For most people, real estate will always be more desirable than stocks. Real estate is a tangible asset that provides shelter, utility, and rental income. Everybody can easily understand the fundamentals of real estate, which is why many prefer real estate over stocks.
Stocks, on the other hand, provide no utility. You can't enjoy your stocks or raise a family in stocks. Further, a stock's value can disappear overnight.
Look at the recent devastation of many high-growth tech stocks in 2022. Companies like Meta, Peloton, Moderna, Teledoc, and many more have given back 1-2 years worth of gains in a matter of months. Thankfully, many big tech names have come back with a vengeance.
Even still, you can't enjoy your stocks with them at all-time highs.
Real Estate Will Likely Build You More Wealth
In this article, I will share why real estate will likely build you more wealth over time. Real estate will also most likely provide more happiness. Owning an asset that provides more wealth and happiness is tough to beat!
I'm all for owning both real estate and stocks to build wealth. However, I've noticed there's been a growing amount of rage against homeowners and real estate investors. This rage is misplaced and should be rectified if these folks want to build greater wealth over the long run.
Over the past 10 years, there's been a growing number of voices saying that owning real estate is a terrible way to build wealth. Some are even rooting for real estate investors to lose money.
Curiously, you don't see this type of schadenfreude and rage against renters or stockholders by homeowners. I want to address this issue full on so you can make better financial decisions.
The Reason Why I Own Real Estate
For most of my post college life, I've had a larger exposure to real estate over stocks. I needed a place to live so I figured it was better to pay down a mortgage than to pay someone rent as soon as I mustered up the down payment. Further, I worked in Equities my entire career. Therefore, real estate was a great way to diversify my net worth.
When it was time to buy another property, I simply rented out my old place for positive cash flow, and enjoyed my new place until it was time to rent it out again and buy a new place. I've gone through this buy-rent-buy cycle five times. It's been by far the easiest way to make and save several million in tax-advantageous dollars.
Real estate is an important part of my passive income portfolio. It has enabled both my wife and I to remain stay at home parents to our two young children. Today, our real estate portfolio generates about $150,000 in passive to semi-passive income.
Within the next five years, our plan is to go through another cycle and buy a property in Honolulu close to the beach. We'll then rent out our current San Francisco primary residence and hopefully build even more passive income.
I own real estate because it generates rental income, provides shelter, takes care of my family, and generally appreciates over time.
Why There Is So Much Anger Against Real Estate
The main reason why there is so much rage against real estate is due to the human condition. We crave what we can't have. I get it.
Saving up for a down payment in a city where the median home price is close to a million dollars or more is difficult. It is also annoying to see your peers buying their first homes with the help of Bank of Mom & Dad.
After you've gone to a fancy schmancy private university or built up a growing business and you still can't afford to buy a home like your parents did when they were 28 years old, you get pissed!
Finally, when you witness real estate prices go up and you don't own, the rage continues to boil. You should see the comments in my post, Stocks Or Real Estate: Which Is A Better Investment? You see people so pissed off at real estate owners, even if they've done well in the stock market!
Just don't confuse your disapproval of owning real estate for your own inability to buy real estate yet. Real estate is one of the key ways people have been building wealth for centuries.
The more expensive the city, the more negativity there is towards real estate. This makes sense. But try not to let your frustration destroy your objectivity.
To buy real estate responsibly, you need to go through these steps:
- Save enough for a 20% downpayment to avoid PMI plus have a buffer.
- Have a financial institution deem you creditworthy enough to qualify for a mortgage.
- Make an attractive enough offer to be accepted by the seller.
- Have the guts to agree to the terms and take on the property.
At each stage, there is risk of rejection or failure.
It takes a lot of discipline and sacrifice to save $300,000 for a down payment on a median priced home in New York City. Therefore, most people don't and get pissed at those who do or have the means.
The human condition assigns luck to the achievements of others and skill to our own.
Due to more stringent lending standards since the financial crisis, the average credit score for those qualifying for a mortgage has averaged over 720 (excellent). Once the pandemic hit in 2020, the average credit score for approved mortgages shot up even further to 770.
Putting 20% down has now become standard. Some banks aren't even allowing existing customers to take advantage of low mortgage rates. Without a minimum amount of assets, these customers are being shut out of refinancing their jumbo loans.
Given the tightness in the mortgage industry today, the chances are even higher that you will be denied a loan. Therefore, you will naturally hate the real estate market even more.
Rejected Offers Are The Norm In Real Estate
In a competitive housing market, it's common for your offer to get rejected multiple times, especially if you have a home inspection contingency. Each rejection beats you down because you always dream about what your life would be like in the property you are pursuing.
Get rejected enough and you'll either put out some crazy high offer to your detriment or get really bitter at the entire process.
Once your offer is accepted, you need to then muster up the courage to transfer a good chunk of savings into escrow. Then you've got to assume a mortgage in most cases. Plenty of people get cold feet and back out from their offer.
It takes guts to take such concentrated risk. If you backed out only to see the property resell years later for lots more than you could have bought it for, of course you're going to be pissed off.
Now let's look at how difficult it is to acquire stock.
The barrier to entry to buying stock is pretty much ZERO. Robo-advisors can build you a stock portfolio for free. And you can open up any brokerage account with $100 and buy stocks for free nowadays.
When anybody and everybody can buy stocks, stocks simply becomes less desirable. In contrast, when there is only one panoramic ocean view property on an oversized lot with a hot tub, of course the desire for such a property will be higher.
Know the human condition.
Renting Is Like Shorting The Real Estate Market
There is also one very important paradox stock owners who rent fail to realize. Let me explain.
If you are a renter, you are short the real estate market. You are a price taker and are at the mercy of any rent increases over time. Just like shorting the S&P 500 stock index isn't a good idea long term, neither is shorting the real estate market by renting.
You are neutral the real estate market if you own your primary residence. Once you are neutral the real estate market, you simply ride the ups and downs. Even if your property increases by 50%, you can only profit if you sell and buy another property.
Only when you own two or more properties are you actually long the real estate market. Your non-primary residence properties can be improved upon, rented out, or sold for potential profit.
Shorting the real estate market or the stock market over the long-term is a bad move. If anybody decided to short the S&P 500 index their entire life, they'd be considered a buffoon.
Yet, people who are against homeownership somehow think it's OK to rent all your life. This logic makes no sense. And the reason why there is such an inconsistency in thought is due to a lack of knowledge or simply blind rage.
Other Reasons Why Real Estate Is More Desirable Than Stocks
Now, of course stocks have shown to be solid long-term investments over the long run. I've got about a quarter of my net worth in the asset class.
But this is an article addressing the housing haters who believe real estate is a terrible investment. Let's continue!
1) You are the CEO, not a minority investor.
Every physical real estate investment you make puts you in charge. As CEO, you are able to make improvements, cut costs (refinance your mortgage), raise rents, find better tenants, and market accordingly. Of course you are still at the mercy of the economic cycle, but overall you have much more leeway in making wealth optimizing decisions.
When you invest in a public or private company, you are a minority investor who is putting his or her faith in management. Sometimes managers commit fraud or blow their companies to smithereens while making mega millions for themselves.
Mortgage rates are still low. As a result, homeowners can refinance their mortgage, save on living expenses, and enjoy their homes. Meanwhile, stock investors are getting whipped around due to fears of a global economic slowdown.
Check out Credible, my favorite mortgage marketplace where pre-qualified lenders compete for your business. You can get real quotes in under three minutes and it's free.
2) Leverage other people’s money cheaply.
Thanks to cheap mortgage rates, qualified real estate investors can borrow money at 30+ year lows. Given the cost of capital is lower, the returns tend to be higher. Cheap interest rates also attract more borrowers, bringing more liquidity to the real estate market. This in turn puts upward pressure on prices.
The year-over-year national home price appreciation accelerated during a pandemic.
Even if real estate only tracks inflation over the long run, a 3% increase on a property where you put 20% down is a 15% cash-on-cash return. At this rate, in five years you will have more than doubled your equity. Just don't get caught being overly levered in a down market.
The thing is, post pandemic, inflation is running hot! We're talking 7.5% in 2022, which makes real mortgage rates negative. As a result, demand to borrow homes continues to be very high.
While the stock market is selling off, home prices are likely going to continue going up. It's the ideal environment for real estate investors. Geopolitical instability in Russia / Ukraine, negative real mortgage rates, a weak stock market, and a desire for hard assets will push real estate prices higher.
3) More tax advantages.
Not only can you deduct the interest on up to $750,000 in mortgage indebtedness on your primary home, you can also sell your primary home for tax free profits up to $250,000 for singles and $500,000 for married couples if you live in the home for at least two out of the last five years.
Thanks to depreciation, a non-cash expense, you can shield your rental income as well. All expenses associated with managing your rental properties are also deductible against your rental income.
If you are in the 32% marginal federal income tax bracket or higher, all the more reason to own your primary residence.
4) Real estate is a tangible asset that can be seen and enjoyed.
Real estate is something you can see, feel, and utilize. Life is about living, and real estate can provide a higher quality of life compared to a rental that is not properly maintained. I always believe in buying real estate for living first, cash flow second, and principal appreciation third.
With stocks, there is no utility unless you spend the dividends or sell positions to purchase something. As a majority investor, the feeling of owning my primary residence is 10X greater than the feeling of owning a hefty amount of Apple stock for the past 10 years.
Stocks have certainly performed well over the years. However, there is simply no utility that comes from stocks. Stocks are just digits on a screen.
To extend your wealth, I encourage investors to regularly turn funny money into real assets. Real assets don't just lose half its value overnight as some stocks do.
5) Easier to analyze and make better investment decisions.
It is much more difficult to analyze a company's income statement, cash flow statement, and balance sheet than it is to analyze a property's financial statements. This is why it's often better to just buy an S&P 500 index fund for your stock allocation and call it a day. If you buy an individual stock, it may do incredibly well, or you might lose your shirt because you misjudged competitive pressures.
For example, anybody who bought Blue Apron stock at the IPO is now down 90% because they misjudged Amazon coming into the market and crushing them. Hopefully you owned Amazon instead. Anybody who bought Lehman Brothers or Enron lost everything.
Anybody who decided to short Tesla stock over the past several years given its financial issues has gotten their face ripped off. There is one JP Morgan Tesla stock analyst who has issued 25+ sell ratings in a row, and he does this for a living!
With real estate, it's easier to estimate rental income, occupancy levels, new supply, job growth, population growth, and demographic trends. People will always need a place to live. The same cannot be true for owning an expensive laptop computer.
6) Less volatility in real estate, or at least less visible volatility.
Your house value could be tanking and you would never know it since there isn’t a daily ticker symbol. During the 2008-2009 downturn, I still got to enjoy my vacation property in Lake Tahoe 20 days a year even though its value was plunging.
Meanwhile, looking at the TV or computer screen just made me mad at how much I was losing in my stock portfolio. When your investment is less volatile, it’s much easier to stay the course and not sell at the bottom.
Here are the historical returns for Fundrise, one of my favorite real estate crowdfunding platforms for non-accredited investors. Past performance does not guarantee future performance. Fundrise is now a leader in the space with over $3.5 billion in assets under management and over 500,000 investors on its vertically integrated platform.
7) Real estate provides a greater source of pride.
After a while, making money for money’s sake is a pretty empty feeling. Money needs to be used for something, such as buying real estate to raise a family. In October 2023, I climbed to the top of the property ladder and didn't feel happier. But I did feel more satisfied and proud that I secured a magnificent home to raise my two young children and provide for my wife.
Every time I drive by my rental property I feel proud to have made the purchase in 2003. It reminds me of the time when I was 26 years old and still trying to make a name for myself at the job. Those regular 60-70 hour work weeks are fun to reminisce about today.
I have zero sense of pride with my stock portfolio. Partly because nobody sees it and nobody uses it. But the reason is mainly because my stocks don't do anything directly to improve the quality of my life.
It makes a parent proud that the home they purchased is providing shelter and wonderful memories for their children. Stocks don't make you feel good unless all you care about is money.
8) More insulated for random exogenous variables.
Real estate is local. If you’ve made a good decision to buy in an economically strong region, you will be more insulated from the national economy or the global economy.
Look at prices in superstar cities such as NYC, Hong Kong, Singapore, London, Paris, and San Francisco. They fall the least, recover the soonest and gain the most.
Of course if tech ever collapses, my real estate holdings in San Francisco will be crunched. Therefore, it's always good to diversify your real estate holdings as well, just like stocks.
I believe in the heartland of America, which is why I did sell one of my SF rental properties in 2017 and reinvested the proceeds in a fund that purchased 17 various properties around the country. With the acceleration of the work from home trend, some 18-hour cities are likely going to benefit from demographic shifts away from big cities.
At the same time, tech stocks and the NASDAQ is going gangbusters in the new decade. So it's hard to see San Francisco Bay Area real estate collapsing when tens of thousands of residents are 20%+ richer despite a global pandemic.
I recommend exploring investing in secondary cities like Austin, Memphis, and Charleston where valuations are cheaper, growth rates and cap rates are higher, and population growth is growing faster. Fundrise is my favorite real estate platform that focuses on the secondary city real estate market.
9) The government is on the real estate investor's side.
There are two organizations not worth fighting against: the Federal Reserve and the Central Government. Not only do you get generous mortgage interest tax deductions and tax-free profits, the government sometimes bails out overextended homeowners during bad times.
In 2010, I got a free loan modification on my vacation property mortgage from Bank of America, even though I didn't need it. The government forced BoA to cut my 30-year fixed mortgage from 5.875% down to 4.25%.
Programs such as HARP 1.0 and HARP 2.0 allowed folks without hefty down payments to get in on the action. There are 12 non-recourse states such as California and Nevada which don’t go after your other assets if you decide to stop paying your mortgage and squat for months.
Just look at how much the government did to save the economy during the 2008 global financial crisis and the global pandemic from 2020 – 2022? With the latest National Association of Realtors price fixing settlement, President Biden and most politicians cheered the verdict is good for the consumer. With a decline in real estate commissions, residential real estate investors are now suddenly richer.
10) You'll save your children from angst and despair.
When you die, you can pass on your real estate holdings to your children using a stepped up cost basis. This means they won't have to pay any taxes on the assets provided that your estate is below $13.6 million per person when you pass as of 2024. The estate tax threshold changes every year.
All the people who are anti-housing could have been saved if their parents decided to invest in real estate 30+ years ago. Life is so much easier once housing is cheap or free.
If you're willing to provide an education for your children, perhaps you should also be willing to provide housing just in case they need it. Buy a rental property every time you have a newborn. By the time they are adults, they can live in them or manage them for rental income.
Think about what your children will say 30 years from now about prices today. They will likely be envious of how cheap we could have owned real estate. Heck, look at the global real estate price chart above. The United States is so cheap compared to New Zealand.
If you are a parent who wishes to achieve financial freedom, one goal is to buy one property for each child you have. Not only will you build your real estate portfolio, you may also provide your children subsidized housing in the future if you so choose.
Real Estate FOMO Is The Hardest To Overcome
In a bull market, the average person's day job income will likely never catch up with their local real estate market.
For example, if the San Francisco median home price jumps from $1,600,000 to $1,700,000 (+6.25%), the median household income of $96,000 would have to jump 104% just to stay even. Is there any wonder why long-term renters continue to fall behind?
If you don't believe me, just look at the average net worth of homeowners and renters as reported by the Federal Reserve. The net worth difference is staggering. If every renter saved and invested the difference, the gap would be narrower.
However, we all know that it is very easy to consume instead. With housing, you are at least paying down principal each month as a form of forced savings. Fight real estate FOMO by at least owning your primary residence.
The good thing is that real estate goes in cycles. You are finally seeing some softening in big cities like Toronto, New York City, and San Francisco due to more supply and some residents moving away.
Healthy downturns will usually last 2-3 years before stabilizing and then resume their upward trajectory as the old is replaced with the new. I believe the time to invest in big cities is now, before there is herd immunity.
Hopefully during soft times, folks who want to buy homes will have already aggressively saved and figured out ways to boost their income. Otherwise, it'll be the same cycle of angst, anger, and despair over and over again.
Good To Be More Objective
Of course homeownership will be wrong for some people. Some people will buy at the wrong time. Others will unfortunately buy a lemon that needs a lot of fixing. While plenty of people will ignore my 30/30/3 rule for home buying and spend way too much money.
