Someone convince me why buying a house is a good idea?

I don't know shit about property but recently have been thinking about weighing between rent vs buy and I just can't make the math work to support buying.

The return on investment for a house seems just so much lower than cost of equity (12-15% year on year SPX). Any amount of down payment could be compounding at far superior long term returns than sitting on some illiquid levered housing asset appreciating at like 2% a year or something. I don't understand why someone wouldn't wait till much much older (when you want to diversify away from equities and when your house value is smaller/diluted relative to your net worth) before buying a house. I understand the diversification argument but I don't understand why you would lock up capital that would likely generate higher returns even against your house which is levered. And yes I know I'm assuming this bull run will continue. 

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Comments (142)

Nov 14, 2021 - 8:05pm

Because you are currently throwing away money to rent. So if you spend 2k a month on rent you are losing 24k a year with no chance of appreciation on that. With owning a property you get to keep a much larger portion of that (obviously losing some to tax and insurance) but you are building equity instead of handing a landlord 24k a year

Nov 15, 2021 - 9:29pm

Imagine thinking buying a house is dumb until you're 40 and still living in a shit apartment and having no equity lol. You buy a house young and roll the equity multiple times and you can have a real nice place far nicer than anything you would ever rent.

Life is more than dollars
  • Intern in AM - Other
Nov 16, 2021 - 11:18am

The opportunity cost of capital? The mortgage of a unit is typically less than the rent for the same unit. Transaction costs? Closing costs on a house aren't really a good reason not to buy a house. The cost to own is greater than to rent (upkeep, tax, insurance) but you retain equity that grows over time. For many people, a home is a retirement plan in itself. The opportunity cost (of capital) to rent is greater than the opportunity cost of owning over time. Flexibility is subjective to lifestyle so no point in going over that.

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  • Associate 1 in IB-M&A
Nov 14, 2021 - 8:26pm

I understand that you are building equity. Why is there a rush to build equity? To me there is no wastage of money on rent because I'm still monetarily better off spending that monthly outflow while having majority of my money invested in stocks as opposed to having that monthly outflow go to mortgage while the house barely appreciates. The equity can wait until my money is done compounding in the market.

Nov 14, 2021 - 9:07pm

That doesn't make sense to me. If the money is an outflow as a given wouldn't you want to keep it as equity that is appreciating rather than just donating to a landlord. There are plenty of reasons to want to continue to rent but saying you're going to spend the money anyway really isn't a good idea. You can continue to invest in stocks etc while paying a mortgage. Just make your mortgage and insurance/tax monthly payments equal to what you're currently spending in rent.

Nov 16, 2021 - 10:54am

House barely appreciating? Ok. Awkward when you are buying a starter home in your 40s. 

Life is more than dollars
Nov 15, 2021 - 12:16pm

I agree with the OP and the hole in your counter argument is the "losing some to tax and insurance". I've sat down and come close to buying a house. So I don't just have a general idea of what these fees are, I know exact numbers and I would encourage you to do the same. I don't think most people realize exactly how much they are paying in taxes, PMI, insurance, maintenance, etc - its adds up quick! I've started to look at mortgages as just a vehicle for fees - only a relatively small percentage actually goes to your principal (or equity).

A prime example is a community I look at in Texas - while it was a nice area and decent homes, the local tax rate was 2.77% (!!!). Even on a 500k home (and that would have been on the lower end for this community) that's about $1200 in taxes each month, which also happened to coincide with the rent I was paying. How are you possibly getting ahead when the taxes alone are the equivalent of rent??? Again, I agree with the OP, at some point it just doesn't make sense. 

Nov 15, 2021 - 7:54pm

Well with the homestead exemption and property tax being deductible from income taxes, you're going to get back 2-3 grand in Texas so then you're actually pretty far ahead of mortgage, taxes, insurance = rent before tax impact. Of course you're locking up 100k in the property but I guarantee that you're getting a far better deal month to month vs renting, ceterus paribus.

Nov 16, 2021 - 10:55am

First off, don't ever insult the great country of Texas. Second, no state income tax here either, so comes out about the same. As mentioned above, homestead exemption is also nice way to save a grand on property taxes. I just pay my $16K out of my bonus each year.  

Life is more than dollars
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  • Associate 2 in RE - Res
Nov 14, 2021 - 9:22pm

At a certain point, the non-financial motivators for home ownership tend to get bigger for people. The control, the ability to change things, the stability. And the available options aren't necessarily equal. If you want to live in a single-family home in an exclusive suburb with good schools, you may have trouble finding a rental.

  • Associate 1 in IB-M&A
Nov 14, 2021 - 9:34pm

At a certain point, the non-financial motivators for home ownership tend to get bigger for people. The control, the ability to change things, the stability. And the available options aren't necessarily equal. If you want to live in a single-family home in an exclusive suburb with good schools, you may have trouble finding a rental.

Thank you. This makes sense to me. 

