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These articles always ignore leverage. Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actu

These articles always ignore leverage. Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. To use the example in the article, if your investment doubled between 2009 and now, your $200k in a $1M home just became 1.2M. 6x growth beats out 3x growth in stocks in the same period. Sure, you can be leveraged in other investments but (1) your interest won't be tax deductible, (2) your interest rates won't be nearly as low, and most importantly (3) you won't be able to borrow with no recourse (depends on the state law, but "no recourse" means your downside on a primary residence is limited to the equity in the home. If you default on the loan they can't come after your other assets.) Does it mean renting is a bad idea? No. There are plenty of reasons it might make financial sense to rent. But articles like these should accurately discuss the financial upside of buying.

garmaine 9y ago
> 6x growth beats out 3x growth in stocks in the same period Was that a typo? Average market returns are much higher than that.
- phamilton 9y ago
  The article states that since 2009 the stock market has tripled while housing markets have doubled. I'm just reassessing that example with 5x leverage.
  - lotsofpulp 9y ago
    I find it hard to believe if even the majority of housing markets have doubled. Economic growth mostly seems contained to a few established and up and coming cities.
    - garmaine 9y ago
      Yeah one flaw with the OP is that you can’t compare against average housing returns. Buying a house or condo in Silicon Valley or New York is going to out perform the average due to supply, demand, and geography. The OP is essentially really saying buy a total stock market fund instead of REIT, which isn’t that controversial.
  - garmaine 9y ago
    Oh I didn’t realize those gains were leverage adjusted. But shouldn’t you compare to trading on margin to be apples to apples?
    - phamilton 9y ago
      In this case I'd argue that apples is "what an average person would do". That's the comparison the article is making. Millions of Americans are leveraged in their homes. Relatively few trade on margin. I think that makes it a valid comparison, even if it's not a fair comparison.
klipt 9y ago
> Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. But if inflation is 3%, you're probably paying 3% (or more) interest on your loan. So suppose your home costs X. You pay 0.2X downpayment and borrow 0.8X through your mortgage. The first year your home appreciates to 1.03X but you also pay around 3% of 0.8X = 0.024X in interest. So your gain is 0.03X appreciation - 0.024X interest = 0.006X: which is exactly 3% of your 0.2X downpayment! Looks like the leverage didn't help in this scenario at all. Of course if you bought in the Bay Area a few years ago you made bank, but that's because the growth here happened to be much faster than inflation, even without leverage. > Sure, you can be leveraged in other investments but (1) your interest won't be tax deductible, (2) your interest rates won't be nearly as low, and most importantly (3) you won't be able to borrow with no recourse (3) is true, but you can buy stocks on margin, the interest is deductible as a business expense, and interest rates are often lower than mortgage rates.
- phamilton 9y ago
  That's fair. It definitely underscores the actual point of the article which is "You should run your own numbers rather than believe 'conventional wisdom'". I'd love to see some analysis (perhaps a monte carlo sim) on how the "no recourse" angle plays out. I can only assume that a floor on losses skews the expected outcome significantly.
  - jo909 9y ago
    It underscores how little you should trust your own numbers (or numbers from strangers on the internet). Forget one small factor and the whole picture shifts a lot.
    - dspillett 9y ago
      > how little you should trust your own numbers. Forget one small factor and the whole picture shifts a lot. Though you should at least try run the numbers. Maybe you will forget an important detail but if you just go with your gut or an insufficiently specific recommendation from elsewhere you will likely miss many more important details. The trick is to do some research first, and if possible have someone else look over your thoughts to see if they can spot an important omission. Be particularly careful if the sums add up in a way that closely confirms your original idea - your analysis might be unintentionally biased by subconscious filtering. > or numbers from strangers on the internet That is definitely something to be wary of. Too many people base decisions on simple advice without checking that the advice is even relevant to their specific situation. I've seen people in the UK dump figures into US targeted calculators with the thought that "the $<->£ is the same for every figure so it will all work out OK" without thinking that our tax regimes and other factors are quite different in ways that can have a large impact.
