"Don't worry millenials! You didn't really want a house anyway, it's a terrible idea! Keep paying those student loan payments and renting!" -- Retired boomer with $1MM+ equity in their suburban California home purchased in 1975 for $10k.
Property taxes are locked to the purchase price of the home in California because of a law called Proposition 13. It's a been major contributor to the housing crisis but is extremely popular with everyone who currently owns property. It lets owners benefit from appreciation of their property without any increase in their tax liability while newer (and often younger) buyers must pay taxes based on the current absurd home prices.
Yes, with rare exceptions Prop 13 means you get your property tax assessment locked in when you purchase. The major way to trigger re-assessment is to pull a permit for construction/improvements, which is why unpermitted remodels/additions are so rampant in California.
That is so true and one of the major reasons SV real estate is such a tight market. Those tax rate freezes essentially eliminate a good portion of liquidity normally present in a market.
suburban California home purchased in 1975 for $10k
Where? About the cheapest you could do in San Jose then was $21K for a 1400sf condo from Singer Housing (the budget developer of the era). I grew up in one.
I bought a house in 2015 (at 32) and it was the best thing I ever did. Even though I had to move away, I turned it into a rental property, and it’s earning $380 a month in profit. I’ve been using that profit to pay down the principal and add to my 401(k). My only regret is that I didn’t buy a lot sooner.
I mean, in the past 7 or so years, all the boats have been rising. What would your returns have been if you put them in stocks? How great was and is the risk you take by taking tenants versus the risk you take by buying stocks?
You do both to diversify (equity and real estate). Having the property as a rental is very tax efficient as well (you get to depreciate a property that appreciates in value). Also, no one is going to let you leverage equity purchases with debt like you can with real estate.
Disclosure: I own several rental properties to round out my investment portfolio.
You don't really need to do both to diversify. There is a lot of exposure to real estate in the stock market (rental companies + commercial real estate + construction), and REITs can be used to gain more exposure if desired.
I can manage my real estate risk better (IMHO) in a rising interest rate environment better than a REIT can (and I find most REITs to be overvalued, specifically O). My cash on cash returns are better as well.
Yeah, but can you diversify by location better by yourself than a REIT? Lots of cases of individual cities and neighborhoods going to pot while the rest of the nation and world prosper
My goals differ from a REIT slightly in that I want a quality return on investment, but also want to be able to live in my properties around the world as time permits (I’m a remote worker).
Returns vs utility is an acceptable trade off for me.
With stocks you don’t get leverage. Cash on cash return on real estate far exceeds stocks. If you put $20k down on a $100k house and you profit $300/month, that’s $300/month on a $20k investment, NOT against a $100k investment. That’s 18% per year not counting the equity as well as (possible) capital appreciation. Not to mention the tax advantages due to depreciation. Stocks are nowhere close. If you have a property manager charging 8% of the rent, you then have a cash flowing asset with almost zero hands-on work.
But the article does note that there's a gigantic subsidy on the leverage for stupid reasons, and the huge amount of leverage is obviously and empirically dangerous.
The sneaky best thing to do is buy a small multifamily unit, live in one, and rent the others. One of my coworkers at the time I bought my building was shopping single-family homes in the exact same price range, and we have almost the same monthly costs. The difference being that my tenant essentially pays my mortgage, and I only have to pay the taxes and insurance. Down the road, when I have a family and buy a real house, the rental will bring in $3k or more every month.
You also have additional deductions on expenses that you don't get on a single owner-occupied home. In fact it goes in a different Schedule than personal. One chooses a percentage of personal and business, which might be 50 50 if each unit is about the same and the owner is in one, while the other rented out.
I bought a house in 2013 and sold it in 2016 for a total return of probably close to 50% -- not including leverage, after factoring in avoided rents and all costs. If you include the leverage, the ROI was probably >100%. What's more, the cash I invested was at the moment of my investment significant with respect to my net worth -- something like 33%. So this was a great outcome.
However, that does not mean I made a wise financial decision. I made a lucky financial decision, which is very different. This article is about making wise decisions, and it's very hard to reason about this from results in a single investment.
I just want to add that a lot of people account very poorly for their real estate profits. Whether that number is good depends on how leveraged you are and the value of the property, and many other variables, like your costs and (unknowable) future vacancy rates. (If you have a lot of leverage and the property is only worth a little, that's great! It would not be very good in a scenario where the the property is paid off and worth $2M.)
At the time I didn't think of it as speculating. I thought of it as "buying a house because that is what people do at this age in these life circumstances." But I agree that there are some interpretations of your word choice under which my actions would fall.
My leverage wasn’t that bad. To close I had to spend about $4,000. No down payment. It’s an FHA 30-year fixed at 3.85%, so I bought really at the bottom of the market. I’ve got a great tenant and about to renew them for another year with no increase in the rent. The income from that has been a god send and I’m net positive on expenditures. I’ve managed to get 3 months ahead on the mortgage payments to account in case I DO have a vacancy and need time to find soenone. I just got extremely lucky. I bought out of a fear of being homeless (for whatever reason) and to secure a foudnation for myself as I grow older. It’s become much more and I’ve learned a helluva lot.
I'm sorry, but the numbers you're putting out there indicate that you might be a person who does not understand how to value their investment property. The typical baseline number to have is one of the expected or historical cap rate. The terms of your mortgage and down payment are almost wholly irrelevant. And leverage is often considered good in real estate investing.
