Without reading the thread…
FWIW, I bought my house from a friend. In the two years he owned it, the value went up 50%. Even after the housing bubble burst, the value never went below about 125% of what I bought it for. Right now, Zillow estimates it at 65% more than my purchase price. (Granted, I’m paying interest; but still…)
Does this take into account inflation? When I bought my house 17 years ago the payments were certainly more than what I had been paying for rent at that time. But over the years rents have increased dramatically. Meanwhile my mortgage is fixed and property tax increases are capped by law (Proposition 13). So now I pay far less than I would to rent an equivalent house.
Your other points are certainly valid, though in my own case I should point out that by the time I bought my house I had already been renting in the area for 13 years so I knew I would be staying there for the long term.
In defense of the op, all he was doing was using the return of an S&P index fund (without even dividend reinvestment) over that time period. No guarantee was implied; merely a historic comparison.
The NYTimes one does take into account inflation, but does not take into account Prop 13. I made a spreadsheet for my own purposes that uses both.
It turns out not to make that much difference if you’re considering buying a house, under the assumptions that the difference in costs is invested in the stock market/pulled out of it, and the stock market does something like what it’s done for the previous 100 years. By the time Prop 13 really starts to matter, either the real estate leverage or the stock market tends to dominate returns.
If you already own a house now with a low real tax rate, or you will get one from a relative in a way that preserves property tax, then Prop 13 can often make it a way better deal to keep owning the house than it does to rent.
ETA: Obviously, you have to make assumptions about stock market return, inflation rate, housing value increase, etc. No one knows what those will be, but using the averages from the past is better than nothing.
Yet in this thread all those have been considered, at least to the degree that it is possible to do so. 1 was calculated out using both investments over a 25 year period
Yes, it was explicitly stated that a negative of owning a home is that it is not a liquid investment. The balance usually shifting to owning is not there for someone who has a realistic expectation of wanting to or having to move within a few years. Other costs were factored in.
Catastrophes hit stock indices too.
Yes the downpayment is leveraged and using historic performances over long time scales that usually leverages a gain. But of course any downside risk is leveraged as well.
Transaction costs have been mentioned and is again a major reason that home ownership is not a good investment for a short term living circumstance unless is very confident that the particular neighborhood is on the cusp of “getting hot”.
And indeed in that long term analysis you do not account for the impact of inflation on rent over this sort of time scale while ownership. For investing the the lesser annual payments in an index fund if one is disciplined. And that for some the mandatory nature of the building equity is investment that would not be made if it was discretionary by others. And OTOH that the more fiscally prudent are also taking full advantage of pre-tax retirement vehicles and 529s for college saving and being appropriately diversified there. Or the tax break for mortgage interest.
That said the biggest risk is what we saw in the last crash - not only that housing is illiquid but that risks of fairly catastrophic events are not independent rolls of the dice but are often linked, like an earthquake with a tsunami. Housing values tumbling triggered stocks tumbling triggered people losing jobs and being both unable to make payments or qualify for refi. Not everyone can manage to ride those events out.
The op was a categorical “real estate is NOT a great investment” … most here would have no problem stating “not always” … would respectfully disagree with a “not usually” … but “NOT” is just a false statement.
Not only do you get to live in it, but with FHA, you get to buy it with only a few percent down, pay less than you would in rent, and you get all the equity and the write-off on the interest while you still have interest to pay. So if you buy a house for 300k with $15k down, and it increases in value to $500 in five years, you’ve made $200k in five years on a $15k investment. What else regularly does that?
I might be missing something here, so bear with me. But you’re not going to get $200K back, right? That mortgage wasn’t free, especially with just 5% down (a fiscally irresponsible amount to put down, by the way. That’s probably one reason why FHA loans default so frequently). There are also agent and closing costs. So you will be making $200K minus all those others things (including repairs that the buyer wants you to make). Of course, this presumes that you will be selling to get some of that cash. Some people hold on to a property and get “rich” on paper while it appreciates. But then the bubble pops and they lose some or all of it. Cue the sad violin.
