Is Real Estate Actually a Good Investment on Average?
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@JaredBusch said in Is Real Estate Actually a Good Investment on Average?:
Neglected a huge cost of owning a house in the U.S., property taxes. That would bring that $115,000 significantly higher as I currently pay ~$6,000 per year in property taxes. That comes to $120,000 over a 20 year loan.
So now I need to sell this house in 2041 for $463,000 (in 2016 dollars) just to break even.And don't forget the huge sales tax and assumed real estate fees that will be on top of that sale. You tend to lose most of your money on the transaction overhead. That adds up quickly.
Keep in mind this is regional. We do not have the same situation in the UK as the US with selling houses. You only need to pay tax when selling if its a buy-to-let or a second home. If you are selling your home to move to another home, you don't get taxes here for that. You would pay a fee to the selling agent. But, the money is yours.
Buyers have to pay various taxes though.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@JaredBusch said in Is Real Estate Actually a Good Investment on Average?:
Neglected a huge cost of owning a house in the U.S., property taxes. That would bring that $115,000 significantly higher as I currently pay ~$6,000 per year in property taxes. That comes to $120,000 over a 20 year loan.
So now I need to sell this house in 2041 for $463,000 (in 2016 dollars) just to break even.And don't forget the huge sales tax and assumed real estate fees that will be on top of that sale. You tend to lose most of your money on the transaction overhead. That adds up quickly.
Keep in mind this is regional. We do not have the same situation in the UK as the US with selling houses. You only need to pay tax when selling if its a buy-to-let or a second home. If you are selling your home to move to another home, you don't get taxes here for that. You would pay a fee to the selling agent. But, the money is yours.
Buyers have to pay various taxes though.
In the US we pay MORE taxes if it is a second home or a non-living investment, but we always pay a lot.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
If they were renting from the 80s until 2014, they would have had zero.
This is unlikely to be true. Your point is valid, but it misses a lot of cost of lost opportunity.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
This is why I ask if this is regional.
All real estate is regional. Some regions will have decades of non-stop growth. London perhaps. NYC had this with a century or more of non-stop growth, and then when it crashed, it crashed hard. The losses were epic.
This is where a lot of places are now, the question is, will the growth continue for decades? Years? Months? Is the end here? The end always comes, adjustment always happens. It's just... how long can it wait?
Rome probably had an artificially high market for hundreds of years. But definitely crashed at the end, for example. But that's an extreme case.
In the 1500s, Spain had the highest real estate prices in the world.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
Looking at inflation 38k would be £164k in 2014.
Not quite. Had they put it into an Index Fund, the most common here being the S&P used as a baseline, that 38K in 1982 would have turned into 556.3K in 2014. Not the same gain as your real estate, but a lot more than you are using for comparison.
Now they would have had to have rented during that time, for sure. But not paid for maintenance and such. Or taxes and those kinds of things. And would have been free to move around to look at other housing options or take different jobs.
The problem that arises is we all know someone, or lots of people, who bought, held for decades, and won big time. It happens. But we almost all also know people who tried the same thing and lost big time. For every winner, there has to be a loser.
What happens to all of us is that if you are close to people who've won, you feel like if you take the same gamble the same thing will happen to you. And likewise if you are close to people who've gotten burned, you'll worry that the same thing will happen to you.
In both cases, the emotions are wrong. Math and math alone is the tool to estimate the likely return on investment opportunity. If you are in the right market, never need to move, and get a great deal on that initial home you could score big time. But we all expect London to undergo a staggering crash, too. So your gamble is one of "hot potato"... will you be holding a mortgage when the crash eventually comes, or will you be safely renting? The trick is to own while it is growing and switch to renting before it crashes, and own again after a crash.
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Your housing can be see like stocks and bonds. Stocks are like owning and bonds are like renting (very loosely, mind you.)
When there is market growth you want to be in stocks to ride the rising tide. When there isn't market growth you want to be in bonds to lock your position relative to the tide.
What's different, and key, is that stocks and bonds you can buy or sell anytime. Housing you often have to buy or sell based on life events you rarely control or loosely control. So a house carries a risk of no longer being what is useful to you at a time that it is impractical to sell it.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
If they were renting from the 80s until 2014, they would have had zero.
This is unlikely to be true. Your point is valid, but it misses a lot of cost of lost opportunity.
Agreed there, for sure. But my point is where I am in the UK renting is more than mortgage. You don't have a monthly disposable difference to invest. You are at a net loss compared to the mortgage. Therefore, you don't have excess money to invest in other vehicles.
Like I said, I get it if rent was far less than mortgage. But where I am, its not.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
You don't have a monthly disposable difference to invest.
The numbers I used were purely based on the initial number, not the much, much larger potential mortgage number. If you had a lower rent and could invest the difference, then renting wins by a staggering amount with little effort.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
Like I said, I get it if rent was far less than mortgage. But where I am, its not.
I think our point is that you are considering the market to be a static thing. It's not. It moves over time. What makes sense today might not make sense tomorrow.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
What makes sense today might not make sense tomorrow.
