Is Real Estate Actually a Good Investment on Average?
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
@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...
It, like average homes, did not gain value. That's the expectation of the housing market. Houses do not increase in value, period. That's fact. Not at the market level. So don't act surprised that it behaved at the average "expected" behaviour. It did exactly what houses normally do... it help to the inflation line almost exactly.
You say that the absolutely proven knowledge of real estate is "unlikely". Why? Why is everything known about the history of American real estate "unlikely" in the case of my dad's relatively average house? That makes no sense. What's your basis for expecting my dad's house to do something that the average house would not?
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@travisdh1 said in Is Real Estate Actually a Good Investment on Average?:
@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.
For sure, anything can be used as a tax shelter. Real estate is really good for that because it's so easy to document and so easy to manipulate down when you need to and heavily protected against staggering loss.
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@Carnival-Boy said in Is Real Estate Actually a Good Investment on Average?:
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.
Actually, that's not quite how it works. Historic data is actually incredibly telling and ALL evidence tells us that we absolutely can predict the future, within a known cone of uncertainty. For example, we know that the house prices in London will come down. We don't know how fast or when.
At some point, markets operate like molecules. When markets are large, it all becomes "math and physics" and individual actors aren't significant enough to affect the outcome.
While yes, a meteor could take out the entire planet and end the markets entirely... barring the totally absurd examples, we actually can and always have been able to predict the future in a reasonable sense. Avoiding historical data is not a good idea, but it absolutely tells us what we need to know on a broad scale.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@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.
wow - maybe - I know home ownership has zero to do with why I don't do what you did. I don't because = wife. My wife has zero desire what so ever to live there. She also wants to be a teacher - wants to go into a classroom and teach, I'm assuming she could do that there, but she also doesn't speak spanish, so she'd have to learn that first.
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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?
So this is an interesting question and having been both the renter of the top example AND a part of an investment group for the bottom portion I think that I have some insights.
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Individuals renting out property rarely earn money compared to the baseline. That's super rare. And, like anything, you get isolated pockets of success either by property or in time (it make bank this year, loses next) offset by large amounts of small loses everywhere else. For everyone making $100 on renting houses, there are ten people losing $10. It all offsets over time. Find people renting out a single house and chances are you'll find people unhappy and unsuccessful. I know lots and lots of people who have done this or are doing it now, and it's bleak. There are exceptions, but they are rare and when they are successful it is because they mimic the behaviour I'm about to describe below.
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Big investment groups are rarely real estate investors. That's beyond rare. Large investment groups sometimes invest in real estate for ancillary reasons (keeping a competitor at bay). I do this myself, as do my competitors, here, for example. The real estate itself loses money, but it has other values (they can't open a restaurant next door to mine.)
Rental businesses don't make money on their real estate, generally, they lose. but they need it in order to do other things. Where do they make their money? On maintenance and operations. Most firms that you will think of as real estate firms, aren't. But it's an easy way to view them. But a big apartment complex will likely make its money on the operations, maintenance, upkeep, events, collections and so forth of a complex. And even bigger ones also make their money on the construction of said buildings. When I worked for a big "real estate" company this is what they did. They literally had two operational units... one built homes, the other maintained homes. Neither wanted to "own" homes, unless they had no buyers. They'd build and sell whenever possible, but to keep the management and construction businesses busy, they were willing to own themselves when necessary (and it often was.)
The actual real estate didn't do they any favours, it was costly and complex. But since they had these other businesses that depended on there buying a buyer, as long as they didn't lose too much on buying it was worth it.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
@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...
It, like average homes, did not gain value. That's the expectation of the housing market. Houses do not increase in value, period. That's fact. Not at the market level. So don't act surprised that it behaved at the average "expected" behaviour. It did exactly what houses normally do... it help to the inflation line almost exactly.
You say that the absolutely proven knowledge of real estate is "unlikely". Why? Why is everything known about the history of American real estate "unlikely" in the case of my dad's relatively average house? That makes no sense. What's your basis for expecting my dad's house to do something that the average house would not?
Alright - he didn't make money - but he did get a whole lot more than he paid for it - because inflation...
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@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.
wow - maybe - I know home ownership has zero to do with why I don't do what you did. I don't because = wife. My wife has zero desire what so ever to live there. She also wants to be a teacher - wants to go into a classroom and teach, I'm assuming she could do that there, but she also doesn't speak spanish, so she'd have to learn that first.
Or she could teach remotely to the US. That's quite common from here. But that's not going into a classroom. But there are English language schools here within walking distance of my house. And four universities at least (partially English.)
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
@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...
