Is Real Estate Actually a Good Investment on Average?
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Just going to add a comment about the emotional baggage bit. This is more common than people realize and something you have to consider in real estate... most people (not smart investors, just average ones) are way, way more emotionally tied to a house than they are to a bond, stock, or gold bar.
I have a friend who moved to Nicaragua last month. Everything she owns is tied up in real estate in Dallas. Logically, renting it barely covers her mortgage and earns her nothing (it earns, but only enough to cover maintenance and repairs - not actual profit.) Long, long term she'll own the house someday (like 22 years from now) and realize actual gains (and taxes.) That's real. She's not losing, just not gaining on a tactical level.
Logically she could sell the house for huge gains today because of the inflated market. Logically her rental value is going to plummet in a few years and she might not cover the mortgage. Logically holding onto the house in the hopes of it being a nest egg for retirement is crazy because the expected value of the house at that time is little more than the gains she'd likely make today in the housing bubble market.
Why is she holding on to the house when the value is expected to evaporate suddenly? Emotions. Logically everything says "sell the house". She has enough gains on the house to put the money in an index and retire, today. She's in her 40s and could retire. Literally, could retire today. Instead of "maybe retire in 22 years if she gets lucky", it's in her hands.
She also wants residency and to start a business. But has no money and no employment. But holding onto the house, it's stopping her from making money working today (if she wanted to, she says she does) and from owning a business that she says she'd dreamed of her whole life. She literally has the money to buy residency, open the business she's dreamed of, and retire living purely from the residual income of the house gains... right now.
But because she's emotionally tied to the house, she's now renting it at a distance and lacks the financial liquidity or wherewithall to do any of the things that she wants because holding onto a house that is expected to lose her her entire nestegg in order to rent it out to someone else who she will never see a few countries away and just hoping that nothing goes wrong.
This is the kind of baggage that many people face when buying a house. She bought low, that was great. But she become emotionally invested. Now when the time to sell high came, she doesn't want to. Emotionally she feels that because it can pay for itself now, that it always will be able to and is lacking the logic required to make the real estate investment pay off.
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
This source (and others) says that prices of houses in US have risen more then 100% percent in 20 years, so it is much faster then inflation:
This is pretty much true here in NE, but that's mainly during/post pandemic - leading up to the pandemic, it might have been around 30% more than I paid...
Bought my house in 2005 for $202K, today 'valued' at $380+
As for my actual income - it's been raising around 1%/year
Curious, over the last 20 years, how much interest have you paid? How much in insurance? How much in maintenance and repairs? How much in upgrades and add-ons? How much in other things? How much did you miss out on because of not wanting to move for better income being held back by a house? What about after adjusted for inflation?
Additionally, had you put 202K into an index fund in 2005,what would it be worth today?
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@Obsolesce said in Is Real Estate Actually a Good Investment on Average?:
Additionally, had you put 202K into an index fund in 2005,what would it be worth today?
Looks like gains of nearly $400K (s&p index fund) after adjusted for inflation, nearly $600K without.
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@Obsolesce said in Is Real Estate Actually a Good Investment on Average?:
Additionally, had you put 202K into an index fund in 2005,what would it be worth today?
The cost of lost opportunity. That's the offset most people miss.
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@Obsolesce said in Is Real Estate Actually a Good Investment on Average?:
@Obsolesce said in Is Real Estate Actually a Good Investment on Average?:
Additionally, had you put 202K into an index fund in 2005,what would it be worth today?
Looks like gains of nearly $400K (s&p index fund) after adjusted for inflation, nearly $600K without.
So basically a loss of ~$400K comparing the two unadjusted numbers.
Assuming 17 years with zero maintenance or repairs or other overhead.
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@Obsolesce said in Is Real Estate Actually a Good Investment on Average?:
Additionally, had you put 202K into an index fund in 2005,what would it be worth today?
Except he didn't have $202k in 2005. He had a loan. He likely had $40k (20%) or less in cash on hand at the time.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Obsolesce said in Is Real Estate Actually a Good Investment on Average?:
@Obsolesce said in Is Real Estate Actually a Good Investment on Average?:
Additionally, had you put 202K into an index fund in 2005,what would it be worth today?
Looks like gains of nearly $400K (s&p index fund) after adjusted for inflation, nearly $600K without.
So basically a loss of ~$400K comparing the two unadjusted numbers.
Assuming 17 years with zero maintenance or repairs or other overhead.
Can't forgot about closing costs and taxes, there's that too.
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This topic is fascinating.
