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Be the expert: What’s wrong with this real-estate comment?

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As you know, I have strong opinions on buying a house, and most people don’t know what they’re talking about when they talk about real estate being the “best” investment.

So when a Wharton professor wrote a Washington Post column pointing out common myths of homeownership, I laughed at some of the comments.

  • “Wow is this a poorly written and intentionally misleading piece of b.s. I wasted countless thousands renting apartments before wising up and buying a house. The author would rather have us all in housing collectives or government owned communes. Home ownership is still the American dream; don’t let this joker fool you.”
  • “…Housing is a great long-term investment. Yes, it is. Because what the author doesn’t mention is that you have to have a place to live. If you rent, you have a place to live but the return on your ‘investment’ when you pay rent is 0.”
  • “this guy gets paid for this s^^t?”

Newspaper sites have the worst commenters in the world.

But there was a comment that made my jaw drop. Can anyone spot the multiple problems with this comment?

“Another story: My father bought our family house in NJ for about $27k in 1964; sold it for $350k in 2000. Home ownership is terrific long-term investment.”

(Need a hint? This and this will help.)

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106 Comments on "Be the expert: What’s wrong with this real-estate comment?"

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Mneiae
Mneiae
6 years 7 months ago

Wow, that last comment is really, really sad. I wish that the general public was a little better informed than it is.

Kevin
Kevin
6 years 7 months ago

Had the guys dad invested in an S&P 500 index fund, he would have been a millionaire by now 🙂

1.75 million $ > 0.35 million $

BTW : Just ordered your book, it better be good 😉

Charley
6 years 7 months ago
I’m newer to the site, sorry if I’m missing the point. I usually preach somewhere in the middle regarding home ownership vs. renting because I play a part in both spheres. I live in one of the perennial poorest cities in the US. If Money Magazine didn’t tell me that every year, I might not notice. Real estate is cheap here, and according to some reports, actually did great during the recession. With all that, I still agree with you 100% that the buy and hold is a poor investment. Time will tell if I am wise, but seven years… Read more »
John
John
6 years 7 months ago
Re Last Comment: His father made an average return of 7.4%. However, between 1964 and 2000 the market had an average return of 13.4%. His farther would have been better off putting the $27,000 in the S&P 500 if his rent over the 36 years would have cost him less than the difference between his return at 13.4 – i.e. $1,750,400 – and his current home value – i.e. $350,000. That is, his father could have spent $1,400,400 in rent and been in the same position that he is today. That is almost $40,000 a year. Hope my math isn’t… Read more »
John
John
6 years 7 months ago

Clarification: The return I used to get the $1,750,000 isn’t the average return at 13.4% but the actual return the S&P 500 would have yielded between 1964 and 2000.

Erica Douglass
6 years 7 months ago
I know someone is going to read the above comments and think, “Well, 7% isn’t bad!” There are still more factors that haven’t been accounted for in that “7%” return. The most obvious one is inflation. According to an inflation calculator, $27,000 in 1964 would cost $149,782.65 in 2000. So our homeowner comes out a bit ahead of inflation…but… * The house requires a 6% fee to sell. * This isn’t factoring in interest paid on the loan. * I am sure there was a significant amount of maintenance done on the house in those 30+ years. * Property taxes… Read more »
Jesse
Jesse
6 years 7 months ago
Ramit: Since these people believe renting is “throwing your money away” they should subscribe to my newest wealth-building strategy – stop eating! People don’t seem to appreciate that life entails a certain amount of “sunk” costs, primarily food & shelter. Related to above, do a quick calculation taking your average monthly food bill and extrapolating it over your lifetime. You’ll soon realize that hundreds of thousands of unadjusted dollars are simply going down the (digestive) drain. As discussed in your book, home ownerships in and of itself is not necessarily a bad decision, but more this notion of it as… Read more »
Mike
Mike
6 years 7 months ago

It’s easy to forget – in 1964 there was no such thing as ‘investing in the SP500’ or an index fund. Investing in the stock market meant buying individual stocks through an expensive broker, or paying outrageous fees (by today’s standards) in a managed fund. It’s almost certain that today’s best investment advice will not be the best investment advice in 45 years.

Mike

Chad
6 years 7 months ago
@ Mike – And there were fewer people like Ramit, telling people what they really need to know 🙂 Question for Ramit – I’m interested to hear your response to Charlie’s Comment #3. If you’re making money from owning a house by renting it is that a good investment – if you plan to sell it eventually anyways. Also, how do you think this all translates to purchasing Land for future development? My Fiance and I are considering purchasing (within the next 5-10 years) some land in a an area of Northern Michigan that we love. It’s a vacation area… Read more »
Lindsay
Lindsay
6 years 7 months ago

I just bought a house for the security. I won’t ever be evicted with a month’s notice, I can paint the walls whatever color I want, and I’ll never come home to find my landlord is in my house unannounced. I know it’s not a great ROI, but I got a great deal at a great rate in a great location and it makes me happy.

