Some of the comments in this story prompted me to write one of my own. The jist of the piece is that all real estate appreciation from the past 10 years is nullified by inflation. Now, I don't know if I should go outside, stand in the street and scream
DUH
at the top of my lungs, or just put my face in a pillow, and scream
DUH
at the top of my lungs in the privacy of my living room.
Stories like this bring out the haters, and several commenters lamented at how a $200,000 house actually costs three times that much in total payments (wrapping it up with a lament about the failure of capitalism) and another said that the stock market is a better investment than real estate.
There is a really really large fallacy some people fall into with when they start comparing buying a home with buying a stock, and here it is:
You can't live in your 401k. It gets drafty.
I really don't care if the stock market outperforms real estate or if it doesn't. It is an apple and orange comparison. I don't care how many charts, graphs and algorythms you show me about how much more money you'll have in 30 years if you took the money you would have put into a house and bought Berkshire Hathaway instead, and here's why: Where ya gonna live Einstein.
To take advantage of the so called "better investments" than real estate, you either have to live in a box, or be a HUGE camping enthusiast, because I haven't figured out how to invest my housing money elsewhere and avoid eviction. A dollar can only go one place.
If you pay 2000 per month rent for 30 years, you've laid out $720,000 to someone else and accomplished two things: avoided being homeless and paid the maximum in taxes possible. If you pay a mortgage over 30 years, you've paid tens of thousands less in taxes and you have an asset of considerable value that you own, even if it hasn't appreciated a dime.
So, here is my question for all the bar graph guys who think they'll have more money in 30 years playing the market while avoiding the pox of home ownership: where will you live while you're being an investment genius? In a pile of stock certificates with no plumbing or cable? A box? Your car?
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Philip,
It is a very interesting blog post. It is surprising that even people in this industry do not understand some basic things.
Thank you
You can't live in your 401k. It gets drafty.
I'm with you all the way! I've noticed an interesting trend. Many of the people who bash real estate also seem to be selling/promoting stocks. :)
It is comparing apples and oranges. But there are many places to rent where the landlord is taking a big loss and the rent is much cheaper than buying.
Philip, While it to believe home ownership generally pays off there are locations where it doesn't. None the less home ownership seems to allow a certain amount of security not afforded renting.
Steve
It isnt all about money anyway...this whole owning a house thing write? But I would say it is a way to build wealth if you look at it as a long term investment. I wish more people would.
I'm voting for the pillow. Minmal exposure :-) Very well put. Sending it along to some folks who could use a little dose of "duh"
Philip - great post!
The other fallacy in that argument, by the way, has to do with leverage. Margin accounts aside, when you buy stocks, you are gaining a 1 to 1 return on you money. However, with real estate you can control property with only a 20% investment (and often times less), and realize appreciation on the total amount. When you run the numbers, the results are staggering.
You can also leverage your real estate equity to buy more real estate, without investing additional cash. You can't really do that with stocks, unless you use margin accounts and the like.
THAT'S WHY REAL ESTATE IS THE BEST INVESTMENT!
-- Danny
UMMM and by the time you retire it can be paid off and supplement your retirement income or make up for what you aren't getting from your 4 0 None...good post.
You absolutely cannot live in a portfolio. Some of the best advice I ever got was to keep in mind that no investment is REAL money until you sell it. In the meantime, loving my home and caring for it so it maintains value are as important as checking in on my financial investments on a regular basis...and a whole lot more fun!
Nice post. Things have changed fast. Not to long ago folks were having paychecks direct deposited to the market (kidding)
Tony
Life choices play a large part into this mix and it isn't that simple. Life choices, relocations, job changes, all factor into the rent vs. purchase discussion. So while you may intend to stay where you are for 30 years that is not necessarily the profile for all. Renting has a place and may be necessary in some circumstances and shouldn't be ruled out as an alternative at times. You are in the small kids at home time of your life...
Good thinking. After all real estate isn't just an investment, it's also a home and it could be financially worthless and still be worth a fortune to the owner.
Philip: (Do you go by J Philip or Philip? My son is S Brian, and we call him Brian) I really love the clever way that you made a very valuable point about the relationship between the stock market (Wall Street) and Main Street. It's no woner you got featured; it is a very clever blog post!
We all know too many people who think their home is an investment. Wrong. Your home is a financial liability that you are willing to take on to improve your lifestyle. Compared to renting, it offers certain advantages like more long term predictability of monthly outlay. It is subsidized by tax policy that favors owning. It is, however, no more of an investment than buying a new car.
I have a rent versus own calculator spread sheet. Even with zero appreciation it still makes sense. I have also completed over 50 CMA's in the last month I send out to my real estate investors. Yes the last two years have seen a reduction in value but in most cases is still higher than 2005 purchase prices for instance. If I took a two year time line I could be singing the blues. But if I look at long term appreciation for the 7 years and up holding period, the 27.5 year depreciation schedule, and the positive cash flow I would say real estate investments aint bad.
If anyone thinks they lost money in their home value, I point out the beating I took in my 401K. Duh!
J. Philip,
I have an MBA and would rather buy rental property. Why, you ask? The returns on Wall Street were originally set up to be for the "shareholders benefit". Today, I find the environment very different with CEO and high level officers just concerned about their bonuses!
I'll take my chances on real estate any day. Also, it's a tangible asset and typically can't go from a $100 to pennies on the dollar, but it can do down, yes I know it can go to 50 cents on the dollar. Also, you really have to love the fact if you get in real estate with today's low interest rates, you should be in much better shape than inflation over the next decade.
I really think it is a much better investment than buying a new car, but we can all have different opinions!
All the best in 2010! Michelle
J Philip
I represent many investors and facilitate 1031 Tax Deferred Exchanges, The biggest problem in comparing real estate to any other investment is:
Investing in Real Estate offers you a tax shelter, cash flow (on occasion) and appreciation. There is no stock that does that.
Deborah: Well said!
Mike (#15): Did you really compare a home purchase to buying a new car!?!? That's the most ridiculous analogy I've ever heard and makes no sense whatsoever.
Daniel, glad to have attracted your attention. I said that your home is no more of an investment than a new car. Technically, I suppose that any time you pay money for something, you are investing. Buying a case of beer is an investment, although it can be argued that you are really only renting it.
I am not disputing the value of real estate as an investment, just don't agree that the home you live in should be perceived as a vehicle for accumulating wealth. If you don't like the car thing, how about your wife's engagement / wedding ring? It has value, will probably increase in value, but it's difficult to perceive that it's an investment, isn't it?
You summed it up exactly the way I would have! Happy New Year Phil!
You've made the point clear. It's an apples and oranges comparison. Now if you took investment real estate and stock market returns and placed them side by side you would have a better comparison to work with.
Those who are treating their homes as investments are looking need to be careful. It will work out that way in the long run but it's a home and not an investment.
The first tenet of financial planning is own the place you live in.
Stocks are easy to get in and out. The changes in stocks over the last 10 years are quick. Homes are much less marketable and you have to chose location over everything else. They are so very different its hard to make a comparision as they are different. Use common sense and have both. Be ready to change your stocks quickly, be ready to hang on to real estate for a much longer term.
Once you have 10 houses paid for, you need not worry about your 201K.
So true. So True. Even with the current state of real estate affairs, historically the wealthiest people I know built the lion's share of their retirement in real estate.
Well said Philip. Get your own roof over your head, then buy stock.