As a result, they will constantly feel stressed when they should really be enjoying their home.
However, just because you can't afford a home yet doesn't mean that real estate is a terrible investment. Please don't let your frustration about the high cost of real estate derail your objectivity.
I've been a renter and homeowner for decades. I've gone through the frustrations of being a landlord and the simplicity of just owning passive real estate investments. Real estate has lost and made me money. Therefore, I believe I'm providing you some objective perspective.
In my opinion you should at least get neutral real estate if you've found a city you want to live in for the next 5-10 years. Inflation is too powerful of a force to combat. After you own your primary residence, then you can choose to get long real estate by owning more real estate or more stocks.
The next time you hear someone shout why they think real estate is a terrible investment, try to understand their background first. Once you do, everything will be more clear.
Real estate will always be more desirable than stocks for most people. But you can always invest in both.
Best Private Real Estate Investing Platforms
Today, anybody can invest in private real estate. Take a look at the two best private real estate investing platforms to help you diversify and earn more passive income.
Fundrise: A way for all investors to diversify into real estate through private funds with just $10. Fundrise has been around since 2012 and manages over $3.3 billion for 500,000+ investors.
The real estate platform invests primarily in residential and industrial properties in the Sunbelt, where valuations are cheaper and yields are higher. The spreading out of America is a long-term demographic trend. For most people, investing in a diversified fund is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. These cities also have higher growth potential due to job growth and demographic trends.
If you are a real estate enthusiast with more time, you can build your own diversified real estate portfolio with CrowdStreet. However, before investing in each deal, make sure to do extensive due diligence on each sponsor. Understanding each sponsor's track record and experience is vital.
I've invested $954,000 in real estate crowdfunding so far, over $140,000 of which is in Fundrise funds. My goal is to diversify my expensive SF real estate holdings and earn more 100% passive income. I plan to continue dollar-cost investing into private real estate for the next decade. Both are long-term sponsors of Financial Samurai.
Real estate will always be more desirable than stocks is a Financial Samurai original post.
Thanks for telling me that I need to have at least 20% downpayment before I am able to secure a property. My husband and I think that we should settle in a luxury home to so we can be closer to a lot of amenities and enjoy a better home compared to regular residential properties. I guess I have to consult a real estate agent if 20% is only needed or more.
We have always had our kids invested in Real Estate to learn the intricacies of the Rule of 72.
Because of these investments they all own their own homes with 60% LTV notes, graduated without loans. All the operating costs of owning those homes is covered by passive income. Admittedly their grandfather left them all a small inheritance & we invested it all in REI, most in 12-14% investor notes on properties we picked up from foreclosures & tax lien foreclosures. We have also gifted the usual IRS allowable amount each year for REI.
Some scoff at the 12-14% notes we hold but few understand that re-selling these properties to investors for 2-4x what we initially paid renders the 12-14% moot. Admittedly some stocks you’re lucky enough to pick may generate similar returns BUT we can do it on every property we hold & have done for 30+ years. In 30 years we have had one foreclosure & we quickly re-sold it for 2x our initial investment hold it @ 12%.
This month my youngest (26) secured financing on a 5 bedroom 3 bath home in Scottsdale AZ using her W-2 & the passive income stream from her rentals & notes she holds. Even with the 2.85% interest rate she secured I doubt if you could qualify for a mortgage on the dividend income from a stock or equities portfolio that is margined around 60%.
We have sat with MANY financial advisors over the years & none of them have ever been able to share with us a (redacted) portfolio, theirs or one of their clients, that has achieved close to our returns.
I’ve read through the comments extolling stocks over real estate. I think the real estate reality is more nuanced than pro RE people may like to admit. (I own both, by the way — but much more in stock than I do in RE.)
For real estate, location really matters and the individual variation between picking the right condo or house can make a huge difference in your return. But, you get more leverage due to your mortgage — so it doesn’t have to appreciate nearly as much to double your money.
For stocks, comparing RE return to an index fund I don’t think is a totally fair comparison if you’re using a single property — as that can have a lot more volatility than the index is designed to do. People who favorably compare, just picked out RE that did really well. What a more relevant comparison is using a company we all know about that has done well, like Amazon or Microsoft or Google or Facebook or Netflix over the past 10 years. And I think you’ll find that when you compare an individual stock that’s a good bet, to an individual real estate property that’s a good bet, the stock will outperform real estate most of the time. (Even in places like San Francisco where RE has really done well the last decade.)
*However* real estate gives you a very different profile of return. Which is why I own rather than rent (and have an additional investment property). So, I’m definitely not anti RE either.
(P.S. I believe you could invest in a REIT which is basically like a stock for real estate as a hybrid — however, I don’t think you’re able to get nearly the same inherent leverage as directly owning real estate, as well as depreciation / writeoffs / 1031 exchanges and all of that which makes real estate a great longer term investment.)
I own my own home and it is one of my contingency plans as it is quite a big bigger than our needs so I could sell it or equity release if things go pear shaped elsewhere.
However, a house is just a house. It does not do anything but depreciate. In recent years there has been house price inflation but that is due to supply and demand factors that could, in reality, go either way. So, unless you think the supply / demand picture is going to continue in your favour I am not sure why real estate is seen as a great investment.
Whereas a business, in theory at least, can do something. Thus its value can grow because it is doing something useful.
The other aspect is leverage. Much easier to leverage for a property. But leverage is risk taking. Again, if the supply/demand moves against you and you are leveraged…
I agree about real estate being more desirable than Stocks. I raised my children in my home and it has provided for a wonderful lifestyle. Not only that, my property has appreciated by by 50% and my equity return on my down payment has appreciated by over 200%.
I’ve also been investing in the S&P 500 every year as well. Not owning your home becomes a very very expensive proposition 10 to 20 years down the road.
On real estate and stocks.
Real estate is highly illiquid compared to stocks; there’s no 6% commission to sell stocks, nor do you (usually) have to wait indefinitely for a buyer while paying carrying costs. Many real estate sales are contingent which means the seller needs to do some work as part of the deal; no contingent sales exist in the stock market that I’m aware of.
There’s no annual school and property taxes on stocks; only taxes on dividends or when you sell, which can also be deferred or reduced through various methods. There’s no maintenance on stocks!
Being a landlord is a pain in the ass; it’s not “passive” income at all. If you’re not spending a significant amount of time managing the property you’re an absentee landlord and your place is a dump. I know you’ll say otherwise but I disagree entirely. Houses are a lot of work and need routine maintenance, period. I’d rather spend my time doing something else while my stocks appreciate, even if it takes longer!
As far as pride of ownership, that is a personal benefit and depends on the property, if I owned a dump I’d be embarrassed; if I owned an ostentatious mansion I might feel self-conscious.
You believe you’re saving your kids from ANGST and DESPAIR but my experience is quite the opposite and is not unique. I live in fear of the day my parents leave their house to my brother and I. The house is full of memories (good and bad) as well as lots of stuff that will be an incredible pain to sell. Likely, the contents will need to be auctioned off for pennies on the dollar because we both have our own stuff and can’t use any more. Selling my parents house gives me so much ANGST and DESPAIR that I’ve investigated my rights as to disclaim my inheritance which is luckily allowed in the state I live in. The last thing I want to do is spend my time prepping that place for sale, dealing with finicky buyers, appraisers, realtors and arguing with my brother. There are many sibling relationships that have been strained by real estate inheritances. It’s nice of you to think of your kids, but it’s likely they’ll appreciate being left money over things. Keeps it a lot more simple!
Perhaps it’s more the death of your parents that is causing more angst and despair rather than inheriting the property itself? I’ve never heard of anybody inheriting real estate and feeling the way you do.
May I ask whether you have ever owned real estate before and if not, why not? I’m trying to understand why some people don’t want to on their own homes and are so against real estate.
Owning both real estate stocks for the long term is a no brainer way to build wealth. Do your kids and wife if you have them feel OK with the property you can only stay at?
Please share more of your perspective.
Disputes often arise when siblings jointly inherit real estate – that is a common occurrence. I rented in the past and now I currently own my home, but my situation doesn’t matter. There are far more benefits investing in stocks over real estate and that is clear to nearly everyone. Now – don’t you have somebody’s toilet to fix?
“Now – don’t you have somebody’s toilet to fix?”
Why do you say it this way? It is so derisive and arrogant. I don’t understand why there is so much animosity towards landlords and homeowners.
If you were truly OK renting and happy with investing, why try and make someone feel bad? I’m not saying anything bad about you renting or others renting. I’m highlighting the benefits of owning real estate.
What happened to your property that has made you hate real estate so much?
The U.S. housing market has 35% – 75% upside if it ever gets as hot as the Canadian housing market.
See: https://www.financialsamurai.com/what-if-the-u-s-housing-market-turned-into-the-canadian-housing-market/
I’ve met many people like Wallie before. They probably got burned and had to sell their real estate holdings at a loss. But since the real estate market has roared back, they are left super bitter. Some got their credit score thrashed as well.
Wallie seems like a really sad person because he lost his property and his parents and is probably single/divorced and alone.
To Wallie, It is OK to rent. But a bad attitude is going to make you miserable for life. Nobody will want to be with you.
Not at all, DLo. You have absolutely no idea who I am and you are completely wrong about me. Why does everyone care about my personal situation? It has nothing to do with the fact that stocks are typically better investments than real estate for most people. I see we can’t have that simple discussion here.
I’m definitely on your side Wallie. I have found that increases in net worth due to real estate are generally because they didn’t really save before they bought the property. The property now acts like forced savings, so of course their net worth went up (not suggesting the author is this way).
I couldn’t agree more with you when it comes to the work associated with real estate ownership. I have yet to find someone who takes this fully into account.
Unless you have kids, I don’t see how owning more space is better than renting less space and investing the difference. I don’t need a 3-4 bedroom house and a 1-2 bedroom condo has any return eat’n up by HOA fees.
I rent an older apartment that needs some cosmetic work (old floors, etc.) just barely outside DC. The math all says this low cost 1 BR apartment is better than buying a house or condo, if I invest the difference.
Now, if I lived in Pittsburgh the equation shifts a little towards real estate, but I still don’t like the definitiveness of the article’s title. It seems like it contains a lot of bias for real estate, while it complains about bias against real estate. Real estate can be a good investment, it just isn’t the slam dunk the title suggests.
I compare the DC area and Pittsburgh because I have lived in both places and are solid representations of cheap and expensive markets.
Yeah, One of my friends had to short sell a condo he owned back in 2010. Since then, he’s been very against real estate. But the funny thing is, he wants to buy some farmland in Maui now.
Not sure why Wallie is so angry. But it’s interesting to find out more.
Nothing at all happened to my property, I’m a happy homeowner for sure, but as for investing purposes stocks are clearly better – you haven’t even tried to make a convincing case otherwise. I made a lot of valid points why real estate is a poor investment compared to stocks and instead of debating them, you want to find out about me personally.
My goal is to understand why there’s such animosity towards real estate by some people. The personal stories are the most interesting. When someone writes with “angst and despair,“ there’s always a very interesting story behind the person.
Everybody knows that real estate, and especially some real estate markets have performed well over time. It’s the reasons behind the emotional and massive comments that are the most fascinating to me.
I’m not being emotional at all. You wrote about ANGST and DESPAIR first – I’m simply using your words. Real estate inheritances often cause ANGST and DESPAIR among siblings. Stocks are typically better investments over time than real estate.
If you think my comment about toilet fixing is derisive and arrogant maybe landlording isn’t for you because the landlord typically fixes broken toilets in their rental homes.
I’m ready to end this discussion because I can see it’s not constructive and I have other things to do today, don’t you?
Sounds good. At the end of the day, everything is rational. If you’re happy renting and if you’re happy with your net worth and stock allocation, that’s all that matters.
I owned investment real estate until this year and funny thing is that when I tried to sell it, the toilet broke and I had to pay the super $200 to fix it. It was lucky that was able to get $22,000 more than I paid for it but the entire amount went to the broker, improvements, taxes, and I broke even on the deal. I was happy not to have to go there to deal with anything. I invested in stocks and have had better luck with no work.
The internet is full of people who write in angry tones. While I agree with Wallie’s stance regarding real estate vs stock market investing in general, his animosity seems to be more a reflection of his character than it is his rational stance towards the topic.
The difficulty with real estate investments, in my mind, is that they have a greater risk on ROI (given potential maintenance issues, taxes, et c). The interesting point from the author that I found, though, is the different estate taxes applied to real estate- especially when considering passing investments on to our progeny.
I agree with you Wallie. I’m 1/4 in real estate (just the primary home for 24 years) and 3/4 in stocks.
I have 2 kids who are adults.
Been in REI for 52 years & watched my colleagues play & lose the equities game for many years & work until 65 then take on menial PT jobs to supplement Ret., income. I retired at 40 (debt free ever since) & we have continued to accumulate properties with our kids fully involved. Only toilet I ever fixed was a student rental we had & I just joined the party at the time.
Our youngest has my wife’s drive for REI & @ 20 yrs she graduated without loans, bought her first run down 6 unit. Lived with the ‘inmates’, rehabbed it & now runs it all via social media & a live-in maintenance guy who pays mkt rent.
She’s now 25 & been in Scottsdale AZ for 2 years working from a home office for her corp. The NOI from her 4 & 6 unit just helped her qualify for $650k, 30 yr term @ 2.75%. Admittedly we ‘gifted’ (estate planning!!) her 20% down so no PMI, no points on the 6 bedroom 3.5 bath home. Her rentals cover all her financing in spades. Apart from the notes on her properties she is completely debt free.
Both my BIL’s are life long stock market devotees/traders, one retired @ 65 on a state pension & still has 2 mortgages. The other is 65, has a HELOC to live off & recently confided that he cannot afford to retire on his Social Security of $52k/yr. Same guy told us for years we were doing it all wrong!!!
This is false, the way to achieve wealth today is building a business and selling it for 2X annual revenue, then rinse and repeat. He ignores the depreciation of money and opportunity loss of compounding investment something impossible with real estate! Inflation wipes out most value and there is no interest to compound.
I really hope you don’t sell a business for only 2X revenue unless it has single digit operating profit margins.
The S&P 500 is trading at 35X earnings.
Further, we’ve got to be thankful the housing market rocketed higher during the pandemic. Unbelievable!
Related post: https://www.financialsamurai.com/why-i-regret-selling-my-online-business-for-millions-every-single-day/
I’ll add to this conversation. I’ve had good and bad experiences in both stocks and real estate. Like there are different stocks, different indexes, options, ETF, closed end funds. Similarly there are different ways to invest in real estate. Being a landlord is only one. There is active rental ownership (fix the toilet so to speak), passive rentals (pay the management company to fix the toilet), AirBNBs active and passive, multi family syndication, multifamily with full time maintenance staff, fix and flip, new builds, land contracts, fix and flip loans, long term notes, crowd funding…
I once lost a decent chunk playing will options (condors, etc) but I think that options and stocks are still a great investment for some folks, it all depends on temperament and your skills. Same with real estate. I recently sold my last rental. I did not like dealing with the management company. But I am still in real estate investing in fix and flip notes. In a bad stock market (broad market) year I do better, in a good stock market year, I do worse. So far, the negative stock years, I have seen positive returns. I understand lending, I understand real estate, I understand rehab projects and this is what I enjoy doing. It works for me, just as stocks work for others. I am listening to Buffets stock advice in real estate… invest in what you understand and never loose money.
Sam, I strongly disagree with you. I much rather own stocks than real estate. I have a much better chance of putting in much less money and making a better return in a shorter period of time than you. Also, I DO NOT want the headache of dealing with people.
As for why I choose to rent or buy, I am a unique case. I actually live in a hotel. I have various health issues, so maintenance and upkeep of a regular sized home is not tenable for me. Plus, I use IHG rewards points to get 4 free months a year. I also like having only 1 bill and the maids coming to clean my room once a week.
Sorry about your health issues. If you have a spouse and kids, do they each have hotel rooms too? Or do you have a big multi-bedroom suite?
We own property in a resort hotel. It’s a 2/2 and we could live there for a couple months.
Looks like someone is a renter and missed out on huge real estate appreciation since 2010-2012. Did you sell at the bottom?
I bought real estate in 2013 and my property is about 50% higher now. But my return on my cash down payment is up more than 200% just living in the property.