Lindsay
Lindsay
6 years 7 months ago

@Erica, that is a really good rule of thumb. My monthly PITI (mortgage payment + insurance + tax + interest) altogether is cheaper or equal to what it would cost to rent an equivalent house in this neighborhood. Of course, I have to pay to fix all the myriad things that go wrong around here, too. But like I said above, I also have added security and peace of mind that in the US does not come with renting.

Fritz
Fritz
6 years 7 months ago

John, did I miss where the guy said that his father paid cash for the home?

If not, then your calculations are rather off.

Andrea
Andrea
6 years 7 months ago

No matter the return, your primary home should never be considered an investment. It is your home. If you want to invest, there are better places to put your money where, over a 30 year period, the long term gain will far exceed the value of your home.

Andrea

PS. I don’t include investment properties in this statement.

lh
lh
6 years 7 months ago

I’m always amazed at how many people buy in to the “home as investment” myth. No one bothers to check the facts on their own. This is totally not an argument against homeownership, but as Andrea says, buy a home if you want all the benefits (and can deal with the downsides) of homeownership. Don’t look at as a way to grow wealth.

Lee
Lee
6 years 7 months ago

It would seem that home ownership could be quite lucrative if you sell a house that you inherited and never had to pay any of the taxes or repairs or anything else. The NJ logic is pretty prevalent here on Long Island as well.

trackback

[…] Has the new buyer credit made you think twice about buying a home? Do you still consider home ownership a solid, if not exactly profitable, investment? Trade your takes in the comments. 5 myths about homeownership [WashingtonPost.com via I Will Teach You to be Rich] […]

HollyS
HollyS
6 years 7 months ago

I love these posts. I’ve known for a long time that home ownership simply wasn’t for me, and I’m tired of people insisting that it is the ~best investment EVER~. My parents continually insist I need to buy and live in a house I don’t want because it’s such a great investment.

mike
mike
6 years 7 months ago
I was once an idiot. The typical .com 22yr old in the mid 1990’s that bought a house 9mo out of college. Single guy who was looking for a status symbol. Total mistake. I was lucky and found a way out. What house ownership comes down to is one thing: EQUITY. If you have access to cash, buy a house if that is what you want. There are plenty of worse things to buy. The problem starts with 30-yr mortgages, 0-10% down loans, getting in a buying rush, and not planning long term. Hate to wax Dave Ramsey, but he… Read more »
Mike
Mike
6 years 7 months ago
Home ownership has been pounded into everyone middle class kid’s head since they were old enough to understand the difference between renting and buying (at least where I grew up). For me – buying a house would probably be a really poor decision. I like to uproot myself every 2-5 years, and its likely that in 2 years I will want to move somewhere closer to the mountains. I also love the fact that when the air conditioner broke this summer I called the landlord and it was fixed in 2 days – total cost to me $0. When Denver… Read more »
adora
adora
6 years 7 months ago

1) That’s only about 7.4% average annual growth.
2) 27K is not the true cost of the house. Mortgage rate(6-8%), tax(1-2%), insurance(1%) & maintenance(1-3%).
3) It’s New Jersey.

trackback

[…] Has the new buyer credit made you think twice about buying a home? Do you still consider home ownership a solid, if not exactly profitable, investment? Trade your takes in the comments. 5 myths about homeownership [WashingtonPost.com via I Will Teach You to be Rich] […]

Duncan
Duncan
6 years 7 months ago
Don’t forget with home ownership comes tax breaks in the form of deducting the interest. This needs to be factored in when comparing rent vs. buy scenarios. I would guess that more renters than not only take the standard deduction. A typical home owner will itemize for the interest but once you are itemizing then you can deduct all sorts of things that the person taking the std. deduction will not. My AGI is a good $20K lower by itemizing. That translates to real money in my pocket. Perhaps its just my group of friends or our age group (30-38)… Read more »
serena (blodger) bingle
6 years 7 months ago
Here is my go at the problem: The 350K in 2000 needs to be discounted back to the 1964 level and adjusted for inflation to see if it truly was a positive NPV (“Net Present Value”) project that is also superior to other investments the person could have made between 1964 and 2000. On the first hint page, I obtained a discount rate of 8.16% using a date rate of 1964 to 2000 and adjusting for inflation. Then using my financial calculator, I entered N: 36 years I: 8.16% PV: 27000 PMT: 0 (since not an annuity in the problem)… Read more »
serena (blodger) bingle
6 years 7 months ago

Correction: I mean not in today’s dollars, in the Year 2000’s dollars. .

Fritz
Fritz
6 years 7 months ago

Serena,

The home purchaser could not have invested $27,000 into the stock market in 1964. Taking out a mortgage and having cash on hand to invest in the stock market are two very different things.

