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

By: Eseer

Eseer — Wed, 19 May 2010 22:09:03 +0000

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.

By: Is Buying A Home The Best Investment? | Mike On Beaverton Real Estate

Is Buying A Home The Best Investment? | Mike On Beaverton Real Estate — Wed, 30 Dec 2009 08:41:45 +0000

[...] 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 [...]

By: Matt

Matt — Wed, 23 Dec 2009 02:49:43 +0000

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.

By: Chris

Chris — Sun, 13 Dec 2009 14:52:34 +0000

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!?

By: john

john — Fri, 11 Dec 2009 18:31:46 +0000

@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.

By: Dave W

Dave W — Wed, 09 Dec 2009 03:21:26 +0000

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.

By: Dave W

Dave W — Wed, 09 Dec 2009 03:12:48 +0000

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.

By: Buying a Home -- What You Need To Know And Is Rent Such a Bad Idea? | Studenomics

Tue, 08 Dec 2009 14:10:00 +0000

[...] What’s Wrong With This Real-Estate Comment? @ IWTYTBR [...]

By: Nobody

Nobody — Tue, 08 Dec 2009 07:54:04 +0000

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).

By: Cathy in Oz

Cathy in Oz — Tue, 08 Dec 2009 03:59:46 +0000

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.