libertyhouse 9y ago
Your 15% leveraged return is only true if you have no borrowing costs. If you had a 4% mortgage you would actually be losing 1% the first year. A leveraged return L = (asset return - ((1- %down) x loan) rate)/%down. With a 4% mortgage that's (3% - ((1 - 20% ) x 4%))/20% = -1%
- phamilton 9y ago
  How does the utility derived from the asset factor in? There's an argument that the cost of borrowing is also paid by a renter (passed through from the landlord). The true cost of borrowing would then be interest paid minus the corresponding portion of comparable rent. The real point of the article stands. "Run your own numbers"
anonu 9y ago
Was just about to mention leverage. I would also add that you'll be hard pressed to get a loan at mortgage-like rates if you wanted to put your money in the stock market. The other important point is that buying a home is still very much the "American Dream" - it is the single best way for the middle class to create wealth simply because the entire system is geared (some people would use the word rigged) for home buying. Interest tax deductions, primary residence rules, etc.. etc... are all setup for you to take out this massive loan and buy a house. If you wait long enough, it will be worth your while.
wldcordeiro 9y ago
Odd I read the article and got the sense that it wasn't necessarily painting one side better than the other but tried to give an overview of the full financial picture. It missed details sure but the overarching point was "run your own numbers and look at your own situation and see what makes sense for you." > But articles like these should accurately discuss the financial upside of buying. I think the reason it didn't is because buying is the default "good" choice in most people's eyes and even if they don't understand some of the details you mentioned (I didn't know all that myself) the goal was to open a layperson's eyes to the broader landscape.
fossuser 9y ago
I’m not following the leveraged point - why is a 3% increase equal to 15% growth? In the Bay Area HOA fees plus property tax add up to nearly my existing rent even before considering a mortgage which has made me nervous to buy. I’d be banking entirely on the upward trajectory of the market for it to be a better bet than renting with roommates.
- T2_t2 9y ago
  You have $100 - you buy a house worth $500. House goes up 3%, it is now worth $515. You invested $100, and have $115 in equity. Growth 15%. (that is ignoring other costs, obviously - just an attempt to explain the maths). That is the power of leverage - you grow on the bit you own as well as the bit you owe.
  - nonameisfinetoo 9y ago
    But the house usually does not go up 3% if you take inflation into account
    - sokoloff 9y ago
      Yes, but the purchase and loan are in nominal dollars. Taking GP's example numbers, a $500 house, bought with a $100 downpayment, in a house and general inflation environment of 3%pa, and an interest-only mortgage (to make the math napkin friendly) You start with $100. You buy a $500 house. $0 cash, $500 in asset, -$400 in liability. A year passes. $0 cash, $515 in asset, -$400 in liability. A year passes. $0 cash, $530.45 in asset, -$400 in liability. After 30 years, $0 cash, $1213.63 in asset, -$400 in liability. That $100 turned in ~$814 of equity in 30 years. That equity has the purchasing power as today's $335. Even though inflation and asset prices rose by 3%, your $100 grew in purchasing power at a CAGR of 4.11%. Contrast that with an unleveraged investment that also rose exactly with 3% inflation. You start with $100. You buy a $100 bond. $0 cash, $100 in bond. A year passes. $0 cash, $103 in bond. A year passes. $0 cash, $106.09 in bond. After 30 years, $0 cash, $242.73 in bond. Unsurprisingly, that $243 30 years from now has the same purchasing power as $100 today.
usaar333 9y ago
A few notes: Deductability of interest (and property tax) is a lot smaller than it was before with the new tax code. On a $1M house for a married couple, you might get ~$9k back but (in CA) that's offset by the $12k (EDIT: likely non-deductable due to SALT max) property tax. Anyway, using my own calculator (https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calculator-22d0bf9bbbb5 https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul... with other defaults), the situation you describe only works if the market is offering a price/rent ratio of 14 (years) or less (which is true in much, but not all, of the country). Regardless, there's a lot of added costs to ownership: property taxes, HOA fees, loss of leverage as you pay down mortgage, closing costs, etc.
- pfarnsworth 9y ago
  Property tax is deductible up to $10k.
  - phamilton 9y ago
    eh... property tax AND state income tax. Living in CA with near 10% marginal state income tax above $100k means that if you're buying a $1M home you're probably hitting the 10k without property tax.
  - deleted 9y ago
    [deleted]
- gnicholas 9y ago