I am UK based (South East) and believe owning is a far better than renting, at least in the current climate in my location. I bet this is regional though. My mortgage is £1,000 per month on a fixed interest rate. There are a few places close to me that have been up for rental recently in the region of £1,200 per month. Similar size dwelling.
They came off the rental market very quickly and now have tenants, I would assume they went for the money being requested. In this case, month by month I am buying an asset. Renters however are not. The money they use to rent the property goes to the landlord.
In the future, I can hopefully sell my asset. An asset which has potentially increased in value. The renter, they cant sell anything. They have £0. Say the house was £500k 5 years ago, and I paid a £100k deposit. In that 5 years, say I paid off £50k. Say the house is still worth £500k even now. Still, great - I've now got £150k of a £500k asset. I can sell and I am £50k up from 5 years ago. The renter, yep - they have £0. What they have done is paid £50k+ of the landlords mortgage for them. Lets say I am lucky and that house increased in value to £550k, even better, I now own £200k of a £550k asset. That is even better. Sure, there is a risk the price could go down, which does happen from time to time. Even if the value of the house went down £100k to £400k, I would still have been £50k up. Meaning, the house would have had to have lost £150k in value to equal £0 like the renter. That is how I see it anyway.
The renter does have the benefit of being able to move at short notice, no house maintenance, and stuff like that. But, if you know you need to be somewhere for a long time, and have the deposit and wage to get the right mortgage, I don't see how renting is better than buying.
Note though, I am not saying owning is a good investment. I am saying I believe it is compared to renting. You could take the £100k above and invest in a fund such as Vanguard global fund. The average increase for the UK for housing is 4.3%. If you can find a fund that on average beats the average of the housing market, then that could of course be a better investment than owning.
In locations where renting is far cheaper than a monthly mortgage payment, then I would see renting and investing in a fund as far better than owning. Just, in the south east the rental price is above what people are paying for a mortgage. The problem is folk building the 10% required deposit where wages are low and rent is high. It sucks for a lot of folk that they pay more rent than a monthly mortgage. Its crazy.
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@Jimmy9008 a house is not automatically an asset. In most cases when buying a house with a mortgage, it is considered a liability. It can take a long time to become an asset, if ever at all.
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@Obsolesce House is definitely an asset.
The most typicall form of asset.(Look at any balance sheet, and real estate is always in assets, where else would it be?)
Mortgage is liability.
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@Obsolesce If you are a company, when you buy a real estate, you book it in your assets (always, and in full price).
If you bought it with a loan (mortgage), you book a value of loan in your liabilities. As you repay your loan, your liability decreases. -
@Obsolesce said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 a house is not automatically an asset. In most cases when buying a house with a mortgage, it is considered a liability. It can take a long time to become an asset, if ever at all.
Perhaps this is a location issue? I don't see this at all in the UK.
In most simple terms. I can pay £1,000 mortgage and buy my house brick by brick, raising my percentage ownership monthly, or I can pay a landlord £1,000 per month for them to use the cash I pay them to own more of their property.
In the first example, I am going to eventually own the house. At the end of the term it may be lower value, higher value, or the same value, but it will be worth some value. In the second example, I have nothing. The landlord does.
Sure, there are probably edge cases where this isn't true. But, if you know you will be somewhere for 5 - 10 years the best option is to own. Renting is best when you are mobile. If I know I want to be in London for 12 months, then Wales, then Germany, then France... yada yada, then owning makes no sense. But, if I know I am going to be South East UK for at least a decade, owning is the only sensible financial choice.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
But, if I know I am going to be South East UK for at least a decade, owning is the only sensible financial choice.
Right, until you get sick long-term or have a divorce and you can't afford to pay your mortgage and you can't sell your house because nobody is willing to pay what you need to pay off your loans.
Renting is the SaaS of living arrangements.
Zero capital expense, zero risk, 100% agility.
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@Pete-S said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
But, if I know I am going to be South East UK for at least a decade, owning is the only sensible financial choice.
Right, until you get sick long-term or have a divorce and you can't afford to pay your mortgage and you can't sell your house because nobody is willing to pay what you need to pay off your loans.
Renting is the SaaS of living arrangements.
Zero capital expense, zero risk, 100% agility.
Pretty much, shit happens.
If you are worried about possible future long term sick, get ASU insurance.
If you are worried about future divorce, well that sucks. Its still better to have 50% of a house than 0%.There are lots of real world examples of shit happening. It still doesn't change the fact that renting is paying somebody else mortgage, when you could have your own and 'hope' to gain from it.
Everything has risk.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
@Pete-S said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
But, if I know I am going to be South East UK for at least a decade, owning is the only sensible financial choice.