The problem determining which approach is the right one to take is significantly harder than the nonsensical calculations that are being posted.

The assumption that mortgage interest deductions and rent payments balance out interest, pmi, and taxes is a bad one to make. Also you are assuming that average is normal when it comes to stock returns, which is not the case.

– Fritz

Scott
Scott
6 years 7 months ago
I think it greatly depends on the part of the country you’re in as well. For me, I own my house, I pay less than $1000 a month PITI for a 2100 sq ft house. To rent a 2 bedroom 800 sq ft apartment would cost me at least $650/mo To me it is a great investment. Not only do I have a larger house than if I rented for the same money, I have a yard, a 2 car garage (one side converted to a workshop) with an unfinished loft. For the first 2 years of owning I rented… Read more »
Robert
Robert
6 years 7 months ago
Hello everyone, I agree with Jesse’s opening comment. Most of us are obsessed with “what makes me the most money over time” but there are many factors that need to be looked at, especially with the homeownership/renting issue. 1. Do you plan to have children/raise a family? i live in Brooklyn, NY and rent for a 2/3 BR apt in obsurd. Most of the time you would not have much storage space, yard, garage, etc. i bought a home this year in Brooklyn and now my family has all these things and I only spent 420K on the home. I… Read more »
Al
Al
6 years 7 months ago
Ramit, Unfortunately the truth is a bit more complicated than just putting money in an S&p 500 index fund and watching it grow 13%. Some points you forget 1) Tax benefits on homeownership 2) People like to cherry pick dates for S&P 500 returns. Over the last 5 years the S&P 500 has returned a dismal – 7%. Over the last ten years almost no return. So it’s easy to say hey from this to this date you could have made …. 3) The U.S. economy gave decent returns from 1930-1980. Excellent returns from 1980 -2000. But no one can… Read more »
JRL
JRL
6 years 7 months ago

OK, but while he was earning 13.4%/year investing in the S&P 500, where exactly was he planning on living?

JRL
JRL
6 years 7 months ago

Hey Erica, did you forget about management/brokerage fees on your equity investments?

Also – does nobody care to mention capital gains taxes on the stocks, which wouldn’t exist with the real estate as it’s their personal residence?

Jeremy Freelove
Jeremy Freelove
6 years 7 months ago
It’s a little frustrating that Ramit never takes a solid stance on the issue. Are there ignorant people championing homeownership? Absolutely. Does that mean real estate has no business being owned by intelligent investors? Absolutely not. Its a numbers game, and Ramit has said more than once to do your own analysis. But thats where he stops short. I’ve never actually seen any analysis, and the constant pointer to the Yale research is horribly misleading and cherrypicked. By making fun of homeowner cheerleaders, he is implicitly telling us not to buy houses, which is not what I think he intends.… Read more »
Lindsay
Lindsay
6 years 7 months ago
Al, you’re right but I don’t think that Ramit’s premise is that buying a home is a bad idea, just that it shouldn’t be assumed that it is a good investment or a sign that someone has “made it.” I think another thing to consider is how few rights renters have as compared to homeowners. After Katrina, homeowners were given FEMA trailers and allowed to take out SBA loans for replacement houses. Renters didn’t get trailers, they had no property to put them on. They didn’t get loans to buy a replacement house. They had to leave. Landlords in most… Read more »
Sumeet
Sumeet
6 years 7 months ago
I recently thought about this process from another perspective.. I have significant gains on a home I am selling. I had the option of putting down 20% on a larger place (an owner-occupied MF home that will cash flow in 10 years when we’re ready to move on), or going with a 3.5% FHA loan and investing the remaining 16.5% that would otherwise go towards the down payment. My expenses in this new place will be only about $125/mo more than what they were at my old place with the FHA option. Even with mortgage insurance costs that come with… Read more »
kode
kode
6 years 7 months ago

Seriously guys give a break.

1) Why assume that the father paid 27K down for the house. He could have paid 10% or 20% down.
2) What about the money he saved on rent?
3) What makes you think that he will keep the money in stock market from 1964 to 2000. What if he panicked and withdrew when the market was down.

JM
JM
6 years 7 months ago
I think Ramit has been trying to push the thought process away from “home as investment vehicle” to something more akin to the original idea of a home – a place that you buy for you and your family to live until you die and someone else gets it and this is a concept I agree with and will continue to help Ramit promote (if I am encapsulating correctly). Homes as an investment vehicle is not only what has caused part of our current economic crisis but create the unsustainable living situations we find ourselves in now. Sprawl and suburbia… Read more »
Al
Al
6 years 7 months ago
@Lindsay I do think Ramit is discouraging people from buying houses. Obviously if you buy a home you have to look at the fundamentals. One economist that I look at for insight regarding home values is Dean Baker, one of the only economists to predict the housing bubble. http://prospect.org/csnc/blogs/beat_the_press He sold his house during the peak of market in 2006 because he saw that the renting rates weren’t following house prices. He just bought a house using the 8000$ tax credit. Ramit’s right in saying that just because someone owns a house doesn’t mean he’s made it, but that’s not… Read more »
DanP
DanP
6 years 7 months ago
Maybe it’s just me, but there sure is alot of hatred in buying a home. While i agree buying a home shouldnt be considered an “investment”, i do feel some major points are being missed. First of all, just say u purchased a home. Your mortgage plus taxes is $1000 monthly. To rent the same location, you’d have to pay 800. Over time, these numbers will both go up. Your mortgage will stay the same but your taxes should go up yearly. But to rent, I believe your rent payment would substantially go up faster then taxes would. So in… Read more »
DanP
DanP
6 years 7 months ago