  Good point about the property tax deduction becoming much less valuable in high-income tax states like CA. It used to be the case that property tax was basically built-into the cost of renting. That is, your landlord pays property tax, gets to deduct some, and then passes the pro rata share onto each of the renters. This implicit property tax created an equivalence with the property tax that you would pay if you bought a home. But we now find ourselves in a strange situation where businesses (i.e., landlords) can deduct property taxes but individuals cannot. So it shifts the balance in favor of renting because one major cost (at least in SF/LA/etc) is no longer deductible to most individual homeowners. I found it odd that as the tax bill was winding its way through Congress, no one asked why businesses should be allowed to deduct SALT, but individuals should not be able to. I can't think of a good reason for this, and I am a (former) corporate tax lawyer.
shin_lao 9y ago
Did you read the article? In the beginning: "I empower you to conduct your own analysis and make your own decision, based on your own circumstances, rooted in logic and math." And later "Your Special Snowflake circumstances don’t change the fact that everyone is responsible for analyzing their own variables. Don’t base the biggest purchase of your life on an intellectually lazy cliche."
- majewsky 9y ago
  > Please don't insinuate that someone hasn't read an article. "Did you even read the article? It mentions that" can be shortened to "The article mentions that." Source: https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
ghgfhgfhn 9y ago
Jesus, If you want more leverage go do spread betting.
misja111 9y ago
You are forgetting that you don't only get the leverage of the $1M, you also have to pay the loan for the full sum of $1M. There is a section in the article about 'opportunity cost' which covers this.
- nojvek 9y ago
  You don’t have to pay full. When you’re done, you can sell. Buy for $500k, put down 100k as downpayment. Suppose it’s an interest only loan and you pay $1500 a month for all house costs. In 5 years you’ve paid 90k. If the house price doubles, you’re walking away with 410k. Renting you’d be putting at least 2k a month, so total 120k. 190-120=70k. For 70k in stock market to become 410k , that’s a 5.8X growth. Really hard. In a booming market, with low interest rates, buying makes sense because of leverage. Obviously you have to do the numbers for rent/buy scenarios and make a decision yourself. There is no right answer.
  - misja111 9y ago
    Yes that would be a nice profit, but to hope that your house price wil double in 5 years is pure speculation. True, you'll have a nice leverage, but when speculating the leverage goes both ways; if your house price drops 50% you'll see the other side of the leverage. The article is not about short term speculation, it is about long term expected returns. Which tend to follow the inflation and the interest rate.
  - alien_at_work 9y ago
    Can you get an interest only loan on a home in the USA?
neuxenian 9y ago
Leverage cuts both ways, though. As someone who just sold their house, the costs are a percent of the sale. You don't get taxed on the sales (generally) but you will probably have to pay real estate sales costs. So yes, if your home increases by 3%, you've gained 15% growth on your investment, but if the sale cost is 5% of the the sale price, then things aren't so clear anymore. The real calculation is the total monthly cost of ownership plus any sale prices on the buying and selling ends over the period, relative to the total costs of renting. Over the 10 years we've owned our home, yes, it's been worth it to buy, because we can recoup money that would have gone to someone else. However, over a short period, the sales costs would dwarf any returns we would get. The sales costs are largely fixed on both ends, as a percent of home value, and diminish as a total percent of gains over the period of ownership. So the period of ownership is relevant. This in turn is relevant because your mobility becomes relevant. The previous market we were in too, was so overpriced relative to the rental cost that we actually saved money over the period by renting rather than buying. Then the Great Recession happened. Either strategy makes sense depending on your mobility risk and the market. I don't think it's clear that one or the other is generally better.
- chii 9y ago
  > This in turn is relevant because your mobility becomes relevant. you don't need to sell, just rent out the apartment when you move. With the rental income, you can pay for a similarly priced location in the new place. Then, when the market fits, make the sale, and you've lost very little (if anything), except upkeep costs due to rental damage, etc.
  - scarface74 9y ago
    You say just rent it out like renting doesn't have its own downsides like finding decent tenants, dealing with repairs, having to carry the mortgage when you have vacancies, dealing with evictions when they don't pay. Even in a landlord friendly state it can take 2-3 months to evict someone for non payment. In some states I've heard that it can take a year. I've been a landlord, never again.
