then yes, clearly it is. But that doesn’t make it a good investment, it just makes it an investment.

Interest being “paying rent on money” does not invalidate that argument.

The point of the argument is that if all your ownership expenses, including mortgage payments, upkeep etc. are equal to the rent, then you’re losing financially by renting, in that if you own that same payment is building equity in addition to paying for your housing, while that same amount paid for rent is only paying for your housing.

It obviously wouldn’t hold if the home-ownership costs minus equity are higher than rent. But this frequently not the case, as has been discussed here.

I’m starting to wonder if there are few people of average wealth/income who are capable of keeping a home without losing their shirts.

From here http://www.newrepublic.com/article/119187/mortgage-foreclosures-2015-why-crisis-will-flare-again:

If I ever raid my brokerage account to get me out of a financial bind, I won’t have to worry about literally eating myself out of house and home. I won’t have to collect my possessions from off the side of the street. My neighbors don’t have to worry about their property values dropping because now they live next to a distressed property. My high credit score will stay intact.

Seems to me if the average person isn’t capable of investing in a conservative mutual fund, they also have no business taking on hundreds of dollars of debt. The same financial savvy one uses to manage their investments should also be employed when buying a house. The fact that people aren’t financially savvy is NOT a good reason to encourage them to buy a house. The solution is to help them to become financially savvy. Perhaps if people were better educated about the basics, then we wouldn’t see so many foreclosures or underwater mortgages AND we’d see more “average people” enjoying the benefits of alternative investment strategies. It’s not an either/or proposition. When I finally become a homeowner, I plan to keep investing in other ways. To me, that’s more responsible than putting all of one’s eggs in a single basket.

As usually calculated, “all your ownership expenses” does not include consideration of 1,2,4,6, and 7 on my list. Which are real costs and risks.

By all means, buy a house if it’ll save you money. And buy a house even if it doesn’t, if it makes you happy. But make sure you know what you’re getting into.

I’m sure that there really are cases where you can buy a house and pay all your expenses for the cost of a rent payment, but I’ve never seen one where I live (I realize that this isn’t proof of anything). It’s generally not even close. For example, if I were to buy the house I’m currently renting for what Zillow thinks it’s worth with an interest only loan at 3%, the mortgage interest and taxes alone would be 136% of my current rent payment. And the rental vacancy rate is < 1%, so it’s not like the rental market is depressed. This sort of ratio is in line with other house sales and comparable rentals I’ve seen where I live. The NYTimes made an awesome "Rent or Buy calculator a while ago, and when I put in reasonable numbers for where I live, the result was that buying never broke even with renting. Yet people who live here seem to think buying property is a great investment.

Back in 07 when real estate collapsed in California, I bought a large (6 bed 4.5 bath) house for the same monthly payment I was making on my 2 bedroom condo in a less desirable neighborhood. I would not have done this if I had children’s schooling to worry about. I have two roommates currently, with room for up to two more. Utilities are higher and property taxes are higher. But no HOA and roommates make me happier in general. The value is about even to when I bought it, however, refinancing leaves my monthly payment about $300 less.

You’ve got to live somewhere. You might as well consider it an investment.

Write to:

Bernard Madoff
c/o US Federal Prisons Systems
10001 SW 14th Street, Suite 3086
Washington, D.C.

I think we both agree that it isn’t an automatic decision either way - one has to carefully consider a bunch of factors, either way.

Much depends on how you are positioned.

Fair enough.

Whether it is a “good” investment is hard to say; I agree with you that it can be, depending on circumstances.

I own both a house and a mixed portfolio of other investments, and over the last five years or so, my house has certainly outperfomed the portfolio, judging by average local sales values …

But then, the past five years has had unusually, even historically, crappy interest rates and stock returns; and unlike in the US, there has been no market correction in real estate prices (though one has been predicted for as long as I’ve been an adult). I can admit that this concatination of circumstances may be unusual. However, at least so far, it would be hard for me to say the house was a bad investment, anecdotally.