ps

An after thought to my above comment, but speaking of automating your finances….what better way to make your self save and build up equity in your home, then to have a mortgage

Carol
Carol
6 years 7 months ago
Duncan, remember that the tax deduction are only on the interest, which is above and beyond your $27k. And it’s only a deduction – you are still paying interest out – you’ll only reduce it by a max of about 35%. Also, you CAN itemize without having mortgage interest. Until this year, I haven’t had mortgage interest for several years, but I had enough other expenses to itemize – charitable contributions, state income taxes paid, sometimes medical expenses or business expenses, other taxes. If your mortgage interest is all that is making it worthwhile for you to itemize, meaning your… Read more »
Jessica
Jessica
6 years 7 months ago
Damn it Ramit, why are you such a mean ass? First of all, buying a home is a great investment if you can afford it and you can always rent for added income to cover the mortgage. Do you even know how much it costs to rent in NYC? Even one bedroom in Queens borough goes for $1600 for just a decent one. Stop deterring people from buying affordable homes if they can afford it. You really suck man. [Update from Ramit: Jessica is a troll who’s posting under different names. I left this comment up but deleted her other… Read more »
JM
JM
6 years 7 months ago

Jessica – How much would a home cost in the same area?

Also, this was useful last year but disappeared amongst homeowner anguish headlines:

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

Meg
Meg
6 years 7 months ago
I really think it depends on where you live. Renting in my Southern California city is much cheaper and has been for YEARS than buying. Renting allows you to live in a larger space than buying would get you. I know people who were buying “investment” properties in 2003-2006 to rent out and were only getting a fraction of the overall mortgage covered. Is that a good deal? No. I have friends who HAD to buy in 2005 and 2006 and are now stuck underwater in homes they don’t want to live in, but can’t sell. Some bought without understanding… Read more »
Lee
6 years 7 months ago

Hmm, don’t get it. Rent is ‘forever’. Mortgages end. That’s not a bad plan.

It’s bonkers to think renting is cheaper. If it was, how would a landlord make any profit? Not many landlords own property outright, the rental is paying the mortgage, plus maintenance costs etc, etc.

grumpy
grumpy
6 years 7 months ago

I’m with Lindsay – once you’ve paid off the house, it’s yours. Even if your income falls to zero for an extended period (and don’t we all know someone that’s been in that position?), you’re not going to be out on the streets.

Oh, and the answer to Lee’s question about landlords making a profit is tax deductibility (at least in my jurisdiction).

Credit Card Chaser
6 years 7 months ago

You mean that nice lady from all of those RealTOR* commercials is really just a marketing ploy?

*I emphasize the “TOR” because it always bothers me for some reason how everyone I have ever heard heard say the word Realtor pronounces it like “Realter” but they pronounce it like “RealTOR” in the commercials – is this just me?

Mike P
Mike P
6 years 7 months ago
Homeownership is a very situational and personal decision. You can not blanket the decision with a simple “renting is better” or “buying is better”. In my own situation, I bought a house that was well cheaper than what I could afford. I wont even be able to claim the mortgage interest deduction this year since the principal and interest and property taxes are going to be below the standard deduction. I prefer owning to renting, it is a sacrifice though, especially in mobility and upkeep costs, I definitely wouldn’t say that its a great investment, but I’m satisfied with it.
JM
JM
6 years 7 months ago

#47 – You are not alone. That irks me as well. I’ve never heard it that way and I even worked in a law office that dealt with RealTORs. Talk about a bunch of…well, we won’t go there.

trackback

[…] Has the new buyer credit made you think twice about buying a home? Do you still consider home ownership a solid, if not exactly profitable, investment? Trade your takes in the comments. 5 myths about homeownership [WashingtonPost.com via I Will Teach You to be Rich] […]