If I sense that the bubble is about to pop in the stock market, all it takes is a couple of mouse clicks and I can escape unscathed (and without having to pay thousands of dollars for the privilege). If the shit is about to hit the economic fan, I can break my rental lease and get my ass out of Dodge so that I can be proactive about staying employed and bringing in income. For an average investor, flexibility and risk-avoidance should be just as important as the ROI.
I’ve seen people loose their homes. I’ve seen people loose their shirt in the stock market. I’m old enough to be aware of people who kept their retirement funds in cash when high inflation hit in the 1970s. There are no guarantees with investments, which is why its recommended that you diversify. Why you need to understand what you are doing. Why you want to have liquid assets (cash) on hand to pay six months of living expenses (more if you have the sort of job where it will take longer than six months to find a job).
Real estate as an investment covers a lot of ground other than the rent/buy scenario. I know several people who have done quite well buying small houses, fixing them up, and then being landlords. They do quite well because its cheaper to own than to rent - especially if you are handy - and because we are in a relatively tight rental market. I know people who have done ok flipping houses, and a few who were sitting on too much flip inventory in early 2009 who are broke now. I know people who own acreage in Northern Minnesota - appraised for a lot, but when the neighbor tried to sell his acreage he found the market didn’t support the appraisal.
And, this is like the stay at home parent debate, there is a lot of emotion. I know people who would never rent again because their building went condo, or the new landlord jacked the rent, or because they have an emotional tie to owning. Likewise, I know people who would never consider owning - the plumbing is someone else’s problem, they like being able to move with little notice and find the idea of being tied to one city through real estate frightening.
To evaluate whether any individual rent buy situation comes out rent or buy, you need to look at all the factors in the situation. You can’t make any sort of blanket statement. There are two big factors on whether owning a home will be successful - the home (its location, its curb appeal, its upkeep, etc.) and the people buying (financial security and responsibility, are they the homeowning type, etc.).
My ex husband and I bought a home together - and after he left he bought and lost another home. He isn’t a homeowner. He doesn’t take care of his property. His employment is too variable for a mortgage and he isn’t a good saver for the lean times. Although without the house, his family would have been on the streets a lot faster than if they’d been unable to pay rent. He isn’t a good homeowner.
Me, I bought another home. Its appreciated from $190,000 in 1998 when we bought it to about $280k now. Not huge appreciation. I had it paid off ten years ago, but took out a small mortgage on it to leverage - which has worked out darn well to date, my interest rate on the house is low and I write it off, and the stock I invested in pays at least that in dividends and has had gain on top. I pay a $300 mortgage, $300 utility bill and $300 in taxes every month. I couldn’t rent 3000 square feet in a suburb with a decent high school commuting distance from work for $900.
Of course. No one is saying (or at least no one I know ever said) that the “renting is just throwing your money away” argument implies that every person in every situation should buy a house. It’s a valid argument that, like many other valid arguments, needs to be weighed against other considerations.
Where I live it’s also generally not even close for a single family house. But you can do it with a multi-family house. I live in a single family house, but when the bottom fell out of the market and I was looking to invest in real estate I bought a two-family townhouse as a rental. So far so good. 
No, the mortgage isn’t free, but even if you just break even on the principal and are out interest,taxes,insurance, you still come out ahead compared to renting. I think this is the part that a lot of people are missing. And to be clear, this is about renting the place you live vs. owning the place you live. You have to live somewhere, and if you’re paying rent on a house, you get nothing back when you move. If you own, you will almost certainly get at least some of it back.
Sure, some people end up losing their homes, but most homeowners don’t. From this article in Asbury Park Press, New Jersey had the highest rate of foreclosures in the country in 2014, and it was only 5.5% of all mortgages.
You don’t have to make a real profit, or even break even to come out ahead. You just have to pay less than you would have paid in rent.
This seems like a misleading stat in the context of this thread.
The 5.5% forclosure rate is the percentage of mortgaged homes which are currently in forclosure. But a mortgage typically lasts a lot longer than a foreclosure. So if, for example, 100 people take out mortgages at the same time and 5.5% foreclose in the first year, and another 5.5% in the second year, and so on for future years, the overall forclosure rate will be a lot higher than 5.5%.