I have older kids and have been looking at buying smaller houses as rentals for them to live in assuming the tax benefits to me would be greater and they could inherit the houses down the road. Kind of my own rent to own program for the kids. What are your thoughts on how to do this most effectively?
FYI – I want them to earn their way, so I am not simply going to give them a house, but have them save a down payment and then rent to own from me.
As a household we are only invested in stocks and bonds. We have almost paid off our primary.
Fundrise looks like an interesting opportunity. For a novice, I am inclined to invest in equity property for long term growth.
Any generalized advice for investing in equity properties through Fundrise? Any specific facts you look for?
Fundrise has streamlined its investment process to focus on eREITs/eFunds for diversification, stability, and scale purposes. I think this is a good move for nonaccredited investors as you want more diversification.
Once you sign up, you’ll choose one of three investment options that best suit your risk tolerance and objectives. The platform has been very steady when stocks are down. ~9% annual returns for the last six years, and probably again in 2020. You’re not going to get rich quick off Fundrise. It’s a more stable investment that you’d want to hold for 3-5+ years.
You left out alot Samurai. Huge closing costs in SF, huge water bills, repairs, property bill increase, etc. I got to over 200k+ in dividend paying securities paying me 1000-1500k a mnth.
And the best part……I got to easily move after I get bored (typically 2 years). Lived in Brooklyn, Queens and SI over 10 years.
Ironically, closing on my first home now because I have wife and 2 kids and need more stability (school)
Also, have u seen the collapse in Manhattan rents? Best time to rent in a long time.
Don’t forget about the yearly tax advantages and write offs that reduce your taxable income levels and depreciation recapture when investing in real estate. Unfortunately, these “Soft Profits” don’t translate well because you don’t seem to “Realize” them similar to “Hard Paper Profits”.
However, they definitely add up over time and can easily add another 50-100% to your bottom line profit if not more. You just have to remind yourself, “Hey, I saved another $5k to $10k, etc. in taxes this year!” and then use compound interest to understand the real impact over time. It’s initially subtle, but also a great way to fuel other investments assuming you put the tax savings aside.
Indeed. The tax incentives of real estate definitely make real estate very attractive for higher income earners.
Brace yourself. The freebies you guys get via real estate investing are going to be reduced when Biden is President.
Hi Sam,
I’ve read this post several times in the last 2 years from owning my first home to now owning 3 renal condos and actively looking for a 4th. It’s amazing how things just keep moving steady.
Have you ever considered multi family properties with JV partners? It seems that price per door is much lower when buying a building.
That was fast! You’re going to build a passive income empire in no time. I usually buy a new property every 2 – 5 years b/c I enjoy living in them and then getting the eligibility for the tax-free profits if I so choose.
I’m trying to simplify life, which is why I just invest in REITs and real estate crowdfunding to earn 100% passive income.
Loved this article! Great job
If you look up the richest real-estate investors in the world, none of them come close to Warren Buffet – mainly stock investor……just saying. And Buffett always seems happy to me.
If you plan to become Warren Buffet, let please don’t forget about me!
Why not invest in both?
This article is not written for the top 1% of billionaires in the world, but regular people.
I agree with most of what you’re saying. I’m invested in real-estate in the form of REITS and may do crowdfunding too in the future.
I think the apprehension with real-estate investing in the traditional sense is the active management involved. Although I have thought of buying and renting out a secondary property numerous, I don’t have the time and temperament for it. It’s something I wish I did when I was single, but hey who knows what the future holds.
well, yes and no.
Buffett and Charlie Munger buy companies, not really stock in the sense you and I might be able to.
For example, one investment they made was in Burlington Northern, before they finally took over.
they purchased a minority stake – enough to get into management’s bed. then aimed to increase their stake as management’s execution progressed…they purchased the bonds and arranged for the firm to carry over some of their credit lines
all of this before they finally bought the company.
but.. you are right…he in not a RE guy at all, except in the sense that RE can generate income or provide a foundation for corporate growth – not a passive guy at all/
Hi Sam,
You’re right that there is a certain amount of irrational hatred of real estate, but have you considered that you’re also being irrationally positive? I’d be curious to hear your counterarguments to the following.
1. Objectively, real estate in most of the country has barely outperformed inflation over the long term, and has dramatically underperformed stocks.
2. Since most people buy real estate on leverage, they are in more danger when prices decline. Few ordinary people went bankrupt owning stocks in 2008-2009. Many people who “owned” houses did.
3. Your statement that “renting is shorting the real estate market” is not accurate in areas with rent control. In our city of San Francisco, rent increases for the past few decades have actually been lower than inflation.
As always, thanks for your opinions.
I’m just a positive guy in general. I own both stocks and real estate and this article is focused on those who hate or refuse to see real estate as a way to build wealth.
Not all properties are rent control. And even if you can only raise the rent by 1.9% a year under rent control, you are still shorting the market and losing by 1.9%.
Are you a renter or a homeowner? If so, for how long?
Long-term (rent-controlled) renter with low 7-figure net worth. I’ve actually thought about buying and could do so in cash, but nervous about tying up so much of my net worth in an illiquid asset, and not convinced that doing so would be a good investment. Property taxes alone would be close to my monthly rent, and of course those are no longer deductible. Glad I’ve been mostly invested in the market for the past several years – very comfortable with volatility.
I do have friends who lost a lot in 2008-2009 by “owning” RE, so I’m also concerned that painting an overly rosy view of this asset could set people up for pain when the cycle turns.
Sounds good. So long as you enjoy your property and your family enjoys the property, that’s all that really matters.
I wasn’t able to find a property that I wanted to rent because the rent was too high for the property I enjoyed. Therefore, I decided to buy instead in 2003 in SF and just go from there.
I think if you can keep your property the under 40 or 50% of your total net worth, you’ll be fine. That’s when the average person has 85% of their net worth in their primary residence which may pose a problem.
When you say real estate has dramatically underperformed stocks?
How do you know?
Perhaps you should do a little bit a fact checking. If you treat real estate like a business, just like stocks, active real estate investing offers higher returns with less risk.
Here’s the first academic study that proves the point. Note how the study compared unleavered real estate to stocks. https://www.frbsf.org/economic-research/files/wp2017-25.pdf
It’s called the rate if return on everything from 1870 to 2015.
Since investing in real estate in a boring Midwest town over 20 years ago, my portfolio has run circles around the SP 500 index. Granted it’s more work than buying a REIT or the SP 500 Index, but it sure offers me more time and freedom compared to a traditional job.
Better yet, I could have easily retired 10 years ago, but I’m having too much fun working on the portfolio while saving a boatload in taxes!
With leverage, the returns have truly been great over the past 10 years. It really is or to invest as much in stocks as one would invest in real estate.
I have so much less fear buying real estate in size versus buying stocks in size.
Related: https://www.financialsamurai.com/why-its-harder-to-get-rich-off-stocks-than-real-estate/
Hi Mr ten,
I confess I didn’t read all 123 pages of the report you shared, but according to Table 5 the real annual rates of return on housing in the US are 6.03% from 1870 to 2015, 5.62% from 1950, and 5.66% from 1980. The corresponding returns for equity are 8.39%, 8.75%, and 9.09%. I’d say 5.66% “dramatically underperformed” 9.09%.
Didn’t realize it was so high at 5.66%!
The thing is, a 5.66% return on $1 million property will beat a 9.09% return on $400,000 in equity. The investment amounts matter.
But again, there Are all sorts of property and all sorts of stock. I like both.
Sam I hear you about investing in residential properties but I don’t see you investing in commercial space. Is there a reason why? In addition to renting my first home, I invest in non traded REITs with Class A office properties that have done quite well for me in the past once the properties are sold. Now I want to get into buying commercial space in 2020/21 when retail space will be a bargain after Covid-19. What are your thoughts on investing in commercial real estate? A blog post on the subject would be nice too.
Thanks,
The Economy Chief
My plan is to slowly build my exposure over 10 years. I started investing $810,000 invested in commercial real estate across 17 properties around the country in 2016 and have about $500,000 left after distributions.
I’m looking for deals right now through CrowdStreet and EquityMultiple with plans to get to $1 million exposure. But I want to take my time given all the uncertainty.
How much commercial real estate do you think I should invest in from an absolute dollar and a percentage dollar perspective? How much have you invested in so far? Thanks
Related: How Commercial Real Estate Is Affected By The Pandemic
Yes, I read your great post on the $810k you invested in commercial real estate in crowdfunding. However, I am more interested in purchasing commercial office space outright like you purchase your homes, not via crowdfunding. I know it is more work this way in terms maintenance and looking for tenants, but I think the return may be higher. A small two-story building and rent the offices and retail space. I am thinking of moving one of my businesses there and lease the rest of the space, perhaps an SBA loan. I know the SBA loan allows you to lease part of the commercial space. I can’t remember the percentage but I think it has to be less than 50% of the rented space to others. This will be my way into commercial real estate.
I got out of REITs around 2015. It was about 20% of my portfolio. I think too much exposure to real estate, residential or commercial, is a too much of an asset in one industry. For me, 20% exposure in commercial real estate is ideal, that is if it is done via crowdfunding. But if you buy the building yourself, that % can go up since you are more in control and can touch it and feel the asset, hence, you may be able to minimize the risk to some extend.
Go for it! And let us know how it goes. I don’t want to take as much concentrated risk. Also, I’m trying to simplify my life as much as possible while also generating passive income.
You have given excellent reviews of Fundrise and CrowdStreet. I think this is your first reference to EquityMultiple. Would love to see a review of EquityMultiple as they have some offers that are quite different than either Fundrise or CrowdStreet. I’m constantly looking for good CRE opportunities but there are so many platforms and don’t know how to evaluate them. Help.
Sure, here is my EquityMultiple review.
There are so many platforms that I’m really trying to just focus on the top 5.
To quote the article:
“Life is so much easier once housing is cheap or free.”
Yet by buying/owning more than one property, you are driving the prices up, making it harder for everybody else to achieve this.
Landlords scoff at the idea that they are not producing value, but at best, they are solving a problem that they are helping to create. I just don’t want to be part of a system like this.
Most people would agree that what Nestle does with water springs in Africa is bad, but to me, living space/real estate is the same. A necessary resource that should not be horded, but made available to as many people as possible. The government should not make it as easy to get more than one property.
True. Many people I know are taking advantage of COVID-19 right now and buying up properties in big cities like SF and NYC b/c they believe once a vaccine comes out, there is going to be a massive snapback in demand from fair-weather friends who return.
That’s just the way capitalism works. In a free market, we are free to invest the best way we see fit.
I have tried to provide subsidized housing, but got no takers. How about you? What is your position on rent and homeownership?
It’s not really a free market, the government heavily influences it with tax advantages. I think these advantages should be geared towards allowing more people to own their primary residence, and stop there. Owning your home is great, more people should be able to do it. And it should not fall on affluent and benevolent individuals like you to make it so. That’s a prime job for a government agency.
To me, renting is one of those systems where every participant does only a minuscule amount of bad, but the system as a whole does more bad than good. This is where the market can’t allowed to be free, but should be influenced for the benefit of the many.
But the government is actively trying to promote homeownership to the masses. Whether the masses decide to save up for a down payment and buy is another matter. And some simply don’t believe in real estate as a way to build wealth, hence this post.
Not sure I agree exactly, with this thought process. While you can look at it statistically in that there has been a fluctuating housing shortage since the early 2000’s, and multiple downturns have slowed the building process. I think it’s something close to 6-7 new houses built (or stated) per 1,000 new households formed currently on average. I still think that people wouldn’t occupy every house even if it was available for them to buy. I just don’t think “home ownership” is for everyone. There are lots of transient people these days. It wasn’t too long ago that most people spent their entire lives in a 20 mile radius. Those days are long gone. Renting gives people more flexibility, I suppose. So I think that having landlords buy up additional places at least keeps those houses in play longer. Otherwise you may end up with house falling apart everywhere. Just check out some of the old mining, and mill towns etc. Plenty of house there if you want to go to them. You can probably go buy a whole village yourself if you wanted to.
If a house is not desirable to live in, why would a landlord buy it? If these abandoned houses exist under the current system, how could the current system help here?
If housing was more affordable, moving would be more affordable. But it’s not, because a small number of wealthy people can buy a large number houses, driving up the price. Then they rent it out to people who can’t afford it anymore, solving the problem they helped to create.
I think the state should make it harder instead of easier to own more than your primary residence and there should be some form of state controlled housing projects (like we have here in Vienna, Austria). I think this will make housing more affordable to most people, similar to single payer healthcare doing the same for medical expenses.
I find your argument flawed. If I own a home now, and want to move to a larger home, why should I have to sell my current home? I bought it and should be able to use it as I see fit. I plan to let my children live there in college, or my mother as she ages and needs a single story residence.
I could leave it empty or I could let someone live there while I wait for another use or purpose. Dictating what people can do with assets or possessions they buy legally of their own volition is a slippery slope to government interference in whats supposed to be a free society.
I like both as investments but definitely like real estate more. My stock portfolio is very set it and forget it. On the other hand I love being a home owner for its tangible aspects and being able to enjoy it every day. With this pandemic I love my home even more than before. Being able to take care of it and customize it is fun, rewarding and I like thinking about owning long term and passing it down to my kids.
Real estate will always be more valuable….to you. I prefer instant and easy liquidity that real estate just can’t offer. I don’t know those that like RE though, it’s just not a one size fits all situation.
The 6% appreciation requires 100% gain in salary to make up is disingenuous. People shop based on monthly payment – a function of house price and the rate. You’re not ‘left behind’ if your income grows in line with that of other homebuyers.
Also often forgotten are property taxes and the real estate agent fees. The latter being the most unattractive.
It’s an important asset class but not all made out to here.
Sure, that makes sense if you focus on monthly payment. However, many people have been shut out of the real estate market at least here in SF after renting for the part 20 years.
One of the reasons why I sold in 2017 was bc I would be uncomfortable paying the price I got for my house.
Compound the growth rate of The median prices housing here in SF over a 20 year period vs the median household income really starts adding up.
Again, this article addresses why there is so much hatred by some people towards homeownership.
Are you a renter or a homeowner?
You are right from where you live. In San Francisco plus buying in Hawaii. I beg to differ if you live in other less hot real estate markets. Plus what do you do if you have places in NewYork, Chicago, and riots break out and people start moving out as major cities defund the police. I would rather own some international real estate than USA right now. You are not taking current conditions of the virus and protesting in your calculations.
why Hawaii – is it under valued?
Hawaii is going to be my #1 place to buy a new primary residence for 2020 and beyond.
It’s good to know that you should have enough money saved up to do a 20% downpayment on the home that you want to buy. My wife and I live in a sketchy neighborhood, and we’d like to move to a nicer and more reputable one. We’ll be sure to start saving now so that we can afford to make a sizable downpayment when we find a home that we’d like to invest in.
Hmmm. (excuse my typos)
I own both RE and Equities. Bonds are for wimps ;) .
Re real estate (RE). Love it.
Bought my first home/condo when I was 27. Took advantage of the FHA Loan (3-5% down); and even though I had to pay PMI insurance, I held the RE long enough (9 years) to sell at a profit, buy another home (defer any taxable gains) and repeat. As an investment, can’t say it grew over 7% per year. But psychologically, owning a home felt great. I was happier paying the mortgage, prop tax and anything home related because pride-of-ownership is a real thing and when the housing market dipped, I really didn’t care. I could “feel” the roof over my head. Would I leverage more? If I really wanted to, perhaps. But the idea of me aggressively refinancing or worrying about being/hiring a property manager was never my thing so instead I just held RE passively and sold when I was ready to buy a new home. The tax breaks are nice, excluding the 2018 tax reform, but overall, RE for me is my home to live in first, investment purposes second.
That said, my investment portfolio is more stocks than real estate.
Long run (10yrs +), I can’t find a better return than the stock market. The 10yr is currently over 10% BUT 2008 will be wiped out from the rolling average which won’t include the subprime debacle (Housing Bubble) so even though +10% is the current 10yr of the S&P500, I’m happy with my financial plan projecting a compound annual growth rate of 7%, including dividend reinvestments.
Does this mean I don’t like RE? of course not.
