How much of net worth in personal real estate?
I'm wondering how you investors think about structuring your personal portfolio and what portion of your assets you want to devote to real estate (non-rental)? It's nuanced because of the dual nature (consumption/investment).
I would view real estate as a means to an end - somewhere to live, not as an investment. If you end up making money at the end of the day great, but I personally did not buy a home thinking it would be a great investment.
But if I were to look at it, the equity in my home is probably ~1/3 of my "net worth"
first off is the mortgage. obviously, rates are low, but it's not free money. you're still shelling out like 20-30% of principal in interest over the life of a loan.
you have a bunch of expenses during the "life" of the home between maintenance, repairs, buying a ton of shit you wouldn't when you were renting, and potential HOA dues.
then on the backend, you have transaction expenses which might take 6% or more.
given all that, there's just a ton of money flowing out over a long period of time, and its rather hard to underwrite to sufficient appreciation to call this an investment.
the calculus changes a lot if you can rent out a spare bedroom or something, though. but otherwise, i would look at a home as really a lifestyle alternative to an apartment only.
If you're making it a purely financial question, the it's "am I paying more in interest than I would be in rent?"
Obviously a time value of money aspect as well, but that's the basic equation. Rates are insanely low - to live in a million dollar home right now, paying 3% a year on a fully amortizing 30 yr mortgage, is to be out of pocket $4,200 monthly And you're paying down principle, of course, so this is more than just money out the door.
So no, it's not as easy as saying "just rent, homes are a bad investment." Especially when you can borrow for very little and you have little recourse for where else to put cash. Stock market is high, bond yields are low... @cap182375" 's take is really basic and really bad.
And, of course, there is some value in the qualitative aspect as well. You have a home. Putting a price on that is difficult, but it's non-zero and may be substantial to some people.
homes are a bad investment, pure and simple. i say that as someone who owns their own place. it was purely a lifestyle decision so i can settle down in a location i like and not have to worry about moving every time my lease expires and my LL wants to jack up my rent.
its forced savings, with significant costs all throughout - upfront, during, and when you liquidate. outside of certain markets, your return is pretty mediocre compared to investing in other things (perhaps slightly less so given the environment we're in). forced savings is great if you're bad with money, but if you're not there's better places to try and grow your NW.
being able to deduct interest is potentially interesting, but mostly if you're able to rent out and net that against vs. in lieu of your standard deduction.
optimistically, you're getting a 5% annual appreciation on your property as your topline. after everything you pay out, you're likely returning like a net 1-2%, at best. if you decide to hold the place after the loan is paid off it becomes a lot better obviously, but you've lost on a yuuuge opportunity cost.
from a dollars perspective, it's "better" than paying rent since you're actually generating a small return versus being out 20% of your income or whatever. but to call it a good investment is very questionable. it really boils down to being a lifestyle decision, rather than a financial one.
you speak so many accurate things that i am not bothering to contribute my agreeing opinon etc.
The biggest advantage of buying is that you have 'forced savings' as you pay down the mortgage. Historically homes have appreciated at ~4% annually in the US with huge variation. (look at Detroit) Throw in the fact that even with 20% down, you are leveraged 4:1, and you are adding a lot of risk. (I wish I could get that kind of leverage in my brokerage account)
Throw in the fact that homes require ongoing maintenance and property tax expenditures, as well as significant fiscal and time costs to buy/sell and the math gets even worse. This is before we even begin discussing the reduced ability to move for a better job.
If you want a house, buy one. Know the pros and cons, and don't buy extra house just for investment reasons. I get overbuying at first if planning on kids, given the buy/sell costs, but that's about it.
Good point. The whole "starter house" thing makes no sense unless you assume prices are going to rise a lot. There are rent/buy calculators online- usually you need to be in the house for a while before the math flips in your favor.
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