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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

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  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.

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