It, like average homes, did not gain value. That's the expectation of the housing market. Houses do not increase in value, period. That's fact. Not at the market level. So don't act surprised that it behaved at the average "expected" behaviour. It did exactly what houses normally do... it help to the inflation line almost exactly.
You say that the absolutely proven knowledge of real estate is "unlikely". Why? Why is everything known about the history of American real estate "unlikely" in the case of my dad's relatively average house? That makes no sense. What's your basis for expecting my dad's house to do something that the average house would not?
Alright - he didn't make money - but he did get a whole lot more than he paid for it - because inflation...
No, he got about HALF what he paid for it because of interest. Inflation must be assumed in "getting what you paid", because if you don't include inflation you cant' even make the assessment. The value in was the value out.
You expect a house to hold value (on average.) Cash just in a mattress loses value. If you put $100 in a mattress for 100 years, you lose money (generally). If you put $100 into a house for 100 years, you maintain your money (generally.)
Don't start thinking that $100 in 1900 and $100 today equals "not losing money", that leads to all financial thinking being wrong.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@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.
wow - maybe - I know home ownership has zero to do with why I don't do what you did. I don't because = wife. My wife has zero desire what so ever to live there. She also wants to be a teacher - wants to go into a classroom and teach, I'm assuming she could do that there, but she also doesn't speak spanish, so she'd have to learn that first.
Or she could teach remotely to the US. That's quite common from here. But that's not going into a classroom. But there are English language schools here within walking distance of my house. And four universities at least (partially English.)
yeah - she was crawling out of her skin to get back into the classroom during the pandemic - she HATED - let me say that again - HATEEEDDDD working from home.
Two main reasons that I know:
- much more challenging to interact via video and a class, even where everyone's face is in it's own window vs in person
- lack of social interaction with peers - i.e. water cooler work.
Of course lack of #2 is good for the employer - should mean the employee is spending more time on the job...
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
@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...
It, like average homes, did not gain value. That's the expectation of the housing market. Houses do not increase in value, period. That's fact. Not at the market level. So don't act surprised that it behaved at the average "expected" behaviour. It did exactly what houses normally do... it help to the inflation line almost exactly.
You say that the absolutely proven knowledge of real estate is "unlikely". Why? Why is everything known about the history of American real estate "unlikely" in the case of my dad's relatively average house? That makes no sense. What's your basis for expecting my dad's house to do something that the average house would not?
Alright - he didn't make money - but he did get a whole lot more than he paid for it - because inflation...
No, he got about HALF what he paid for it because of interest. Inflation must be assumed in "getting what you paid", because if you don't include inflation you cant' even make the assessment. The value in was the value out.
You expect a house to hold value (on average.) Cash just in a mattress loses value. If you put $100 in a mattress for 100 years, you lose money (generally). If you put $100 into a house for 100 years, you maintain your money (generally.)
Don't start thinking that $100 in 1900 and $100 today equals "not losing money", that leads to all financial thinking being wrong.
Yeah - I definitely get that.
though interest is the cost of actually living in the house, if that's all he lost over the life of the house, which I'm sure in 40 years wasn't the case (taxes, reno's, repairs, etc).
There is value to actually living in the house - so at worse, to me - sounds like he broken even. I'm guessing a typical bond would have done better - investment wise - but could he actually afford to do that in live somewhere, and if so - what do you guess his actual walk away cash in hand would be today had he done that instead of buying the house (mind you - he'd be paying rent somewhere else).
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
lack of social interaction with peers - i.e. water cooler work.
Of course lack of #2 is good for the employer - should mean the employee is spending more time on the job...
That's awful for an employer. Employers don't make money by people not working nor from them "being at work". They make money from them working. Water cooler time isn't just bad, it's the absolute worst. Employees view it as "working" and the government views it as "working" and it carries all the costs of people working and all the risks and insurance problems... yet it has zero business value. Huge negative business value.
A smart employer wants the water cooler thing out the window more than almost anything. Water cooler time is loathed by productive employees who are there to work and it makes them disenchanted. It's mostly a tool to avoid work at the employer's expense.
Middle managers willing to sabotage their businesses for their own gains like water coolers because they make it easy to fool upper management that work is being done when really, everyone is lost and doesn't know what to do.
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
I'm guessing a typical bond would have done better
Bonds are the highest risk, worst performing type of investment. Nothing doesn't do better than a standard bond.
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
though interest is the cost of actually living in the house, if that's all he lost over the life of the house, which I'm sure in 40 years wasn't the case (taxes, reno's, repairs, etc).