The article doesn’t say that buying a house is a bad idea — just that it’s a bad investment. There’s many reasonable motives for buying a house, you’re just better off making sure that those motives are strong enough by themselves and you’re not doing it “because it’s a good investment”
Yes! Tbh I wasn’t really all that interested in buying. I finally gave in after spending a summer working with the homeless, and reading a Priceonomics article about David Raether. I got really afraid.
This article didn't scare me just shined the light that people are truly not willing to sacrifice.
They had a $500k nest egg and living in a 4000 sqf home. The decision could have been to sell the home, downgrade to a home half the size, cut all 'future children investments' and lived a frugal life.
The best future investment that could have been made here is living within the reality of the numbers.
Absolutely agree. He should’ve downsized and cut expenditures, but for whatever reason (maybe hubris? Pride?) he allowed things to get out of control. For me, I know that I can get a job at Home Depot and make the mortgage payments, and that’s why I stuck with something small and affordable.
One could write a similarly ridiculous article about how renting is flushing your money down the drain, you're paying someone else's mortgage, etc. Worrying about the rent going up, hoping your landlord isn't too much of a scumbag, and so on.
Sure, a house is not a great investment. But there's more to housing than investment. You have to live somewhere, and you're probably going to be paying for it one way or another. There's no perfect solution--you have to figure out what works for you.
We bought this house nine years ago, and hope that we never have to move again. Now the mortgage is about half of what it would cost to rent an apartment in this neighborhood. That's kind of a trap, too. There's no point to thinking about moving--there's no place we could go that would be cheaper than what we have unless we leave the area entirely.
This is awful analysis. Almost every one of the bullet points is just wrong, or at least terribly spun. I mean, one of them argues that homes are "heavily taxed" when of course they are the source of the biggest single deduction category in the whole budget, another claims with a straight face that the ability to leverage the investment via a (again, government subsidized!) loan is a bad thing!
Now, obviously not all investments are winners, even if they are "good" investments in principle. And there are all sorts of very good arguments about why homes should not be subsidized in the way they are, and that our government has made them "too good" in a way that harms the public as a whole. But nonetheless homes in almost all of the US are absolutely good investments. They have been for going on three quarters of a century now and certainly don't show signs of stopping.
This is excellent analysis. Every one of the bullet points is correct, and you've picked one to debate (and misinterpreted the argument): relative to virtually every other investment you can make, homes are heavily taxed. Arguing that you can (possibly) deduct some of those taxes misses the point. I don't have to pay my state and local governments annual taxes on the stocks and bonds that I own.
On average, homes in the US appreciate at about the rate of inflation, and the choice to rent vs. buy is favorable in some markets, unfavorable in many others. It's nowhere near as clear-cut as the comments in this thread would lead you to believe.
I recently sold and bought a house, and as far as I know I paid no taxes on it, and I am still deducting mortgage payments. I could pay off my mortgage tomorrow (it's Sunday here, so I'd have to wait for my bank to open) but my accountant tells me that's a horrible idea.
Yeah, the parent is being willfully obtuse. Property taxes are taxes that you have to pay merely for holding your investment.
Until this year, you could deduct those taxes up to your total federal tax liability (which may be what the parent is saying), but now you're limited to $10,000. Either way, it's a lot more burdensome than most investments.
Capital gains didn’t apply because of the unique rules around primary residences — our new home cost more than the old. In fact it’s better than other investments in this particular way!
Regarding property tax, yes, but dividends are taxed as well and you generally are going to pay capital gains in the specific situation I’m describing if you replace “primary residence” with “stock”. Primary residences with mortgages have better tax treatment, really. If it didn’t I wouldn’t have a mortgage.
I like to think of this as the Government encouraging you to pay more in recurring taxes by waiving a one time tax - you did end up increasing your exposure to the real estate market and your annual property taxes through this transaction.
In the USA, if you live in your home for 2 out of the 5 years prior to selling, you can qualify to pay 0 capital gains tax up to 500k if you're married and filing a joint return (250k if single)
Do I have to pay taxes on the profit I made selling my home?
It depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
Mortgage is leverage (debt) and that can be bad. When you buy a house you speculate, to some degree, on the price of the house. I am sure a no-arbitrage condition exists in the housing market so your guess regarding housing prices in 10y is as good as anyone's.
Also, the point about diversification is a valid concern. Would you put (50% of your net worth + loaned money) into only FB/AMZN/XYZ stocks, today (tomorrow)? Probably not.
Sorry, no. Leverage by itself does nothing to make an investment good or bad, as you say. Arguing that a leveraged investment is bad inherently is simply wrong. Doing so when the interest rates are regulated at a near-prime level, the interest is untaxed, and the downside loss is capped by foreclosure and bankruptcy laws a much less than the loan amount is flipping insanity.
Like I said, I actually am on your side that the US obsession with homeownership has led to all kinds of bad externalities with poor urban development and income inequality. I'd support all manner of regulation intended to decrease the subsidy we pay out to the middle class in favor of higher density rental environments.
But houses in all but a few markets are and remain "good investments" by any reasonable interpretation. To argue otherwise is to argue in bad faith. Stop it.
> But houses in all but a few markets are and remain "good investments" by any reasonable interpretation. To argue otherwise is to argue in bad faith. Stop it.