Tim
Tim
6 years 7 months ago
I can see that Ramit’s “job” is to provoke people so that they think about the “homeownership myth” a bit. He has to take an extreme position one way or the other. The thing is the “renting is better than owning in the long term” is a myth as well. As many people have said, it depends on too many things to have a definite answer. So, one thing we could do is leave this subject to rest. That being said, Ramit, you said: “Don’t forget that with a house, consumption goes up: You’ll buy nicer furniture, do renovations, and… Read more »
Sarah
6 years 7 months ago
Mortgages do end, but not everyone stays long enough to see them end. They stay only a few years and then “trade up” to something bigger. In that situation, you can watch any “profits” you may have made disappear in fees and higher costs of the new house. Buying and house and not moving for several decades is a different story, as is buying a house in full without a mortgage. That can trump renting. Buying a house as an “investment” and selling it after a few years is no better than renting money-wise. It takes decades for a house… Read more »
Jesse
Jesse
6 years 7 months ago
@ Erica, your points are all well and good, but I think it’s missing points as well. The int. and prop. taxes are deductible. Another person mentioned that you “CAN” itemize without using mortgage interest. I guess, but really that must be incredibly hard to do. We have to keep in mind, that the major portion of the expenses (the mortgage payment), is fixed. The other expenses (e.g. property taxes, insurance, & maintenance), will indirectly get rolled into the monthly rent payments, if renting. During inflationary times, each year, the rent payment will increase, while owning is sheltered from that… Read more »
Jesse
Jesse
6 years 7 months ago
First, it looks like there are two of us here. I’m #7, not #53. After reading some comments, I wanted to expand upon my original post. Unlike politics, you can be on the fence and not simply “for or against” this position. I think there are issues trying to be addressed which are actually being overlooked: housing solely as an investment along with understanding the assumptions, source, and context used to justify home ownership. 1.) Read the first sentence of my 3rd paragraph, and put emphasis on the word “singular”. Point blank, gambling your financial future on a single investment,… Read more »
JChoe
JChoe
6 years 7 months ago
I’m a renter, and I would definitely buy a house if the situation is correct. It has to be a house that I can afford, and a place I plan to live forever. My current rent is ridiculously low for me and my wife, so it’s going to be tough to find a mortgage that’ll be lower than my rent. I’m happy the housing market has cooled down a bit. But I think the market hasn’t crashed enough. Houses are still overpriced. Thanks to the low interest rates and tax credits, it looks like house prices will stay inflated longer.… Read more »
Neil
6 years 7 months ago

This is all assuming he had the 27k in cash up front.

MD @ Studenomics
6 years 7 months ago
I’m in the middle of writing a 3000 word post on this topic so I will share some thoughts: 1. Renting keeps you more flexible. If you’re a twenty-something this is a critical factor to consider. If you are an entrepreneur or would love to travel the world it will be very difficult with a mortgage over your head. 2. If you view renting as “throwing money away” then you should live at home forever. You are paying to have a roof over your head, you are paying for shelter. If you view shelter as a “waste of money” then… Read more »
JesseH
JesseH
6 years 7 months ago

@Jesse #7
You’re right…I should have differentiated between us.

JHunter
JHunter
6 years 7 months ago
What timely article. I’m a proud 20-something renter. But I used to be one of those “you’re throwing your money away” guys and felt I was missing the boat by renting. After all, my friends were all buying houses. But shelter is the fourth most important thing we need to survive behind air, water, and food. Rent is hardly throwing money away. I’m renting an apartment and preparing to move into a house as a tenant. I negotiated the rent price down 12% because I offered to pre-pay a one year lease upfront. This is a “big win” to me.… Read more »
Sara
Sara
6 years 7 months ago
I appreciate the numbers showing housing as purely an investment doesn’t compare to the stock market, especially with the additional costs of ownership. It’s a service to let people know the math of buying a home doesn’t actually make it the best investment option. If we were more rational we’d make better money choices… Yet, I bought a house 10 years ago, wrote a $300 check at the closing and the numbers have worked well for me. Yes, the mortgage and taxes have been a higher monthly payment than my rent was, but I never would have chosen to invest… Read more »
Lee
6 years 7 months ago

OK, things obviously work differently in the US. I don’t think you can rent for cheaper than you can buy in the UK. Just had a look on nestoria.co.uk, renting a property like mine would cost £250/month more. Tax? My area was exempt from Stamp Duty, and Council Tax is paid by the occupier, not the owner.

pijou
pijou
6 years 7 months ago
i always try making these points but no one believes me. a mortgage is pretty much the same thing as renting. you’re paying for the use of someone else’s assets, whether it’s a home or cash used to buy a home. there are a lot of costs associated with buying a home, (closing costs, selling costs, homeowner’s insurance, repairs/maintenance, property tax, utilities which may be included in rent, etc…), which people almost never factor when talking about their huge real estate returns. (even with the tax deductible portions) i feel the general rules of investing also applies to homes as… Read more »
pijou
pijou
6 years 7 months ago

i got on such a rant, i forgot one of the points i wanted to make…

when renting a home, people look for a comfortable place to live. however, when buying a home, people don’t seem to mind dropping a lot more cash on a bigger home and improvements, because they view it as an investment. i don’t believe housing to be a particularly good investment. find a comfy home, and invest the extra into into low cost funds.