    - 9y ago
quickthrower2 9y ago
1,2,3 don't apply in Australia. Here are some things do that apply in Australia, that are advantages, but not sure about the US: 1. Primary Residence has no Capital Gains Tax 2. Can rent out Primary Residence for up to 6 years at a time and keep it exempt from CGT. 3. Pension eligibility ignores Primary Residence value. So you can own a $1m house, $0 cash and get the pension. But $100,000 cash and renting you are SOL.
cko 9y ago
> Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. In a 30-year loan, it’d be actually less than 15%. It’s 15% the first year. Calculating the compounded return, it’s 1.03^30 * 5, then you raise all of that to the (1/30) power. You get a 8.7% compounded annual return, assuming 20% down. Then I think you subtract the 3% inflation. 5.7% is better than just tracking inflation, of course. The return is different if it’s not owner occupied, since you need 25% down and there’s capital gains tax. But then there’s cashflow, depreciation tax shelter, etc.
erikb 9y ago
There are so many buts. For instance, but this doesn't work in other countries where you can't downpay so little or where you can't get that kind of credit on a house. Or, but what happens if you default and you live in the house? And I'm not so sure they can't come after your other assets without further protection. If they can't turn that house into money then they'll certainly try, or if you did just the slightest mistake and they find out about how to leverage that. If you don't have 100+ hitmen with guns, 5 lawyers and a politician in your back pocket always assume they come after you.
kudokatz 9y ago
> These articles always ignore leverage. Generally, with 20% down you are leveraged 5:1. Don't forget that leverage works both ways; it magnifies the downside as well.
jonbarker 9y ago
Yes, and leverage can also cause more rapid destruction of personal net worth too. I could make leveraged purchases of other assets too and the examples would be the same. The no recourse thing is interesting, but it doesn't solve the problem of having to move, in which you have to either find a renter or pay a mortgage on an empty house. This seems to be effectively the same consequence.
aaavl2821 9y ago
When comparing asset classes, you should consider the returns of the underlying asset class independently, and then compare the potential returns with leverage. And also remember that leverage has a downside In this example, stocks outperform real estate (not saying this is true, just referencing the article). So for buying a home with a mortgage to be better than buying stocks, the cost of debt must be significantly lower. Which is sort of counter intuitive -- if an asset gets better returns, shouldn't you be able to borrow against it more easily? -- but it may be the case But the second point -- that leverage has a downside -- can hurt you here. If the distribution of housing returns is a bell curve with expected return equal to inflation, you have just as much chance of leveraging hurting you as helping you. Lots of people lost their homes in the recession, and in a lot of cases leverage made it way worse So if you believe the numbers in the article, you shouldn't be over-leveraging your home compared to your income, and you should diversify your assets (another benefit of investing in things other than homes)
nilsbunger 9y ago
One other key difference that makes leverage in stocks scarier: once you hit zero, you’re wiped out. In your example, a 20% decline in stocks would wipe you out. In principle, the same thing can happen to a home. But there are two reasons it isn’t as bad : 1) as long as you keep up the payments, the lender won’t foreclose you. 2) there’s a dampening effect in home sales - when demand softens, volume collapses. So a 20% decline doesn’t happen as often. I owned a house in Redwood City during the 2008 collapse and ended up under-water in it for a while (negative equity). I just held on and it recovered nicely, and I sold it for a great profit in 2014. My stock broker would’ve never let me do that. More broadly, buying is also an “option” to stay in the area long term. In a place like the SF Bay Area, where you just can’t tell what will happen next to house prices, that should be factored in as part of the value.
deleted 9y ago
[deleted]
kcanini 9y ago
Leverage only matters if your home appreciates (or depreciates!) in value relative to inflation. There is a very large section of the article devoted to explaining that on average, this does not happen.
zeusk 9y ago
In financial speak, leverage is always the source of ruin especially when taken to extreme levels (which mortgages do). To attain that leverage, you pay a financial cost in terms of interest which btw - can be replicated in the market for much better returns and if you know your math and derivatives - for a much lower cost of capital (equity options and index futures) in a market that is highly liquid with transaction fees as low as single digit dollars.