What about the interpretation that I don't want to be subject to price fluctuations of a single object that represents a large fraction of my net worth? The argument that I might not wish to manage a property? The argument that I don't want to avail myself of the opportunity to be foreclosed on because I would like to maintain my credit? All those seem reasonable enough to me as factors to consider in defining a good investment (obviously subject to any individual investor's utility function).
Personally I think what should stop is you accusing anyone who disagrees with you of arguing in bad faith.
> What about the interpretation that I don't want to be subject to price fluctuations of a single object that represents a large fraction of my net worth?
That only makes sense if you bought the house in cash or if someone is willing to loan you money at 4-5% to buy stocks. Investments aren't zero sum when the government is effectively underwriting your mortgage.
Biggest single deduction category relating to federal taxes, yes. But state-to-state varies pretty widely, looks like from 0.27% to 2.40% [1]. Notably, no one in their right mind would invest in, say, a hedge fund that charged 2.40% fees, right? Meanwhile, to get 0.27% "fee" in Hawaii, you're looking at an average minimum investment of half a million dollars. Not great.
Houses do pay dividends. You have to live somewhere, and you get to live in your house for free (in the analogy where it’s discussed as an investment.)
There was a flyer on my door yesterday. We pay cash for your home, close in 3 days. Avoid realtor fees. There is only one problem, I have to live somewhere.
I'm not huge fan of being a homeowner, but if I decided to rent, my rent would be almost twice what my mortgage is.
I really fail to see how most of those points are relevant when you consider that a home is an investment you can, you know, live in. The alternative would be to rent indefinitely, which apparently we're ok with even though its not just a 0% return on investment, its an infinitely negative percent return on investment. Even if your house breaks even over 10 years, you still got to live in it for ten years for what is, functionally, the cost of interest + upkeep, which would often easily amount to less than rent.
If I stayed where I rented last year for ten years, the total cost over ten years (assuming the rent is never increased) (rent is always increased) is $132,0000. Even if my house cost that much to maintain over ten years plus interest (it won't), I'll still break even on the principal and enjoy the benefits of home ownership.
That's not to say that home ownership is always the right choice for everyone in every stage of life. But to sweep a broad generality like "houses are a terrible investment"...
All of these analyses also ignore the fact that most people generally want to have some parts of their lives where they aren't working, and people still want a place to live even then. My parents may have made (by the article's standards) "bad investments" for 40 years, but after rolling steadily increasing amounts of equity into a few different houses, they own the place they live outright.
Even if they could have done better with stocks, the peace of mind to only have to pay property taxes and upkeep on a house is something that has substantial value in retirement.
> which would often easily amount to less than rent.
Hang on a minute there. Big citation needed, or caveat for which locality you're talking about. In LA or SF, for example, the interest + property tax + upkeep + HOA fees + closing costs + etc. very often run significantly more than rent on an apartment. And that's after the huge assumption that you can even afford the up-front cost needed to buy a house in the first place.
> the interest + property tax + upkeep + HOA fees + closing costs + etc. very often run significantly more than rent on an apartment
Yes, but rental prices also change over time, whereas your mortgage payment doesn't (although the tax deduction falls over time, and your locality may up your property taxes, but these are fairly minor components).
If you have reason to believe that rent will continue to increase (either around CPI, or in the case of the Bay Area, 10%+ per annum...), then by all means buying a house now (which produces an infinite stream of rents) allows you to profit off that view.
Another way to view this is that you are acquiring an rental inflation-indexed asset and a nominal liability, so you will profit if inflation is high enough.
Yeah, I think a frame that people don't use often enough when talking about homeownership is as a hedge against rising housing prices. As a person who needs somewhere to live, you already have a short position in the market whether you like it or not.
Indeed. Though this only applies if you actually live in the house.
Rental is a way to hedge the short into long position for investors in homes and apartments. The renter instead is probably in long position on house prices add they likely want their own house - if they don't, they are subject to many market risks, including some existential ones.
I find myself wondering what, with a similar approach to analysis, would ever qualify as a good investment. Certainly stocks are out, given their volatility, the individual investor's inability to ever compete with professionals, the brokerage fees, and the taxation of any gains you make. Owning your own small business? Goodness, you have taxes, expenses, and the continual risk of losing everything if you become sick or market conditions change. 401K? Subject to government regulation that could change at any time; you're restricted in how much you can invest and how and when you can withdraw. That sounds terrible, too. What's left? Bitcoin?
Stocks lack most of the weaknesses listed in the article. Point by point . . .
- Not an ongoing drain on cash.
- Liquid.
- Cheap to buy and sell.
- Simple to buy and sell.
- Have historically generated high returns. (Although see my earlier comment for questions about whether this truly distinguishes stocks from housing.)
- Normally not leveraged.
- Normally not mortgaged.
- Often productive (dividends).
- Mobile. You can sell it to anyone in the world.
- Many large corporations are multi-national, and certainly immune to any event that would occur at a neighborhood level.
- Do not discourage you from moving to seek better opportunities.
- Stocks can be pretty cheap. Shares of good ETFs are in reach of anyone.
- Require no ongoing maintenance.
- Relatively immune to local or even global weather.
- Generally tax efficient, especially if held in a retirement account.
- Not subject to eminent domain.
What about this analysis makes you think that stocks fare poorly in it?
How totally incorrect.
Stocks are typically highly leveraged by big investors. Otherwise the gains are highly limited.
Large bigcorps ate also vulnerable to market downturns and can fail. This has been shown in the recent lending crisis and car manufacturer problems.