Michael Cordle
6 years 7 months ago
Big points missing in the argument. Real Estate is an appreciating asset — that’s a good thing. The (profitable) point of real estate as an VERY effective investment vehicle is not to use your own money to control or own it. It’s simple arbitrage. Borrow money at low rates, and invest it in things that produce a higher rate of return. That is — do not pay cash for real estate. Take a mortgage. If you have a $200,000 home, you should not pay cash for it. Pay $40,000 down payment, get a mortgage (yes, there is a monthly cost… Read more »
Sumeet
Sumeet
6 years 7 months ago
There’s a very simple answer to this question: The goals are to: 1) keep you monthly expenses as close to rent as possible 2) not lock up all your assets in a down payment To do this: 1) Determine the prevailing rental rates in your area. 2) Find a home where your living expenses will be THE SAME as rent on a 15-yr FHA loan, even if that home is a little smaller. This is really the best option. You might have a smaller place, but taking a 15-yr loan means you’re building equity incredibly fast. After 5 years, you’ve… Read more »
Sam
Sam
6 years 7 months ago

All the above comments are great. I regret making the decision to buy the condo I’m in. Rent is not near as much as what I pay for my mortgage. Now that I’m in the hole, what can I do?

Selling is not an option given the economy. Or is it?

John
John
6 years 7 months ago
You guys are all making things too complicated. I did a calculation in posts #4 and #5. 1. You don’t need to calculate inflation or future value: you are comparing apples to apples. The man has a $350,000 home now but if it would have been in the S&P 500 he would now have $1,750,000 in a bank account. 2. You don’t need to calculate the interest he paid: again you are comparing apples to apples. If he paid interest on the home he would have paid interest on the investment loan. 3. For all those screaming: but where would… Read more »
Shamik
Shamik
6 years 7 months ago
A lot of you guys are talking about buying a home or renting in terms of living somewhere. If it comes down to that, I think overall renting is a good decision but it really depends on what you want. Buying a home gives you a “home” which you own and can pretty much do what you want with few restrictions. Renting you are much more confined. Financially renting makes sense but its more of a lifestyle choice. However…Ramit always knocks real estate in terms of an investment. How about the case where you buy a condo and then rent… Read more »
Sarah
Sarah
6 years 7 months ago

Shamik – it depends on alot of things. If you aren’t going to be living there, what is the purpose? If it is for an investment, many of the points being talked of here suggest that there are much better (and more diverse) ways to invest. If it is for a place to live one day, consider all the costs. Now may not be the best time to buy a home and you may be better off saving for a home to buy once you actually want to live there.

I’m not expert, of course. That’s just my two-cents.

Shamik
Shamik
6 years 7 months ago
That is my point…I am going to be living in a home where I pay no rent (parents home). Therefore if I buy a condo and rent it out I basically build equity in the home while the rent I collect pays the mortgage. I am not a 100% sure of the numbers…but let’s say it is this.. $220k home, $20k down, $1700 mortgage, $4k taxes per year. If I charge somewhere between $1600-$1800 in rent,that covers my mortage payment. All I need to pay are the taxes, insurance premium, and maintenance fees. Over the years, I’ll be able to… Read more »
Diane
Diane
6 years 7 months ago
Interesting reading, but what I fail to see in most of the comments is any real in-depth thinking about WHY someone wants to buy a house. Buying a house is a lifestyle move. If you travel, change jobs alot, still have college loans (or any other big outstanding debt) and don’t want to put the time and effort into maintaining a home, you’re better off renting. Believe me, you will have to replace the roof, the heating system, the air conditioning system, all the appliances, perhaps the flooring or the wall to wall carpeting. Your time and your money will… Read more »
Diane
Diane
6 years 7 months ago

Should have mentioned in in my previous post that the interest rate we were paying at the time was 12%. Different times call for different strategies, I guess.

Shamik
Shamik
6 years 7 months ago
Ramit, I see your point. I def need to do a lot more reserach into all the costs. However, I don’t want to write off buying a rental property as a good investment. A lot of people do it and a lot of people have made money through investing in real estate. Your point about buying a home to live in vs. renting a home to live in is mostly valid. Financially it makes sense to rent but there are a lot of benefits of buying from a lifestyle perspective. However, a lot of readers including myself would like to… Read more »
John
John
6 years 7 months ago

@Shamik

Your home ownership v. stock scenario isn’t appropriate. In your home ownership scenario, you add $180,000 of borrowed money. But you don’t do the same for the stocks.

Sarah
Sarah
6 years 7 months ago

Shamik – in your scenario you don’t say anything about the risks. If you lose money, you stand to lose alot more than you even have in an investment with such a huge margin.

There are also peripheral costs that don’t make real estate as clean cut. And then there’s the possibility that you can’t get someone to rent and you have to pay the mortgage yourself. It might be a viable investment, but it is only one option, and not a simple one, nor necessarily the one with the best returns vs risk.

