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Another counter-point: when you buy a house, even while the mortgage isn't paid off, you can immediately start renting parts of it and end up in a situation whe

Another counter-point: when you buy a house, even while the mortgage isn't paid off, you can immediately start renting parts of it and end up in a situation where your mortgage payments are equaled or exceeded by your rental income. I also believe that this is taxed differently from normal income, especially so if you're renting rooms in a house you live in vs. owning rental property. In the Bay Area at least, a single-bedroom apartment is easily $2000 a month. If you play your cards right, a single-family home in a desirable neighborhood for tech workers or others can be had for under $1m with 4 reasonably-sized bedrooms, a garage, and a yard. You can then rent out 2 of the bedrooms at $1400/month each and end up with your mortgage payment from your tenants each month. There are still maintenance costs and very significant property taxes (~single-tens of thousands per year on such a property), but you also build equity, which you can later sell (minus the mortgage interest). Depending on the mortgage, you could also use this situation to over-pay mortgage payments in order to pay off the property faster and reduce the amount spent on interest if that works out to a better investment opportunity than anything else you could do with the same money (any early payoff penalties included). It does seem to me that renting is a mixture of paying for convenience and throwing money away, given the above scenario and considering how after 5 years, the home owner ends up with ~$150k in equity assuming the housing market stays flat (it doesn't in the Bay Area, e.g. http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby ) , taxes, maintenance, and interest included, you should still come out ahead with the house. Once you also factor in that renting gets you 8-20%+ increases in rental price per year, while the house value appreciates on the low end of that range over the same amount of time (and also that you can raise the rent for your lodgers accordingly), you really start to see why houses in the Bay Area are attracting foreign investors and starting bidding wars above asking price for nothing-special properties. Edit: lastly, the point I feel everyone neglects: unlike other investments, your first property has the additional advantage and value that you can live in it, so comparisons to other investments become quite different. Sure, you could take your down payment and put it into ETFs, and on paper the yearly average gains might look similar, but if you suddenly lose your job, the ETFs won't provide a place to sleep at night.

soyiuz 10y ago
Landlording poses significant risks which you also must take into account. Thus if your net worth is 500k and all of it is in a rental unit, what happens if your renter floods the house or damages it in some other way? What happens when your renter quits paying rent and starts legal proceedings based on a grievance, real or perceived? Now you cannot sell the house nor are you collecting rents. Lastly see my other comments. Any investment that pays dividends gives you a place to sleep. The fact that you live in your investment is uniformly a downside, as it hinders liquidity. The fact that you can rent is again not relevant. Most financial investments begin to return a percentage immediately. Renting rooms is just less liquid and more risky than investing in a balanced portfolio.
nemo44x 10y ago
I think it's important to not conflate being a landlord (investment and business) with buying a home to live in. The Bay Area is but a single market and not representative of all markets. There are many more markets that haven't seen similar growth. The Bat Area is the exception. If you are paying off a home and you lose your job, if you've leveraged yourself like many home buyers have then you might lose your home! Especially if you lose your job because the economy tanked and home prices have ranked leaving you underwater owing more than the home is worth. And then the bank takes the home back and your entire investment is wiped out. Look to 2009 for an example of this. And rents dropped significantly at that time. The opportunity cost of tying up a solid down payment needs to be considered too. 200k down could be used in other places too. I think most people who buy with 20% or less down don't understand how leveraged and dangerous their position is. Lastly if buying a home was a good way to get rich then we'd have a whole lot more wealthy people. It's not a bad thing at all and for certain people in certain positions it's a good thing. If you can buy with cash and have at least 40% of your bankroll left afterwards then yeah it makes sense. If you plan on staying in a place forever (laying down roots) and can afford 30% down and still have 2 years of mortgage payments in a cash savings account it makes sense. I feel like a lot of people buy homes because they just think that's what you do. A home has meaning to a lot of people. But the opportunity costs and risks are large and the rewards are generally a wash with renting long term in most markets with the exception of places that get a 30 year boom or other rare real estate lottery scenarios. There are ways to win but 10% down and a 30 year mortgage is rarely it.

soyiuz 10y ago

Landlording poses significant risks which you also must take into account. Thus if your net worth is 500k and all of it is in a rental unit, what happens if your renter floods the house or damages it in some other way? What happens when your renter quits paying rent and starts legal proceedings based on a grievance, real or perceived? Now you cannot sell the house nor are you collecting rents. Lastly see my other comments. Any investment that pays dividends gives you a place to sleep. The fact that you live in your investment is uniformly a downside, as it hinders liquidity. The fact that you can rent is again not relevant. Most financial investments begin to return a percentage immediately. Renting rooms is just less liquid and more risky than investing in a balanced portfolio.

nemo44x 10y ago

I think it's important to not conflate being a landlord (investment and business) with buying a home to live in. The Bay Area is but a single market and not representative of all markets. There are many more markets that haven't seen similar growth. The Bat Area is the exception. If you are paying off a home and you lose your job, if you've leveraged yourself like many home buyers have then you might lose your home! Especially if you lose your job because the economy tanked and home prices have ranked leaving you underwater owing more than the home is worth. And then the bank takes the home back and your entire investment is wiped out. Look to 2009 for an example of this. And rents dropped significantly at that time. The opportunity cost of tying up a solid down payment needs to be considered too. 200k down could be used in other places too. I think most people who buy with 20% or less down don't understand how leveraged and dangerous their position is. Lastly if buying a home was a good way to get rich then we'd have a whole lot more wealthy people. It's not a bad thing at all and for certain people in certain positions it's a good thing. If you can buy with cash and have at least 40% of your bankroll left afterwards then yeah it makes sense. If you plan on staying in a place forever (laying down roots) and can afford 30% down and still have 2 years of mortgage payments in a cash savings account it makes sense. I feel like a lot of people buy homes because they just think that's what you do. A home has meaning to a lot of people. But the opportunity costs and risks are large and the rewards are generally a wash with renting long term in most markets with the exception of places that get a 30 year boom or other rare real estate lottery scenarios. There are ways to win but 10% down and a 30 year mortgage is rarely it.