Stock require maintenance as in you have to watch the prices and the general condition of the market at the very least or you stand to lose a lot of money.
Stocks are not even immune to power outages. (E.g. one at certain flash manufacturing plant of Samsung)
Media are less predictable than weather and affect stock prices a lot. Main factor in prices of mortgages is supply of houses and interest rates which are relatively predictable.
Stocks are taxed at capital gains tax level when you sell them like everything else.
Whole you can technically sell stocks to anyone, not anyone will want to buy your stocks anyway or will buy it for a massive discount.
The remaining point about not moving is moot when you have a family. Want to move yearly with a kid or two in tow? Good luck!
And then you also presume there are always better opportunities to move to. This might be true in a score of professions but not most of them.
> I really fail to see how most of those points are relevant when you consider that a home is an investment you can, you know, live in. The alternative would be to rent indefinitely, which apparently we're ok with even though its not just a 0% return on investment, its an infinitely negative percent return on investment.
This would only make sense if you want to live in a place indefinitely. When the economy here (Alberta, Canada) tanked due to falling oil prices, people who were renting and were laid off simply gave their 1-2 month notice to their landlord and moved to Montreal or Southern Ontario for better employment opportunities. Those who owned could not do that without taking a huge loss, selling their house for less than the price they bought it for, potentially less than the remaining mortgage obligation, potentially leading to their bankruptcy. As for renting it out? Forget about finding a tenant in that economy. And even if they did, how could they manage a property from the other side of the country?
Mobility is worth more than zero. If you think the economy in the place you are living is going to be good for the rest of your life (or at least the rest of your mortgage term) and you are certain you would not want to move during this time, go ahead and buy a place. Otherwise, it makes sense to rent.
To chime in, being able to move to smaller or bigger places depending on your family needs, or closer/farther from big cities depending on your priorities of the moment are huge advantages.
Towns that depend on one or a few employers have been a losing bet for home ownership. This has been learned multiple times already. It seems good if you get out before it goes bust, but that's like catching a falling knife (especially if the company is not forthright about its impending doom).
It was not that there was one or few employers. There were many companies, large and small, operating in Calgary, Edmonton, and the rest of Alberta. The problem was that the lion's share of the economy was directly or indirectly related to a single industry: oil and gas. When the price of oil went down, they all suffered.
I think the majority opinion on HN is that unlike other industries like energy, auto manufacturing, agriculture, etc., tech is uniquely immune to downturns. My impression is that most people on HN believe that the tech scene in California is only ever going to get bigger and more lucrative, and with it property prices are always going to go up. Even suggesting that tech and SF bay area might end up like, say Detroit and auto manufacturing industry, would make many to dismiss your point entirely. But as an outsider who does not have a horse in this race, I don't share the same mindset. Only time will tell the truth. But I won't be surprised if the sustained tech boom goes bust at some point during the next half century.
Whoa, you have to go bankrupt to stop paying a mortgage in Canada? In the US, these are (in my experience) secured, non-recourse loans. That means that the bank's final option is to take the house, but if they do that, you owe them nothing else.
> Whoa, you have to go bankrupt to stop paying a mortgage in Canada?
It depends on which province your property is located at. In Alberta and Saskatchewan, mortgages are non-recourse. In the rest of the country they are not. So for the majority of Canadians bankruptcy is the only way to get rid of their mortgage.
Admittedly in the specific example I gave this would not be the case. However to the best of my knowledge, defaulting on a non-recourse mortgage ruins your creditworthiness the same as declaring bankruptcy. Considering how many landlords and employers check your credit report, defaulting on a mortgage could have serious consequences for your livelihood, even if it is non-recourse.
Normally the homestead exemption would protect the homestead from creditors other than the mortgage lender. Otherwise, it would be substantially impossible to induce banks to give mortgages.
You know what's worse than homes when it comes to investments? Kids! They don't give you any return on investment at all until possibly late in life, depending on your culture and relationship (better hope they stay near you) and they make you a lot less mobile, both in terms of geography and career opportunities. They suck up a lot of your income and they probably shorten your life span due to lost sleep in the early years.
I think a lot of people miss this point. A home isn't an investment. It's a place to live. There are studies I have seen that show that your children do better in school if you have a house vs an apartment. There could be other variables there sure. But the main reason I hear to buy a home is to 'invest in your future'.
Personally, I live in an apartment. I don't want the upkeep costs and time associated with a house. Even if I were to find a place to buy with a mortgage similar to my rent, I would then have upkeep costs on top of that. No thanks. I'll let someone else do all my maintenance, mowing, and snow removal, thank you very much.
Those $132.000 could into another investment like the SP500 and you could get 2.6x times the investment over a 10 years period (average return of 10% with dividends). This would pay the rent + provide you a return.
I don't agree with all the points of the author as there are many factors to have into account when making the best financial decision. But rent can't be just seen as a negative investment, it's a cost that makes a person free to move their money into investments that provide a better return.
For a lot of people the "investment" piece of owning their home is secondary to having a home to live in and raise their family in. Especially in the US, there are tax benefits to owning, and depending on the market owning could make more sense than renting.
Exactly. A house is more than an investment, it's a place to live. My sister and her family are living in their 3rd home in as many years because the owners of the places they are renting keep selling and don't renew their lease.
