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

106 Comments

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

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

  2. 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 ;)

  3. 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 ago, I bought my first two family home for no money down (in fact got $750 back at closing) moved into one of the units and rented out the other, which subsequently covered 95% of the mortgage, insurance and taxes.

    I did that process three more times, and since I only lived in one of the units, it got so that I was cash flowing over a thousand a month. This has covered major repairs, and, of course, the mortgage plus additional principal. I should pay the first of these properties off in 2013.

    Is this a better way to home ownership? It is for one guy living in a depressed area of the country. This would probably fail majorly in most other major cities, or even the suburbs of where I live.

    So, my conclusion is, like most other investing advice, there really is no one-size-fits-all answer to it all.

    Keep challenging the system, Ramit, and thanks for the article.

    - Charley

  4. 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 off. It seems to crazy to be true.

  5. 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.

  6. 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 aren’t accounted for.
    * Insurance isn’t calculated in.

    Factoring all of that in, our homeowner would only be better off buying a house if it was significantly cheaper than renting the same place.

    Key point: Mortgages should be *cheaper* than rent on an equivalent place! And if they aren’t, wait to buy.

    People here in my area of California (N. County coastal San Diego) are already $60,000 or more underwater if they bought a house in 2008. That’s staggering. It’s not worth it to buy if you’re in a market like this.

    -Erica

  7. 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 a singular investment. You expand on this with the unfortunate reality that people fail to work in absolutes – which is the fatal error. The output from any calculation is only as good as the input assumptions. Apparently, we should all move to NJ because agents close houses for free and inflation has been restrained for decades.

    Good timing on the post, just finished reading your book.
    Jesse

  8. 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

  9. @ 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 and cost of property/homes has risen like crazy in the past decade and most likely will not stop any time soon. We will most likely be living in a big city for a number of years (renting) but want to buy land up there before it all is way too expensive (lakefront property) to build a home for retirement/vacations etc. Any thoughts?
    Thanks as always for your insights.

  10. 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.

  11. @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.

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

    If not, then your calculations are rather off.

  13. 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.

  14. 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.

  15. 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.

  16. [...] 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] [...]

  17. 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.

  18. 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 is correct -> live like no one else, and you will end up living like no one else. When you pay cash for things, you keep your a$$ out of the fire.

  19. 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 got a freeze much earlier than expected and the sprinkler system wasn’t drained and it froze the lawn guy was out that day to fix it – total cost to me $0.

  20. 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.

  21. [...] 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] [...]

  22. You guys are good. All great comments, especially Erica’s (#6).

    Don’t forget that with a house, consumption goes up: You’ll buy nicer furniture, do renovations, and host larger parties. That adds yet another layer of unexpected expenses.

    I cover this in more detail in my book.

  23. 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) or whatever but those who are married, have kids and own homes are viewed as having “made it”. Those who are single, living carefree like they were still in college and renting are viewed somewhat differently.

    • Same is true of my friends. When someone in their mid-20s mentions that they own a house, everyone else goes, “Wow.” That sense of approval can be intoxicating. And if it’s a good financial decision, that’s great.

      But I echo many of the comments here that point out how owning a home is seen as the “best” investment and “next step” to being an adult. It’s not. Unfortunately, many people never spend much time running the numbers to get a realistic view of how buying real estate will affect their finances.

  24. 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)
    FV= 454,741. (The value in 2000 of $27000 is $454,741)

    Investing $27000 in the stock market in 1964 would have generated $454,741 in todays dollar due to return and inflation. The home was therefore a bad investment and technically the owner lost $100k on the project since $27,000 in 1964 would be worth $454,741 today.

    I didn’t account for the true value of owning the house…property tax, mortage interest if any..in that case the owner lost even more.

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

  26. 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

  27. 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 out rooms to friends and paid for most of the mortgage.

    Now if I was living in San Fransisco or any other larger city, the same house would have probably cost me triple and thus not a good investment.

    Could I get a better return on investment if I put it in the market? Maybe. But I would lose my hobby (woodworking/remodeling), would only have about $300/mo to put in (difference between mortgage and renting) and loss of freedom to do what I want with the house and yard.

  28. 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 also have a rental unit that helps with the mortgage.

