16 Comments

Just running these very numbers while staying in Honolulu. Real Estate is about as safe of an investment as anywhere in the world (USA rule of law, remote work trend, truly a paradise), but the prices well reflect that!

I would say it's about 3 million to get an average house in a nice location, and 1 million USD really gets you a pretty worn out house built in the 70s or before. A small lot with a tear down is 1 million in a nice neighborhood.

So why not rent and invest simultaneously in something that performs better? 3 million * 8% gives you a budget of $20K per month, and with that you are now looking at prime ocean front real estate, 5000 sq ft, pool, modern renovation, while paying none of the taxes, and on the hook for none of the upkeep.

The downside: you won't have the stability/peace of mind of ownership, and may get squeezed in a rental shortage,

However, it seems more often to me, you are able to get a deal from someone who is using the property as a store of value (huge embedded cap gains they don't want to realize) but isn't getting the occupancy use out of it. An empty 5 million + property has quite the carrying cost if sitting empty.

I, for one, will likely never invest in real estate again, and agree with Nick's analysis.

(Exception: if you truly love it, have the cash, and must own the property). Also, some markets have undeveloped rental offerings and owning can be a better deal.

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author

Thanks for your comment. I agree with you that it’s better to rent and invest every month!

There are pros regarding buying such as the peace of mind as you said. But the real peace of mind is having a higher net worth and a better diversification. I can’t understand why buying real estate is considered such an achievement in life. “Go to College, pay off your credit card debts and student loan and then buy a house”. Just why?

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Yeah, it's certainly a good goal to secure reliable housing.

I've always thought that real estate was a good investment for people who aren't able to save any money from their income stream due to a lack of discipline, as well as some people aren't cut out to invest in stocks as they can't help but take advantage of the real time liquidity to trade or change stocks. It's actually quite tough to invest long term and not fiddle with stock investments. I should sit on my hands more than I do.

The fact that a house is very illiquid can be a good thing for someone prone to rash decision making, and it can enforce a higher time preference by turning the house into a commitment device. I know a Bitcoiner that uses physical bitcoins like Casascius or Denarius as a way to keep them from spending or trading them.

As a landlord, one of the worst jobs I've had in terms of pay, I understand very well that I'm just renting from the local government in the form of property taxes and passing that cost along to the tenant. So even if you are the "owner", you really are just a tenant of the state. Property taxes in Chicago are up 50% in 5 years and nothing anyone can do about it other than collapse the property values. *shrug*

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author

That's an excellent point! If you're too afraid to invest in stocks because you think you won't just buy and hold then it's better to buy a house. I love the sentence " it can enforce a higher time preference by turning the house into a commitment device". It's exactly that. If you lack the discipline then you should buy a commitment tool. At first I have thought than bonds might be a better investment because of diversification but it's easier to panic sell your bonds rather than your house.

Ps: wtf Chicago taxes...

Pps: I have just checked for Paris. Between 2008 and 2018 the land value tax grew by 80.9%. Lol.

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What if you use real estate not as a place to live but a place to rent? You basically use the rent to pay your mortgage and accumulate wealth. You are inflating your income no? This is something stocks (or bonds) are not able to offer you right?

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author

Thanks for commenting. Stocks and bonds offer the same value proposition with dividends.

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Your computation of return forgot two key elements :

* you can live in real estate, meaning that your real estate earns you a virtual rent every month. This is especially true for middle class people who buy real estate somewhat adjusted to what they would rent

* the "ghost income" from the "ghost rent" does not show on the taxman's radar, unlike the investment income you need topay rent.

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What do you think about hybrid model like Divvy (https://www.divvyhomes.com/) ?

In theory, you could sell the land ownership, but keep the rise to use / home built.

It would allow a smaller investment, on a clearly depreciating asset (home), but you can keep the freedom (and some investment returns) to re-model, re-decorate.

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This is really dependent on your local prices/rates, also it's impossible to have 10:1 leverage on 30k$+ on any other investment.

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Thank you for commenting. You can use leverage when buying stocks or companies but it's often a bad idea. One might argue that it is also a bad idea when buying real estate. Regarding prices, it depends on your local market of course.

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Or you can buy property because ownership means more than just finding a place to live. Of course, if the article was actually answering what the hyperbolic title purports it would consider this and a lot of other things that have nothing to do with using real estate as an investment vehicle.

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Thanks for your comment. There is indeed a psychological dimension with buying a house that you don't get with others investments. The feeling of safety is, for most people, immeasurable.

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While Bush played a part in the house crash, Clinton did as well, per: https://www.cbsnews.com/news/heres-what-really-caused-housing-crisis/

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author

Thanks for your comment. Well, it's a compelling proposition to say to voters: "guys, I will give you a house. Vote for me!"

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Real estate is as much of a lifestyle choice as it is an investment. This took me a long time to realize but it's the conclusion I've come to. I'm not a house owner myself, but realize that if I one day want to enjoy the freedom to re-model, re-decorate my living space as I wish, as well as removing the dependency on a landlord who could decide to change terms/sell or other uncertainty building events, then I will have to buy. Yes, it's not a superior investment (but with the right leverage, it's not a terrible investment either) but it can be a real lifestyle choice.

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author

Thanks for your comment. It's true that when you are renting you don't have the incentive, nor sometimes the possibility, to remodel your house as you wish. If you like this activity, it's probably better to buy a house. As you said, it's a lifestyle choice.

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