Then it's a hectic couple of months of finding somewhere new (but close enough to the same location so kids don't have to change schools) packing up everything in to boxes, moving and unpacking everything. It's 2-3 months of hassle they would love to avoid. Not everyone is buying a house as an investment.
I am generally sympathetic to the idea that homes are a bad investment. The fundamentals are terrible, as discussed in the article, the most important one probably being the lack of diversification. But I wonder how it meshes with the results proposed by the article "The Rate of Return of Everything." That article found that housing has only slightly underperformed stocks as an investment.
Now, obviously, if you're living in your house, you're not going to get nearly the same return -- this is the total return on housing, so a house you're living at could be expected to provide returns on average as listed, minus the annual value of rent. But that means its overall performance as an investment is actually better than observed appreciation.
Every house I've ever owned has (a) cost way less per month than rent (I know it will cost less, but I mean on the order of nearly 50% less) and (b) appreciated enough after a short time that it made a sale worth it. The first house we owned appreciated by about $25k in 2 years, and the house we're in now (according to comps we just ran as we're preparing to sell) has appreciated about $80k+ in 3 years.
You can make smart property choices, even for the home you occupy (i.e., not just rental properties). But "smart" includes evaluating all the criteria. If you live in an area with a ridiculous property market (e.g., the Bay Area) or a very, very slow one, then the investment isn't as enticing. I'm blessed to live in a market with a lot of movement for a variety of reasons, not just being a "hot" area to live in, but others are not so much. I'm also blessed to work remotely, so I can choose to live in an area like this. :)
tl;dr: this is probably true in a lot of America, but it's not universal by any means.
Homes are a bad investment except that we all need somewhere to live. Even if you're renting many of the costs and risks the article mentions are borne by the landlord and then passed on to you.
Renting and owning from a cash flow perspective are usually pretty close, and you need to live, so a suboptimal investment with any return is better than making a landlord money and investing the scraps into 401ks.
I’m in my late 30s and missed the gogo crazy years. But everyone I know in my age cohort has had a positive, meaningful ROI in trading houses up at least once.
The supposed flexibility of renting is overrated as well. No decent landlord will take less than a 1 year lease, and some premium properties will demand a premium if you refuse a 2 year lease. Getting jammed up with buying out a lease early, or getting stuck with a high rent when the market cools is another way that renting is almost always a bad deal for the tenant.
This sounds like a corporate accounting analysis, not advice for people. People don’t benefit from deducting opex.
> The supposed flexibility of renting is overrated as well.
Plus there's nothing keeping you from renting out your property and then living somewhere else.
You lose some of the nicer deductions and time spent being a landlord, and that certainly hurts ROI, but it's definitely not the case that you must live in what you own.
This makes great points that shouldn't be ignored. But here's the reality: most people don't invest in anything but do pay rent. If you just shift that rent into a mortgage + repairs, at least you're investing in something that will slightly under-perform inflation (maybe).
It's lower risk / higher return when you think of it that way.
(I do not own a house nor do I plan to own one, however)
I actually agree with a lot of the points made here. Still terrible advice. Youre always gonna need somewhere to live. Guess whats a better bet to invest in than an apartment? A house. If you buy though, check all your bases. Whats appreciation looked like for the last 10 years in this neighborhood? How are the schools? Hows the job market for professionals? etc.
1. Interest rates are at historic lows. Real interest rates have recently been negative. When this changes in the next decades, interesting things will occur.
2. It is time for the baby boomers to leave their houses and move into smaller digs. There is a demographic shift on the horizon.
3. The Republican tax legislation just hammered home deductions in many areas.
- Massive tax subsidies provided by the government. Seriously apalling if you think about it hard enough, but since they're available, you should try to take advantage of them.
The author makes a few good points, but IMO most others are negated by the two he conveniently skips:
1. Your house is usually generating income (for a rental property) or offsetting the rent you would otherwise have to pay. Saying "you have to pay a lot of taxes" doesn't mean much unless you compare the numbers.
2. He mentions that property value is tied to a specific geographical area (and that's a bad thing), but then contradicts himself by calculating appreciation based on the national average. If you live in a fast-growing city then it's pretty certain that you're going to make more than inflation.
That is equivalent to any investment. The difference is that the property still generates income if not capital total gain. A depreciated stock generates no dividend.
Moreover there is a floor on a value of a home unless you let it completely unmaintained or it gets bombed in a war. There is no floor on stocks. There is such a floor on some material futures. (Though probably lower.)
I own my own home and this idea being pimped to millennials that they should lease everything from car rides, music, movies, bicyles, and shelter is a fast curtain to a bad "third act." (read that as old age)
John Goodman said it best while playing a loan shark in the the film "The Gambler..."
Frank: You get up two and a half million dollars, any a-hole in the world knows what to do: you get a house with a 25-year roof, an indestructible [Japanese]-economy shit box, you put the rest into the system at three to five percent to pay your taxes and that’s your base, get me? That’s your fortress of Fucking solitude. That puts you, for the rest of your life, at a level of fuck you. Somebody wants you to do something, fuck you. Boss pisses you off, fuck you! — Own your house. Have a couple bucks in the bank. Don’t drink. That’s all I have to say to anybody on any social level... Did your grandfather take risks?
Jim Bennett: Yes.
Frank: I guarantee he did it from a position of fk you. A wise man’s life is based around fuck you. The United States of America is based on fuck you. You have a navy? Greatest army in the history of mankind? Fuck you! Blow me. We’ll fuck it up ourselves.