Nov 15, 2021 - 9:32pm

Where I live in Dallas you literally can't rent a home. Only Purchase. One anecdote but still.

Life is more than dollars
  • Assistant PM in AM - FI
Nov 16, 2021 - 3:58am

I don't think he's making the argument of never buying a home, he's saying what's the rush. You can rent for first 15years out of college and then buy around 35yo in which I agree with the assessment once you've built up a nice nest egg in the market

  • Analyst 2 in AM - FI
Nov 14, 2021 - 9:35pm

Ah yes, the 12%-15% annual returns of SPX which has happened in the past and thus will happen in the future. Very good reason to not buy a house

  • Associate 1 in IB-M&A
Nov 14, 2021 - 9:44pm

The two markets aren't uncorrelated. And yes if your holding period is at least 20 years which I assume is most peoples, then I think 12% annualised is a very fair number. If it's 3 years then fine - who knows what can happen. 

Nov 19, 2021 - 1:39pm

Definitely not true. If you pay off a house in the standard time of 30 years you don't think you're going to want to move? in those years you don't think maybe about moving to somewhere like with better schools or maybe to somewhere with lower taxes for retirement. Does the idea of living somewhere for the rest of your life sound good to you?

  • Analyst 1 in IB-M&A
Nov 15, 2021 - 8:10am

Also get the benefit of leverage in real estate. Not sure anywhere else that you can so easily get 20x.

Had a friend put 3% down on a 300k house. Two years later worth 450k. Huge return over putting that 9k in the SPY.

Nov 16, 2021 - 12:18pm

Almost any bank will allow 3% down - I found a few with 0% if you have a professional degree or certification. I bought a house a few years ago for $400k with $12k closing costs, of which $5k were paid by the seller. Just recently sold it for over $500k and certainly can't beat the return on that.

I generally agree with the OP on buy vs. rent but if you can get a low enough interest rate and down payment, the mortgage/PMI/taxes/insurance is slight less to equal to a similar rent and you get the benefit of future appreciation. 

Nov 16, 2021 - 11:15am

I had a friend put $9k into TSLA - two years later it was worth $90k.  Huge return over putting it into a house.  It's definitely an unfair comparison though because the house is a highly diversified, non-idiosyncratic asset.  

Nov 19, 2021 - 1:21pm

Agree except houses are far less risky, but I wouldn't say it's non-idiosyncratic.  Lots of stuff can change.... state tax laws, SALT, state budgetary problems/repair, degradation in neighborhood and schools, etc.

Nov 15, 2021 - 8:24am

As stated above, you don't have to put down the typical 20%. Investing small sums of money in a broad market index isn't really going to do that much for you on a short term horizon vs buying a property. When you choose to rent instead of buy, it is always a 100% loss. Even if you lived in a place for a few years and sold it for a $10,000 loss, I'd still be willing to bet that it was a better deal than renting during those years.

At least with owning, you can deduct the interest from your mortgage payment off your taxes or get a couple roommates and have them completely pay your mortgage. There is reason why the average homeowner has a net worth ~44x greater than that of a renter. 

  • Associate 1 in IB-M&A
Nov 15, 2021 - 9:23am

I guess if you can get around putting down just 3-5% then it could make sense though that is a shit ton of leverage. I don't buy the 100% loss point though. Yes It's a loss, but you're still probably better off monetarily with the additional free cash you have invested elsewhere.

People who own houses are going to have higher net worths because the house itself is a big contributor to peoples net worth. But realistically - obviously owners are going to be higher net worth. There are so many people renting because they can't afford the capital upfront and that skews things. I do think there is value in buying a house - I just think the value comes later in life when you want to diversify away from equities after it's been compounding for years and also when it will make a less concentrated part of your overall net worth. 

Nov 15, 2021 - 3:42pm

Piggybacking on your point of maxing leverage, of course, all things being equal and if the property increases in value, leverage is good. Putting on max leverage before a real estate correction obviously quickly leaves you underwater on your mortgage and your equity completely wiped out. It's like a margin call, but you're not going to sell your house for a loss, so you just keep throwing money into an endless pit and hoping that property values will go back up to make you whole. 

Nov 15, 2021 - 8:57am

Because housing isn't a flexible need, and at some point there is more to life than maximizing a return on capital.

Buy a house you feel happy and comfortable returning to every night.  Even if you can't quantify it, there is real value in that.

Most Helpful
Nov 15, 2021 - 9:06am

Speaking as a married person in later 30s with children.... owning a house is far beyond a financial decision, it is mainly (should be in my opinion) about family/life stability and enjoyment. Being a renter keeps you moving potentially (and why in your 20s, especially if unmarried, probably little reason to buy imho), while you can do what you what with your home as you chose. Also, the choices of rental properties are NOT equal to what you find in the for sale market (especially if you want a yard and don't want to live in a high rise). 