I believe owning RE is essential for true diversification but as the primary driver for wealth accumulation, I respectfully disagree. History, since 1973 (THE worst US Economic Stagnation), shows that the overall stock market has grown higher compared to the housing market. Outperformance can be done just like anything else when we actively pursue that objective. And whether someone glorifies stock OR RE as “THE BEST” investment, it will likely lead to the FOMO for the schmucks looking for a short-cut. That’s what happened in 2008. Kinda. Perhaps a crude summary on my end, but that aside, Stocks > RE re the historic compound annual growth rate. The problem isn’t whether Stocks are REALLY better than RE or vice versa… the problem is investor behavior and without the mental fortitude to hold, BUY, and NOT SELL when everyone else is screaming save us, no stock holder or home owner has a legitimate chance to build real wealth.
Cheers Sam! Another thought-provoking post indeed!
Considering where we are in the investment cycles also makes a difference. We are near or nearing the top of the bull market in stocks, with “likely” a decade ahead of very low returns (nobody knows for sure, obviously). On the other hand, we are “likely” only half way through the real estate run if it follows the highly regular and predictable 18 year cycle— peaking in 2024-25, with the last 5 years as the strongest, with a parabolic run-up in prices. So I would not be surprised that over the next 5-10 years that real estate substantially outperforms stocks….in the SHORT run
I agree with your statement, sort of. Nobody know exactly where we are in the cycle, but to say that the real estate cycle will peak 5 years after the stock market peaks seems stretched. I can see 1-3 years MAX, but not 5 years.
See: What If You Buy Property At The Top Of The Market
Hi Sam
Question for you – do you sign the offer to purchase real estate with the arbitration and mediation clause? Or do you say, “no I won’t sign that specific clause”?
I never sign that clause, and I’m a lawyer. People usually freak out a little at first, but I tell them that arbitration was a great idea, but that in practice, it doesn’t turn out to be all that great. It used to be much faster and more efficient than court litigation, but (1) now it takes about the same amount of time and has nearly all of the same procedural inefficiencies (discovery disputes, etc.); (2) you have to pay your arbitrator/judge a handsome hourly fee to manage your case and sit through the trial, whereas with a regular court action, at least the judge’s time is already paid by your tax dollars; and (3) the filing fees can be pretty insane for arbitration, depending on the dollar value of the dispute, whereas in unlimited civil court in CA you’re looking at around $435. We were involved in one arbitration where the dispute was $1 million, and the filing fees alone were $10,000. It’s ridiculous.
Once I explain that ^ to the other party, they usually refuse to sign the arbitration clause, too.
Mediation is a different story, at least in CA. In our real estate contracts here, you have to offer mediation before filing suit, otherwise you lose your attorney fee recovery right. There’s no “opt-out” of the mediation provision in the CA agreements, at least last time I looked.
I totally agree with you. I have invested in the stock market and the real estate market for many years. The real estate market has been a way better investment. After 15 years in real estate, I could retire on it’s income. I could not do that with the stock market, and I put more money in the market than into real estate.
Dr. Cory S. Fawcett
Prescription for Financial Success
Dr Cory,
Huge advocate for REI also. What style and where are you invested? I’m in NC, primarily short term notes and several rentals in TN.
I am in Oregon and own small apartment complexes, 4-31 units each.
I very much agree that living is first and appreciation third. I don’t think RE would be nearly as attractive without the benefits of quality living and making decisions about your dwelling and property.
Cheap mortgages are also a source of a short position against your currency denomination. A 30 year mortgage with 2.5% inflation targets per year with a low interest rate can bring hidden returns that way as well.
Noticed a lot of people keep saying stocks beat real estate.
Time to set the record straight.
Rental real estate has actually outperformed stocks over the last 145 years across 16 developed economies according to the epic study “The Rate of Return on Everything, 1870-2015.”
The study looked at unlevered income property returns net of all expenses.
The only expense they did not include was property taxes due to the complexity of the various laws.
Over the entire time period, stocks returned a nominal 10.81% with a 22.67% standard deviation.
Rentals returned 11.22% with a 10.76% standard deviation.
Higher return, half the risk. Exactly what I experienced over the last 3 bear markets in stocks and the mother of all bear markets in housing.
My rentals did well, by the way, in the housing bust. More people need a rental when they lose their house.
If you were to invest in rentals with 25% down in sensible areas, you would achieve higher returns. However, it would entail more work.
Once you dial in your rentals, they take little work in my experience. Plus, you don’t have to rely on your day job anymore.
Here is the link to the Federal Reserve Bank of San Francisco working paper.
https://www.frbsf.org/economic-research/files/wp2017-25.pdf
I’m clearly biased since I own a bunch of rentals in the boring Midwest and have achieved higher returns than I could have ever achieved with stocks as a result of my efforts.
It’s hard work, but worth it.
Better yet, rentals offer a perfect non-correlated hedge against stocks.
Interesting article from a global perspective. Some of these countries have higher returns on real estate vs. equities. And other countries, equities outperform real estate.
However this data can be used to skew opinions towards Real Estate.
I think you are quoting from page 24, table 6, the full sample data (Worldwide from 1870 to 2015):
“Over the entire time period, stocks returned a nominal 10.81% with a 22.67% standard deviation.
Rentals returned 11.22% with a 10.76% standard deviation.”
However, in the Post 1950 section of the same table, equities slightly outperform housing 13.00% vs 12.47% (Worldwide 1950-2015)
Table 7 shows the USA total returns if you invested in US equities and US real estate. The total return would be 8.87% Housing vs 11.08% equity. This can be a huge difference invested over decades.
My personal opinion is we all should be diversified in all of our assets. Never put all your eggs in one basket!
For the record, I own real estate and equities. They both have their own pros and cons should have a place in all of our portfolios.
I don’t believe “rentals” and “housing” should be looked at in the same light. Housing is lived in and rentals are income producers.
I’m with Mr. Ten here.
I’m with you. Much to the chagrin & despair of my JOB colleagues we were foolish to have invested in properties for 30+ years. We retired VERY early & many of my colleagues are still working to supplement their pension.
We have never looked back & just in the last couple of months dropped another $375k into multi units that will provide arms length double digit COC returns. In fact we will not even buy into a real estate investment unless it Nets 12%+ COCROI.
7 years ago a family member (who was a stock broker before becoming a living large financial consultant) asked for a sit down to review our niche in real estate. He grilled us for 2 hours & then sent us a 3 page dissertation on why we are doing it all wrong. Just 2 months ago he approached us & asked for advice about how to get into real estate because at 65 he cannot afford to retire & yet he always acted very wealthy.
Requesting some pearls of wisdom shared on the following thought-process:
Background:we bought a 350k townhouse outside Washington DC metro area in 2016 using a VA loan at 3.5% rate with no down, no PMI, seller and bank paid the closing costs + the required VA upfront funding fee. Basically, we just got the keys to the house with zero out of pocket. We opted for 15 year payments and out monthly payment is approx. $2500.
The current situation: we are ready to move into a bigger SFR and plan to rent this TH for the long-haul as renting in this DC metro area neighborhood is absolutely never an issue. Many government folks, especially military personnel and diplomatic crops, can sign stable long-term leases for $2500+.
The question: Should we allow the tenants to keep paying the mortgage over next 15 years, so when both our kids are going to college, they can use the proceeds from this Townhouse to pay their college expenses? Or, instead, should I pre-pay $65k each in Virginia state’s 529 plan TODAY that will buy them guaranteed 8 semesters of college tuition at any Virginia school AFTER 16-18 years?
I would do both. Probably based on KIyosakis advice, put some money in for their stock market and keep investing in new cashflows so that by the time they reach college theyll have the stocks they can keep growing and putting into plus youll have a ton of money coming in from your rental properties. I live in NOVA as a realtor and I would only find rentals that allow for good cash flow return. It’s good to find a nice area or a few that allow this.
Sam, whatever you’re doing it is working, clearly. For some people they can keep flipping homes in and out of these high growth cities and do well. In my area real estate, at least owning a home, is a pretty bad investment. I live in a nice house in a great school system and I recently calculated that for every $1 I have put into this house, I have gained $.25 of equity. That is not a typo.
After mortgage interest, real estate taxes (they are awful in the northeast), occasional repairs, the fact that houses in my particular city grow exactly at inflation (not a penny more), they just aren’t thrilling.
I am still considering trying to buy a property to get into renting it but we’ll see…
I presume there is less “rage” against owning stocks, because you can’t live in a stock. Thus, stocks are not essential for life.
Everyone has to live somewhere. So, I can understand how people get upset, when they spend most of their salary on rent.
Now, will most of them do anything to change their circumstances and put them in a better position to buy property? Probably not.
Disagree. Forget all other arguments (liquidity, ownership, convenience, blah, blah). An Apples to Apples comparison will show that you will Double your returns in Stocks vs Real Estate, Period. Example of investing $100K that turns into $1M vs $.5M.
That’s not entirely true.
Real estate carries significant tax breaks and is unique (ie: not a homogeneous stock), is almost always levered and always has a capital expenditure component.
I lean toward stocks but we can’t compare a RE index to a stock one – it’s impossible.
Ya ought to know where/when to buy low (market timing), and have lots of dumb luck to follow over the years (in-addition to good prognosis).
As much Sam was interested to buy and keep/rent directly owned real-estate, his plan and his entry/exit prices in SFO rental property are nothing short of real-estate home-run! BTW, he could have paid a full $100K extra for his SFO rental property when he originally purchased (he sold recently), and still would have made truck-loads of gains. Given that the markets, timing, local/national economy on roll and interest rates have been that low — Sam could have originally paid $200K extra for that very home, and still would have boat load of gains upon selling it!
His other CA investments (Lake Tahoe one) have barely recovered after years of patience (and possibly had to put money into that sinkhole, albeit for some period of time).
If you were lucky to buy property at low prices, its good; if its generating positive cash flow, sweeet! The underlying point is: can you afford to buy your very home at current market prices ($2.7 Million?), then do the Rent-vs-Own analysis, or build a good RE-rental business case at that purchase price (at current market interest rates) !? Sam knows his business well, hence he should be delighted to have cashed-in on that SFO rental property. If Sam, who is really good at hustle, finally can’t handle the tenants and sold the property., how much success us mere mortals be able achieve dealing with tenants (or worse yet, the lack of tenants – empty house!)
One of the major differences in RE vs Stocks is – if you don’t (are not able to) make your monthly mortgage timely payments, lender may foreclose: you may lose the principal, or worse yet, owe more than what you already put-in towards the down payment !! With good ETFs/funds, one loses no worse than 40%-50% during big dips, mostly/fully recovering after some time. With ETF/funds nothing else is lost (we are not talking margin/leverage here!).
The cool thing about Rental RE is – somebody else making payments for you. so long you chose your tenants with good criterion, and solid background, now you have an un-invested partner to help your RE business. You own all the gains, renter gets zero upside/gains – while working hard to maintain his/her job and roof-over-their-head. If you find a good stretch of such good partners (ie., renters) for you to fill-up a near 100% occupancy over a decade+., in good location, you definitely could come out much ahead. Since RE is leveraged, your gains/outcome will typically multiply by a factor of 3 (or, should I say improve 200%). Or you could have bought AAPL/AMZN when they were at give-away prices, and you be holding 100-bagger(s) !! You gotta keep an eye open for good opportunities .. and execute on them when you see good-price/strong-case to-enter: let it be RE or ETFs/stocks/funds. I gravitate towards: keep buying ETFs/stocks/funds periodically/automatically similar to 401K contributions, like clockwork, similar to dollar-cost-averaging strategy; wish there is similar dollar-cost-averaging for RE ownership too with no-pressure if missing/delaying a few payments (may be akin to pay-option and/or negative amortization mortgages; guess most/all of these types of mortgages are now out-law’ed)
But to who are we preaching here? Sam worked in finance and business world for about two decades and knows his stuff! Hoping we all learn something from his wisdom.
You give me too much credit, but thank you all the same.
I don’t see why financial freedom seekers wouldn’t want to try and own both their primary residence AND invest in the S&P 500 or great companies. Yet anti-housing crusaders shun housing and think that investing in stocks is the only way to go. That’s silly talk. Housing is about lifestyle first, then as an investment second.
I especially agree with this particular statement about housing being about lifestyle first, then investment second. I’ve been paying extra on my mortgage which has a low interest rate of 3.75%. I realize that I stand to gain more money by writing off the interest and investing that money. My main reason for doing it is that extra money in the stock market won’t lower my monthly expenses. If I pay my house off in the next few years I’ll have saved a large sum in interest that I haven’t paid (gauranteed), and I’ll lower my cost of living significantly which will allow me to make different decisions in regards to where and how much I work.
Hey Sam-
Isn’t the real question on if buying a home is better than investing in the stock market? Of course buying a home is better than renting. When you buy, you get three benefits of asset appreciation, building equity, and tax deduction. There’s no question it is better. However, you have to decide if putting money into a property is financially better than investing it elsewhere.
Let’s say you put 500k into a 2M apartment with a 30 year mortgage. In 30 years, maybe the apartment doubles and it’s worth 4M (it’s quite hard to imagine it being more than that but maybe I’m wrong). So now, your 500K and all your mortgage payments ends up giving you an asset worth 4M. However, if you put that 500k into the market and it doubled 3 times in 3 years, now you have 4M.
Am I thinking about this even remotely correctly? I’m in a situation where I’m considering buying in NYC but am very concerned about all the lost stock market gains by moving significant amount of money into a down payment.
My opinion.
Don’t buy a home this year. Keep your money in the market. Stock market is still decently priced now. Get the gains from the tax plan. Buy your home in late 2019, the latest 2020. The stock market will crash hard sometime between late 2019 and the 2020 presidential election.
lol, it did not. it went up
But real estate prices did fade down a little in 2018 and 2019 in some markets.
Don’t forget the rent payments coming over the years on top of the appreciation..along with all of the tax benefits on that extra income.
You are thinking correctly. But many will argue that renting your whole life is better than buying a property in a place you want to live your whole life. That is the main argument for anti-housing crusaders.
As for how your primary residence will perform compared to the S&P 500.. it’s almost a “who cares” debate since you buy your home to live and love life first. To get your life started often times. The cash flow generation is a nice BONUS if you rent it out and buy a new house. And the capital appreciation is the next amazing BONUS.
It’s much easier for most folks to earn larger returns via RE overall IMO.
I appreciate the reply but for people considering buying in NYC where it’s a majority of your NW that would go into a down payment, it’s a much bigger decision compared to putting 50k down on a 250k house somewhere. I agree with “Who cares” on a 250k property but not so much on a 2M.
The S&P 500 has returned about 10% annualized including dividends over the long term. With large sums of money, I prefer an S&P 500 index over real estate. I prefer stocks over real estate.
Indeed. I prefer to invest in the S&P 500 and at least own my primary home as well.
It feels great to get some utility from property every day.
Sam I know you’re trying to convince the anti real estate people, but I think you are being overly provocative in this article and not sure I agree. I’m definitely not in the anti real estate camp and believe everyone should eventually own a house instead of renting. However, the facts are that the S&P 500 averages 10% a year including dividends. National real estate averages around 6% a year, not factoring in expenses, maintenance, and upgrades. I realize that San Francisco has performed better than nationally for quite some time. If you own great individual stocks for a long period of time the return can be even better than the S&P 500. You are also able to add to your position during sell offs for a better cost basis.
I’m not sure that the real estate hatred movement is as pervasive as Sam claims. Perhaps it’s more local.
However, to the extent that systemic real estate hatred exists in the coastal FOMO areas, it is one thing that makes real estate somewhat less attractive because the real estate haters become your very tenants. Hence they end up with a sense of entitlement — because as we all know rich people became so undeservingly primarily out of luck. Well actually, some rich people became so because the very tenants (or their parents) grabbed a pitchfork and headed to city hall every time new desirable housing were to be built, but that’s another story.
It’s pretty pervasive in every large metropolitan city. The hatred is immense in places like Vancouver, Toronto, SF, London, HK, NYC, LA, etc.
Cool article.
My counter arguments on the benefits of stock investing:
1. You are the CEO, not a minority investor
You are not the CEO is one of the benefits of being a minority shareholder. Find the really smart people and invest in them (Bezos, Hastings, Musk, etc). As they rise, you rise proportion to how much you put in.
2. Leverage other people’s money cheaply
No argument. While technically possible in stock investing via buying on margin or options trading, I do not advocate any of these methods.