    2. Saving money is an excellent idea, but we need to remember to not forget today. Try telling your children(5 year old) that you would like to let her have a bike, but you have no room to store it, or that that $100 would be worth $600 in 2035. Let’s be real. Save some money, enjoy your life…not just ages 65-80

    3. How much money do we spend on items today that could effect our future net worth. Cable, Cellphones, Cars, Eating out, Sporting Events, Clothing, etc. We don’t think twice about those things. Do we calculate a 1992 Honda vs. a 2010 SUV? Live without HD Cable? Make my coffee at home vs. Starbucks/Dunkin? What’s the rate of return on a 36 month auto lease? How much Credit card debit do i have + 14.99%?

    When I graduated college, half of my friends went into Unions, Teachers, FDNY, NYPD and the other half Finance. We took our lumps (lower pay) for while our friends on Wall St. rubbed in their life.
    Well, 15 years later we all have our jobs, pensions, health care, homes, families and our 403B.

    Robert

  29. 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 predict that we are not in a 1930-1950 almost no return period, In fact most economists don’t think the economy will start to grow again at least for a few years.
    4) One you premises in your book is automatic savings. Buying a home allows you to save automatically. Though investments in stocks are considered tied up, they are much more liquid than a home investment. So the premise that buying a home is bad, sort of contradicts the philosophy of your book.

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

  31. 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?

  32. 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. There is obviously some equivalence level where there the rental rate vs the price of the house would make one indifferent to one choice or the other. Find that amount, and if you can buy the house cheaper than that, its a good deal. If it costs more than that, its a ripoff.

    How about a post with an actual real life example? Pick a house, forecast both its costs as a buyer and as a renter, and show us the how that analysis that leads you to a decision.

  33. 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 contracts can enter your residence without telling you they will do so, for certain reasons (specified in the lease, usually related to preventing property damage). So your landlord can go into your apartment because they think a faucet is leaking or a critter might be damaging their property, without telling you. In some other countries, a landlord absolutely may not enter a renter’s residence without permission.

    In other nations such as Germany, also it’s almost impossible for a landlord to kick a renter out, they have to have a very good reason. The rented place is considered the renter’s home, with the same sanctity of a homeowner’s home. Not so in the US. If your landlord wants to sell your house, you have a month’s notice to leave. It doesn’t matter how long you have lived there, whether your kids are in a good school, if they have friends down the street, or if you can’t find anywhere else to go or take off work or pay to move on such short notice.

    I think this means that our legislators should give renter’s more protections, and I think this means that renters should demand better terms in their leases or go elsewhere, of course. But my pragmatic side also thinks it’s a good idea to own a home if I want to have more rights. Sad but true.

  34. 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 all FHA mortgages, my borrowing rate is effectively 5.1%. If my long-term stock investments do better than 5.1% over the next 15-30 years, I come out way ahead. It also helps me sleep better at night knowing that I have the 16.5% in liquid (although invested) assets, and have therefore padded my liquid assets by several tens of thousands of dollars in the event of an emergency. If I decided to go on a vacation after putting 3.5% down, the 16.5% I didn’t put into the home would cover all living costs for about 20 months.

    I’m first in line in thinking the FHA artificially increases home values and should be abolished, but as long as it’s an option, do the math (or ask someone to do it for you). In my case, the FHA option trumps the conventional 20% down option by a wide margin.

  35. 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.

  36. 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 created by real estate developers that create a plot of land from nothing and plop down a dozen or more houses hoping to get a good ROI. Most of the materials these houses are built with can’t even be re-used due to being sub-par. This is all part of a greater emphasis this, and other frugality/money-saving blogs, try to emphasize: short term vs long term thinking. It’s an unfortunate characteristic of American society that we are always looking for the quick buck instead of long-term happiness.

  37. @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 all that insightful given the fact that around 10-20% of home owners are underwater. You gotta be blind not to see that. My point is that if you buy a house at a good price, fix it up a little wisely, you can accomplish one of Ramits favorite pitches which is to automate your finances.

    There is a lot of bull around this whole topic. For example people will give inflation adjusted returns on homes but then compare it to the stock market with cherry picked dates and returns before inflation.

    If Ramit knew what he was talking about why didn’t he correct the lady on NBC morning that claimed you could have received a 10% return in the stock market in the last 10 years?

  38. 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 the long run, you’ll be paying a much larger amount to rent, then to pay down a mortgage.