That said, there can be amazing financial benefits to owning vs. renting. The available use of cheap leverage (potentially tax advantaged, granted after the '17 tax law, less the case for middle income people), the potential for appreciation, and even the wealth growing effect of long-term equity buildup by just amortizing your mortgage (biggest difference imho between renting, beyond differences in monthly payments and overall costs) are very legit. I ended up doing a "short" hold of about two years on my first house with my wife (sold to move to new city), and frankly it was the highest IRR I ever made and it was 100% tax free (gains excluded up to $500k for married, $250k single, don't forget that one benefit when comparing investment returns). 

Still, the capital costs of a home are no joking matter (brand new a/c-furnace 10K, etc.), but again, it's not all financial. So, likely at the OP's stage of life (given the context of Assoc-1), it probably does not make sense. Get married and want to have kids.... the calculus changes! 

Nov 15, 2021 - 9:17am

Agreed, owning is def better than renting. But be careful of trusting zillow prices and don't just base a purchase on sq. foot/comps in the neighborhood. Due to the liquidity of the market, if something looks cheap its probably cheap for a reason. You really want to analyze costs of replacement / repairs like the fellow above mentioned as these can significantly add up (furnace, electrical ac/heating system, any water leakage repairs, plumbing, home insurance, also make sure you are not violating any building codes etc.) 

Nov 16, 2021 - 11:19am

This is the correct, balanced way to look at it.  There are costs and benefits (tangible and intangible for both) which you should carefully weigh before making this decision.  I literally built a breakeven model for renting vs. buying with rental comps, sensitivity tables, inputs for mortgage rate, maintenance, repair costs, etc.  I finally got to a place where I felt it was a financial coin flip (~50% of the time renting would be better, 50% buying better) and then I made a decision based on the intangibles.  Unfortunately we live in the US where the population worships at the great altar of Homeownership and so these decisions often aren't evaluated as carefully as they should be.  

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  • Prospect in PE - LBOs
Nov 16, 2021 - 8:16pm

I'm not in redever's shoes (still in college), but I agree with his comments. However, back to OP's comments of how homes are low growth assets. Yes, while a home may not have high growth compared to corporate public equities in sectors like tech and healthcare, you can lever TF up. If you have a single family home growing at 3% a year (btw, if you read the news these days single family home rent and asset values have grown much more than that across the US this year), and lever up at 50% debt (this is VERY modest leverage imo), a 3% asset appreciation is 6% for you equity. Now if you rent this out, you'd have positive cashflow for your holding period growing as well. Run an IRR calculation on your desired holding period. Now, what I will say for growth is that it depends on your market. If you're in a tech or a financial hub with population growth, home and rent values will probably rise (or at least, not collapse).

It depends on what you want to do with the home. In the example above, I'm more referring to buying a home as an investment since you mentioned the S&P500. However, if you are talking about buying vs. renting. Just run the IRR on your cash inflows (rent if you have some rental space like a basement + sale value in X year) and outflows (down payment + mortgage payments + operating bills + renovations if needed). You'll see that a home is not a bad investment at all. My parents bought a home and have lived there for 15+ years. They lucked out and the home is zoned for a lot of development potential in a high population growth market. Rough IRR on a 15 year hold period has been 18%, not bad at all (and a peace of mind like redever said).

If my rushed writing isn't convincing, Peter Lynch, a legendary stock picker, recommends buying a home before going all out on equities!

Nov 15, 2021 - 9:30am

For a lot of people, buying a home is a form of fixed savings. Meaning, there a lot of people who are bad with money, and won't save extra cash; however, they won't miss a mortgage payment. Depending on the price you're paying to rent, it could be cheaper to rent when you factor in all the other costs of home ownership (taxes, larger area to heat/cool, lawn care, interest on a mortgage). 

James Altucher recently did a podcast on this, where he discusses the pros/cons of buying a home. He said in prior podcasts he thought buying a home was a bad idea, but came back around on the fact it allows you to pay the same mortgage amount over the years and stay in one area. 

Nov 15, 2021 - 5:50pm

This is the biggest thing for most people, it let's them pay off their housing needs after 30 years (sure you have to worry about utilities and taxes, but the bulk is taken care of) and survive off the fixed income a retiree has to deal with. There are some wealthy people who choose to just rent, live a cosmopolitan lifestyle and have apartments in various cities, but they have the cash for that. If you really think you can manage your money or earn enough to live that lifestyle, buying really might not be right for you, but 95% of the population isn't going to a) have the means for that or b) even want that. 

Nov 15, 2021 - 9:38am

You've gotta find a good deal! Make money when you buy, build equity over the long term, and if you're really interested in getting a return buy a duplex or fourplex and rent the other units. As long as you're a first time homeowner you should be Eligible for an FHA load meaning you only need 3.5% down. Furthermore you can always sell and avoid paying capital gains tax by rolling your profits forward into another RE investment (as long as you live in that one too).

It's not that your math is wrong, you're just not looking hard enough for good inputs to your model.