3. More tax advantages
Long term gains from investment capital gains still trumps wage income. If one can make all its income from investment income its better than making it from wage income. That would be my long term dream anyway.
4. Tangible asset.
No argument other than the liquidity benefits of stocks
5. Easier to analyze and make better investment decisions.
I personally know a lot of people who have made really bad real estate decisions. It’s the same on both sides.
6. Less visible volatility.
Zillow and all these other more recent sites now make it very easy to monitor perceived home owner price. The benefit of stocks is you know the price at any given time. Housing you do not know. People over value their real estate holdings all the time. It’s only worth what a person is willing to pay.
7. A greater source of pride.
I have great pride in using the products I own even the products that I own that I don’t consume I have great pride in. Every time a Tesla rolls by a slight smile comes across my face with a slight head towards the Tesla owner. I now own about a Tesla worth of Tesla but don’t have one yet. I know some say it’s risky stock but shrug they have been saying similar for years now.
8. More insulated.
Diversification is a form of insulation
9. The government is on your side.
No counter argument. Government will only bail out industries that it thinks are beneficial towards the national economy (ie Obama saving the Auto industry)
10. You’ll save your children from angst and despair.
Stock investments can easily be transferred to offspring. My wife once told her parents, if you leave me our childhood home, I’m selling it hehe
Smart wife! But oh how I’d like to own my childhood homes for nostalgia’s sake at least. Memories are priceless.
I much prefer real estate as well, while I realize that neither one is necessarily *better*.
Stocks are liquid, but volatile and you are betting on appreciation. You’re essentially investing for the long term growth of the macro economy, so it’s not exactly gambling but less predictable than real estate. Stocks are simpler, easier to buy, but that means that anyone can do it yes.
Real estate is less liquid, less volatile, and you shouldn’t be buying for appreciation. You’re after more predictable immediate profits that should last theoretically forever.
Real estate doesn’t have to tie you down at all, physically or otherwise. If anything, I find the predictability of it much more freeing.
Isn’t there a significant return difference between completely passive absentee landlord and semi- active handyman manager landlord? I’m the latter and have run the numbers for the first type, and they don’t look attractive. But it is quite a bit of work. I’d say it only feels like half financial independence.
HB, I think there is. Seems to me that the difference is at least 5% (a management fee), and likely higher (10-15%?) depending on how many repairs your property needs. In my experience, many property managers aren’t as good about finding inexpensive repair persons than property owners are. I do the same as you, actively manage and handy(wo)man my way through as much as I can before calling in reinforcements. It’s a lot of work, but it can be kind of fun sometimes, too. How many homeowners get to hot-swap a fuse? :-D
My plan is to keep doing this for now, keeping the extra money for myself and/or saving for another property. When I get sick of doing it myself, then I will probably hire a management company and turn it into a much more passive investment.
“Real estate doesn’t have to tie you down at all, physically or otherwise. If anything, I find the predictability of it much more freeing.” – This is a great counterpoint to those who say real estate ties you down.
With the invention of Airbnb, VRBO, Homeaway etc, one can easily rent out their property for income if they need to.
It’s real estate that gives folks more confident to settle and to start families and establish roots too. Not knowing whether you’ll be kicked out within the next 3 years is disconcerting.
Ricky, are you referring to the monthly check that a landlord is receiving from his tenant? I say this because you mentioned that one should not focus on the appreciation. Thanks for the info!
Hernan
no thanks. In my neighborhood in Charlotte I see investors buying homes and they often sit for 6 months vacant waiting for renters. We’ve done the calculations and even paying cash they will be hard pressed to collect 5% net in income after rent and maintenance/taxes. Perhaps if you buy in an area growing 10% a year but that’s not here only San Francisco. Meanwhile, I often make thousands of dollars between my first and 2nd cup of coffee at 8 am in the morning, while at my kitchen breakfast counter, just by a few clicks on my lap top. With high dividend yielding stocks I make money no matter what the actual price is (which I only loosely keep an eye on). If a 5% yield stock dips 20% in value, all the better my yield went up so I buy more.
And what kind of dividend yields do you get these days? Aren’t they similar to the return you’d get from a rental?
I wonder what the investors buying up 6 properties at a time see what the rest of us do not see. Hmmmm….
Owning RE is definitely more “tangible” than owning stocks.
We get to see and touch what we own. And it’s a lot easier to control all the financial aspects of the investment.
The real problem is that your savings are highly concentrated (when compared with owning stocks and bonds through an ETF).
Also selling a house is usually a lot more difficult (less liquid) than stocks.
The other glaring issue with renting at any stage and depending entirely on market returns like extreme early retirement millennials is a lower return year forces the renter to adjust their overall budget which in a major correction could result in forced moving to cheaper digs or frequently living nomadically. The latter is fine at a young and healthy age but as our health deteriorates or opt to have kids then there’s greater need to have roots, routine, stability, and logically home ownership
The entirely stocks and bonds portfolio return income dependent folks also can’t enjoy staying in an expensive city for too long because well frankly they are forced to be rent sensitive so they go like “aww naw I’m bored or don’t wanna stay in boring sf/la/Vancouver/Toronto /new York/London/Tokyo/Hong Kong when in truth affordability dictates their decisions so their choices are the lower cost of living cities like in south east Asia, Mexico, south America, eastern Europe where the north American currencies can go further .
The idiotic blogs out there that are giving young people ideas about leaving your jobs after you have saved up $1Million. Young people, remember that we have been in a bull market for many years. Your $1Million is overinflated, it really might be only $600K. When the stock market crashes and if we enter a pro-longed bear market will that be enough to sustain you? Will there be a mass exodus of our young people to the low cost countries when the bear market comes around? Do you want to have to be forced to live the nomadic life? The blogs out there who are pretending to be financial experts and are spewing out stupid stupid thoughts are there to make money and to sell their book. They will step up their posting frequency when they have something to sell. This means posting just for the sake of it even though they have nothing intelligent to say. Aways remember that. They are not looking out for your best interest. When you run out of money will they be there to help you? They are probably blogging in a cheap rental in a low cost country, afraid to spend money and desperately trying to make money off of you. Is this what you want your future to be? Keep your job, save much more than $1Million so you won’t have to live such a deprived life, you have a long life ahead of you. Don’t listen to the moron people running these blogs, they are not financial geniuses, they are financial scammers.
Wow you are one bitter, unhappy person. What is your background and to which blogs are you referring? Clearly you aren’t referring to this one because Sam is legit and has a LOT of experience.
Of course I’m not referring to FS’ blog. This post from FS is long over due. I hope he is helping many young people out there with this post. Hopefully he will write a blog to educate the young on how much they really need to save and invest so they can have a good quality of life without depriving themselves. What’s the point of saving all this money if you cannot enjoy your life? It is not hard to figure out what dumb blogs are out there that are spewing nonsense. I have told all the young people I know (nieces, nephews, cousins) remember that that these scammers HAVE to blog cause they have probably run out of money in the low cost countries they are hiding out in. Keep up the good work FS.
Those early retire extreme bloggers were often software engineers and no one should expect those to be lifelong careers when compensation is front loaded. Only a handful become the fellows and techleads and it is a very rare population. The remainder have to find alternate vocation after burnout or fail to keep up with new frameworks so developing digital assets is one logical exit option since that’s what they’ve been working with for years.
Many others more hands on go into building construction, mechanics, or electricians. They are innate problem solvers .
It’s important to maintain a critical thought process when reading about retire early extreme and consider who and why they are delivering those messages.
Just bought in Austin. The prices have certainly gone up for a long time here, but as I have just moved here this is as soon as possible. I won’t look back and think what if I bought when I first got here.
Sam,
NEW TAX LAW is must own 5 of 8 years for 250K/500K TAX free gain. Great article, as always. J
I think this is a great law for real estate investors if it passed bc it will encourage people to naturally own and live in their homes longer. The longer you own your property, The better it generally is. You don’t want to be turning and burning with such expensive property transaction fees. You also want to hold long-term through down cycles.
It’s partly because of high transaction fees that I was not inclined to sell my rental house. I had to have a no-brainer offer in hand to pay such egregious fees. So when someone offered me a whole million dollars more than five years ago, equal to 30 times annual gross rent, I took it. Otherwise, I would’ve kept the house and probably even left it empty I had to have a no-brainer offer in hand to pay such egregious fees. I liked the family, and I thought it was a perfect buyer who would enjoy the house like I had imagined.
Incorrect. TCJA retained current law. From NAR:
Exclusion of Gain on Sale of a Principal Residence
The final bill retains current law. A significant victory in the final bill that NAR achieved.
The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.
I don’t hate RE, it’s just that equities appeal to me:
1). I don’t want to be a landlord. Having rented, I know how much hassle it is (I was told horror stories by many of my landlords for some reason), and if you use a management company forget about cashflow being positive unless you own quite a few properties (if then).
2). You can NOT beat the liquidity of stocks.
3). Don’t expect the exemption for selling your house to last forever, and if it’s taxed for capital gains, then it’s a wash with appreciated equities.
When I first moved to Central CA, housing was exploding. After seeing 20% gains two years back-to-back, I smelled a bubble and dug in my heels – for ten years. Of course I had far more cash to bring to closing when I did buy and housing had just started to recover when I did. But many people here did not wait and they got badly burned in the collapse. Several of them lost multiple houses and went bankrupt. Others bought almost exactly at the height of the bubble in rural areas and were upside down permanently – still are.
There’s nothing wrong with RE, it’s just a lot more hassle then watching your portfolios grow over the years. Best of all, no tenant drama. I guess those are the angry people Sam was talking about.
I agree Sam. I’ve been a stock market investor for a couple of decades and sure it’s been a nice ride up. Since December ‘17 I drastically pared back on my equity allocation (to only 25% of my overall asset allocation) and reinvested in real estate Crowdfunding, similar to you with the proceeds from your SF house sale. I’m way more excited about Crowdfunding and I’ve blogged about it recently. I live the fact that there’s consistent cash flow, a preferred return AND that real estate is not market-to-market each day. This is a remedy to anxiety.
Like you and everyone reading your wonderful blog, I’ve participated in this Bull marlet bit I’ve hated it the last couple of years. They say this is the most hated bull market in history and I’m a hater. Lately I’m bearish-bent.
It’ll all end very badly and many passive, index investors will be left bloody. Real Estate won’t be impervious to marlet volatility but it will bounce back more quickly.
Gotta agree. One capital markets dude wrote a book arguing about the wealthy renter. National media interviewed him and asked if he was a renter or buyer. Oh the irony.
It’s funny how all owners want others to rent while renters have 0 incentive whether others owned or rent. Control rests with the landlord. There are laws to protect tenants to some extend but the government provides a plethora of financial incentives for the owner who takes more risk while the renter have 0 financial incentives from government.
Now to admit my bias, I get house horny while educating others how to manage house horniness too.
But is it the right time to buy right now? Been saving for 20% down to avoid pmi and now I wish I bought 3 years ago instead. Over $600k for 2 bed 1 bath in Orange County, ca
Right now is a terrible time to buy compared to five years ago. But if your income is stable, you plan to live in your house for 10 years, this is your primary residence, and you have nice cash buffer equal to 10% of the value of the house or more, you’ll probably be OK. It’s the people who want to buy at all cost and don’t run the numbers and don’t run scenario analysis that I worry about, who ultimately hurt those of us who are responsible for maintaining our homes.
LA area Is the one market that I noticed that has got back to pre-bubble levels, but hasn’t aggressively exceeded those levels and like here in San Francisco where we’re about 35% higher than the previous top.
Buying a bigger home than you can afford is always a not so good idea in terms of financial independence. As I mentioned in one of my earlier comments the true cost of your housing at any point in time is the market value of your home times the opportunity cost of that market value (about 5% currently) — and that is true whether you purchase the house with cash or you borrow someone else’s cash (mortgage) or a combination thereof.
So, if you live in a house with current market value x10 your income, then your housing cost equals half your income (x10x5%=50%). Forfeiting half your income in housing cost works against eventual financial independence. Unless you are banking on spectacular housing appreciation that will overcome forfeiting half your income into housing cost. But as I said in an earlier comment that appreciation (above inflation) is likely limited.
Things are very different if you buy a house to rent out. As one of Financial Samourai’s best posts says: Rent Luxury, Live in Utility.
Very well presented arguments Sam, hard to disagree. I’ve never had the desire to invest in property outside my primary residence like most of my fellow Australians, but I do own my own home (currently about 40% debt funded), and the asset value is significantly higher than my stock portfolio – which I’m more focused on building up.
I’ve often toyed with the idea of drawing down equity to invest in stocks to readdress this balance to some extent, but for some reason, making a huge downpayment on a single property feels much more comfortable than dropping a huge lump sum into the stock market…
Hi Frankie,
Nice to see another Aussie here.
I take it your in Sydney or Melbourne with large and recent capital gains?
I was always pro home ownership, pro stock ownership and cooler on rental property. It seems the cash flow is harder to make it stack up as an investment case down under.
ASX is heavily pivoted towards banks and resources which makes investing somewhat difficult and lumpy.
Recently (last four years) I’ve moved to an investment property and increased super contributions. Will let you know in a cycle how it turns out.
Just a share.
I should have mentioned, negative gearing and franking credits in the right proportions seem to work very well.
I don’t see why this is even a debate when the stats are clear that stocks outperform real-estate over the long term. /end
No matter how many variety of scenarios we conjure up to try to make RE look more attractive, the statistics say otherwise.
Good strategy on generating controversy and buzz though, this article is sure to go viral, but you’ll never win the argument ;).
It’s not really a debate. It’s simply to explain why real estate will always be more desirable and why there so much first ration among people living in the coastal cities. I didn’t really think about the human condition of wanting what you can’t have until recently. But it makes complete sense.
There’s also a reason why the average homeowner is 40x Wealthier or some absurd multiple wealthier than the average renter. The minority of people have the discipline to save and invest the difference over a lifetime.
Correlation does not imply causation. I’m not convinced that homeowners are wealthier because they got into mortgages. Had they rented and invested the difference in stocks, they’d probably be even wealthier!
Honestly though, I’m not one of those anti-house crusaders. I understand that owning a home is a good lifestyle choice for many. I just look at the raw numbers, and to me its clear that if you’re a disciplined investor and you put most of your equity in stocks vs a single family home — you will win in the long (long) term.
However, I’m not saying that’s the most gratifying choice in terms of happiness. That’s a whole other topic :).
The very fact that both real estate and stocks exist as competing investments in a market should tell you both that each type of investment has merits. While most people are suckers, those who know better are the ones who bring the market equilibrium.
NiceTry, from an investment return standpoint there’s a huge difference between buying a home to live in and buying one to rent out.
Probably also because those people who have the desire to work hard towards financial security also work hard towards owning a home and retirement accounts.
Causation does not imply collrelation indeed.
But I would be willling to bet people with healthy retirement accounts likely have real estate and possibly stock investments as correlated financial choices.
“Real Estate FOMO Is The Illest”
Never in my life did I think I would get to read a sentence like that. Totally made my day!
If you cannot have fun with words, you are probably not having fun in life!
Well said!!! Excellent job on this post FS. I encourage the young people in the financial community to process what is being said here and ultimately make your own decisions. FS’s posts shows that he has a lot more experience in the financial aspects of life (and life in general) than some of the other blogs out there. This isn’t just about real estate. It’s about deciding for yourself what is good or bad advice. Some blogs are just winging it folks.
Yay New Zealand. The rage is strong here. Every second article in our media is about how renters are being ripped off by landlords and how things should be more tightly regulated. I own 11 properties in the capital city and everytime a new measure is introduced rents go up to cater for increased compliance costs. Its pretty crazy.
Huge gains in value so I plan to weather the storm. Love your blog and advise my clients to read it as part of their financial education.
Thanks Troy And congratulations for New Zealand being the number one most expensive country for real estate in the world! I got to make a visit one day. Maybe on the way back from the Australian open.
It’s not healthy. Homelessness and poverty rates have increased significantly since 2000, real estate values far exceed the value of the local stock market at over $1T – in a country of just ~5m people. It is a real estate oriented economy. I don’t live there anymore, but always thought I’d be able to return one day. That’s looking less and less likely.
Basically this:
https://www.newsroom.co.nz/2018/03/19/98111/our-economically-cancerous-addiction
“Our research and development spending is about half the OECD average. Our non-residential investment is about 60 percent of the OECD average and our hourly labour productivity is just 65 percent of the OECD average.”