Right, until you get sick long-term or have a divorce and you can't afford to pay your mortgage and you can't sell your house because nobody is willing to pay what you need to pay off your loans.
Renting is the SaaS of living arrangements.
Zero capital expense, zero risk, 100% agility.
Pretty much, shit happens.
If you are worried about possible future long term sick, get ASU insurance.
If you are worried about future divorce, well that sucks. Its still better to have 50% of a house than 0%.There are lots of real world examples of shit happening. It still doesn't change the fact that renting is paying somebody else mortgage, when you could have your own and 'hope' to gain from it.
Everything has risk.
Yeah, but a shitty investment such as a single family home isn't worth that risk. It's a lot more financially responsible to rent your home and invest your capital in something better. Something that is not coupled to your living arrangements. Something you can sell and buy when the opportunity is right, not when you want to move.
If you like real estate there are plenty of things to own. Apartment buildings, commercial real estate for example.
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@Pete-S said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
@Pete-S said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
But, if I know I am going to be South East UK for at least a decade, owning is the only sensible financial choice.
Right, until you get sick long-term or have a divorce and you can't afford to pay your mortgage and you can't sell your house because nobody is willing to pay what you need to pay off your loans.
Renting is the SaaS of living arrangements.
Zero capital expense, zero risk, 100% agility.
Pretty much, shit happens.
If you are worried about possible future long term sick, get ASU insurance.
If you are worried about future divorce, well that sucks. Its still better to have 50% of a house than 0%.There are lots of real world examples of shit happening. It still doesn't change the fact that renting is paying somebody else mortgage, when you could have your own and 'hope' to gain from it.
Everything has risk.
Yeah, but a shitty investment such as a single family home isn't worth that risk. It's a lot more financially responsible to rent your home and invest your capital in something better. Something that is not coupled to your living arrangements. Something you can sell and buy when the opportunity is right, not when you want to move.
If you like real estate there are plenty of things to own. Apartment buildings, commercial real estate for example.
The prices in the UK for renting are above what you would pay for mortgage payments. You are spending far more renting than you would not renting. That makes no sense.
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@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
@Pete-S said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
@Pete-S said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
But, if I know I am going to be South East UK for at least a decade, owning is the only sensible financial choice.
Right, until you get sick long-term or have a divorce and you can't afford to pay your mortgage and you can't sell your house because nobody is willing to pay what you need to pay off your loans.
Renting is the SaaS of living arrangements.
Zero capital expense, zero risk, 100% agility.
Pretty much, shit happens.
If you are worried about possible future long term sick, get ASU insurance.
If you are worried about future divorce, well that sucks. Its still better to have 50% of a house than 0%.There are lots of real world examples of shit happening. It still doesn't change the fact that renting is paying somebody else mortgage, when you could have your own and 'hope' to gain from it.
Everything has risk.
Yeah, but a shitty investment such as a single family home isn't worth that risk. It's a lot more financially responsible to rent your home and invest your capital in something better. Something that is not coupled to your living arrangements. Something you can sell and buy when the opportunity is right, not when you want to move.
If you like real estate there are plenty of things to own. Apartment buildings, commercial real estate for example.
The prices in the UK for renting are above what you would pay for mortgage payments. You are spending far more renting than you would not renting. That makes no sense.
See this is the thing people are trying to explain to you. Math doesn't work that way.
You are very confused if you think owning a home as an investment is a smart thing.
Owning a home is fine. Thinking of it as an investment is the issue of this topic.
I bought my house for $228,000 in 2016. I paid 10% down and the rest was a loan. I refinanced last year to take advantage of the lower interest rate and to drop my term to 20 years. I was 5 years into a 30 year term, so I gained 5 years on the payback also.
I don't' have my original amortization schedule handy, but for my refi I do.
My refi has an original balance of $205,986.
After making a payment of $1,168.34 for 240 months (20 years) I will have paid $280,401.60.This means before any other expenses or values are calculated, I will have lost $74,415.60 over the term of this loan.
This is a shit ass way to start an investment return.
By the way, I only put 10% down on the original loan in 2016, because I knew the house needed remodeled. I drop approximately $25,000 to remodel everything in 2016.
So that puts me down $100,000 at the 20 year mark.
I converted the half bath to a full master bath in 2019 for $11,000.
So that puts me down $111,000 at the 20 year mark now.
I gutted 2 rooms and reinsulated them in the last 6 months for ~$4,000.
So that puts me down $115,000 at the 20 year mark now.