When I was house-hunting, I found it really frustrating how difficult it is to truly price out the total cost of owning a house.
Many people think that renting is throwing your money away, and buying is acquiring equity. This is true as a first-order approximation, but far from the whole story. Home ownership also has ton of non-recoverable costs:
- interest on your mortgage
- mortgage insurance (if you have >80% LTV)
- closing costs on your loan (2-5% when you buy)
- property taxes
- homeowners insurance
- yard care / landscaping
- HOA fees
- home maintenance (estimated: 1%/year)
- realtor fees (6% when you sell!)
- excise tax (~1% when you sell, in my locale)
All of these costs come before you have contributed a single dollar of equity to pay down your loan. If you rent, your rent check covers all of the above expenses.
I'm still really happy to be a homeowner. I love my house and I love being able to do what I want to it. I just wish it was easier to price out the total cost of ownership prior to buying, so that rent vs. buy comparisons could be more enlightened. I certainly felt like I didn't have enough information to make a totally informed decision when I was choosing to rent vs. buy.
Part of what complicates this analysis is: a lot of the financial benefit arises from the house's appreciation, not your accumulated equity. But betting on home appreciation is a bit of a gamble. Home values are subject to a lot of economic and political factors that you can't control. If the mortgage interest deduction went away, or mortgage interest rates rose significantly, it could devalue houses a lot.
109 comments
[ 4.2 ms ] story [ 168 ms ] threadDisclosure: I own several rental properties to round out my investment portfolio.
Returns vs utility is an acceptable trade off for me.
However, that does not mean I made a wise financial decision. I made a lucky financial decision, which is very different. This article is about making wise decisions, and it's very hard to reason about this from results in a single investment.
I just want to add that a lot of people account very poorly for their real estate profits. Whether that number is good depends on how leveraged you are and the value of the property, and many other variables, like your costs and (unknowable) future vacancy rates. (If you have a lot of leverage and the property is only worth a little, that's great! It would not be very good in a scenario where the the property is paid off and worth $2M.)
Also known as speculation
https://priceonomics.com/what-its-like-to-fail/
They had a $500k nest egg and living in a 4000 sqf home. The decision could have been to sell the home, downgrade to a home half the size, cut all 'future children investments' and lived a frugal life.
The best future investment that could have been made here is living within the reality of the numbers.
Sure, a house is not a great investment. But there's more to housing than investment. You have to live somewhere, and you're probably going to be paying for it one way or another. There's no perfect solution--you have to figure out what works for you.
We bought this house nine years ago, and hope that we never have to move again. Now the mortgage is about half of what it would cost to rent an apartment in this neighborhood. That's kind of a trap, too. There's no point to thinking about moving--there's no place we could go that would be cheaper than what we have unless we leave the area entirely.
Now, obviously not all investments are winners, even if they are "good" investments in principle. And there are all sorts of very good arguments about why homes should not be subsidized in the way they are, and that our government has made them "too good" in a way that harms the public as a whole. But nonetheless homes in almost all of the US are absolutely good investments. They have been for going on three quarters of a century now and certainly don't show signs of stopping.
On average, homes in the US appreciate at about the rate of inflation, and the choice to rent vs. buy is favorable in some markets, unfavorable in many others. It's nowhere near as clear-cut as the comments in this thread would lead you to believe.
Homes are heavily taxes if you don't live in them, to the above poster's point.
Property taxes also apply to home ownership.
Until this year, you could deduct those taxes up to your total federal tax liability (which may be what the parent is saying), but now you're limited to $10,000. Either way, it's a lot more burdensome than most investments.
Regarding property tax, yes, but dividends are taxed as well and you generally are going to pay capital gains in the specific situation I’m describing if you replace “primary residence” with “stock”. Primary residences with mortgages have better tax treatment, really. If it didn’t I wouldn’t have a mortgage.
It depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
If your profit isn't 6 figures, choose this option carefully.
Are you referring to the over-55-once-in-a-lifetime exemption that was replaced in 1997 with the introduction of the Taxpayer Relief Act? https://en.wikipedia.org/wiki/Taxpayer_Relief_Act_of_1997
Also, the point about diversification is a valid concern. Would you put (50% of your net worth + loaned money) into only FB/AMZN/XYZ stocks, today (tomorrow)? Probably not.
Like I said, I actually am on your side that the US obsession with homeownership has led to all kinds of bad externalities with poor urban development and income inequality. I'd support all manner of regulation intended to decrease the subsidy we pay out to the middle class in favor of higher density rental environments.
But houses in all but a few markets are and remain "good investments" by any reasonable interpretation. To argue otherwise is to argue in bad faith. Stop it.
What about the interpretation that I don't want to be subject to price fluctuations of a single object that represents a large fraction of my net worth? The argument that I might not wish to manage a property? The argument that I don't want to avail myself of the opportunity to be foreclosed on because I would like to maintain my credit? All those seem reasonable enough to me as factors to consider in defining a good investment (obviously subject to any individual investor's utility function).
Personally I think what should stop is you accusing anyone who disagrees with you of arguing in bad faith.
That only makes sense if you bought the house in cash or if someone is willing to loan you money at 4-5% to buy stocks. Investments aren't zero sum when the government is effectively underwriting your mortgage.
This article is total woo. Sorry.
[1] https://wallethub.com/edu/states-with-the-highest-and-lowest...
The alternative is much worse in many markets.