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[…] Has the new buyer credit made you think twice about buying a home? Do you still consider home ownership a solid, if not exactly profitable, investment? Trade your takes in the comments. 5 myths about homeownership [WashingtonPost.com via I Will Teach You to be Rich] […]

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[…] consensus seems to be 2-3x your annual salary. Even if banks may suggest you can afford more, be careful.  Look at your circumstances and decide for yourself if it is smart. We were given a larger […]

dan
dan
6 years 7 months ago

around 7% return on investment…could have done better. Yes we need a roof over our head but not 3500 sqft at 4 times rental rates!

Lee
6 years 7 months ago

Of course houses in NJ aren’t terrific long term investments. They’re in New Jersey! He should have instead bought a 27K loft in SoHo and sold it for like $5 million!

2dogcasa
6 years 7 months ago

@Diane, #72: That is bada$$. That’s my highest form of praise. Love it.

Al
Al
6 years 7 months ago
Guys, I have to relate a story to give people some perspective on reality. My Grandpa thought exactly like Ramit. Instead of buying his apt. he signed a contract that agreed on a fixed rental rate as long as he and his wife lived in the apt. These kind of agreements were fairly common some 70-80 years ago. His thinking was that with the money he saved buy not having to put down a down payment and higher mortgage fees he could invest and make twice-three-four times the amount of money. The reality is that when he thought he needed… Read more »
dan
6 years 7 months ago
To Al, Some people think investing needs to be very hard and have inside info to get ahead. But actually growing your money and protecting your money are simpler than you’d expect. Long term buy and hold in the stock market is a dead horse. Do that and you cannot win. Sell before it goes down. Novel thought. How do you know when it’s going down you ask? when it goes down your stop loss gets you out. Seriously anyone curious about getting out of the market, like in Jan of 2008, before the collapse…my financial adviser is crazy good.… Read more »
Siddhartha Herdegen
6 years 7 months ago
Thanks for those links Ramit, very helpful. The commenter seems to have simply subtracted the cost from the sale price and divided by the number of years. This led him to believe his father got an amazing 33% annual return on his investment. If that were true real estate would certainly be the best investment in the world. But obviously you have to annualize the ROI and account for inflation which makes this 1300% increase over 36 years a good, but not staggering, 7.38%. But this is not the real return. Many people fail to consider the additional cost of… Read more »
Kevin@OutOfYourRut
6 years 7 months ago
“Another story: My father bought our family house in NJ for about $27k in 1964; sold it for $350k in 2000. Home ownership is terrific long-term investment.” I can think of four problems with this generalization… 1) Ignores inflation… a dollar in 2000 was worth only about 1/6 of what it was in 1964. In real terms the $350k received was vastly overstated 2) Ingores alternatives…Dow was well below 1000 in 1964, but above 10,000 for much of 2000. Even a boring buy-and-hold would have produced stunning results. 3) Ignores debt…”the best investment in the world” is also a borrowing… Read more »
Tina
6 years 7 months ago
Purchasing my home was the best financial decision I could have made. I built it for $180k, my broker split the commission with me, the place where I was renting gave me $2k for paying my rent on time, the builder gave me $6k towards the Mortgage and I had another $4k from an IDA I opened 4 years before. I moved into a super neighborhood in the smallest home on the water and my value has increased 20%. I also purchased my furniture from Craigs list and have hosted just one Housewarming party. Purchasing a home works if you… Read more »
Ronak
Ronak
6 years 7 months ago
After reading most of the comments so far, I guess the main point is whether to invest in property or rent a place and invest that money in some other instruemnts(such as index funds) to get better returns than property. I would certainly agree with Tina #87. I guess the main objective of investing the money is not only to grow but also to protect the loss or hedge the money against inflation. There are limited instruments that can hedge your investment against inflation like real estate, stocks, gold etc. Many of the people here who are favoring stocks/index funds… Read more »
Laura Graham
6 years 7 months ago
Here in Italy they say, don’t take a step that is longer than your leg. I love Diane’s story about her home ownership. My husband and I did pretty much the same thing. Make a carefully considered decision, do the math, stick to it and enjoy it. Our home is paid off and here in Italy there is no property tax on your first home. Our home is truly ours. As I get older, I am 42 now, I know that my husband and I, and our kids have a reliable roof over our heads. My husband and I never… Read more »
Laura Graham
6 years 7 months ago

Ramit,

You are always talking about the psychological angle of money. Renting a house in some ways is like renting a car. How well do you treat a rental car? Home ownership is good for the social fabric of a town or city.

That said I have two hyper educated friends who somehow managed to buy a huge house at the peak of the market, way above what they could really afford. They are now under what my husband and I call ” house arrest.”