I am amazed your government doesn’t do more to help the locals out. Seems like foreigners are making real estate unaffordable.
To be fair, NZ is a special situation.
Auckland is really the only city worth living in (I know their are others but I’m sure few would recognise the printed names), foreign investment has squeezed out locals rarther than increasing domestic demand, government policy, boom/bust economy, lack of easily accessible investment alternatives.
Live in Australia instead bro.
I own a lot of real estate for many of the reasons you state — but your analysis is lop sided.
As most housing indeed merely keeps up with inflation over time, the overall return on investment in a rental is only about two thirds compared to stocks.
Another great inaccuracy you have written is about “housing haters” pushing government to build more housing. Quite the opposite.
In the Dan Francisco area whenever I’ve gone to city hall meetings where Pontious Pilot decides on the fate of someone’s housing aspirations, the room is typically full of grassroots pitchforkers trying to thwart any development. Pitchforkers who are making their next house even more expensive and at a faster rate than the one they currently own, and who are essentially pricing their children out of the area. Talking about pitchforking yourself in the foot. These are the suckers I pray on by buying real estate in zoning restricted anti-growth areas. Few things are more enjoyable than seeing the children of these enviro-nimbys come begging to rent from uncle HB at exorbitant prices.
Case in point New Zealand. How can a country with the land mass of California, only one tenth the population, and lower overall salaries have housing that is x 4.5 more expert ham the US? It’s the enviro-nimbys self destroying their next house upgrade and pricing their offspring out of the country.
That being said there is only so much this can continue in the long term. Yes, places like the San Francisco Bay Area have a natural geographical endowment that sustains housing prices that are multiples of the national housing price average. That geographical endowment has propped up San Francisco home prices to around x7 the national average. But the crux of the matter is that this geographical endowment while significant is nonetheless finite, while San Francisco home buyers are implicitly banking on continued almost infinite above inflation housing appreciation and an EVER INCREASING housing price multiple over the rest of the country. Sure the equilibrium geographical premium could be more than x7 or it could be less (meaning it’s already in bubble territory) but can it grow to x10, x15, x20? Note, I’m not simply talking about housing appreciation, I’m talking about the pricing MULTIPLE than San Francisco housing commands over the rest of the country. That, the multiple, has to be finite, limited by the finiteness of the geographical endowment.
If the multiple were to peg then that means that San Francisco Bay Area housing would only appreciate at the rate of inflation. That would spell disaster. Look at how low rent to purchase price ratios are in areas like Palo Alto and you quickly realize that nobody in their right mind would choose buying over renting unless they expected long term housing appreciation well above inflation. With price to annual rent ratios of around 40 I’m sure you can do the math. So, the moment housing price inflation expectations (or a price saturation reality) in the San Francisco Bay Area drop down to inflation, nobody will want to buy, and those who hold rentals will want to dump their multi million dollar capital trapping underperforming house investments as soon as possible — before the exits jam.
Of course, for many years this has not happened and thus by virtue of the law of probabilities is not likely to happen soon, leaving my comment to be ridiculed for a long time… until it does perhaps happen… as it inevitably will at some price multiple.
I need to buy another house!
Yes totally agree which is why I kick myself for selling my duplex, the only other property I owned besides my primary residence. Where I used to work, it was the employees who owned several properties who were able to retire early and enjoy life to the maximum. Leveraging other people’s money like you can with real estate magnifies your gain as you say. You can leverage stock too with margin (very risky), when stocks tumble you have margin calls. That doesn’t exist with Real Estate.
Thank you Sam for writing truths to help the uneducated. You’ve been a little soft lately, catering to feelings instead of hard to swallow financial advice. Renting is good for a number of reasons, but financially, never. This is a financial website, and that is what is primarily discussed here. If there was financial gain to be had by renting, then why do landlord exist? They must just like to give away the money they’ve worked for, to their tenants, right? Again there are reasons to rent, but folks, please stop trying to convince yourself or others that you are SAVING money by renting!
I generally agree unless one lucks into a below market rent (relative, friend, paying with sweat equity instead of $) or lives in a very low cost rent area. In those cases, renting with a strong discipline to invest the difference will ultimately create more net worth than buying a property in the same area.
If I lived in the (SE Ohio, western W VA, NE KY) triangle, I probably would prefer renting and then socking as much in equities or REIT’s as I could. I would not see a strong upside to housing when taking all costs into consideration.
I’ve met many people with rent controlled apartments since 2001 here in San Francisco. Every single one of them wish they had bought years ago.
That is the irony of rent control. It provides you the below market place to rent, but a trip see you in the place as rentals go up, leaving you with a slowly aging apartment that may no longer suit your life’s needs. Meanwhile, rent control creates artificially low supply and causes upward pressure on the rental market and therefore house prices.
14 years ago I bought the home I plan to retire in. It is in a very desirable area of the country for retirees and millennials alike; a vibrant and very social environment with lots of natural beauty and vast resources to enjoy. We made sure it was large enough to help out our parents if they ever needed to move in with us. Our careers worked out that we chose not to ever relocate again and in another 5 years we will own the home free and clear and hopefully, have a lot of years together in retirement and a lot of great memories. The rest of our portfolio is in mutual funds, ETFs, bonds, REITs, PE Funds, some other alternative investments and company stocks/options where we worked. I’ve rented and owned throughout the years and I’m happy with where we are right now in our lives and the financial position we are blessed to be in.
Like others have noted, I think renting and owning can both be good decisions based on individual situations and circumstances.
This, over the long term is my exact view, well said.
Even if real estate only tracks inflation over the long run, a 3% increase on a property where you put 20% down is a 15% cash-on-cash return. At this rate, in five years you will have more than doubled your equity. Just don’t get caught being overly levered in a down market.
Sam, I have wrote some thoughts in one of Tawcan’s posts, but have not blogged it yet and wondering your insight on an idea.
We are building a real estate portfolio over time – single family home with a basement suite, apartment rental and townhome rental. We will also be adding one to two properties per year.
My thought is to secure a home equity line of credit against the properties, in addition to a reasonably leveraged mortgage to allow for opportunistic investments.
For example, if the market has a very large correction, then we would be in a position to leverage our HELOC to invest in a depressed market and clip returns for the rebound over the coming years.
Some might call this ‘market timing’, but I am not viewing it that way for a couple reasons. First, I have a certain amount that is consistently in the market. Second, the amount that I would be investing opportunistically, would go to repaying debt at ~ 4% when not deployed so it’s not sitting ‘idle’ waiting for the next injection.
Is this flawed thinking on my part? Reasonable? Also, what is your insight on borrowing ability once your portfolio starts to be above a certain size. I have heard people are being challenged now in Vancouver to get their personal investment portfolios above 3 properties without putting substantially more down in equity than they previously could – i.e. you cannot put only 20% down anymore. I am going to test this out for the first time next year, likely, myself.
Appreciate your feedback!
I have owned real estate in the Vancouver area since 1969. Here’s what I would do:
– work your way up the market with your principal residence (still 100% tax-free savings) instead of adding more rental properties. For this you will need more than 25% equity so concentrate on that property not more properties
– build the stock portfolio at the same time, maximizing RRSP and TFSA
– use leverage but not too much. With rental properties, think how you would handle no rental income for 6 months and rising interest rates
– I did not buy rental property until I had a NW of > $1M and thought I could handle a loss of net worth of a $200-300K
– I always go variable rate and amortize for as long as possible for safety — I want the lowest overhead possible in case I have no income for a while. Favourite lender is Vancity CU.
– get your HELOC on principal residence in place but don’t use it. You always want the credit in place when things are going well and you can get good rates. Same with credit cards. High limits but do not use. I would not buy real estate using a HELOC on my principal residence (the rents won’t cover a 100% financed property). I would be surprized if you could get a HELOC on rental property
– I always buy in rising markets (stocks and real estate) and look for best quality and best value (overlooked value) and properties that will appreciate the fastest. Also buy in good neighbourhoods for renting (near UBC). Waiting for real estate to correct and then buying — I would never do that. Those dips can and do last for 10 years and the worst quality properties suffer the most and the longest.
– buy houses whenever possible, they always appreciate more and you always have the right to rent them (unlike strata)
– I would not pay down debt with my idle cash waiting for a real estate market correction. You can make more in the stock market than the mortgage costs you. I would sooner leave money in a chequing account for emergencies than pay down a mortgage. You never never want to miss a payment or not have the money for expensive repairs.
Hope somebody with a lot of rental properties in this market gives you some advice as well for balance.
I should have been more clear, apologies.
The debt paydown and waiting for a correction is a correction of the stock market, from time to time, not real estate.
Real estate, I continue to buy over time where the prices appear reasonable. We are building a single family home in the city and I don’t intend to upgrade my single family residence beyond this, it’s been painful.
We are financially in the position you said you’d target before getting into rental.
Cool.
Current cap rate in Vancouver is less than 3%
Lending has tightened this year.
Unless you have a lot of capital to deploy or trying to find a way to hedge against stock market volatility, I’d wait it out a few years.
Calgary on the other hand is like black Friday sale right now. Should provide decent cap rates and appreciation as oil eventually rebounds.
Being a home owner is something I’m really proud of that I didn’t really think would be possible growing up. I have both real estate and stocks and personally prefer real estate too. I’ve learned how to do simple fix it projects over the years and enjoy taking good care of my house. Stocks are not really enjoyable but I am glad and grateful I do have both. :)
I like owning rental real estate. We currently have a single family and a duplex that we’re renting out and I’ve been looking at buying another duplex (the deals are a little tougher to find right now).
That said, I think the simplicity of owning stocks makes it more attractive. You can buy it and forget it if you want.
I have a property manager for my properties, but it still involves some work and headaches. You don’t need to replace a furnace on a stock. :-)
Both asset classes definitely have their appeal, but not everyone should own real estate. Although real estate provides better benefits, it takes a lot more work.
— Jim
From a strictly financial perspective, another problem with buying real-estate is that it encourages you to spend more on nice furnishings, high-end appliances, and flashy remodeling.
Also, if your income is high enough to afford real estate in San Francisco or New York, the new tax law means you won’t be able to deduct property taxes.
Sam, want to get clarification on your point of view on these articles. This articles seems to be more of a “pro own your living space and don’t rent” article rather than a “pro invest in real estate” article, correct? Most of your articles of this type seem to focus on riding the fantastic appreciation wave realized in San Francisco and similar cities and the fact these properties are lived in for a period of time before they are turned into rentals.
What I don’t see from these articles is the recommendation for going out and hunting for buy and hold rentals (impossible in SF anyway) and possibly flips. In markets where buy and hold actually makes sense such as the Midwest and Heartland where properties actually cash flow, these markets also have the problem of not appreciating but maybe 1-3% year to year. I’ve found that investing in real estate in this manner is more pain than it is worth versus the stock market and returns in the long run are about the same without having to deal with tenants/liability. Likewise, you’ve been a proponent of crowdfund investing in the Midwest, which is much more passive, which is what I prefer.
But I wholeheartedly agree that someone that has come up through your situation, it makes all the sense to buy the way you did (and I agree makes sense for pretty much anyone else as well). From reading other comments here, it seems like some may be interpreting your stance as “invest in real estate”, but I get the sense that you’re actually more so trying to drive the point home of “don’t rent”, not necessarily go buy a bunch of rental properties.
Maybe I’m off base, but wanted to get a better sense of your outlook.
Good question for clarification.
Main point is to explain why there is a growing anti-housing crusade and then to explain why the desirability of real estate will always be higher than stocks because its harder to acquire.
I do believe everyone should own their primary residence if they plan to say for at least 5 years, if not 10+ years. We’ve seen the benefits over a 10 year cycle over and over again. Inflation is too hard to combat. The government is too hard to go against. Might as well ride them.
As for buying investment property, it depends on the cycle. We’re late cycle, so I’m not buying expensive coastal city real estate w/ <3% cap rates, hell no. Instead, I'm buying higher yielding properties in the heartland. A $500,000 investment in the heartland through real estate crowdfunding has the potential to earn $15,000 more than my $2,740,000 exposure to a single SF rental house, while being 100% passive. That is very attractive to me.
It feels phenomenal to have $815,000 less mortgage debt and more diversified exposure.
Sam,
I purchased a 2 family in the suburbs of NYC (westchester) in 2013 that I live in and rent out and have made a nice return on the house since then. I have no plans on selling it but I am looking to buy another much larger duplex in the same area and do the same thing (house hack). My concern, as you also stated, is that prices are high, but at the same time i have no plans on leaving the area so I am not looking at it as purely an investment prop. At the same time the places im targeting are around 5% cap rates with 3% cash on cash. Do you think this is ill advised considering where we are in the cycle? On one hand I might be slightly overpaying, but I’m also factoring in the personal aspect of having a home to live in with my family in one of the nicest areas in the country. Thanks for the interesting post.
-Mike
5% cap rate is not terrible compared to the 10-year yield at ~2.85%. In SF and Manhattan, cap rates are often under 3%.
It depends on your family situation, income, and balance sheet. Once you have a kid, real estate drastically becomes much more about lifestyle, and less about returns. I’ve always just bought a property for lifestyle first, and after 2-10 years of living, rent it out and repeat.
The Hawaii home I want won’t appreciate much IMO, but I don’t care. I just want to be near the beach on a 10,000 sqft flat lot so we can run around and play. But in 20 years, I’ve got a feeling it’ll be worth far more than what I will have paid for it.
Thanks for the reply. Similar idea for me in terms of appreciation not being a big factor. Westchester, NY is one of the most desirable counties in the country and with no current plans to sell any real estate I buy, I’m comforted by the long term value. It’s hard to take 200k and put it into a new house with a huge mortgage, but at the same time I can only live for so long in a small 1 bedroom (4 years so far and that’s after 3 years in a studio in NYC) even though the rented unit is covering all expenses and I’m saving a lot. The alternate scenario is to just buy a single fam and get the living situation i really want, however I’m not willing to sacrifice the lower living expenses yet. Low end single family here are around 600k with close to 3% property tax. I’m basically paying double the living expenses for a single fam vs living and renting half of a townhouse style duplex. I can’t justify that right now especially considering I don’t have kids and I’m just getting married this year.
current 2018 federal tax change to SALT makes the NY/CA big house more expensive because the property tax is not deductible… :(
It really depends on the situation. My equities investments have outpaced my home investment substantially. Its a good idea to have both so if one is selling off the other will potentially offset it. My 2 cents
I love the idea of having an awesome home base vs. more exposure to equities that you don’t really need once you’ve won the game. I just like small but spectacular…in the process now of traveling around the world to figure out where my “forever” home base would be. $3M beach home on the north shore of Oahu or Maui looks vastly different than a $3M beach home in Thailand, Costa Rica, Caribbean, or in the Bahamas. (they are all pretty stinking spectacular) As long as you buy in the best spot you’ll come out fine in the long run, plus life is too short, I’ll let my benefactors worry about selling the place, in the meantime I’d rather enjoy those perfect sunsets vs. having more dollars earning dollars I won’t need.
Fantastic! Travelling around the world to find the best place to set up a home base and the perfect sunset. While I was working I had plans to move overseas for cheaper COL, lower taxes, and sunshine. But Vancouver is just too wonderful as a home base (although the rainy cold dark winters do get me down). Now I travel in search of great places for temporary sojourns. Perfect for long-term is hard to find. At the moment, a week is a long stay for me, although I have tried longer house rentals in the south of France and Mexico. I am claustrophobic on islands and bored in resorts.
I kind of agree with this….how many “perfect” places get re-sold in a year or two because they looked nice, but then were boring or impractical? I only like beaches for about a day and I also think that people who have a “view,” no matter how spectacular, stop really seeing it after a short period of time. That said, I need some space and do not want to be in an apartment.
I NEVER get bored of my ocean sunset view. It changes every day. It is magical.
You hit the right formula. House with view is over my price range so it will have to be a penthouse condo, but I am not ready for that. I’ve lived and worked with great views and never tire of looking at it either.
I agree most dream homes I would find boring or impractical. But a view property on the west side of Vancouver would be perfect. As for the beach, I walk it every day all year round and never get tired of it. It’s right in the city so not boring.