We had a single renovation that cost more than the entire original purchase. Buying older property in the US where construction is wood comes with a lot of costs. That houses so often have a very limited lifespan means you often get left with a house that actually devalues to zero at some point within a few generations.
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
There is value to actually living in the house - so at worse, to me - sounds like he broken even.
For sure, but the mortgage would have been easily double the cost of rent in the area. That makes it pretty hard to justify as an investment considering the downpayment would have had so much time to have grown.
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@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
There is value to actually living in the house - so at worse, to me - sounds like he broken even.
I believe that the downpayment was $35K in 1976. An index would have generator $1.55m in 2021 when he sold it.
Assuming 45 years of monthly rent of $1,500 (way, WAY above market for the entire time) that would have been just $810K, or about half of what the money would have cost.
In reality, in those early years rent of $400 would have been more accurate. And by the end, more like $1300. So really, actually renting on his street would like have cost around $450K - $500K over those 45 years.
So roughly, considering he "gained" around $100K on the house, and would have spent $600K... He only LOST about $800K... plus any additional improvements that he had to make over the years which I know were more than $300K.
So his total cost for ownership over renting was easily a loss of more than $1,000,000 USD.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
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.You got any links because I've heard no-one predict any kind of "staggering crash" and I have some financial knowledge. There's a massive difference between not going up and a staggering crash.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Actually, that's not quite how it works. Historic data is actually incredibly telling and ALL evidence tells us that we absolutely can predict the future, within a known cone of uncertainty.
It is how it works. Or if you like, let's just say the "cone of uncertainty" is a really, really big cone
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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?:
Actually, that's not quite how it works. Historic data is actually incredibly telling and ALL evidence tells us that we absolutely can predict the future, within a known cone of uncertainty.
It is how it works. Or if you like, let's just say the "cone of uncertainty" is a really, really big cone
Other than "how soon", it's surprisingly small. It always feels big when you are "in it" because emotions take over. But just like the 2008 crash, the dotcom bubble, everyone not feeling the "but I might get rich" flood of emotions was pretty much all together and expecting exactly what happened.
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Here's a real example.
I'm renting. I love the area we're in. There are other areas where we would enjoy living as well that are exactly the same.
I'm paying under $3K a month for rent. It's a large condo, 3BR 2Bath, wonderful area, 4 pools 4 hot tubs, awesome view, great location, great & quiet neighbors, great community.
Renting other places around here are similar priced, many are a few hundred $ more for now, but still in range.
We'd like to buy a house in our current area, or another area we like, and pretty much keep our current standard of living as we are in this condo, but in house form.
If we did that, the minimum mortgage payment we're looking at MINIMUM is $6.5K, that is with dumping a bunch of cash as a down payment... note that the $6.5K does not include insurance, PMI, taxes, closing costs, etc.
So you see, renting and owning a home is not the same thing. Just because I choose to rent, doesn't mean that I automatically will rent the same kind of house that I would want to buy. So it's just not logical to me to compare them like that. Typically, you rent to save money. Sure, I could rent a house for $8K a month, but wtf would I do that? I'd rather buy! Except, I don't want to buy, because I need the freedom to be mobile and choose where to live and not be stuck... I don't want to throw all my money into a house and live paycheck to paycheck and be forced to sell at the next higher bubble than is currently to make anything.
Yeah, we could move to a cheaper area, but we don't want to. There's no point because we just don't want to give up what makes us live happy and looking forward to the next day/weekend/time off, etc.
I'd rather keep renting, and saving money, and investing money, that I'm not throwing into a house that I may or may not get back plus more later, if life works out perfectly for home ownership. I'm very likely to move as well, need that freedom, while saving! We can't time our life according to the house, we need our housing to work for us.
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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?:
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.You got any links because I've heard no-one predict any kind of "staggering crash" and I have some financial knowledge. There's a massive difference between not going up and a staggering crash.
Sort of, in the terms of house prices there is already a big drop from 2004's peak that the UK hasn't returned to. So even today it's 18 years of lower than the peak (after adjustment for inflation.) Holding steady (not adjusted for inflation) is a pretty rapid crash in reality if that holds for any length of time because that's a lot of loss on top of maintenance and other overhead costs, especially when it's already down so much from the top.
Unfortunately the UK doesn't have the hundreds of years of data that places like the US have because the housing market wasn't an open economy until recently and council houses weren't for sale until the 1980s. So the UK lacks the historical data of baseline and the historical knowledge of investing at the generational level, that many other countries have. So you get a much more wild west market of fluctuations more like crypto where speculation is more rampant.
But if you had prices stop increasing altogether and simply match inflation, I think most people would feel like it was a pretty serious crash and not just a "cooling off".
