Is Real Estate Actually a Good Investment on Average?
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
How is that better than owning where the rent cost == mortgage cost?
Because there are taxes, fees, sales overhead, maintenance, time value of money, liability, insurance, upkeep, etc.
You CAN make out better when the two are equal. You can also lose. Unless one is dramatically more than the other, and you know will always been, then you can't look at that number at all, that's not the whole picture, it's an under the hood component that is meaningless on its own.
Also, we can never assume that renting = mortgage. Typically, it is lower. Almost always. Anytime that renting becomes too expensive, people take out mortgages for the market to adjust. So you can safely assume that nothing you see today is meaningful and that over time, the rent will be lower than the mortgage rate. It has to be as a general average, it's how real estate works.
One of the biggest mistakes that people make with investing is looking at how something does "today" and assuming it will always do the same thing.
Investing in real estate "today" is similar to Bitcoin two months ago. It was going up and up, you "couldn't lose money". but logic and math said it was the worst time to invest. And guess what?
Buying at the peak is never a smart move from an investment perspective. If you make any argument to the contrary, you are missing the most basic concept of investing which is "buy low, sell high."
Yet almost everyone (and this is how the rich stay rich and the poor stay poor) gets emotional and tells each other that it is good to buy when things are the most expensive and to sell when things get rough. The average person literally will argue for buying high and selling low. Not when you state it that way. But all those hordes saying real estate is good today or that crypto was good a few months ago were arguing for exactly that.
People don't "see" the high and low when they are doing the buying and selling and generally do the opposite.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
I have read "Rich Dad.. Poor Dad" book, and it is a good read, but the claim that "house is not asset" is exaggeration to explain his points.
Only sort of. Everything is an asset and a liability at some point. But houses are far more of a liability than most things. They are truly either depending on the circumstances.
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@Mario-Jakovina my numbers were quick off the cuff showing only a part of the reality.
Obviously, not all of the money is in 2016 dollars, but it a simple number we can work for point of example without being in the future.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Only sort of. Everything is an asset and a liability at some point. But houses are far more of a liability than most things. They are truly either depending on the circumstances.
If we want to be precise in finance (like you are when you talk about IT) - Nothing can be "asset and liability at some point".
Some things are assets (money, real estate, investments), and some other thing are liabilities (loans, account receivables....) -
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
P.S. I bet you will be able to sell it for $463K in 2041. - at least because of inflation.
yeah......
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
I can pay a bank 1,168 dollars every month for 20 years and hope to have a house I can sell for 200k+. Or, I can pay a landlord that money have after 20 years have sweet fuck all... hmmm, sure, I will rent.
If that is how you look at it, then you are who we make our money on. Because that "logic" sounds great, it's a salesman's sound bite, but it's only part of the picture.
On the surface, it feels like an obvious truth. But as a real estate investor, I can tell you it's false and meant to mislead you into buying without investigating. Every agent will point it out and ignore all the risks.
ANY situation where that's the only thing you look at, means you aren't taking the discussion seriously. Nothing about home ownership / investing can be distilled to such a simplistic view. The costs and benefits are so largely not related to those numbers.
It's like with RAID 5. People try to sell RAID 5 (or used to) by trying to distract everyone from the real risk by talking about "drive failure", but drive failures were not the primary risk. They were A factor, not THE factor. But they sound easy to understand, so that's how you sell people. Make them feel like they can just understand one easy number and its easy for them to lie to themselves that it's an easy decision and that they don't have to understand financial math and risk.
But it remains a trick. The risks of the house are far and away different than you are pointing out.
Can the situation you mention exist? Yes, rare, but CAN exist. Have I ever seen it in real life, no. But it does exist once in a while. Can it be profitable? Yes, it CAN be. Is it likely? No, no part of it is likely to be true. Especially because the factors that make the one part true (rent being illogically high) forces the other to be untrue (that the investment in the house will grow instead of shrink.)
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@JaredBusch OK, but the wrong is to say it is in 2016 dollars - it is more accurate to say it is in "ca 2030 dollars". And that is a BIG difference.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Only sort of. Everything is an asset and a liability at some point. But houses are far more of a liability than most things. They are truly either depending on the circumstances.
If we want to be precise in finance (like you are when you talk about IT) - Nothing can be "asset and liability at some point".
Some things are assets (money, real estate, investments), and some other thing are liabilities (loans, account receivables....)No, houses are truly both. Because they carry costs whether or not their are used as an asset. They are like a loan in some cases. You have to pay to hold them.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
The prices in the UK for renting are above what you would pay for mortgage payments.
TODAY this is true. Unless that has always been true, then your logic doesn't hold. Looking at a momentary financial situation isn't a good way to invest for a lifetime.
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@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.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
P.S. I bet you will be able to sell it for $463K in 2041. - at least because of inflation.