I picked up my first SFH in the Seattle area 3 years ago when I was 25. The market has made the house appreciate over 50%, not including the upgrades I did myself. I plan to purchase another house this year if all things go right.
I really am ignoring the market. Up, down, sideways, I am young enough I can weather any storm. Good luck to my fellow millennials that are too scared to take a calculated risk :)
“I am young enough I can weather any storm”
Be careful, that could be a the most expensive thing you’ve ever thought.
“Be careful, that could be a the most expensive thing you’ve ever thought.”
Sounds like someone who didn’t take enough calculated risks!
For the reasons you stated yes. But like you said it takes time and courage to accumulate that much dough and then put it in one asset. I’ve thought about this many times but I just prefer the ease and flexibility of Reits. We’ll see what the future holds.
Agree with all points except that real estate is local. We have moved four times thru the years because of my husband’s employment, and I can assure you that we never made a large profit such as would have been available in the Bay Area. And of course we never kept the old house since we always moved to another state.
Another good post that points out the advantages of RE ownership, but as an owner of both RE (home and investment property) and having a considerable portion of my net worth in equities, I can think of a pretty long list of advantages and disadvantages of each asset class that doesn’t lead me to the conclusion that RE is *always* the better option over stocks. But, let’s not forget one of the overarching messages of this blog is to save aggressively and invest your savings into assets that have a high probability of appreciating over a longer period of time, and if you do that, you’ll be in fine shape whether your preference is to focus on RE or stocks.
I believ it’s a deeply personal question. Real estate unlike stocks, is not passive. If your tenet breaks a water pipe who is up in the middle of the night calling a plumber. Even if you have property management whom pays and spends time approving. No such time commitment exists for stocks for better or worse.
I own my own home but no rentals. I could own both if desired. I definitely prefer owning to renting and may even someday buy a rental. But… there are also days when I wish I was a renter so that flooded basement from the leaking water heater could be someone else’s problem…
I feel like your views on real estate are highly colored by the fact that you’ve lived in New York and San Francisco, two areas that have experienced incredible bull markets due to falling crime, falling interest rates, foreign buying, and the increased desirability of living in cities.
My parents have owned for decades in suburban NJ. They’d be far richer right now if they rented instead and had their home equity in the stock market. My extended family has owned for decades in IN. They’d be far richer right now if they rented instead and had their home equity in the stock market.
Don’t get me wrong, I’m not anti-real estate. I have a number of real estate investments. I just view it as a fairly boring asset that nominally and in aggregate tracks inflation and that delivers a real return of the rental rate minus expenses over the long term to owners. That rate is probably lower than delivered by the stock market. You might be smart/lucky enough to buy in an area with rapidly rising prices, but you might not be.
It’s very hard to make a blanket statement about it being smart to buy or not. I’m moving to a 3-bedroom on Battery Park. It costs 9k/mo to rent said apartment, or 3mm to buy the same (along with a 5k/mo tax/maintenance fee). That puts the cost of renting at $108k/yr vs the cost of buying at $200k/yr (assumes 4.625% mort with destructibility on 750k – also some maintenance). You need to achieve a 3% price appreciation to break even on that trade (higher if you include the incredibly high transaction costs associated with buying and selling in NY – hello mansion tax!). That’s certainly possible, but it’s not a layup, especially now that many of the trends that have benefited NYC real estate are mostly played out. Furthermore, I don’t know where my kids will go to school long-term so the flexibility afforded by renting has real value.
I always roll my eyes when people claim renting is “throwing money away”. Is paying real estate taxes not throwing money away? Paying mortgage interest? Paying for maintenance? Paying real estate agent and lawyer fees? Depending on real estate price action, buying may involve throwing away a lot more money than renting.
I’m not arguing renting is better, indeed buying is probably smart over the long run in many cases. Buying is also effectively a good forced savings program for people who lack financial discipline. But I think blanket statements about the appropriateness of buying vs renting are usually wrong, and buying demands a more nuanced and case specific analysis. The notion that people who argue against buyers are just jealous haters is silly.
Hear, hear. You can rent the home or rent the money to buy the home.
My viewpoints are definitely influenced by real estate exposure and living in Honolulu, Washington DC burbs, NYC, and San Francisco.
The return on rent is always -100%. There is no chance of getting it back after the month is done. The return on paying for your property still has an option to sell or rent out b/c it’s in your name. Both rent and paying for property provide shelter, so that is cancelled out.
This article is addressed to the anti-housing crusaders who are making affordability worse w/ their FOMO.
“The return on rent is always -100%. There is no chance of getting it back after the month is done. The return on paying for your property still has an option to sell or rent out b/c it’s in your name. Both rent and paying for property provide shelter, so that is cancelled out.”
Sure, owning comes with options. Sometime those options become valuable, but sometimes they’re extremely costly overpriced options that become wealth destroying. The statement above makes a claim that holds true in any situation, but surely there are prices at which it is wealth accruing to rent rather than buy. Right now it’s much cheaper to rent than to buy in many highly desirable cities. You’re getting paid to wait to buy. If you believe prices continue to zoom higher, then yes, you’re not getting paid enough. However, your own article states that prices are feeling toppy, so now is a perfect time to rent (your decision to sell your rental property reflects this reality). It all boils down to (a) rent vs buy math (b) the value of flexibility (c) the value of various “feel good” intangibles of owning. Making blanket statements about the appropriateness of owning real estate is simply wrong. You accuse others of being crusaders, but it’s frankly you who seems to be on a crusade. For a otherwise financially sophisticated guy, you’re strangely dogmatic on this issue of real estate.
“This article is addressed to the anti-housing crusaders who are making affordability worse w/ their FOMO. ”
I re-read your article and simply don’t understand this point. If someone is against owning housing, then they’re not the marginal buyer. They’re a marginal renter. When people shift to renting, prices go down and rents go up. Is the argument that people have a FOMO on lower prices, so miss the upside? You may be against YIMBYs who want to built more housing to increase affordability, but why? Building more housing in SF makes great sense. Why does arguing that we should increase the supply of housing make you some sort of irrational hater? To oppose building seems to be the position of a rent-seeking incumbent rather than a rational welfare maximizer. I think your self-intrested biases on on clear display here.
Okay, so you’ve made some good points about in built biases in Sams post.
Those still don’t detract from the fact that great money can be made from a buy and hold real estate strategy- and that’s the insight he is sharing on his blog.
The article intends to be biased, it’s a counterpoint to those who are vocally against real estate. I’m not a huge RE fan but do believe an allocation has its place.
I bought a house in New Jersey in 2007 for $441,000. I refinanced about 3 times for not much in closing costs. I sold the house in 2013 when I had a new job for $369,000. My employer covered the closing costs and added another $35,000 to cover the losses. In the end, what I got from the sale was about $10,000 more than what I put down. So essentially, it was almost like expensive rent, to the order of $2,500 per month. I then moved to South Florida. That house I owned less than 2 years and made a quick profit when job moved me again, and often I regret not renting out, but remembering that house in NJ makes me glad I sold it and moved the money into the stock market.
The lash back against owning a house is hard for me to understand. Renting is probably a good fit for some people, but buying is a much way to spend your income. It’s a form of forced saving. Equity is how most people build their savings.
Sure, buying probably will cost more in the short term, but you get to build equity in the long term.
I think Millennials will buy more once they start a family. Renting is okay when you’re young and childless. Those expensive cities are tough.
Someone please educated me how owning a primary residence is “forced savings”. I hear this all the time, but home equity is hardly equivalent to a savings account. With a savings account I have immediate access to liquid cash. With a home the equity is only available to me once I sell. Of course, you can get a HELOC to access equity. But why in the world would I want to pay interest to a bank to access my own so called “savings”? What am I missing?
i like how everyone is so convinced about their perspectives on the matter that another perspective is just plain outlandish.
That’s more about paying down an amortisation loan. Assuming house prices don’t change, the reduction in principal is bought equity in the property – forced savings.
These articles trying to convince us that real estate is a valuable asset make me chuckle. As someone from a Southern state where a nice house starts in the 150k range, I grew up with zero exposure to this “rage against real estate.” In fact, by age 23 people were asking me why I would bother renting. I now live in a more expensive Northern city, but again, median house prices aren’t bad, sitting around 260k. People still strive to buy. I suspect the rage you encounter is mostly concentrated in expensive markets. I wonder, what percentage of the readership comes from the coasts?
Glad to make yah laugh. Yes, if real estate is cheap, it is not as desirable. Hence, this article is addressed to those who live in expensive areas of the country.
86% of readers hail from America. California, New York, Texas, Florida, Illinois, Pennsylvania, Georgia, New Jersey, Massachusetts, and Washington lead the way.
https://www.financialsamurai.com/who-is-the-typical-financial-samurai-reader/
Thanks for the link, Sam! The density map helps put it in perspective. I suppose I’ll take the post as broadening the ol’ world view.
Looking forward to the cash flow from owning some rental properties one day…That’ll help us catch up to the readers in the surveys.
Great post, Sam. On your future HI move, may I ask what you expect your “ballpark” budget to be? 2M, 5M, more? I’m asking, because my wife and I are starting to consider moving there in about 5 years. We’re thinking 2M or so will get us 2-3 acres with ocean view (view from up high, not on beach) in some of the outlying areas. As long as we have electricity and wifi, we can live anywhere. Thoughts?
Probably somewhere between $1M – $10M. Property taxes are so cheap in Hawaii, it’s amazing.
I think both asset classes have their place. I agree with some of the reasons you list for RE getting a bad rap as well. There is one big catch with RE in my opinion. It’s hard to buy a property and not have it be a large portion of your portfolio. Consider somebody with a $1M portfolio (successful by most standards) that wanted to buy a $500K investment property. They would have 10% of their cash and 50% of their net worth tied up in it. If it crashes for any reason, it could be a disaster.
I pass on RE right now for two reasons. 1) It’s not actually passive. It takes work and my time and handyman skills are limited. I’d prefer to use my time on other projects. 2) Investing in RE directly would drastically reduce my portfolio’s diversification. RE may yield me a better ROI. For now, with the exception of my primary residence, I pass.
This article shows one side of the argument and says “always” more desirable than stocks which to me is greatly biased. You don’t show the flip side extreme benefits of stocks or financial investments along with this.
Some other sides of your story:
Tax advantage – yes there are unique tax advantages to real estate especially if you end up turning into rental. However, capital gains tax is also heavily tax advantaged at only 15% (or 0% if lower income, and a bit higher if very high income).
Liquidity – liquidity cannot be stressed enough. When down markets come, not everyone can or wants to just ride it out with a property. Being able to click sell button instantly is a very large advantage and risk reducer should calamity strike.
Tangible asset – this is a pro & con. Pro if you have a nice luxury place to retreat too when you want (that’s the exception for real estate ownership). But a big con when it comes to maintenance and all the tangible items that can go wrong (find out your on a sinkhole, structural damage, insurance claims, etc).
Inheritance – there are many ways to transfer wealth with stocks and financial instruments with tax deferral or even tax reduction by getting to people with lower tax brackets and/or charitable contributions.
That’s not the whole other side of the argument, but quick things that come to mind. I’m very surprised at the bias in this article.
On the other hand, one of the things I like most about real estate is that it is not liquid. The forced savings aspect of always owning a primary residence and at least one rental property since I first entered the work force has worked out very nicely for me, both in that it has saved me from myself, and it has saved me from my partner who is more spendy than I am. I like having a good portion of my net worth locked up and inaccessible. I like my 401k and 529 plans for the same reason. I consider our taxable accounts to be my least favorite place to invest because the money is too accessible and too tempting. Obviously this is personal to me and your mileage and investing is probably quite different and it works for you!
That seems crazy to me, but glad it works for you. If you can’t trust yourself to save appropriately, there are several other ways to lock up your money long-term than buying real estate. That shouldn’t be a factor at all in deciding to purchase RE, unless it makes you feel good on top of your other reasons.
Actually, you have hit on one slight disadvantage of real estate. Lack of liquidity. Now I would like to get access to more of my equity for travel and other fun things. The numbers work best if I keep the house and try to make more money in the stock market for cash flow. For now. You still need to find other sources of regular cash flow.
Related, I have seen smart people lose in real estate by not knowing themselves, their job stability, their staying power, and selling at the wrong time. They decide to go back to school, have a baby, quit their jobs, start a business, move across the country, so they sell in a down market, or they do not cut back expenses to match new circumstances. Usually, the result is that they can never get back into the market in this city.
Real estate is a long term investment — at least 10 years. You lose far too much on transaction costs even if the property goes up in value. Buying and selling only works to increase PNW if you are levering upwards.
Even though my exposure to real estate and stocks is roughly balanced, the article is a counterpoint to the anti-housing crusaders and answers why it is that real estate is more desirable than stocks. Of course stocks have their merit too, which is why ~30% of my net worth is in stocks.
Too many people are fooling themselves if they think renting is the way to build wealth. In 20-30 years most people will be kicking themselves for renting all those years.
What is your real estate exposure?
I made a comment on another blog a couple of years ago (she’s for renting) about the financial benefits of owning your home versus renting as proven by spreadsheet projections no matter how you slant the numbers. But she wasn’t having it — no cracker box for her.
As for my real estate exposure, 67% of net assets. The rest is stocks. The value of my pensions is not included. The real estate portion keeps growing because of house prices in my coastal city. The stocks (weighted to growth) are doing great but cannot beat real estate, plus I withdraw part of the annual gains for travel. I don’t have a bias to real estate versus stocks emotionally. I enjoy the house, have great tenants, and enjoy following the stock market every day, even though I don’t buy or sell very often. I travel about half the year, and find both types of investments easy to manage from afar. Unlike many of my retired friends, I do not feel overburdened by managing my own assets, more like stimulated.
You are only lucky in that you bought in San Franc. Do you not know about the US housing crash where people were walking away from their mortgages due to being so underwater. Lots of people have lost their wealth from real estate too.
Love Real Estate.
Currently “overweight” in real estate based vehicles. Multiple cash flowing rentals (bad year is 14% CoC using 25% down). Majority is in notes. Originated over 150 notes mostly at 12% and 2 points, 6 months. At any point in time managing 12-20 notes in multiple cities I’m familiar with. In the big stock up years, I miss out a little, on the neutral and stock down years…. Happy Dance.
So far had 1 loan almost go bad and have one now that the borrower and I are having “discussions” about how to continue progress. 100k note, land is worth 80k. Down side of 20% plus opportunity costs. If I take it back, I’ll tear down and have something built on it to recover the 20K…
Invest in what you know.
Life is good!
I think those are definitely great reasons to own real estate. Hubby and I also plan to buy another house in the near future.
However, one thing that really bothers me about owning our home is the repairs. Mr. FAF is not a handyman, so I feel like I’m responsible and in charge every time something breaks from the fridge to the water heater.
His solution is to have me call a pro and take time off from work to wait for them for hours at home. That really pisses me off. We recently had a huge fight about that. I feel overburdened and infuriated that he looks to me to fix everything around the house. I also take care of our son and do most of the housework.
I am no handy man either and get super stressed when I can’t find the solution to something, especially when it can get really expensive. That has made me have second thoughts about owning real estate.
I hear your frustration and I get it. When I was married I was always stressed out about it too, for different reasons. I am a lot less frustrated now that I do all the work myself including social, home maintenance, car maintenance, shopping, cooking, financial, travel arranging. It’s actually not a burden when you have total control and set up your resources and systems. Not nearly as much of a big deal as my ex convinced me it was (I laugh at how dumb I was). He was not a handy guy but insisted on doing it anyway (result bad jobs taking years between start and finish). I used to get more stressed trying to find people to do things, but I now am more relaxed about it, as I know I will find somebody great. Having rental income helps because you can deduct expenses against it.
I can relate to the “hidden” costs of owning a home… it has me not too jazzed to jump into home ownership despite how widely lauded it is.
I hear ya. My husband and I bought our 1st house two year ago when we got married. We went from living in a tiny apartment/ living with parents to becoming homeowners and landlords in one fell swoop (it is a duplex). It was a difficult time, neither of us had any home improvement skills and had to begin dealing with various appliances breaking, a water main burst, leaking roof, remodel, and even evicting tenants.
Things we have found useful:
* Youtube is your friend. Many things have simple solutions. Even if you are not gonna DIY it, its still helpful to see what you’re dealing with before talking to any contractors.