  • Associate 1 in IB-M&A
Nov 15, 2021 - 12:26pm

Thank you. Agree that math could work with 3.5% downpayment because the leverage is cheap. I'm not in the US anymore and where I'm at requires you to put up higher amounts of capital which sucks. I guess the idea of staying with flatmates again is kind of cringe but I see your point re:building equity, renting out to cover mortgage

Nov 15, 2021 - 9:50am

The above is called a 1031 tax deferred exchange to defer capital gains. 

To defer capital gains using a 1031 exchange there are several requirements:

  1. Property must be used for investment, trade, or business that is relinquished or exchanged for a like-kind property
  2. Requires the use of a neutral third-party such as a tax deferred exchange intermediary or accommodator
  3. Within 45 days of the relinquished property being sold up to three (or even more) replacement properties must be identified, and within 180 days they must be purchased
  4. All sales proceeds from the relinquished property must be held by the intermediary and can not go to the seller
  5. The equity from the relinquished property must be reinvested in a replacement property(s) of equal or greater value to the one that was sold.
Nov 19, 2021 - 1:29pm

To be clear if you're going to live in the property and get certain benefits as owner occupied than you cannot 1031 exchange.  1031 is tax deferral, not tax avoidance.  If you have it as an owner occupied (and therefore cannot deduct maintenance, repairs, etc for taxes) then you get up to $500k tax free profits if married ($250k if single).

Nov 15, 2021 - 12:54pm

1) its a levered bet on a finite resource, more so if its in a nice area

2) its an inflation hedge

3) most people don't actually invest all their money, its a pain, people say they will but don't. Thus its a simple way to lock up capital without holding cash 

4) with rates this low, its borderline free money to borrow 

5) only relevant to CA, but you lock in your tax basis in perpetuity (capped at 2% increase a year)

* as an aside, you're only "throwing away money" on rent for the tax adjusted interest and property tax portion of the mortgage payment, so once you're rent is equal to or greater than that is when the calculus should shift, not total payment

Nov 16, 2021 - 5:37am

plus HOA and PMI

We're not lawyers. We're investment bankers. We didn't go to Harvard. We Went to Wharton!
Nov 15, 2021 - 3:26pm

Agree with you OP... One reason might be that a mortgage is a way to lock in (P&I) costs to effectively pre-pay monthly living expenses... Counter is that right now, rents are cheaper than a mtg in my city so why would I buy here? 

Somewhat relevant article in the FT today: "The oldest asset class of all still dominates modern wealth" 

  • Associate 1 in IB-M&A
Nov 15, 2021 - 4:51pm

OP here - thanks all. The sense I'm getting here is that it makes sense if you want to raise a family in a decent place. I never thought about the lack of quality options on the rental market for that. Otherwise - if you're just another finance guy with <5 years YOE and no family, it sounds like am better off continuing to rent. 

Nov 15, 2021 - 5:53pm

It's came up a bit obliquely in this thread, but transaction costs are big in real estate, houses are very illiquid assets, so if you plan to stay somewhere less than 5 years it usually makes more sense to rent vs buy. The longer you stay the longer you can amortize those costs over the course of ownership and it makes comparisons better. 

Nov 15, 2021 - 7:18pm

Assuming you're renting it out, that makes you a landlord. Yes, a Lord, meaning you can instate prima nocta.

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Nov 15, 2021 - 8:06pm

Its personal but for me, it was a combination of lifestyle and a 'decent financial decision'. You are comparing it to investing. I looked at the benefits of having more bedrooms, a place to host bbq's and family events, room in the garage for my weekend car and motorcycles. I wasn't comparing a house purchase vs putting the downpayment in some index fund lol. 

The key is to not overpay and try get something that makes sense. I also like the idea of basically paying myself in principal paydown year on year. 

Nov 15, 2021 - 9:34pm

What always makes me chuckle is nobody ever mentions the compound effect of rolling equity. Buy a house in your 20s, roll the equity into the next 2-3 Houses and drop another $100k or so each time and you can afford a really nice house for the family in your 30s or 40s. Also a tip: don't use a realtor if your state doesn't require one. Realtors are the biggest sham I've ever seen. Charging 6-8% on a 7 figure home is absolutely criminal and they don't do shit

Life is more than dollars
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  • Associate 1 in IB-M&A
Nov 15, 2021 - 10:10pm

Sorry I don't quite follow but am actually interested to know more about what you mean by rolling equity. Do you mean flipping the first house and then moving to a new one?  Or do you mean holding multiple houses at the same time? Cause then you would have multiple mortgages which adds up. 

Nov 16, 2021 - 10:31am

You buy House1 for $500K and put $100K down (20% equity, $100K equity value, $400K mortgage). 5 years later you want to move. Let's say House1 has increased in value to $600K (+$100K of equity) and you have paid $30k down in principal. Your mortgage has a balance $370K so after you sell House1 for $600kK, you now have $230K of equity in the home. You can now use this $230K of equity as the down payment on House2. You passively gained $130K. 