This is very true, which is why drawing conclusions from historical data is always flawed. So "is real estate actually a good investment on average"? Who knows, you can't predict the future.
In as much as there is a correlation between house prices and interest rates, we look to be moving in to a period of higher interest rates, so would expect prices to fall, but who knows.
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In looking at it from Scott's point of view - it looks like renting property is almost never worth the investment. So then who are the idiots who are buying these home and renting them to others?
How are these investment groups making any money buying all of these houses and then renting them all - taking all of these putting them under an umbrella and then selling ownership shares in that umbrella... how are they making money?
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
In looking at it from Scott's point of view - it looks like renting property is almost never worth the investment. So then who are the idiots who are buying these home and renting them to others?
How are these investment groups making any money buying all of these houses and then renting them all - taking all of these putting them under an umbrella and then selling ownership shares in that umbrella... how are they making money?
I know in this area, most of the single-family rental properties were bought as tax write-offs. They're known to always loose money, so we've got slum lords that buy these things and rent them out till they get condemned by the city/county.
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Another point that's only briefly really covered here is - the difference between living in the home you are buying versus buying as an investment property with the express purpose of making money.
In Jared's example - claiming that he'll need to sell the home for $460K to break even - hardly... because Jared got value from living there. The chances are he would be paying nearly that same amount of money to live anywhere else in that area (a place he specifically wants to live because of the schools and community).
Chances are Jared could move out when his children leave for collage - sell the house, pay off the mortgage and walk away with some nickles in his pocket - but now he'll be homeless - he can't live in that money.
Huge difference between the home you're buying/owning versus money you're investing into the stock market. You sell your home - hopefully you have some money, but you're homeless - you sell your stocks (other investments) and you have cash, but they don't change your living arrangements...
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
My dad is a great example, once I moved away, the pets were gone, and my mom had passed... the house that he bought when I was born and held for 40 years cost so much in taxes that he couldn't afford to live there, it made no sense (it was only a liability.) He didn't make money on the sale, even having held for 40 years, but it was necessary so that he could move to a small, appropriate, modern apartment where he could have someone else mow the grass, pay a small fraction in energy costs, and doesn't need the vehicle to go to the store.
His house didn't increase in value at all compared to when he moved in? or he continued to siphon the equity out while he lived there? It seems pretty unlikely - though not strictly impossible - that in 40 years the house value went up zero, unless the house was basically ready to be demo'ed because it was in such bad shape...
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
I'll use myself as another example. I had a mortgage of $1600/mo recently. Now I rent a bigger place for $350/mo. In a place that I like more. ANd now I don't need a car, but I needed one before. That's even more savings. Assuming that rent will always equal mortgage just isn't a reasonable assumption.
Your situation changed beyond drastically. Moved from first world country to third world country. Moved from a place where typical wages (according to google) are $16/hr to a place (again according to google) are $1.70/hr (https://take-profit.org/en/statistics/wages/nicaragua/) average monthly wages around $310/m.
You'll get no disagreement from me on the whole need a car thing... one of my favorite things about Rome was a market on nearly every corner... of course - the reliance upon the need to get groceries nearly daily (because small homes, little food storage, etc) breeds it's potential issues.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
But we all expect London to undergo a staggering crash
Whose we?
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@Carnival-Boy said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
But we all expect London to undergo a staggering crash
Whose we?
Anyone in financial circles or with financial knowledge. Or real estate experience.
Anyone with the common sense that a market cannot simply go up and up based on no underlying value.
All the people who don't think Bitcoin is magic and will just make the planet rich, lol.
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There are fundamental problems with the "the price will always increase" model. First that there is no historic or logical reason behind it. Why would this happen? There's not a great and greater value to the housing, if anything, it is decreasing. So why would the price go up if the value is not?
Second is that housing is a self regulating market. It has to be. It cannot simply keep increasing because people cannot afford it. And once they cannot afford it, they stop buying. And once they stop buying, houses stop selling and their value start to plummet.
It's impossible for house prices to get too high, because you literally run out of buyers.
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
How are these investment groups making any money buying all of these houses and then renting them all
It's not guaranteed that they do. Look at some recent examples of companies over paying for homes and getting screwed. It happens a lot. It's also not only about making money for them on the house, it's about holding money. There's so many loop holes in the system that it is a way to legally launder, avoid other things such as taxes, etc.
That said, when you can buy homes with cash, it is less likely to be a liability. They avoid PMI, mortgage, interest, not living in the home so aren't tied to it, much easier to time the market to buy and sell, etc. They tend to immediately find renters because these home are usually move in ready. If not, they have other plans.
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
Your situation changed beyond drastically. Moved from first world country to third world country. Moved from a place where typical wages (according to google) are $16/hr to a place (again according to google) are $1.70/hr (https://take-profit.org/en/statistics/wages/nicaragua/) average monthly wages around $310/m.
It did, and most people have those options. And most people bypass them because of home ownership. Buying a house is a key factor in people paying too much in many aspects of their life and can be a bigger millstone than people calculate.