*Shop around for contractors. I accidentally had 2 plumbers show up at the same time to give me a quote (I thought they were the same person…) They were unhappy to see each other but I got competitive rates.
*I’ve turned out to be the better DIY-er than my husband. I’m always working on a house project. To encourage my husband, I’ve taken to giving him ownership of specific (not hard)projects and timelines (Can you install the dishwasher on Saturday? We need it before the party.) It gives him a sense of accomplishment without me having to hover/nag like I am prone to doing.
* There’s nothing wrong with calling in a pro! The key to DIY is knowing what is DIY-able…
Thanks for the great tips, Lilia! :)
That’s the downside to real estate investing
Ehh. Not sure I agree with this article. I’m pretty vocal in my opposition to real estate (for personal homes at least) and I live in San Francisco and can afford a home (or two for that matter). In fact, I owned a home and did reasonably well. However, folks quickly forget that while leverage is your best friend when investments are increasing, it’s your mortal enemy when the opposite is true. A property that I sold in Phoenix 10 years ago has just recently recovered from all of the losses in 2008.
I recognize rental properties as possibly a good investment given appropriate research, your personal home? Not so much. With rental properties there’s the “how much is your time worth?” aspect, and for me personally, it’s not worth my time.
Ironically, I’m looking to buy a home in Hawaii, but more as a hedge against rising prices so I have the option to retire there when it’s time to call it a day.
Real estate is beautiful, but it’s a rough road to conquer if you lack the discipline or resources to build the capital. Saving $300,000 is great but I’m in SC and the per capita income in my city is about $31,000. I was able to save enough to buy a home of about $120,000 so I agree that the income rates stay inline with cost of housing, but I’m still trying to figure out where the next $30,000 is going to come from to get into investing. I hope by following along with the FI community (which I recently discovered…not sure that’s the right terminology) will help me accomplish this. I use Robinhood too, but not just for stock investing, it’s been a great aide in confidence building. I’m able to relieve some of the anxiety by only putting in what I can afford to lose and learning how the stock market works. They offer lots of resources and articles that I probably wouldn’t have sought out and it’s opened a whole new world for me in terms of learning to invest. Riding out my first little dip with out panicking and saying give me all my money back was a great and relatively painless lesson in patience, one that will benefit me as I learn to invest in other sectors. Thanks for all the great insight you’re offering here. Looking fwd to a blog binge of your older articles.
“Old money” has long been a proponent of 1/3 stocks, 1/3 bonds and 1/3 real estate. The tangible aspect of, and control over, real estate (not a REIT) is particularly appealing when contrasted against the truly passive retail stock and bond investments. I wouldn’t include a residence as part of the equation for a number of reasons, however. Mainly, return is all speculation of value that isn’t linked to any cash flow. Commercial and investment real estate typically generate cash and a return on investment that isn’t so tied to liquidation.
This is one point that most people do not get.
The cost of your personal residence is the current market value of your house times the opportunity cost of money. This is true whether you used your own money (100% equity) or are paying interest to someone else to use their money (i.e. mortgage) or a combination thereof. So, for example, with opportunity cost being around 5%, if you live in a 500k house your annual housing expense is 25k, plus taxes, insurance, and maintenance (both short term and long term ticket items which amount to about 4K annually amortized). That is the cost you have to compare against and offset with (only above inflation) appreciation before you compare to renting, or before you compare to other investments if you have investment rental ( at which point you have to also account for your time managing the house and the renters as a cost).
Very interesting read. I’ve been interested in real estate for a long time but never owned any rental properties. My wife and I planned to rent our first place (a condo) after we outgrew it, but we moved out of the area and didn’t want to deal with a long distance rental property. One of these days I’ll take the plunge.
I am a big fan of real estate or at least owning your primary residence. In South Africa real estate growth has been subdued for the past couple of years and every financial advisor is punting how much better it is to invest in stocks.
The problem is it is easy to generalise real estate while a good property in a good area is almost always a good investment even compared with stocks.
We also kept our first appartment and since then many developments has taken place in the area, it has turned out to be a good investment from a total cost base while leveriging using a mortgage.
Nice Read!
What are your thoughts on the long term risk adjusted returns of the SP500 versus moderately leveraged (~75 LTV) rental real estate that generate strong cash flow (7-10% cap rates)? For me, it’s hard to get excited about stocks at these valuations when I can add to my rental portfolio and earn 15-20% cash on cash returns quite easily before accounting for any appreciation and loan paydown… of course you have the headaches of managing tenants and maintenance issues, but even if you pay a 10% management fee, the numbers are still a lot better than average stock returns. To me it’s hard to match the returns of leveraged real estate, especially when accounting for ~2% expected future appreciation… the new tax bill also is great for pass through businesses like rental properties since there will be a new 20% deduction on taxable rental income.
I find myself in the same place. I feel I should build up my paper portfolio more but it’s hard to justify given the leveraged returns from the rental income I receive. As you mention, the rental income alone make for a good business case, even before factoring in equity paydown, the potential for appreciation, and tax benefits.
If you don’t mind me asking, where are you easily finding 15% cash on cash returning rental properties? I’ve been running the numbers is several major metros and they’ve all seen significant yield compression over the past few years. 8% seems more attainable.
Rochester, NY. Sounds like you’re referring to cap rates (8%), not cash on cash return. Returns with leverage can be well above 20%, particularly on value add deals.
I really want to get into real estate but we aren’t in the place to do it yet. We are building up our opportunity fund and if we are lucky there would be another market crash right as we get enough in there.
I think a big part of my apprehension is the knowledge barrier of entry. My problem is researching something incessantly until I am comfortable enough to do anything about it. Perhaps if the right opportunity arises I’ll have the courage to grab it.
Everyone has their favorite asset class. If you’re good at a particular asset class, stick to it. No asset class is right for everyone.
I got the first house I ever put a bid on. And it’s almost paid off now.
I dislike the physical world. I’d rather live in a world of the mind. So, real estate is a big turn off, with the maintenance and the tenants and everything.
I’d rather do the stock market because it’s an abstraction of the physical world to the level of information flow.
I agree. And Sam doesn’t address the biggest disadvantage of real estate: illiquidity. I have a large stock portfolio, and could go to cash in 30 minutes using my smartphone. A house takes months, or even years to unload in a down market.
Yeah, but people often overrate or miscalculate their liquidity needs. Sam mentioned that he has 1/3rd of his large asset base (presumably $10 MM) in stocks; in other articles, he also mentions about the muni bonds and other fixed income assets he owns, so that’s plenty of liquidity even if half of his net worth is tied in real estate. Liquidity matters only if you need to sell an illiquid asset like RE to fund your living expenses, not if you have other liquid assets worth several years of living expenses readily accessible within the same “30 minutes using a smartphone”.
I agree with you. Liquidity is important, but really think about how many times we’ve ever gone down to our last dollar and needed to liquidate any of our investments? The fear in our head is greater than reality.
Yes, my real estate values were tanking during the crisis, but the rent kept coming in at the same rate before the crisis b/c rents are pretty sticky. By the time my tenants moved out, the recovery had begun b/c the downturn lasted ~2-3 years. And that was the worst downturn ever!
Finally, if you are relatively frugal, you’ve got a huge buffer to protect you until you need to cut muscle.
Sam – OK, now I feel bad because I sold my primary residence in the burbs so that we could rent an apartment in downtown Philly.
I do agree with most of what you said, but for me I like renting for a several reasons:
1) Mobility – I’m 58 and have 2 adult sons. I would like to live near at least one of them when they settle down and buy a property.
2) Upkeep – As I get older, I will be able to do less upkeep. Also, I feel that contractors sometimes try to take advantage of elderly people when they do home repairs. I hate being screwed.
3) Investing – We had no mortgage when we sold our primary residence so I invested the proceeds in index funds. Therefore, I still get a decent return on my money which I use to offset rent. I also believe that in the long run stocks have a higher return than real estate. But I could be wrong and I have some money in a REIT just in case.
It’s a very personal choice. Not saying my approach is the right one for you, but here’s my POV for what it’s worth:
1. Family – I have no kids, but some of my friends who try to live near their kids find that the kids often move away in the course of their lives. Better to count on travelling to visit often. The main source of happiness has to be your own life, then the family, when it comes to where to live. I think about living closer to my hometown to be closer to my siblings and their families, but again, for reasons set out, reality says, live your life and visit family often.
2. Upkeep – I am much older than you are and have a well-maintained house built in 1935, renovated in the 1980’s and 90’s. There is minimal work to keep it up so that I can easily spend 6 months of the year travelling. I hire local people to do any repairs and renovations (I do the gardening), which might be one plumber visit, one garage door expert visit, and one power washing/window washing/gutter cleaning per average year. I have not been ripped off yet, but then I don’t come across as elderly, so maybe I am not a target. I prefer to plan a long healthy life, and then if something happens, I will deal with it, rather than plan my life around something that might never happen.
3. Real estate has made me far far more money (in the market since 1968) than my stock market portfolio, partly due to leverage, partly due to living in a coastal city, partly due to my selection of good properties. I don’t consider REITs to be an investment in real estate. They are more like a bond equivalent and they definitely fluctuate in value and whole segments can have drastic dips. My experience has been that you can’t increase net worth with REITs. A house provides income as well — I have two smaller rental units and have also rented out 2 of 4 bedrooms for extra cash when I first bought the house. And there are so many tax advantages as Sam detailed. Finally, I have owned and lived in apartments and condos and feel way too constricted in the space.
Just want to say REITs are absolutely NOT Bond equivalents. Here is a great table comparing Bonds vs REITs (scroll down a little bit), . Do bonds raise their payout every year? No. Do Bonds provide potential capital appreciation? No. What about a Dividend Aristocrat in SKT (Tanger Outlets). You can bet, this year, they will RAISE their dividend.
And how is investing in REITs not investing in real estate? REITs = REAL ESTATE Investment Trusts. Its like saying investing in JNJ is not investing in the healthcare industry.
BTW, I think both stocks and real estate are great investment choices and it all comes down to one’s personal preferences.
The reason I think of REITs as bond equivalents is that the factors that affect bonds prices affect REIT prices in a similar way, i.e. interest rates. Dividend paying stocks are similar. I prefer to have limited exposure to interest rate risk in this rising interest rate market. My main goal is always to increase net worth every year as well as provide cash flow and that is hard to do with income type investments.
I agree both real estate and stocks are great and I think one should own both. Whether one or the other will increase net worth and provide income is a matter of numbers and markets, not so much personal preferences. I do make choices regarding money knowing that personal preference might cost me money (e.g. I might spend money on a kitchen renovation knowing it will not increase the value of the house).
I’m not even 30 yet, but those are my top reasons for not buying real estate as well. Freedom and low maintenance.
Bias is showing in this article. Saying that we crave what we can’t have. Zero desire to be tied down to a plot of land, manage the property, sink most of my money into it, manage the tenants. REITs are more appealing if I wanted exposure. I’m okay renting, I’d be okay living in a car. Those small micro apartments, or dorms There’s no craving of real estate whatsoever.
Agreed David! I have zero desire to own real estate as well! At least right now. I love stocks and I am also investing in a REIT index fund. Plus, not to be pessimistic but some of these homes take years to build and can be completely destroyed in a natural disaster. I know there is homeowner’s insurance, but it is definitely a personal preference.
I also prefer the city life and love feeling free! Of course you can still buy condos and what not.
These real estate “cheerleaders” never mention the fact that if you are homeowner, you will pay property taxes until the day you die- I am a renter and invest in the stock market- Not only I will never have to worry about paying property taxes but also they fail to mention the maintenance costs of owning a home, over 30 years, they are absurd! Buying a home never made any sense to me
I’m definitely biased. And so far, things have worked well. The real estate is en Fuego during the pandemic and likely post pandemic for many years.
Believe it or not, real estate investors ALSO invest in the stock market as well.
Related post: Why The Housing Market Won’t Crash Any Time Soon
You mentioned Robinhood as a stock investment platform. I recall reading about it a year ago or so and even downloading the app. It just seemed a little strange to me that it was supposedly free trading so I stayed away from it. Any better or worse than something like fidelity (aside from the fact that it’s free?)
Also, thanks for this post and many others. I enjoy reading your experiences. In 2004 my wife and I moved from Shanghai to Seattle so I could attend grad school. By renting the cheapest place we could find ($700 a month in Lower Queen Anne!) we started saving money and then when I got a job in Los Angeles after graduation we continued squirreling away more savings. Finally in 2011 we had enough saved that we could purchase our first home.
I felt and still feel very proud about that experience and our ability to save enough for a down payment over many years. It didn’t happen all of a sudden for us but took many years of continuous saving and staying focused on the goal of buying our first home. It helped that it was in a downturn for which we were simply lucky.
Robinhood is great! I use it regularly and have not had any issues. It does feel a little bare bones (they didn’t even have a website version until recently), but it really is commission free. They won’t have the nice research reports that other brokerages have, and no advisors. If course, if you have an account with another brokerage, you already have access to those things. Why not also have Robinhood?
Robinhood does make it easier to do smaller or more frequent trades as you won’t have to worry about the costs. I think it is worth using if you are a very active investor. If that’s not you, the benefits would be minimal.
I m 48 now and own a lot of re-15 units. but I don’t want any more cause of my age. now I like stocks. I don’t care if I miss time the market because it is profits on profits. dividend stocks are easy to get. thanks samurai
What’s a re-15 unit?
I think it means 15 units (of Real Estate). Eg. He owns 15 condos.
I’m 48 with 13 properties. All my local town, I kinda enjoy working on my houses he’ll lot more than I like my job after all yrs. something more satisfying about painting my property then driving into work. That’s expenerience I didn’t expect. I wasn’t a handy type guy before I started investing in RE. I do love my stocks because of ease. But That said, hands down real estate portfolio has been on rocket ship compared to stock portfolio.
The power of leverage is amazing in rising markets. Plus the tax benefits of living there for a few years and then selling. Definitely looking into buying once we move from NYC.
Also, that house looks so dope.
I didn’t know the market has soften in San Fran or NYC. I feel like RE is the most powerful when it’s done at a correct time. Get lucky with that and nothing will stop ya. Oh and if one leveraged right. Then I would say depending on the price, it could easily beat at med risk mutual fund. The biggest cons to me is the maintenance & realtors fees that takes such a chubby lump of dollars naturally.
Typically realtor fees are paid by the selling party. So, in the case that I believe Sam is suggesting where you buy and hold a property indefinitely, you never pay those fees.
That may technically be true, but the buyer is really sharing in those fees through the purchase price.
Absolutely. The seller increases the list price to cover their fees, so they still walk away with the desired amount in hand. Both sides of a transaction share in fees.
Not really, a house is priced based upon what the housing market supports. Sure someone is more likely to sell if they expect to receive more from the sale and oftentimes sellers think that their home is worth more than it is. However, if you are looking at a house like that then don’t buy it. Buy a house that is a good deal or at market rate. The market sets the prices. If housing prices were based upon what the seller wants to get for a house, then the market would always be going up. Sam actually wrote about the cost to sell a house a while ago and I managed to dig it up:
https://www.financialsamurai.com/what-does-it-cost-to-sell-a-house-a-look-at-the-commissions-taxes-and-fees/
I wonder why technology is not dragging down transaction costs in real estate like it has in so many other areas. It seems to me that the traditional realtor is just a dinosaur but yet they still exist in droves.
I think this would be an interesting post Sam.
I totally agree. Paying 3% commission on each side of the transaction is ridiculous. With more institutional liquidity entering the space (like Roofstock), increased pricing transparency from websites like Zillow, and technologies like Blockchain should, over time, lower the cost to transact. After seeing what Robinhood did for stock trading (Charles-Schwab and other brokers lowered commission costs), I would hope real estate transactions follow a similar path.
The reason there is a commission is that unlike stock trading. There needs to be someone to show the residence to prospective buyers, negotiate the price, know the real estate regulations, do the contract work, market the property to prospective buyers. Be my guest if you want to do all that work, more power to you but for most it is easier to increase the house price to accommodate the real estate fees and not deal with the hassle.
I don’t know why real estate agents still exist in NY. In NY, buyer and seller must have an attorney. It’s pretty easy for a buyer and seller to negotiate prices, and your lawyers already do 100% of the plerwork. I don’t know why we spend $30k+ for realtors that provide little, if any value.