garmaine 9y ago

> 6x growth beats out 3x growth in stocks in the same period Was that a typo? Average market returns are much higher than that.

phamilton 9y ago
The article states that since 2009 the stock market has tripled while housing markets have doubled. I'm just reassessing that example with 5x leverage.
- lotsofpulp 9y ago
  I find it hard to believe if even the majority of housing markets have doubled. Economic growth mostly seems contained to a few established and up and coming cities.
  - garmaine 9y ago
    Yeah one flaw with the OP is that you can’t compare against average housing returns. Buying a house or condo in Silicon Valley or New York is going to out perform the average due to supply, demand, and geography. The OP is essentially really saying buy a total stock market fund instead of REIT, which isn’t that controversial.
- garmaine 9y ago
  Oh I didn’t realize those gains were leverage adjusted. But shouldn’t you compare to trading on margin to be apples to apples?
  - phamilton 9y ago
    In this case I'd argue that apples is "what an average person would do". That's the comparison the article is making. Millions of Americans are leveraged in their homes. Relatively few trade on margin. I think that makes it a valid comparison, even if it's not a fair comparison.

klipt 9y ago

> Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. But if inflation is 3%, you're probably paying 3% (or more) interest on your loan. So suppose your home costs X. You pay 0.2X downpayment and borrow 0.8X through your mortgage. The first year your home appreciates to 1.03X but you also pay around 3% of 0.8X = 0.024X in interest. So your gain is 0.03X appreciation - 0.024X interest = 0.006X: which is exactly 3% of your 0.2X downpayment! Looks like the leverage didn't help in this scenario at all. Of course if you bought in the Bay Area a few years ago you made bank, but that's because the growth here happened to be much faster than inflation, even without leverage. > Sure, you can be leveraged in other investments but (1) your interest won't be tax deductible, (2) your interest rates won't be nearly as low, and most importantly (3) you won't be able to borrow with no recourse (3) is true, but you can buy stocks on margin, the interest is deductible as a business expense, and interest rates are often lower than mortgage rates.

phamilton 9y ago
That's fair. It definitely underscores the actual point of the article which is "You should run your own numbers rather than believe 'conventional wisdom'". I'd love to see some analysis (perhaps a monte carlo sim) on how the "no recourse" angle plays out. I can only assume that a floor on losses skews the expected outcome significantly.
- jo909 9y ago
  It underscores how little you should trust your own numbers (or numbers from strangers on the internet). Forget one small factor and the whole picture shifts a lot.
  - dspillett 9y ago
    > how little you should trust your own numbers. Forget one small factor and the whole picture shifts a lot. Though you should at least try run the numbers. Maybe you will forget an important detail but if you just go with your gut or an insufficiently specific recommendation from elsewhere you will likely miss many more important details. The trick is to do some research first, and if possible have someone else look over your thoughts to see if they can spot an important omission. Be particularly careful if the sums add up in a way that closely confirms your original idea - your analysis might be unintentionally biased by subconscious filtering. > or numbers from strangers on the internet That is definitely something to be wary of. Too many people base decisions on simple advice without checking that the advice is even relevant to their specific situation. I've seen people in the UK dump figures into US targeted calculators with the thought that "the $<->£ is the same for every figure so it will all work out OK" without thinking that our tax regimes and other factors are quite different in ways that can have a large impact.