That's very likely true. But given the current state of real estate, the risk that it isn't true is reasonably high. Rampant inflation tends to favor real estate investing with mortgages because mortgages offer a hedge against high inflation. That's very true. But if inflation stays low for 19 years, and the real estate market corrects or worse, over-corrects, it's really easy to see a real loss on the property. Almost expected given the trends.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
No, houses are truly both. Because they carry costs whether or not their are used as an asset. They are like a loan in some cases. You have to pay to hold them.
No, houses are assets.
You are talking about costs related to owning a house over a period of time. And that costs are related to specific countries, types of houses...
You can own a house in my country without any significant costs, and these costs, are small fraction of price of rent. -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
P.S. I bet you will be able to sell it for $463K in 2041. - at least because of inflation.
That's very likely true. But given the current state of real estate, the risk that it isn't true is reasonably high. Rampant inflation tends to favor real estate investing with mortgages because mortgages offer a hedge against high inflation. That's very true. But if inflation stays low for 19 years, and the real estate market corrects or worse, over-corrects, it's really easy to see a real loss on the property. Almost expected given the trends.
I aggree mostly. I do not like investing in real estate.
But I am watching rise of prices in last 40 years, and I can't say that people are stupid to buy a house/apartment.
In many countries, it shows like a good investment. -
@Mario-Jakovina And there are more and more people on Earth...
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The biggest likely factor in all of this is: flexibility.
Anyone buying a house (at a reasonable deal) that can guarantee that they will never want or need to relocate or move to living in a different house will likely (but anything but surely) benefit from buying if they are going to hold out for 30-50 years in the same house and never need to upsize, downsize, or move. But I honestly have never known anyone that fit that scenario over their lifespans, so they always end up either overbuying and overpaying and/or selling at an inappropriate time to absorb the adjustment.
Most people need a small house when they are young, want something big when they are middle age, and small (or none) when they are old. Buying a house logically doesn't fit that pattern. Owning a house essentially forces you to conform your life to your house, rather than letting your housing work for you.
Whether it is because you have kids, hobbies, pets, change jobs, changing neighbourhoods, changing interests, changing friends, changing weather, career opportunities, marriage or whatever... having the same home rarely is a good fit.
Comparing rental vs. owning costs can't be done based on the same house unless, and again, I've never met any person ever where this would be true, you're that unique person who at every life stage and every career opportunity would always choose the house that you are buying as the example house and would never, neither in youth or old age, ever opt for a different living situation.
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.
The ability to predict a lifetime of housing isn't something most people can do, and anyone who thinks that they can is likely crazy or just lying to make a fake point. Now you can estimate the cone of uncertainty and within that owning can quite easily make sense. But you have to consider just how much the house not remaining the right fit is over a lifetime when gauging this investment.
That that's not being mentioned shows how far off the evaluation is. What matters most isn't even being considered.
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.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
@Mario-Jakovina And there are more and more people who on Earth...
True, but less and less in the places all of us are reasonably considering for housing. Europe, Japan, LATAM, China... all starting to shrink or see shrinkage coming. Sure, if you live in India or sub-Saharan Africa and only want to live locally you have to consider the population growth. If you plan to live anywhere else, you have to consider the shrinkage and how much of a housing crash that is expected to create.
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For years China's peak has been predicted to be between 2022 and 2025. This year, probably because of COVID, it's already on us and China is expected to be at its peak right now. Growth has already stopped. So the place that everyone has been pointing to for generations as "the earth just won't stop growing" has stopped. Will it fall? Almost certainly, but that's just a projection. But the peak projections proved to be true, as they did in Europe and Japan. So likely the decline projections will hold true as very little can alter them.
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Global population peak is projects for the early 2060s putting it towards the end of most of our potential real estate investment timelines. So we are likely the very, very last group with enough resources to do "growth based" real estate investments and only if we focus on the poorest of the distant third world where the limited growth remains.
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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?:
The prices in the UK for renting are above what you would pay for mortgage payments.
TODAY this is true. Unless that has always been true, then your logic doesn't hold. Looking at a momentary financial situation isn't a good way to invest for a lifetime.
This is why I ask if this is regional. Its been true in South East UK for a long time. My parents purchased in Greenwich, London, in the early 80s for £38k. They sold in 2014 for £1.1m. Looking at inflation 38k would be £164k in 2014. They were hugely up on the initial purchase ~£960,000. Sure, they had some maintenance, insurance, and other costs, but that is a huge amount.
If they were renting from the 80s until 2014, they would have had zero.
Even now, my place in 2019 was £270,000. Its currently valued at £340,000. In fact, I am going to sell soon and move. But that is £70k addition compared to if I had rented. If I rented, I get £0 from that £70,000. That 70k goes straight in to the pocket of the landlord.
I get it. It may not have always been like this. But where I am in SE UK, mortgages are going for 1,000 and rental for the house next door is £1,200 - £1,400. It just doesn't make sense to rent here right now. If I could rent this place for say £500 - £800 that could make sense. I could take the difference and put it in a fund long term. But, realistically - its just not going to make sense here right now.
Same for Liverpool, Aberdeen, Barcelona? I don't know. That is why I think its regional. If I have to rent for more than it would cost to own, then it makes sense to own here.
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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.