Many will argue what about property taxes, maintenance costs (dont buy a POS house if you don't want high maintenance costs, but shit does break), what if the real estate market crashes etc. Here's the thing: they ain't making anymore land! 

Life is more than dollars
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Nov 16, 2021 - 10:23am

Doing it yourself. Takes a lot of time but if you do your research and use a real estate attorney for some docs, it can be done.

Life is more than dollars
Nov 19, 2021 - 1:36pm

I wouldn't rely on this too much. Seems to work unless you got caught buying the late 80's, potentially in the early 2000's, and in 2008.  Easy to say things come back or go higher (which btw isn't true everywhere after 2008) but that shit will fuck with you seeing your house drop in price.

  • Associate 1 in IB-M&A
Nov 16, 2021 - 9:29am

Avg annualised return of S&P500 since inception is 10-11%. I'll take my chances assuming a 20+ year horizon.

Nov 16, 2021 - 12:44am

Most people that think a house is a good idea do not understand how to value their time or have kids.

Landlord at a nice apartment dealing with all the headache is 100% worth it if you make over ~$300k-ish IMO.

Personally, I only bought an apt b/c my fiancé said she will deal with all the ancillary BS. Otherwise I had 0 plans of buying RE until much older. Lightbulb out? No problem, text the apt maintenance and tell them to replace it. You don't have to order a lightbulb or go to the store to buy one. Same deal with misc other problems like a weird garbage disposal problem that will eat up 3 hours of your day...not worth the time!!!

It's worked out well and the deposit was immaterial. If it was material, I still would not have bought.

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Nov 19, 2021 - 1:42pm

You own everything inside your 4 walls and essentially outsource the maintenance of everything else for a fee, while living in one of the greatest cities on the world with the best cultural experiences, food, nightlife, access to resources, access to your job (if you work in the city), and will likely see very strong returns over the long term due to the scarcity of your asset compared to the consistent demand.

Nov 16, 2021 - 10:33am

lol. this guy must think he is really hot shit if he is too busy to change a damn light bulb! Agreed on buying an apartment. Nice way to build equity but no way I'd buy an apt in NYC in a 100+ year old building with no control over neighbors. 

Life is more than dollars
Nov 16, 2021 - 11:01am

That was a bad example. I mean things like a leaky roof, weird lawn issues, appliance issues etc. Any of those will eat up 4 - 12 hours of your time. Given you're in PE I'm guessing that's pretty painful because you're working 12 - 15 hours a day already.

Nov 19, 2021 - 1:38pm

This doesn't account for schooling.  In many cities the schools aren't good or people are fighting to get into the 1 good one. If you're going for private then that's a choice and a BIG expense when you can own a house in a wonderful town with awesome schools and pay a fraction through property taxes.  Again, maybe you require nothing less than private.

Nov 16, 2021 - 5:48am

At the end of the day, it doesn't matter what you call it or if you own/have a mortgage on the house: living somewhere is a form of consumption and people disguise it as an "investment." I can rent a $10,000 a month condo/house or buy a $1.2 million property, but regardless these two things are consumptions. If you truly believe in real estate, well then buy property and rent it out, but often times people will buy places in order to trick themselves into thinking that the large house in the wealthy suburb isn't actually a consumption. 

I read a blog where a semi wealthy guy was talking about how just because he rents where he lives doesn't mean he doesn't own property. In fact this is like a tax cheat code. Rent where you live, use leverage appropriately and buy real estate, then rent out that real estate. This way, the property tax you are paying is pre net income and lowers the money the government can tax on your net income from the rentals. And when you rent the place you live, it's the land lord that is paying the property tax. Imagine getting income tax on your work pay check, and then also getting property taxed after you've already been taxed from work. 

I plan on investing in rental properties, and utilizing the same money that traditional people would use on a personal home's downpayment, and instead buying a couple duplexes and using the same mortgage/debt levels as well, while continuing to rent in my city's downtown. 

Residential real estate investing and personal home consumption are not necessarily the same thing. 

We're not lawyers. We're investment bankers. We didn't go to Harvard. We Went to Wharton!
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Nov 16, 2021 - 11:52am

Eh, maybe if you're younger and don't have a family...or if you/your wife don't mind moving a lot. But that way you're at the whims of a landlord...maybe the raise rents, maybe they need the property back, maybe its sold and you have to move out, etc. Who wants to deal with that level of uncertainty and moving a lot, especially with a family. A better version of this strategy is just buying, and not moving until you have enough down payment to buy another house and rent out the first. 

Nov 16, 2021 - 7:05pm

correct, in which case your suggestion for owning where you live and enjoying the continuity and comfort of the same location is a form of consumption. The OP is asking about buying a personal residence from an investment point of view.