That means for my house to be a value as an investment, assuming I have zero other house only expenses (aka expenses that I would not also have as a renter), I would need to sell my house for $228,000 + $115,000 = $343,000 in 2016 adjusted dollars just to break even on my investment.
Edit:
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.
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@JaredBusch said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
@Pete-S said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
@Pete-S said in Is Real Estate Actually a Good Investment on Average?:
@Jimmy9008 said in Is Real Estate Actually a Good Investment on Average?:
But, if I know I am going to be South East UK for at least a decade, owning is the only sensible financial choice.
Right, until you get sick long-term or have a divorce and you can't afford to pay your mortgage and you can't sell your house because nobody is willing to pay what you need to pay off your loans.
Renting is the SaaS of living arrangements.
Zero capital expense, zero risk, 100% agility.
Pretty much, shit happens.
If you are worried about possible future long term sick, get ASU insurance.
If you are worried about future divorce, well that sucks. Its still better to have 50% of a house than 0%.There are lots of real world examples of shit happening. It still doesn't change the fact that renting is paying somebody else mortgage, when you could have your own and 'hope' to gain from it.
Everything has risk.
Yeah, but a shitty investment such as a single family home isn't worth that risk. It's a lot more financially responsible to rent your home and invest your capital in something better. Something that is not coupled to your living arrangements. Something you can sell and buy when the opportunity is right, not when you want to move.
If you like real estate there are plenty of things to own. Apartment buildings, commercial real estate for example.
The prices in the UK for renting are above what you would pay for mortgage payments. You are spending far more renting than you would not renting. That makes no sense.
See this is the thing people are trying to explain to you. Math doesn't work that way.
You are very confused if you think owning a home as an investment is a smart thing.
Owning a home is fine. Thinking of it as an investment is the issue of this topic.
I bought my house for $228,000 in 2016. I paid 10% down and the rest was a loan. I refinanced last year to take advantage of the lower interest rate and to drop my term to 20 years. I was 5 years into a 30 year term, so I gained 5 years on the payback also.
I don't' have my original amortization schedule handy, but for my refi I do.
My refi has an original balance of $205,986.
After making a payment of $1,168.34 for 240 months (20 years) I will have paid $280,401.60.This means before any other expenses or values are calculated, I will have lost $74,415.60 over the term of this loan.
This is a shit ass way to start an investment return.
By the way, I only put 10% down on the original loan in 2016, because I knew the house needed remodeled. I drop approximately $25,000 to remodel everything in 2016.
So that puts me down $100,000 at the 20 year mark.
I converted the half bath to a full master bath in 2019 for $11,000.
So that puts me down $111,000 at the 20 year mark now.
I gutted 2 rooms and reinsulated them in the last 6 months for ~$4,000.
So that puts me down $115,000 at the 20 year mark now.
That means for my house to be a value as an investment, assuming I have zero other house only expenses (aka expenses that I would not also have as a renter), I would need to sell my house for $228,000 + $115,000 = $343,000 in 2016 adjusted dollars just to break even on my investment.
Edit:
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.
Say somebody was renting your dwelling for 20 years from a landlord. They also would be paying $1,168 every month for 20 years. Where you are down $74,415, they are down $280,401.
Rent here in the UK is MORE than the cost of a mortgage. I'd get it if the renter was paying $400. They could take the other $768 and stick that somewhere with better interest than a house.
Owning may not be a great option, but its still better than renting. In 20 years you hopefully have a house you can sell worth at least $205,986. Then renter doesn't.
How is that better than owning where the rent cost == mortgage cost?
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.
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@JaredBusch said in Is Real Estate Actually a Good Investment on Average?:
That means for my house to be a value as an investment, assuming I have zero other house only expenses (aka expenses that I would not also have as a renter), I would need to sell my house for $228,000 + $115,000 = $343,000 in 2016 adjusted dollars just to break even on my investment.
This calculation is wrong in many aspects, and here are few big ones:
- You have not deducted cost of renting that house from you cash flow calculation (because if you haven't bought it, you would need to rent it if you wan't the same living standard)
- You can't say "$343K in 2016 adjusted dollars", because your payments are not in 2016., but accross 20+ years.
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@JaredBusch said in Is Real Estate Actually a Good Investment on Average?:
So now I need to sell this house in 2041 for $463,000 (in 2016 dollars) just to break even.
- Again - it is not "in 2016 dollars", because you have not paid all $463K in 2016.
- And if you do sell it in 2041. for $463K - that will mean that you have almost used it "rent free" for 25 years (not exactly, but I hope you understand what I mean)
P.S. I bet you will be able to sell it for $463K in 2041. - at least because of inflation.