    We also seem to compare renting to having a mortage in sense that they will last forever. Well at some point, your mortgage should end. So long term again, after 20 years, your home is paid off, and now ur “mortgage” payment can go straight to your savings.

    Now I’m not trying to say owning is better then renting, what I’m trying to say is that without the proper research, the proper scenarios run, I don’t think you could ever have a real answer. And to so strongly say one is better then the other is just irresponsible.

    I for one live in a city that went through a huge boom 5 years ago that resulted in rental rates doubling and in some areas, even more!
    Now those people who were able to buy a home 5 yrs ago, well their homes doubled in value too, but aside from that, they are paying mortgages on 2004 values, not renting on 2009 values which are substantially higher.

    And also, Ramit, do you yourself not own a home? Not to pick on you or anything :p

  39. 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

  40. 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 standard deduction is higher than the total of all your non-mortgage deductions, then the tax benefit is not really material. I think there are many reasons to buy a home, but I agree with the commenter who said that home ownership is not really an investment. It’s really about making the best decision for how you meet your needs.

  41. 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 one. Just ignore her/him.]

  42. 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

  43. 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 where they would be in 5 years and now own a home they don’t live due to moving for work, can’t sell or rent out to cover the mortgage. Is that a good deal? No.
    California has very good renter’s protection, but each state and city is different.
    Again it depends on where you live, where you are in life and what your goals are.

  44. 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.

  45. 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).

  46. 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?

  47. 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.

  48. #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.

  49. [...] 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] [...]

  50. 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 host larger parties. That adds yet another layer of unexpected expenses.”

    That sounds like a pretty dumb reason on why one should be renting. It has absolutely nothing to do with home ownership. And besides, doing these things might be called “enjoying life”. Everyone should look into it.

  51. 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 to pay off as a pure investment.

    This doesn’t take into account the possibilities that a house could open up that renting may not, as other commenters suggested – security, more space, family growth, ownership rights.

  52. @ 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 (for the most part.)
    *Note. I’m not saying owning is a slam dunk. It’s definitely not. Crazy neighbors? If renting, moving away is pretty easy. Neighborhood turning south? Move away…
    For a “long term” horizon though, in a good neighborhood, owning does seem to be beneficial.

    One item I haven’t seen here, which I think is important. It’s LEVERAGE!
    As long as there is inflation and house prices increase, it’s hard to beat.

    During inflation, by borrowing as much as possible, you get to pay it back with cheaper dollars, plus you benefit from the inflationary effect on the house, and if leveraged.. wow!

  53. 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, whether it be an individual home or stock, equals bad news. **Enter Asset Allocation Mascot**

    Think of it this way. If someone told you their home accounted for 80% of their take home pay, were paying 8% or more in interest, put no money down, and had no other investments wouldn’t you raise an eyebrow?

    Actually, one of the strongest cases for owning a home was hinted at in posts #46 & #47. As long as you stay put after the loan is paid, you’ll realize a significant savings from the portion of your monthly budget that was dedicated to the home loan. Remember, the focus should not be on the home itself but rather how that home ties into your overall portfolio.

    2.) An underlying theme exists between posts #27 and #33 – assumptions. Everyone knows the adage about “Ass-u-me-ing” (work with me here), and this is a very important component. Both under-assuming (missing variables) and over-assuming (“cherry-picking”) can lead to skewed results. And irrelevant facts only lead to irrelevant debates.

    As an example, I recently asked myself the most important financial question, “When will I become a millionaire?” Using different online tools with the same variables, I came up with very interesting results. The ages varied within a 16 year range!

    The point is, most personal finance articles are meant to be informative. In order to reach the most amount of people, articles rely on representative samples, not specific scenarios. Before dismissing the information, the reader has to understand the context of the information. Making blanket statements, as was the case with the Washington Post excerpts, add no value to the article or the sharing of information.

  54. 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. If that happens maybe I have to rent forever unless I get lucky and find a great deal.

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

  56. 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 why move out at all?

    3. Please make sure you know the numbers. A buddy of mine moved out into a brand new condo. He loved the gym, the freedom, the party lifestyle, but he didn’t love having to work TWO jobs to pay the bills. Property tax, mortgage payments, utilities, parking, etc. slapped him in the face.

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

  58. 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. I know not everyone can do this, but if you can afford a down payment for a house, consider renting and pre-paying your rent. You may only want do this if the landlord owns the place free and clear though.