We're not lawyers. We're investment bankers. We didn't go to Harvard. We Went to Wharton!
Nov 17, 2021 - 6:55pm

The problem with the rent where you live idea is that 

1) 95% of people can not control their spending so they will spend any and all percieved savings over owning.

2) It does not allow you to control your housing consumption costs.  This is the biggest problem that renters have.  Sure you do updates and maintenance when you own but you have 30 years of a fixed housing consumption cost, assuming you don't move.  Rents will be about 3x what they are today in 30 years.  People talk about the 2% appreciation in housing.  Where the value actually comes in is the reinvestment of the growing spread between mortgage and rent over a 30 year period.  Guess what, buyers win 100% of the time.  Obviously ignoring catastropic impact that would lead to foreclosure as it would wipe out a renter similarly. 

A note about your strategy.  You will not get the same leverage or access to the same debt with what you laid out.  Aside from missing out on higher leverage for owner occupied property, having a rent bill will cut your loan qualifications by 30 - 40%.

Nov 16, 2021 - 10:40am

Lol where do you guys live that houses go up at inflation? Toronto housing is doing 7% unlevered returns for the last 20 years. Pretty hard to imagine a better asset to store your money in (risk adjusted especially considering the government will literally stop at nothing to prop the boomers up). 

Nov 16, 2021 - 11:03am

Real estate is local.  There are quite a few markets that have averaged significantly more appreciation than 2% per year and are forecasted to continue at higher rates well into the future. 

I'm mid-30s with IB, PE and public company c-suite experience.  My Austin residential real-estate has been, by far, my best ROI.  Even when compared to stock investments in the current bull market.

Most people have hit the main topics, I'll just offer a few more points.  Asset diversification.  Inflation hedge.  Cheap leverage, high-loan to value.  Tax incentives - not just interest, but the ability to capture the first $500k gain tax-free.  Psychologically - for some it's easier to write a big check for a real-estate deal than stocks given the market volatility, so your really need to test that assumption if you say you'd invest an equal amount in SPX as your down payment.  

The blanket statements you see from the internet financial guru's on how "buying a home is not an investment" are far too broad - it's market specific, do your research, and calculate how your home equity is expected to grow, burdened by carrying costs.  I bet in good markets you'll find very attractive risk-adjusted returns.  

Nov 16, 2021 - 4:38pm

It seems you're talking about real estate as an investment, not a home possibly? 

Generally, all else being equal, you come out ahead renting rather than buying for a like-for-like place. The math changes after you've been there 10+ years. The math is also changing with interest rates being so low, the availability of interest only mortgages and the ability to put down <20%. To everyone's point here, real estate increases of 2% is not equivalent to stocks increasing 8% because it doesn't factor in your leverage. Buying a home though has a ton of transaction costs, unknown ongoing costs (yes you should factor in yearly maintenance but can obviously blow through it) and is concentrated, not diversified (I'm not sure why everyone is saying it is good for diversification - yes it diversifies you from the portfolio you have, but for folks in their 20s and 30s, it usually ends up being a very a concentrated position. Can get real estate diversification through REITs).

As others have pointed out, where you live isn't just a financial decision. You usually can't or don't want to fix up a rental to be exactly how you like it. If raising a family, the stability of an owned home is important. Some people like the idea of a steady mortgage payment vs. the possibility of rent increases (although if rents are increasing and you had your down payment into apartment REITs you'd do just fine). For non-major cities, there also may not be a ton of like-for-like rental options, whereas you can literally rent condo product in NYC

Nov 16, 2021 - 1:23pm

Well think about it, by the time you retire you can have a paid for asset worth half a million dollars plus that doubles as a place to live, relatively free compared to still paying a monthly expense towards rent deep into your retirement. 

  • VP in IB-M&A
Nov 16, 2021 - 1:26pm

In my opinion buying a home should not be looked at from an investment perspective (unless it's an investment property not where you plan to live) but rather it should be viewed from a lifestyle perspective. I'm in my early 30s and still rent but that is because I knew there was a possibility that I would not stay with my current employer and would potentially move to another part of the country, which I am, I wanted the freedom to move around and owning complicates that. At a certain point though I do plan to buy simply because I want a place that I can call my own, whether or not I can make more money by investing or spend less money by renting after factoring in all the sunk costs of owning is irrelevant to me.

Nov 16, 2021 - 4:01pm

real estate is the only asset that has undeniable intrinsic value. businesses will come and go, cryptos will pop and disappear, but people will always need to live somewhere.

Nov 16, 2021 - 5:47pm

Rent will always go up to keep up with the local market. Remember, you're paying the landlord to own the property and make a profit margin. If you lock in a $2k mortgage right now, it never goes up, while a $2k rental will be $3-4k in 20 years. Plus, you never quit paying rent. Mortgages get paid off at a certain point. Buying a house always wins unless you move a lot or for short-term solutions. 

Nov 16, 2021 - 10:48pm

Usually rent is more than a mortgage but lets say they are even.