I'm not huge fan of being a homeowner, but if I decided to rent, my rent would be almost twice what my mortgage is.
If I stayed where I rented last year for ten years, the total cost over ten years (assuming the rent is never increased) (rent is always increased) is $132,0000. Even if my house cost that much to maintain over ten years plus interest (it won't), I'll still break even on the principal and enjoy the benefits of home ownership.
That's not to say that home ownership is always the right choice for everyone in every stage of life. But to sweep a broad generality like "houses are a terrible investment"...
Even if they could have done better with stocks, the peace of mind to only have to pay property taxes and upkeep on a house is something that has substantial value in retirement.
Hang on a minute there. Big citation needed, or caveat for which locality you're talking about. In LA or SF, for example, the interest + property tax + upkeep + HOA fees + closing costs + etc. very often run significantly more than rent on an apartment. And that's after the huge assumption that you can even afford the up-front cost needed to buy a house in the first place.
Yes, but rental prices also change over time, whereas your mortgage payment doesn't (although the tax deduction falls over time, and your locality may up your property taxes, but these are fairly minor components).
If you have reason to believe that rent will continue to increase (either around CPI, or in the case of the Bay Area, 10%+ per annum...), then by all means buying a house now (which produces an infinite stream of rents) allows you to profit off that view.
Another way to view this is that you are acquiring an rental inflation-indexed asset and a nominal liability, so you will profit if inflation is high enough.
As someone who doesn't plan to indefinitely stay in the Bay Area, I'm very happy renting a rent-controlled unit.
https://www.quora.com/What-percentage-of-San-Francisco-apart...
Rental is a way to hedge the short into long position for investors in homes and apartments. The renter instead is probably in long position on house prices add they likely want their own house - if they don't, they are subject to many market risks, including some existential ones.
- Not an ongoing drain on cash.
- Liquid.
- Cheap to buy and sell.
- Simple to buy and sell.
- Have historically generated high returns. (Although see my earlier comment for questions about whether this truly distinguishes stocks from housing.)
- Normally not leveraged.
- Normally not mortgaged.
- Often productive (dividends).
- Mobile. You can sell it to anyone in the world.
- Many large corporations are multi-national, and certainly immune to any event that would occur at a neighborhood level.
- Do not discourage you from moving to seek better opportunities.
- Stocks can be pretty cheap. Shares of good ETFs are in reach of anyone.
- Require no ongoing maintenance.
- Relatively immune to local or even global weather.
- Generally tax efficient, especially if held in a retirement account.
- Not subject to eminent domain.
What about this analysis makes you think that stocks fare poorly in it?
Large bigcorps ate also vulnerable to market downturns and can fail. This has been shown in the recent lending crisis and car manufacturer problems.
Stock require maintenance as in you have to watch the prices and the general condition of the market at the very least or you stand to lose a lot of money.
Stocks are not even immune to power outages. (E.g. one at certain flash manufacturing plant of Samsung) Media are less predictable than weather and affect stock prices a lot. Main factor in prices of mortgages is supply of houses and interest rates which are relatively predictable.
Stocks are taxed at capital gains tax level when you sell them like everything else.
Whole you can technically sell stocks to anyone, not anyone will want to buy your stocks anyway or will buy it for a massive discount.
The remaining point about not moving is moot when you have a family. Want to move yearly with a kid or two in tow? Good luck! And then you also presume there are always better opportunities to move to. This might be true in a score of professions but not most of them.
This would only make sense if you want to live in a place indefinitely. When the economy here (Alberta, Canada) tanked due to falling oil prices, people who were renting and were laid off simply gave their 1-2 month notice to their landlord and moved to Montreal or Southern Ontario for better employment opportunities. Those who owned could not do that without taking a huge loss, selling their house for less than the price they bought it for, potentially less than the remaining mortgage obligation, potentially leading to their bankruptcy. As for renting it out? Forget about finding a tenant in that economy. And even if they did, how could they manage a property from the other side of the country?
Mobility is worth more than zero. If you think the economy in the place you are living is going to be good for the rest of your life (or at least the rest of your mortgage term) and you are certain you would not want to move during this time, go ahead and buy a place. Otherwise, it makes sense to rent.
I think the majority opinion on HN is that unlike other industries like energy, auto manufacturing, agriculture, etc., tech is uniquely immune to downturns. My impression is that most people on HN believe that the tech scene in California is only ever going to get bigger and more lucrative, and with it property prices are always going to go up. Even suggesting that tech and SF bay area might end up like, say Detroit and auto manufacturing industry, would make many to dismiss your point entirely. But as an outsider who does not have a horse in this race, I don't share the same mindset. Only time will tell the truth. But I won't be surprised if the sustained tech boom goes bust at some point during the next half century.
Whoa, you have to go bankrupt to stop paying a mortgage in Canada? In the US, these are (in my experience) secured, non-recourse loans. That means that the bank's final option is to take the house, but if they do that, you owe them nothing else.
It depends on which province your property is located at. In Alberta and Saskatchewan, mortgages are non-recourse. In the rest of the country they are not. So for the majority of Canadians bankruptcy is the only way to get rid of their mortgage.
Admittedly in the specific example I gave this would not be the case. However to the best of my knowledge, defaulting on a non-recourse mortgage ruins your creditworthiness the same as declaring bankruptcy. Considering how many landlords and employers check your credit report, defaulting on a mortgage could have serious consequences for your livelihood, even if it is non-recourse.