Christian
6 years 7 months ago
Passively buying a house and thinking that you’ll make a fortune won’t work. But the home as an investment can be a good strategy if you work it carefully. Uncle Sam lets you keep all of your capital gains on the sale of your home every two years. Buying a fixxer upper on a good street and doing lots of the work yourself can make you a good bundle of money if you manage your costs well. A realtor’s cut can wipe out your capital gains so you need to factor in those costs. Get loans with no origination fees… Read more »
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Wayne
Wayne
6 years 7 months ago

Ramit spends time telling people how to automate their savings.

He even says to use lifestyle funds, which while not optimal, provide reasonable returns and at least you’re doing *something*, which is much, much better than doing nothing.

For most, buying a house is just another way of doing that.

Buy a house at 30, when you’re 60 and close to retirement you don’t have a monthly rent check to write out. You’re forcing yourself to save!

You may not get rich, but that’s not the point.

Wayne

Mike
Mike
6 years 7 months ago
Wow, I didn’t go through all the comments, but it seems like Ramit and the first few posters are missing a major point. The guy’s dad didn’t BUY the house for $27k. He most likely put down $5,600 and had a mortgage for the rest. So the initial investment of $5,600 grew to $350k (less selling costs). That’s a big difference than saying $27k grew to $350k. If you put $5,600 into the calculator, it would’ve grown to around $363k invested in the S&P 500. That’s just slightly higher than the $350k the house fetched in the same amount of… Read more »
Tom
Tom
6 years 7 months ago

Guys…. there’s an easy calculator to use that takes into account the fact he only downs $5600, what rent appreciation is, what stock appreciation would have been, home price etc. You just have to go through all the parameters.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

Cathy in Oz
Cathy in Oz
6 years 7 months ago
Let’s not forget it’s a big world out there. Every situation is different and generalisations are not helpful. I live in Western Australia where due to strong resources industry we have a booming economy and have done (in cycles) since the 60s. My husband and I bought our first house for $230K 10 years ago (10% deposit). Six years ago sold for $550K, bought for $635K. Increased our mortgage by $150K. Last year before the crash our house was worth $1.4m. Now it’s worth $1.2m. In 10 years our equity has gone from $25K to $800K. Sure, there have been… Read more »
Nobody
Nobody
6 years 7 months ago

I don’t know if it’s been mentioned or not, but one thing this article fails to consider on top of the value increase of the house (in relation to how much one could have made putting it in the market) is that the person’s father essentially lived rent free for 36 years. Add that up and THEN cross reference it and give me a correlation as to how much he would have made in the market as opposed to how he did it (with the house).

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Dave W
6 years 7 months ago
Wow, makes me want to put my house on the market now! if you’re 35 and renting, you’re not necessarily a slacker and they do have apartments in good school districts too. Here’s some pros and cons to both that I see: Renters: Have freedom to move whenever you want May be cheaper than homeownership in some areas No need to dip into the emergency fund or borrow to pay for repairs or renovations Can’t use the rental unit as an ATM (yes, that is a good thing) Less likely to buy “stuff” to take up space in your dwelling… Read more »
Dave W
6 years 7 months ago

Sorry, my first paragraph doesn’t make sense…posted by accident before I was done…you need to let us edit our own posts, Ramit 😉

What I meant to say was there is a couple of negative perceptions to renting that cause many people to take the plunge into homeownership prematurely:

Many people think if you’re 35 and renting (or even younger), that you are slacker and throwing your money away.

Several people have posted that they bought a house so they could be in a good school district. For the record, they do have apartments in good school districts too.

john
john
6 years 7 months ago

@64, you are making a silly assumption – that people who purchase $200k homes have $200k of liquidity. When buyer purchases the home, they post the down pmt of $40k and the bank posts the remainder ($160K). Seller recieves the $200k in cash. Buyer receives the house and a $160k liability. There isn’t necessarily $160k “left over” to go invest.

Chris
Chris
6 years 7 months ago

Guys I think you’re all missing the point. The biggest problem with the dads decision was that he bought the family in NJ.

Why would you do that to your wife and kids!?

Matt
Matt
6 years 7 months ago

What people are forgetting is the use of leverage. With the initial 27k, he could have purchased 10 houses @ 27k each (10% deposits of 2.7k). This would then increase his returns by a factor of 10 (plus any positive net return from the rents the houses produce). Taking this into consideration, I think having property as part of your portfolio is a great idea and helps diversify a portfolio even more.

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Eseer
Eseer
6 years 2 months ago
I know this is an old thread but I will post this every time I see the author speak about home ownership being a poor investment. You are all morons including the author for not realizing how the father had made a great investment. You have to pay for shelter whether you own or rent realize that when you calculate. So the father had $5,400 to invest. 20% of $27,000, standard for conventional financing. Two options he can purchase a $27,000 home or buy $5,400 in an index. The house appreciates from $27,000 to $350,000 over 36 years. A 7.4%… Read more »
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