    So I’m paying $775/month for a house that was on the market for $125K. This is lower than a mortgage payment especially if you consider taxes and maintenance. I get to keep my cash for better investments and still enjoy the benefits of a neighborhood and a house with little maintenance.

    But the best part is I’m not a debt slave. If I lost my job, I wouldn’t have to jump at the first lousy offer just so I can make my mortgage payment. I can move whenever I like and not worry about finding a buyer.

    I’m not against buying. It can be a wise decision if you plan to stay put for at least 10 years. I actually want to buy a house some day. Nobody is entitled to a house though. Suze Orman says you shouldn’t buy unless you can afford saving your monthly rent payment +45%. I say you should go even further and be able to make a 40% down payment as well. 20% would go to the bank and the rest would be your emergency savings cushion.

    “But how can anyone afford that?!”

    If everyone did that, house prices would continue to drop and become affordable again. The whole home-owning “American Dream” is a crock. Freedom is the real American Dream and renting gives you plenty of that.

  59. 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 the difference in stock rather than buy at that time in my life, so although I “could” have made that choice, I wasn’t in the mental space to do it. I used one of the calculators and estimated how much I’ve put into it, the rental income of over $28K I’ve received from having roommates off and on, the equity I have now even after the market drop, tax benefit, cost of major improvements, and… it shows I haven’t made any money.

    However, if I make the bold assumption that I would have been paying $500/mo in rent anyhow, and pulled this number out… then I am showing an investment return of nearly 25% on the difference. (To do this, the one change in the calculation I made was to reduce the input by the $60,000 I’d have paid over 10 years if I kept renting cheaply at $500/mo). I also thought, what if I spent $200/mo more than I think, and even when plugging that in, I got an 11% return.

    I know myself and there’s no way I would have actually invested the difference… I have 9 years to go on the mortgage at 4.75%. However, if I’d never had rental income in my home, the return would be significantly lower and less satisfying. And if I’d bought in a higher price range, the numbers wouldn’t have worked so well either. And if I had bought more recently when the prices were much higher, I’d be underwater like so many others.

    I like the stability of my home and it’s been a huge source of pleasure and comfort — but after seeing these numbers I’m also buying more stock!! Thanks again for the reminder that there’s the value of housing to meet our need, and then there’s the investment side.

  60. 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.

  61. 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 well. most americans’ equity (net assets) is in their home. allocating down payment money into a home leaves your net assets with a high concentration in a single, highly leveraged, undiversified asset.

    in 2005 forbes did an analysis on the market vs real estate in a few major cities:
    http://www.forbes.com/2005/05/26/cx_sc_0527homeslide.html
    in every case, despite huge returns in real estate, the sp500 dominated. (note: this is before the real estate bubble popping, and the fall of the sp500. both asset classes are down a lot now.)

    you have to remember that home prices are related to the income levels of the people living in the area. home prices can not rise above a certain ratio to income, otherwise people can’t afford to live there. to speculate on a large increase in housing prices is speculating on an increase of average income in the area (like hipsters moving into willamsburg in brooklyn).

    i personally believe the average joe should live in their home, and invest in low cost funds. if you want real estate exposure, buy a REIT fund. the american love affair with housing has perpetually perplexed me. i think far too much of people’s income is spent on housing, and far too much of their wealth is invested in housing.

    whether renting or buying is better is different for everyone. you should do the math yourself. unfortunately, most people don’t even attempt to do a projected budget and balance sheets when buying a home. and even less factor in the proper expenses.

  62. 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.

  63. 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 for the interest), and then invest the $160,000 you have left over into the market. If you borrowed the money (mortgage) against your home and pay 7.5% (rates are MUCH lower today, but not for long), and then you invested this money into the long term S&P 500 (12.75% annual rate of return), you”d be performing simple arbitrage. It’s what the banks do. You’ll never get beyond working hours for dollars unless you do become a (Smart) investor. And becoming a smart investor means leverage, i.e., using other people’s money, time, energy, etc. In ADDITION to the arbitrage that you get to perform in owning a primary residence, you don’t share any of the asset appreciation with the bank — the lender who loaned you money with your home as collateral. All they want is the return on their $ investment. They are performing simple arbitrage as well !! They borrowed the money they gave to you from their depositors, or other banks, and they pay anywhere from .75% to 3% for it. And then lend it to you for 7.5%. Simple arbitrage, and that’s the way that banks make money.

