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A primary residence shouldn't be compared to stock market investment on pure returns basis, as you get additional utility out of the home by living in it, using

A primary residence shouldn't be compared to stock market investment on pure returns basis, as you get additional utility out of the home by living in it, using all that the neighborhood offers etc. However, you can absolutely compare rental income (a kind of perpetuity, or an annuity with an indefinite payment stream duration) with another annuity (such as a dividend producing stock or a bond). In general, these all can (and in my opinion should) factor into your investment diversification strategy. Real estate cash flows tend to be more volatile than say a bond from a AAA+ rated borrower (leases end, people stop paying, roof leaks, etc), but that should be measured against your required rate of return for the said risk. When compared with stocks, real estate cash flows tend to be less risky (if valued properly), because even in disastrous situations you have some salvage value, whereas if a company goes bankrupt that's kind of that. (Gross oversimplification but still.) One aspect of homeownership that I am a very big fan of is that even in a flat market, the mortgage acts as a type of forced savings account with negative interest (that is, you pay the bank). In a culture where the savings rates are dismally low, this is better than nothing. Unfortunately, refinancing and HELOCs really screwed this up for people. At the extreme of the last housing bubble, people were literally treating their home as an ATM...

fbonetti 9y ago
All good points. Another benefit of investing in real estate (compared to investing in the stock market) is that you have significantly more leverage. You can ask a bank to give you a loan for hundreds of thousands of dollars and use that to produce positive, monthly cash flow. It's a lot harder to convince a bank to give you a loan to buy dividend producing stocks.
JBlue42 9y ago
>using all that the neighborhood offers etc. Great general comment but this specific point is one I try to make to people I know that are in the insanely stressful, desperate search for buying a house. In LA, there are plenty of neighborhoods on the way up or already there with houses at minimum of $600-700k. I hear all the typical rhetoric from these folks of "why waste all my money on rent, when I can get equity, etc." and I try to point out that yes, you're "building equity" for 30 years but you should also be ready for the reality that in 10-15 years (or sooner) the shit could hit the fan. When looking at a house, instead of purely as investment vehicle, maybe approach it as "If the house doesn't grow in value, or even sinks a little bit, would I still be happy to call this place and my neighborhood my home?" Because I think that gets lost and none of the reality tv shows help. You're taking out a 30-year mortgage and hopefully you get 30 years good use out of the house and much more. Will it be enough to raise kids, relax, enjoy neighborhood stuff, what have you? So much is about the money/investment side of it that I think lots of folks lose sight of the idea of a "home".

fbonetti 9y ago

All good points. Another benefit of investing in real estate (compared to investing in the stock market) is that you have significantly more leverage. You can ask a bank to give you a loan for hundreds of thousands of dollars and use that to produce positive, monthly cash flow. It's a lot harder to convince a bank to give you a loan to buy dividend producing stocks.

JBlue42 9y ago

>using all that the neighborhood offers etc. Great general comment but this specific point is one I try to make to people I know that are in the insanely stressful, desperate search for buying a house. In LA, there are plenty of neighborhoods on the way up or already there with houses at minimum of $600-700k. I hear all the typical rhetoric from these folks of "why waste all my money on rent, when I can get equity, etc." and I try to point out that yes, you're "building equity" for 30 years but you should also be ready for the reality that in 10-15 years (or sooner) the shit could hit the fan. When looking at a house, instead of purely as investment vehicle, maybe approach it as "If the house doesn't grow in value, or even sinks a little bit, would I still be happy to call this place and my neighborhood my home?" Because I think that gets lost and none of the reality tv shows help. You're taking out a 30-year mortgage and hopefully you get 30 years good use out of the house and much more. Will it be enough to raise kids, relax, enjoy neighborhood stuff, what have you? So much is about the money/investment side of it that I think lots of folks lose sight of the idea of a "home".