Stay away!
Just don't do it as an investment.
Personally, I live in an apartment. I don't want the upkeep costs and time associated with a house. Even if I were to find a place to buy with a mortgage similar to my rent, I would then have upkeep costs on top of that. No thanks. I'll let someone else do all my maintenance, mowing, and snow removal, thank you very much.
I don't agree with all the points of the author as there are many factors to have into account when making the best financial decision. But rent can't be just seen as a negative investment, it's a cost that makes a person free to move their money into investments that provide a better return.
Then it's a hectic couple of months of finding somewhere new (but close enough to the same location so kids don't have to change schools) packing up everything in to boxes, moving and unpacking everything. It's 2-3 months of hassle they would love to avoid. Not everyone is buying a house as an investment.
Now, obviously, if you're living in your house, you're not going to get nearly the same return -- this is the total return on housing, so a house you're living at could be expected to provide returns on average as listed, minus the annual value of rent. But that means its overall performance as an investment is actually better than observed appreciation.
https://www.frbsf.org/economic-research/files/wp2017-25.pdf
You can make smart property choices, even for the home you occupy (i.e., not just rental properties). But "smart" includes evaluating all the criteria. If you live in an area with a ridiculous property market (e.g., the Bay Area) or a very, very slow one, then the investment isn't as enticing. I'm blessed to live in a market with a lot of movement for a variety of reasons, not just being a "hot" area to live in, but others are not so much. I'm also blessed to work remotely, so I can choose to live in an area like this. :)
tl;dr: this is probably true in a lot of America, but it's not universal by any means.
Renting and owning from a cash flow perspective are usually pretty close, and you need to live, so a suboptimal investment with any return is better than making a landlord money and investing the scraps into 401ks.
I’m in my late 30s and missed the gogo crazy years. But everyone I know in my age cohort has had a positive, meaningful ROI in trading houses up at least once.
The supposed flexibility of renting is overrated as well. No decent landlord will take less than a 1 year lease, and some premium properties will demand a premium if you refuse a 2 year lease. Getting jammed up with buying out a lease early, or getting stuck with a high rent when the market cools is another way that renting is almost always a bad deal for the tenant.
This sounds like a corporate accounting analysis, not advice for people. People don’t benefit from deducting opex.
Plus there's nothing keeping you from renting out your property and then living somewhere else.
You lose some of the nicer deductions and time spent being a landlord, and that certainly hurts ROI, but it's definitely not the case that you must live in what you own.
It's lower risk / higher return when you think of it that way.
(I do not own a house nor do I plan to own one, however)
1. Interest rates are at historic lows. Real interest rates have recently been negative. When this changes in the next decades, interesting things will occur.
2. It is time for the baby boomers to leave their houses and move into smaller digs. There is a demographic shift on the horizon.
3. The Republican tax legislation just hammered home deductions in many areas.
There are interesting times ahead.
- Massive tax subsidies provided by the government. Seriously apalling if you think about it hard enough, but since they're available, you should try to take advantage of them.
That list is sufficient.
1. Your house is usually generating income (for a rental property) or offsetting the rent you would otherwise have to pay. Saying "you have to pay a lot of taxes" doesn't mean much unless you compare the numbers.
2. He mentions that property value is tied to a specific geographical area (and that's a bad thing), but then contradicts himself by calculating appreciation based on the national average. If you live in a fast-growing city then it's pretty certain that you're going to make more than inflation.
Moreover there is a floor on a value of a home unless you let it completely unmaintained or it gets bombed in a war. There is no floor on stocks. There is such a floor on some material futures. (Though probably lower.)
John Goodman said it best while playing a loan shark in the the film "The Gambler..."
Frank: You get up two and a half million dollars, any a-hole in the world knows what to do: you get a house with a 25-year roof, an indestructible [Japanese]-economy shit box, you put the rest into the system at three to five percent to pay your taxes and that’s your base, get me? That’s your fortress of Fucking solitude. That puts you, for the rest of your life, at a level of fuck you. Somebody wants you to do something, fuck you. Boss pisses you off, fuck you! — Own your house. Have a couple bucks in the bank. Don’t drink. That’s all I have to say to anybody on any social level... Did your grandfather take risks?
Jim Bennett: Yes.
Frank: I guarantee he did it from a position of fk you. A wise man’s life is based around fuck you. The United States of America is based on fuck you. You have a navy? Greatest army in the history of mankind? Fuck you! Blow me. We’ll fuck it up ourselves.
https://www.youtube.com/watch?v=xdfeXqHFmPI
Many people think that renting is throwing your money away, and buying is acquiring equity. This is true as a first-order approximation, but far from the whole story. Home ownership also has ton of non-recoverable costs:
All of these costs come before you have contributed a single dollar of equity to pay down your loan. If you rent, your rent check covers all of the above expenses.I'm still really happy to be a homeowner. I love my house and I love being able to do what I want to it. I just wish it was easier to price out the total cost of ownership prior to buying, so that rent vs. buy comparisons could be more enlightened. I certainly felt like I didn't have enough information to make a totally informed decision when I was choosing to rent vs. buy.
Part of what complicates this analysis is: a lot of the financial benefit arises from the house's appreciation, not your accumulated equity. But betting on home appreciation is a bit of a gamble. Home values are subject to a lot of economic and political factors that you can't control. If the mortgage interest deduction went away, or mortgage interest rates rose significantly, it could devalue houses a lot.