    Wake up people! The banks are not crazy or stupid. They are money making machines (AND they get bailed out by us consumers/taxpayers !!!!! )

    In addition to using other people’s money and owning real estate, you get to deduct the interest expense off your taxable income. It’s even cheaper money than the 7.5% mortgage that you have !

    Ramit, I like a lot of the things that you put out in your Blog, etc., however, your very over simplified message to people about renting vs. buying is going to keep them in the poor house, stepping over dollars to pick up dimes. There is much more to it – but not complicated !

  64. 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 spent the equivalent of 5 years worth of rent, BUT YOU HAVE 20% EQUITY IN YOUR HOME TO SHOW FOR IT, INSTEAD OF ZERO!!!! The numbers aren’t nearly as nice for a 30-yr loan.

    And taking an FHA loan allows you to get a home with 3.5% down instead of 20%. So take the other 16.5% and invest it. Depending on the size of the home, the homebuyer credit might even cover all or most of the 3.5% down.

    It is truly the best of both worlds. You get to pay rental prices for a place you own and are rapidly building equity in, and you don’t lock up all your assets in real estate.

  65. 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?

  66. 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 he live? He would have to spend $1,400,000 on rent before he would end up behind.

    Moreover, I left out, and Erica point out, all the maintenance and property taxes the man would have paid over those 36 years. That probably comes out to $100,000′s of dollars.

    Clearly, with the benefit of hindsight, buying was a mistake in this case. The point is buying isn’t always better despite what the home ownership cheerleaders say. And the man who posted about his father’s house has the real numbers to prove it but it to ignorant to even bother running through them first.

  67. 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 it out (as a rental property). I still live at my parents place but am thinking of buying a condo and renting it out. Is that a smart move for me? Anyone have the analysis on this? Will it only be a good move if my rent covers the mortgage? Please help

  68. 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.

  69. 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 increase rent as well. So my out of poker fees are about $4-6k a year (taxes, insurance, and maintenance). I am assuming I can’t get more for rent. That is not bad for owning a home. Also, I get a lot of tax breaks which brings that 4-6k to probably 3k.

    Once I pay off the mortgage, I collect rent each month and that goes straight into my pocket. How is that a bad investment scenario? Am I missing anything big here? Ramit what do you think?

    • You need to do a lot more research. What are the closing costs? What are your margins? What scenarios have you built? There are a ton of real-estate questions that you need to research. This will be the biggest purchase of your life, so I encourage you to spend a LOT of time looking into this.

      More importantly, what are your other alternatives to investing in this? Sure, you could make 1% in a savings, account, but you could earn a lot more investing in CDs or even equities. Where does this fit in?

  70. 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 go into maintaining the house you own, whether you rent it out or live in it. However, if you have some money in the bank, want a good school district for your kids, have a stable job which is going to last another 10 years, perhaps buying is for you. Here’s my story, which is now years old, but perhaps may help some of you decide why and how to approach buying a house. We liked the area in which we lived and we weren’t moving anytime soon. We had a toddler. Because I wasn’t working at the time, the bank needed 25% down (imagine that!). Since I wanted this debt off our back ASAP, we got a 15 year loan. On top of that, we paid an extra $10k off at the end of every year. (We had a prepayment penalty if we paid off more than that!). We paid the loan off in 5 years, in a year when my husband was unemployed and back in school. 23 years later, the house is worth 4x what we paid for it, and we have been living in it rent-free for 16 years. In case you think we were rich, we weren’t. In case you think we didn’t fund our IRAs, retirement accounts or emergency funds, we did. This can be done. You have to set your sights on what you want, set up a plan, follow through on it. Do what works for you – don’t try to follow the herd. Get control of your consumer-driven instincts – we all want to live in a mansion (hey, all I want is my own little indoor heated swimming pool)and fly to exotic locales on a whim. You can plug in all the numbers you want, but you really have to want the responsibility and the groundedness that comes with owning your own house .

  71. 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.

  72. 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 see how we can MAKE money by investing in real estate. It would be a good topic for even you to reserach and post about. What goes into buying a rental property, tax benefits, costs, etc. I think people will see that you CAN make money by buying a rental property as long as its the right financial choice for you. Not everyone can afford it.