libertyhouse 9y ago

Your 15% leveraged return is only true if you have no borrowing costs. If you had a 4% mortgage you would actually be losing 1% the first year. A leveraged return L = (asset return - ((1- %down) x loan) rate)/%down. With a 4% mortgage that's (3% - ((1 - 20% ) x 4%))/20% = -1%

phamilton 9y ago
How does the utility derived from the asset factor in? There's an argument that the cost of borrowing is also paid by a renter (passed through from the landlord). The true cost of borrowing would then be interest paid minus the corresponding portion of comparable rent. The real point of the article stands. "Run your own numbers"

anonu 9y ago

Was just about to mention leverage. I would also add that you'll be hard pressed to get a loan at mortgage-like rates if you wanted to put your money in the stock market. The other important point is that buying a home is still very much the "American Dream" - it is the single best way for the middle class to create wealth simply because the entire system is geared (some people would use the word rigged) for home buying. Interest tax deductions, primary residence rules, etc.. etc... are all setup for you to take out this massive loan and buy a house. If you wait long enough, it will be worth your while.

wldcordeiro 9y ago

Odd I read the article and got the sense that it wasn't necessarily painting one side better than the other but tried to give an overview of the full financial picture. It missed details sure but the overarching point was "run your own numbers and look at your own situation and see what makes sense for you." > But articles like these should accurately discuss the financial upside of buying. I think the reason it didn't is because buying is the default "good" choice in most people's eyes and even if they don't understand some of the details you mentioned (I didn't know all that myself) the goal was to open a layperson's eyes to the broader landscape.

fossuser 9y ago

I’m not following the leveraged point - why is a 3% increase equal to 15% growth? In the Bay Area HOA fees plus property tax add up to nearly my existing rent even before considering a mortgage which has made me nervous to buy. I’d be banking entirely on the upward trajectory of the market for it to be a better bet than renting with roommates.

T2_t2 9y ago
You have $100 - you buy a house worth $500. House goes up 3%, it is now worth $515. You invested $100, and have $115 in equity. Growth 15%. (that is ignoring other costs, obviously - just an attempt to explain the maths). That is the power of leverage - you grow on the bit you own as well as the bit you owe.
- nonameisfinetoo 9y ago
  But the house usually does not go up 3% if you take inflation into account
  - sokoloff 9y ago
    Yes, but the purchase and loan are in nominal dollars. Taking GP's example numbers, a $500 house, bought with a $100 downpayment, in a house and general inflation environment of 3%pa, and an interest-only mortgage (to make the math napkin friendly) You start with $100. You buy a $500 house. $0 cash, $500 in asset, -$400 in liability. A year passes. $0 cash, $515 in asset, -$400 in liability. A year passes. $0 cash, $530.45 in asset, -$400 in liability. After 30 years, $0 cash, $1213.63 in asset, -$400 in liability. That $100 turned in ~$814 of equity in 30 years. That equity has the purchasing power as today's $335. Even though inflation and asset prices rose by 3%, your $100 grew in purchasing power at a CAGR of 4.11%. Contrast that with an unleveraged investment that also rose exactly with 3% inflation. You start with $100. You buy a $100 bond. $0 cash, $100 in bond. A year passes. $0 cash, $103 in bond. A year passes. $0 cash, $106.09 in bond. After 30 years, $0 cash, $242.73 in bond. Unsurprisingly, that $243 30 years from now has the same purchasing power as $100 today.

usaar333 9y ago

A few notes: Deductability of interest (and property tax) is a lot smaller than it was before with the new tax code. On a $1M house for a married couple, you might get ~$9k back but (in CA) that's offset by the $12k (EDIT: likely non-deductable due to SALT max) property tax. Anyway, using my own calculator (https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calculator-22d0bf9bbbb5 https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul... with other defaults), the situation you describe only works if the market is offering a price/rent ratio of 14 (years) or less (which is true in much, but not all, of the country). Regardless, there's a lot of added costs to ownership: property taxes, HOA fees, loss of leverage as you pay down mortgage, closing costs, etc.

pfarnsworth 9y ago
Property tax is deductible up to $10k.
- phamilton 9y ago
  eh... property tax AND state income tax. Living in CA with near 10% marginal state income tax above $100k means that if you're buying a $1M home you're probably hitting the 10k without property tax.
- deleted 9y ago
  [deleted]
gnicholas 9y ago
Good point about the property tax deduction becoming much less valuable in high-income tax states like CA. It used to be the case that property tax was basically built-into the cost of renting. That is, your landlord pays property tax, gets to deduct some, and then passes the pro rata share onto each of the renters. This implicit property tax created an equivalence with the property tax that you would pay if you bought a home. But we now find ourselves in a strange situation where businesses (i.e., landlords) can deduct property taxes but individuals cannot. So it shifts the balance in favor of renting because one major cost (at least in SF/LA/etc) is no longer deductible to most individual homeowners. I found it odd that as the tax bill was winding its way through Congress, no one asked why businesses should be allowed to deduct SALT, but individuals should not be able to. I can't think of a good reason for this, and I am a (former) corporate tax lawyer.