Which is not to say that I think most people end of foreclosing, or anything close to most. But the stat in that article is not appropriate for this discussion.
If the last five years have been crappy for stock returns, I’d hope the next fifty remain as crappy!
We own two properties, but, thus far, our index funds have far outperformed the housing market where we have properties. That said, while I don’t really think of my house as an investment (although the rental property do give us some extra beer money), I still hope for about a 6% ROI in the long term, which is lower than what I hope for in my index funds (closer to 8-10%), although the last few years the markets have just been killin’ it.
Not unless there are no new mortgages taken out in subsequent years. If you look at the stats for previous years they had lower foreclosure rates, making the overall rate less than 5.5%.
THat’s not correct, for reasons already given.
As a simple illustration of the math involved, assume that the foreclosure process takes one year, and that 5% of mortgages are in foreclosure at any given time. In Year 1, 100 mortgages are taken out, 5 are foreclosured, leaving 95 still standing at year end. In Year 2 there are an additional 100 mortgages taken out, for a total of 195. Of this total, 9 (4.6%) are foreclosed, leaving 186. Total number of foreclosures is 14 (5 plus 9).
In this example, the two measurements comparable to your cite were 5% and 4.6%. But the total percentage of foreclosures was 7% = 14/200.
I’ve set forth the general principle. FHA loans used to be as low as 3 percent down, and without the credit default swap mortgage crisis, that worked fine for 50 years. It is true that there are costs in closing and it takes time. But it is not unusual in California to get twenty percent appreciation in five years. You can cash out and move to the next cheap outlying community and do it again there.
Not to hijack, but no wonder they have huge budgetary shortfalls! That’s a truly crazy way of assessing property taxes.
You are right there. We pay a lot less in property taxes than the guy to our right, and we pay a lot more than the guy to his right who has been there forever.
This has caused a lot of the California budget to be dependent on more volatile things like income tax and sales tax. And the budget is much better now since we have recovered.
Business property is covered by Prop. 13 also which is even crazier.
This was about home equity loans, which are dumb things to have except under certain cases where the loan involves financing improvements that increase the value of the house. Ads for these loans, which I’ve been hearing again, never mention cash flow for some reason. However they are no more relevant than the concern that a person renting who needs money could run up credit card debt.
The problem is that for many people the mortgage is one of the first bills to pay while the bill to yourself in terms of an investment is one of the last bills. No notice in the mail, no angry letters from the bank.
We save a lot beyond my 401K and my wife’s SEP - financed in no small part from the fact that our mortgage payments are not greater, and in fact are slightly smaller from refinancing, than they were 17 years ago, while our salaries have increased.
If everyone had good investment habits the average retirement account would be much bigger.
I’m not a tax expert, but I once looked into this and my understanding is that mortgage interest can only be written off if it’s used to buy or remodel/extend a house. If you have a paid off house and take out a mortgage for investment, it’s my understanding that this mortgage interest is not tax deductible as home mortgage interest.
However if you’ve used the mortgage for investment purposes, then the mortgage can be deducted from the investment profits as investment interest expense (to the extent that it’s less than the profit).
This. So very, very much this.
For myself, I’ve avoided that problem by setting up an automatic monthly deduction from my bank account into a savings account (from which investments are purchased). That way, it comes off the top and I live on the rest.
For most people I know, it works the other way - investing is something done with what’s left over.
That’s why discussions about renting and investing can have a slight air of unreality about them - it is no doubt true that successful strategies can be followed along those lines, and some do, but only financially savvy people are likely to actually succeed using those strategies.
My guess is that if one did some kind of trial, tracking a mixed group using one strategy or the other, one would find the average group would do better with real estate over renting, purely because of this factor - not because the real estate strategy is better overall in the financial sense (I say that depends on a bunch of factors). A group composed solely of financially savvy people equally dedicated to saving, I have no idea who would come out better - in a purely financial sense. It could well be the rent’n’invest group.