    Also, I want to say this about real estate. You put down 20k for a home and own a $200k asset. Sure you owe money on this asset but your initial investment is 200k and you only put down 20. If this property goes up to 250k in 3 years, you have almost doubled your money. With stocks, you can’t invest 20k and own something thats 200k. If your 20k investment in stocks goes up 10% a year, you make 2k in one year. If your house goes up 10% in one year, then you made $20,000. See this difference? People can def. make money with real estate. Ramit can you please post on this topic and do your own research if needed because I don’t think it is totally fair to say you shouldn’t invest in real estate. Thanks.

  73. @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.

  74. 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.

  75. [...] 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] [...]

  76. [...] 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 [...]

  77. 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!

  78. 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!

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

  80. 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 money for side projects and other investments it was there. He didn’t lose all his money but in the end he had almost nothing to give as an inheritance to his kids. Not that it matters we love him anyways but his story is one we can learn from. All these people claiming that if you don’t buy a house and invest in the S&P 500 you will see a return of 13.75% are merely speculating on past trends. Most of us are not that good of investors, not because we’re not smart but we don’t have the time or insider info to go against the likes of Goldman Sachs or other heavy investment firms.

  81. 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.

    Google…RC Peck…read his book see his free webinars from Jan-April of 2008…he says buy gold and get out of paper assets.

    I have a day job, I’m not that smart and this guy has a system for growing and protecting my money that taking all the fear out of investing for me.

    If anyone’s curious to know more…I tell you my experience in feeling totally safe around retiring someday with a bunch of money.

    Dan
    drrogers@email.com

  82. 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 home ownership such as:

    Maintenance costs (which can be substantial but even if they’re not they add up over time)
    Insurance costs
    Property taxes

    These all must be added to the cost of the investment before a real ROI can be calculated. Most people don’t run their household like a business and don’t keep detailed records of maintenance costs so they just get forgotten.

    The biggest overlooked expense however is the carrying cost of the mortgage. Mortgage rates in 1964 were around 6%. So, presumably, for 30 of those 36 years he was losing most of that 7.38% gain to interest he was paying. (This could also be complicated by accounting for the home mortgage interest income tax deductions which would reduce his carrying costs by up to 1/3 depending on his tax bracket.)

    As is apparent, these calculations are not easy (even given the online tools available) because so much additional information is needed most of which the average person does not keep record of. It’s no wonder most people simply take revenue minus cost and divide by the number of years.

    One last thing to consider.

    On the brighter side, you do have to live somewhere so most of the cost of home ownership is offset by “renting” to ourselves. The real cost of owning the house, or the cost of the investment, is reduced by the amount we would otherwise be paying in rent elsewhere.

    So the real calculation is:

    Purchase price + maintenance + insurance/tax + (interest paid – income tax deduction) – accumulated rent = total investment

    Sale price – total investment (annualized and adjusted for inflation) = ROI

    Siddhartha

  83. “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 magnet. I know this first hand having been in the mortgage business for many years.

    4) Ignores repairs and maintenance that a renter doesn’t have to pay. If we assume 2% per year for repairs and maintenance on an average value of approx. $190,000 (27,000 orig value + 350,000 final value, divided by two) over a period of 36 years that works out to be nearly $137,000 paid in addition to the purchase price, just for repairs and maintenance. That’s a soft cost usually ignored by homeowners, but it should come off the final proceeds to get an accurate picture of the real return.

    Another variable that we can’t know, but can suspect, is that the property probably underwent the equivalent of at least one complete refurbishment–new kitchen, new bathrooms, new windows, floors, etc. That’s another bundle right there, but how much would depend on when the improvements were made.

    Also, we don’t know if the house had any additions added on.

  84. 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 know exactly why you’re doing it long term. Career, kids, better schools, etc.

  85. 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 as a better source of investment, I would agree with that too but one of the main rule of asset management is diversification. You have to diverse your investments to multiple streams to reduce the risk associated with that. By not putting all your eggs in one basket, you are minimizing the risk and at the same time increasing your portfolio. Its globally applicable that property and stocks are better instruments to hedge your money against inflation.

    So for average person or family, who has a very self-knowledge about stocks/index funds, can definitely take property as a starting point of investment. So what you may get a somewhat lesser returns than index funds, you can at least start with something that is still considered as a good investment and then diversify in stocks/index funds later. Both are better investment in long term. So its better to start building a mix of portfolio as early as anyone can.