$2000 in rent a month =$24000 gone

$2000 in mortgage= $24000 towards a loan that you're building equity in that appreciates.

You're able to take loans against your equity for other properties too.

Also if you trade up you defer taxes.

You could end up living at a much much nicer place than an apartment. The idea that an apartment is a better use of money is so mind boggling.

Mortgages are also low interest loans.

Nov 19, 2021 - 1:50pm

This is misleading.  I do agree owning in the long run is better. But you're not putting $24,000 annually towards a loan. You're putting a VERY small part of that towards the loan especially in earlier years, and a LOT of it towards the loan towards the end. That's why "long term" is the key word in owning your home.

Nov 16, 2021 - 11:35pm

Simple answer is cash flow. If you do it right you can buy a property and live in it which you're then paying mortgage and in return receiving equity or you can rent it out. A good investment property will have the monthly rent cover the mortgage and the extra is cash directly into your pocket.

Returns might not be as high but at the end of the day you're getting passive income and cold hard cash in your bank account. Whereas, equities might have higher returns but it's all unrealized gains. Can't use a stock to buy groceries and when you cash it out there's no more gains on it. Not to mention real estate is typically just seen as a safer investment, but value plays can offer a very lucrative upside.

Nov 17, 2021 - 9:13am

The benefit of purchasing a home when you're young vs investing the market is definitely situational. It can make a ton of sense in the right scenario. I lived at home for 2 years after school, banked my bonuses and lived in an apartment for just one year before buying a small 2br condo in Chicago (2015). I always rented out the 2nd bedroom to buddies - I think in the 4 years I owned it, the room was only vacant for 2 or 3 months. Worked out to a ballpark 14% annual return on the price appreciation alone, and my personal "rent" component (Interest + HOA fees) was only $1,275/mo which is way cheaper than rent in that particular neighborhood.

Original Purchase Price: $355k, 20% down payment ($71,000)

Monthly PITI + HOA: $2,800 ($625 Principal, $1500 Interest, $675 HOA)

Monthly Extra Bedroom Rental Income: $900

Sale Price 4 years and 1 month later: $405,000

Nov 17, 2021 - 4:55pm

Just looking at this from a cost/benefit perspective, on a four year basis. 

If you took the $71k originally and invested it @ 6%, you'd get ~$89.6K compounded after 4 years. This leaves you $1,275 to rent a place (HOA + interest - renter payment).

For the purchase, you put in $71k, and pay into the principle $30K ($625* 48 months). Then you also get $50k from the sale, totaling $151k ($71k + $30k + $50k). You pay net $1,275 per month in fees, or $61.2k over the four years. Therefore, total gain is $151k - $61.2k = $89.8k. 

Obviously no time value of money incorporated. 

This is the right way to think about it? Points in my head would be is 6% low or high, and what could you rent for $1,275 per month? 

Nov 17, 2021 - 6:06pm

I've never really thought about it in detail, but I'm not sure you can strip out the net rent from one gain calc but not the other - I think you'd strip out the principal from the ownership scenario, and consider it similar to if the renter was putting $625/month into savings or something. So under a renting scenario at 6% you walk away with the $89.6k but in the ownership scenario you walk away with $71k + $50k = $121k. Renter would have to make something like 14.5% compounded to have $121k at the end of 4 years. Again, never put a ton of thought into this so thinking through it live... hopefully that makes sense...

To the second part of your question... the apartment I lived in for a year, which was just 3 blocks directly south of the condo I bought, was $2,625/mo for a 1 bedroom back in 2014 (looking on their website, the same 1br today is $2,875 and cheapest available 2br is $3,919) so the monthly savings were significant. The only major difference between the two was that the apartment was 7 floors higher up and had a pool (condo did not), but otherwise the amenities were the same (8 year old condo building, newly renovated weight room, party suite, business center, outdoor seating/grilling). 

Nov 17, 2021 - 10:02am

I've been considering buying in the coming years. I'm kinda tired of moving and watching my rent costs continue to rise. I can get a beautiful 3 bedroom apartment and rent out two rooms. I get a little more house than my individual salary would allow for, I get the tax benefits related to interest expense, and I can lower my rent expense and keep it consistent.

I've also considered buying a tri-level so that I can own land in my city. It is much more expensive, however, I would own three to 4 apartments. Between rent from my roommates and the other tenants, I could completely eliminate my rent/mortgage expense. My biggest concern with this is all the upkeep, maintenance, repairs, etc. that would add to my headache of already being in IB.

Obviously, if you were to take out an identical loan and put it in the stock market your returns would be exponentially higher. But you're still taking on leverage to increase returns and minimize some of your personal expenses (which can be invested in the stock market).

I think I did this right

  • 2
Nov 17, 2021 - 12:31pm

1) IF you know 100% that you want to stay in a city for ATLEAST 5-9 yrs... then buy a home.