shin_lao 9y ago

Did you read the article? In the beginning: "I empower you to conduct your own analysis and make your own decision, based on your own circumstances, rooted in logic and math." And later "Your Special Snowflake circumstances don’t change the fact that everyone is responsible for analyzing their own variables. Don’t base the biggest purchase of your life on an intellectually lazy cliche."

majewsky 9y ago
> Please don't insinuate that someone hasn't read an article. "Did you even read the article? It mentions that" can be shortened to "The article mentions that." Source: https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html

ghgfhgfhn 9y ago

Jesus, If you want more leverage go do spread betting.

misja111 9y ago

You are forgetting that you don't only get the leverage of the $1M, you also have to pay the loan for the full sum of $1M. There is a section in the article about 'opportunity cost' which covers this.

nojvek 9y ago
You don’t have to pay full. When you’re done, you can sell. Buy for $500k, put down 100k as downpayment. Suppose it’s an interest only loan and you pay $1500 a month for all house costs. In 5 years you’ve paid 90k. If the house price doubles, you’re walking away with 410k. Renting you’d be putting at least 2k a month, so total 120k. 190-120=70k. For 70k in stock market to become 410k , that’s a 5.8X growth. Really hard. In a booming market, with low interest rates, buying makes sense because of leverage. Obviously you have to do the numbers for rent/buy scenarios and make a decision yourself. There is no right answer.
- misja111 9y ago
  Yes that would be a nice profit, but to hope that your house price wil double in 5 years is pure speculation. True, you'll have a nice leverage, but when speculating the leverage goes both ways; if your house price drops 50% you'll see the other side of the leverage. The article is not about short term speculation, it is about long term expected returns. Which tend to follow the inflation and the interest rate.
- alien_at_work 9y ago
  Can you get an interest only loan on a home in the USA?

neuxenian 9y ago

Leverage cuts both ways, though. As someone who just sold their house, the costs are a percent of the sale. You don't get taxed on the sales (generally) but you will probably have to pay real estate sales costs. So yes, if your home increases by 3%, you've gained 15% growth on your investment, but if the sale cost is 5% of the the sale price, then things aren't so clear anymore. The real calculation is the total monthly cost of ownership plus any sale prices on the buying and selling ends over the period, relative to the total costs of renting. Over the 10 years we've owned our home, yes, it's been worth it to buy, because we can recoup money that would have gone to someone else. However, over a short period, the sales costs would dwarf any returns we would get. The sales costs are largely fixed on both ends, as a percent of home value, and diminish as a total percent of gains over the period of ownership. So the period of ownership is relevant. This in turn is relevant because your mobility becomes relevant. The previous market we were in too, was so overpriced relative to the rental cost that we actually saved money over the period by renting rather than buying. Then the Great Recession happened. Either strategy makes sense depending on your mobility risk and the market. I don't think it's clear that one or the other is generally better.

chii 9y ago
> This in turn is relevant because your mobility becomes relevant. you don't need to sell, just rent out the apartment when you move. With the rental income, you can pay for a similarly priced location in the new place. Then, when the market fits, make the sale, and you've lost very little (if anything), except upkeep costs due to rental damage, etc.
- scarface74 9y ago
  You say just rent it out like renting doesn't have its own downsides like finding decent tenants, dealing with repairs, having to carry the mortgage when you have vacancies, dealing with evictions when they don't pay. Even in a landlord friendly state it can take 2-3 months to evict someone for non payment. In some states I've heard that it can take a year. I've been a landlord, never again.
  - 9y ago

quickthrower2 9y ago

1,2,3 don't apply in Australia. Here are some things do that apply in Australia, that are advantages, but not sure about the US: 1. Primary Residence has no Capital Gains Tax 2. Can rent out Primary Residence for up to 6 years at a time and keep it exempt from CGT. 3. Pension eligibility ignores Primary Residence value. So you can own a $1m house, $0 cash and get the pension. But $100,000 cash and renting you are SOL.