    Being born and brought up in India, been living and working in Australia and currently in Singapore, I can certainly say that owning a house is one of the source of happiness in one’s life. In Asian culture, it is being rooted as part of our values. So if you are self confident and knowledgeable enough to get better returns through other sources than real estate then it is advisable to follow it. Buying a property may take some regular maintainance and costs, taxes and other expenses but in Asian culture, it is considered as a beginning to start and raise your family. And there is certainly a difference of happiness,freedom and belonging in raising your kids in own house than in a rented place.

    -Ronak

  86. 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 argue about money, we sleep well at night. We have a great life. By the way. I am an artist and my husband is a teacher. Crunching numbers is very important, combined with good common sense.

  87. 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.”

  88. 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 and closing costs.

    I made a profit of 80K tax free on a home I lived in for 6 years, after taxes, interest, insurance and improvements. I had a roommate paying 60% of the mortgage and I did all the home improvement myself. It was a lot of work but I did it around my full time job. Combining the tax breaks on interest and property taxes with putting the full amount in my 401k had me paying little or no fed. income tax.

    That 80K tax free makes up a significant amount of my net worth today.

    Don’t kid yourself about not paying the taxes and repairs when you rent. No landlord on Earth is going to eat those costs for you.

  89. [...] 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] [...]

  90. 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

    • It’s a good point, Wayne. And in practical terms, forced savings via a mortgage might be a sub-optimal — but nonetheless effective — way to save.

      However, (1) people overestimate how effective real estate is an investment, (2) underestimate how much monthly costs will be — try adding 40%-50% to the monthly mortgage to cover insurance, taxes, overconsumption, and other assorted costs — and (3) could make hundreds of thousands of dollars more via index investing.

      But as you know, whenever you use the word “could” or “should” you’ve basically eliminated 90% of people. That’s why I take the lifecycle-fund approach.

  91. 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 time. It’s called leverage — something that Ramit always ignores when he says real estate is a bad investment. In reality, real estate is a decent investment — maybe on par with bonds after factoring in maintenance, real estate taxes, and insurance. I agree stocks are generally better in the long run though, but it’s very misleading to say a house is a BAD investment.

  92. 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

  93. 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 costs of finance, improvements, agent fees etc. But the point is we’ve come out well ahead. I would not have borrowed that much money to go into stock market. We have been forced to make the mortgage payment every week (about $600) even when times were tough (3 young kids) and like Ramit says, it’s automated. Perhaps we could have made more in stocks. But life’s not all about how much better we could have done. If we hadn’t bought we would now be paying $600+/wk rent for comparable (basic) house in good location, We would not be able to afford to buy what we have now.
    In summary, home ownership might not be for everyone, it might not have been the “best” investment for us, but it was the right lifestyle choice and we think we’ve done great.
    BTW, thanks for great site, Ramit.

  94. 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).

  95. 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 because you don’t have room
    Don’t get a check when you move out of your apartment, but don’t have to worry about being “upside-down” either.

    Homeownership:
    Inflation or no, you are building equity and making money long term.
    There is a sense of security tied to homeownership that generally isn’t present in renting.
    Once the mortgage is paid, it’s yours. No more mortgage payments (Unfortunately, between refinancing or trading up, this doesn’t happen for a lot of people.)

    You get a deduction on the interest paid in the mortgage, which lowers the net cost of your payment. However, while the tax deduction helps, but is not a reason to take on or keep a mortgage. Paying the bank $1 to avoid paying the IRS .30 is just bad math. And it’s even less once you factor in the standard deduction that you still get even if you don’t itemize.

    I think Ramit does a great job of not just blindly following conventional wisdom and looking at the whole story.

  96. 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.

  97. @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.

  98. 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!?

  99. 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.

  100. [...] this book excerpt with pretty much encases the points I wanted to make. I found this author from this post. I was originally trying to find an article I had seen before where a study found that home [...]

  101. 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% return on the house value, but remember he used leverage to finance the property and only put in $5,400. So his return was 12.28% annually.

    The second option to invest $5,400 into the stock market. In April 1964 the Dow was at 810 and at the end of 2000 was at 10787 also a 7.4% return but slightly higher. His $5,400 investment would be worth approximately $69,500.

    Assumption is made that rent equals mortgage interest plus taxes and maintenance.