2) If you stay in a home long enough, the opportunity cost of renting rises. Think like this: If the downpayment + equity appreciation is > than the renting costs (for when you want to live for atleast a few yrs)

3) Home provides you more privacy, independence and many intangibles.. think of those when wanting to buy a home. 
       EX; In Las Vegas, you can get a really really nice large mansion for $1M - $2M while paying less in taxes vs NYC... BUT this depends on where you want to live. 

my 2 cents. 

Nov 17, 2021 - 6:45pm


That is the only actual answer here.  The rest isn't even relevant.  People seem to easily forget that in retirement people are on relative fixed incomes.  It isn't like you can just easily budget for 20 years of esclating rent costs in retirement.  This is the main driver of why it is a good idea to own a home. 

Edit: Also the tax advantages of real estate ownership make it a complete no brainer. 

  • VP in RE - Other
Nov 17, 2021 - 7:57pm

Sometimes we in life make decisions that may not always make sense in an excel spreadsheet. Some things cannot be quantified. As you grow older you will realize that. There is more to life than making every decision based on how many pennies you save. Why do you watch movies at the theater?- money down the drain, Why do you travel? money down the drain, why do you spend quality time with your kid on the weekend instead of a side hustle on the weekend? you see where am I going with this. As you grow older you will also realize that some actually take paycuts. That will be unfathomable to you right as it does not make sense but it will as you grow older and you realize there is more to life than what do for living and making money- beyond a certain point of course as we all would agree that being comfortable in life needs a certain amount of money. To your question- first remember, we are all not a monolith, we all value different things in life, so its okay that some would have a different opinion and we dont have to agree on everything.  From my view, being in a good school district requires you to be in an area where it made more sense to buy. If you are at that stage in your life, you are certainly thinking about putting down your roots and settling in a place long term. So, the advantages of renting- flexibility to move does not appeal to a homeowner, if anything it is a downside. First moving just sucks, only thing worse than that is being forced to move- landlord is selling, rent is being increased constantly, neighbors suck (they are usually on top of you in apartments as opposed to SFR's). Imagine having kids as a renter in an apartment and moving and trying to still be within the same school district. It absolutely sucks. If you want to rent SFR's- homes with a backyard and a little more space, you rent at a premium and at that point, you might as well buy if you can afford it. On the convenience point- meh, sure the landlord will take care of the stuff that is required by law- heating, water, etc. But the little annoying things like a broken lightbulb, clogged toilet, etc is not going to be on the top of their priorities. They will get to it when they get to it, there is nothing you can do about it. What will you do about it? Leave a bad review when you move out? lol, the places I have lived in have waiting lists, they couldn't care less. 

Nov 19, 2021 - 1:14pm

1) As you said, you are assuming the recent equity returns continue rather some sort of mean reversion to a bit lower return long term
2) Rent can and will go up.  With how much money is being printed do you not think rents will go up?  As landlord's taxes go up will they not pass that through?
3) How do you quantify owning a home and raising your family with more stability of location?
4) 2% house price inflation is also an assumption.  Why didn't you choose 2 or 4%?  With 20% down you get 5x leverage on a non marked to market asset.
5) Where are you considering buying?

How old are you?  You don't seem to be talking about investment properties.  So if this is about a owner occupied home, what life circumstances are causing you to even consider this?

  • Associate 1 in IB-M&A
Nov 19, 2021 - 2:06pm

2. Yes - which is why I was considering buying in the first place. 
3. No family now. No plans in next 3-5 years to settle down
4. Fair. But I think flexing inflation % is kind of like flexing cost of capital. Just other side of coin. The leverage sounds cheap for sure. I'm just not sure 20% downpayment is that good due to opportunity cost if you're invested in equities for 20+ yrs
5. Either London or NY. London based now but who knows if could be back in NY in 5 years

6. I'm 26. Am at the point where am considering staying alone. Rent prices have got higher post covid and I was contemplating whether it made sense for me just to buy a house and flip it whenever I want to leave. The thought process was the obvious - "if im going to be paying $x for rent, I might as well pay similar or more for mortgage cause at least I build equity then" but I couldn't make the math re: opp cost of downpayment to work to justify buying over renting from an monetary perspective.

Nov 19, 2021 - 2:14pm

2)  money printing and inflation pump up all assets so a view on inflation shouldn't push you to a house over stocks
3) No family, then why bother with a house.  You don't need the space
4) Agree, it's all assumptions.
5) You can't buy a place in London or NYC and pay less than rent anyway, so why even bother?
6) You may say you want to be alone.  Based on the above there really isn't any reason to be buying.... so what if you just buy anyway and you soon after meet your life partner. You guys are a team and all decisions should be made as such.  She may not want to live in YOUR owned place and prefers to find a place together.  Or your job may take you far away.  The rent may or may not cover your mortgage at that point. Do you want to maintain the hassle?

Pass on buying.

Nov 20, 2021 - 9:59am

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  • Associate 1 in IB-M&A
Nov 30, 2021 - 10:08am

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