cko 9y ago

> Generally, with 20% down you are leveraged 5:1. So even if your home is just keeping pace with inflation of 3%, you actually experience 15% growth on your investment. In a 30-year loan, it’d be actually less than 15%. It’s 15% the first year. Calculating the compounded return, it’s 1.03^30 * 5, then you raise all of that to the (1/30) power. You get a 8.7% compounded annual return, assuming 20% down. Then I think you subtract the 3% inflation. 5.7% is better than just tracking inflation, of course. The return is different if it’s not owner occupied, since you need 25% down and there’s capital gains tax. But then there’s cashflow, depreciation tax shelter, etc.

erikb 9y ago

There are so many buts. For instance, but this doesn't work in other countries where you can't downpay so little or where you can't get that kind of credit on a house. Or, but what happens if you default and you live in the house? And I'm not so sure they can't come after your other assets without further protection. If they can't turn that house into money then they'll certainly try, or if you did just the slightest mistake and they find out about how to leverage that. If you don't have 100+ hitmen with guns, 5 lawyers and a politician in your back pocket always assume they come after you.

kudokatz 9y ago

> These articles always ignore leverage. Generally, with 20% down you are leveraged 5:1. Don't forget that leverage works both ways; it magnifies the downside as well.

jonbarker 9y ago

Yes, and leverage can also cause more rapid destruction of personal net worth too. I could make leveraged purchases of other assets too and the examples would be the same. The no recourse thing is interesting, but it doesn't solve the problem of having to move, in which you have to either find a renter or pay a mortgage on an empty house. This seems to be effectively the same consequence.

aaavl2821 9y ago

When comparing asset classes, you should consider the returns of the underlying asset class independently, and then compare the potential returns with leverage. And also remember that leverage has a downside In this example, stocks outperform real estate (not saying this is true, just referencing the article). So for buying a home with a mortgage to be better than buying stocks, the cost of debt must be significantly lower. Which is sort of counter intuitive -- if an asset gets better returns, shouldn't you be able to borrow against it more easily? -- but it may be the case But the second point -- that leverage has a downside -- can hurt you here. If the distribution of housing returns is a bell curve with expected return equal to inflation, you have just as much chance of leveraging hurting you as helping you. Lots of people lost their homes in the recession, and in a lot of cases leverage made it way worse So if you believe the numbers in the article, you shouldn't be over-leveraging your home compared to your income, and you should diversify your assets (another benefit of investing in things other than homes)

nilsbunger 9y ago

One other key difference that makes leverage in stocks scarier: once you hit zero, you’re wiped out. In your example, a 20% decline in stocks would wipe you out. In principle, the same thing can happen to a home. But there are two reasons it isn’t as bad : 1) as long as you keep up the payments, the lender won’t foreclose you. 2) there’s a dampening effect in home sales - when demand softens, volume collapses. So a 20% decline doesn’t happen as often. I owned a house in Redwood City during the 2008 collapse and ended up under-water in it for a while (negative equity). I just held on and it recovered nicely, and I sold it for a great profit in 2014. My stock broker would’ve never let me do that. More broadly, buying is also an “option” to stay in the area long term. In a place like the SF Bay Area, where you just can’t tell what will happen next to house prices, that should be factored in as part of the value.

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kcanini 9y ago

Leverage only matters if your home appreciates (or depreciates!) in value relative to inflation. There is a very large section of the article devoted to explaining that on average, this does not happen.

zeusk 9y ago

In financial speak, leverage is always the source of ruin especially when taken to extreme levels (which mortgages do). To attain that leverage, you pay a financial cost in terms of interest which btw - can be replicated in the market for much better returns and if you know your math and derivatives - for a much lower cost of capital (equity options and index futures) in a market that is highly liquid with transaction fees as low as single digit dollars.