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everyone thinks housing is supposed to be a great/high yield investment. that's only true if you're renting it out and even then, the rent to own ratio tends t

everyone thinks housing is supposed to be a great/high yield investment. that's only true if you're renting it out and even then, the rent to own ratio tends to be about 3-5% minus expenses and property taxes and insurance and taxes, which ultimately gets you to about 1-2% per year, plus the appreciation. In the very long term housing can not increase in value quicker than wages (roughly inflation). And, if we were to actually make any progress in the industry of providing shelter, housing should actually lag inflation.

pojzon 7y ago
When the rates in bank for anything over 500k is 0.1-0.2% per year -> 1-2% from renting sounds like an amazing deal.
- lotsofpulp 7y ago
  Rates in US banks are 1.7%+, and there is considerably more risk involved in renting a residence rather than having cash deposited in an FDIC insured bank account requiring a considerable premium. Also, if the home investment is on the time horizon of 5+ years, I can't see many homeowners outside of hot real estate markets (which is a gamble) beating a total market index fund, if you factor in labor, time, tenancy and home maintenance risk, and the fact that the US government is going to bail out the public equity markets no matter what.
j8014 7y ago
Property is a decent investment, commercial and industrial you can expect to see nice returns and all expenses are pushed to the tenant. When renting homes, its usually about getting your tenants to pay off the mortgage and then you have excellent monthly recurring revenue streams, of course you can then sell your 100k+ assets whenever you want.
- lotsofpulp 7y ago
  I wouldn't recommend property as a decent investment for most compared to a total stock market ETF. You have the risk of the location becoming undesirable (lots of places in the US with stagnant or declining property values), you have the risk of bad tenants, you have the risk of being liable for the tenants in case something happens (even though you have insurance, they can always sue you), you have the risk of maintenance issues in the house requiring costly repairs. Etc.
pspencer 7y ago
Some reasons I think people like housing as investment: They can use relatively safe leverage to increase the return on equity by three or four times. There are large tax incentives. There is the time value of money aspect where you pay off a fixed amount over 15 to 30 years. Also, housing is a hard asset unlike stocks or bonds.
- munificent 7y ago
  Also, housing is effectively a "free" investment. You must have a place to live and you are going to be paying for that. Why not own it so that your payments actually accrue capital while you're at it?
  - frockington1 7y ago
    I think this a piece that a lot of people miss. Last year I was spending about 1.8k a month in rent. Now I pay 1.9k for a mortgage of which 300 (and increasing) goes directly into home equity. Once home equity comes into the equation it becomes pretty basic math
    - refurb 7y ago
      Yes, but what about property taxes, maintenance, transaction costs (6% to sell!) and opportunity cost of your down payment. I've run the number in the past and in some markets it's clearly cheaper to own than rent (typically where there is slow but steady increases in prices - mid-west US). For other markets, you need 3-5% asset price increases just to break even with renting after 10 years (bay area).
    - aianus 7y ago
      My landlord was definitely losing money (on a cash flow basis) renting to me in Toronto -- rent did not cover mortgage interest + condo fees + property tax. He was just gambling on real estate appreciation and using me to cover most of his carrying costs; I would rather gamble on stocks.
      - 7y ago
cmuguythrow 7y ago
1-2% returns on rentals is far too low (REITs return ~12% and require no headache) but even if that was true, housing is one of the few places where a "Regular Joe" with just a little bit of research can actually gain a market advantage and "beat the market". I can link you properties right now that can be bought and instantly rented for 15+% returns with no work and >20% with some fix up work. This is possible because of 1. easy to access leverage vs. other asset types and 2. difficulty of scale, which prevents the Blackrocks of the world from just buying up all of the property that could actually return 20% and making the market efficient. If I had to guess, the reason you are seeing 1-2% returns is because you are looking at really "hot" markets where the prices reflect an assumption of future appreciation.
- aianus 7y ago
  > difficulty of scale, which prevents the Blackrocks of the world from just buying up all of the property that could actually return 20% and making the market efficient What exactly is stopping House Flipping BigCo from doing what you're proposing at scale?
  - opportune 7y ago
    Housing asset management only scales linearly because you need several people to physically inspect/validate each property before purchase to make sure there are no serious issues. Also you need to assess the rental conditions for each property on a case by case basis, and contract everything out to property management. A lot of REITs invest in medium-large sized complexes to avoid the potential headaches. I’ve lived in a few of these and found them to be quite well managed.
- brianmc21 7y ago
  This guy knows real estate. It isn't an efficient market. Efficient markets have very little to no alpha. Real estate has been my best side job ever. Currently looking at a 40% annualized returns since 2015. All thanks to the same principals used to invest in public fixed income and equities.
- thorwasdfasdf 7y ago

pojzon 7y ago

When the rates in bank for anything over 500k is 0.1-0.2% per year -> 1-2% from renting sounds like an amazing deal.

lotsofpulp 7y ago
Rates in US banks are 1.7%+, and there is considerably more risk involved in renting a residence rather than having cash deposited in an FDIC insured bank account requiring a considerable premium. Also, if the home investment is on the time horizon of 5+ years, I can't see many homeowners outside of hot real estate markets (which is a gamble) beating a total market index fund, if you factor in labor, time, tenancy and home maintenance risk, and the fact that the US government is going to bail out the public equity markets no matter what.

j8014 7y ago

Property is a decent investment, commercial and industrial you can expect to see nice returns and all expenses are pushed to the tenant. When renting homes, its usually about getting your tenants to pay off the mortgage and then you have excellent monthly recurring revenue streams, of course you can then sell your 100k+ assets whenever you want.

lotsofpulp 7y ago
I wouldn't recommend property as a decent investment for most compared to a total stock market ETF. You have the risk of the location becoming undesirable (lots of places in the US with stagnant or declining property values), you have the risk of bad tenants, you have the risk of being liable for the tenants in case something happens (even though you have insurance, they can always sue you), you have the risk of maintenance issues in the house requiring costly repairs. Etc.

pspencer 7y ago

Some reasons I think people like housing as investment: They can use relatively safe leverage to increase the return on equity by three or four times. There are large tax incentives. There is the time value of money aspect where you pay off a fixed amount over 15 to 30 years. Also, housing is a hard asset unlike stocks or bonds.

munificent 7y ago
Also, housing is effectively a "free" investment. You must have a place to live and you are going to be paying for that. Why not own it so that your payments actually accrue capital while you're at it?
- frockington1 7y ago
  I think this a piece that a lot of people miss. Last year I was spending about 1.8k a month in rent. Now I pay 1.9k for a mortgage of which 300 (and increasing) goes directly into home equity. Once home equity comes into the equation it becomes pretty basic math
  - refurb 7y ago
    Yes, but what about property taxes, maintenance, transaction costs (6% to sell!) and opportunity cost of your down payment. I've run the number in the past and in some markets it's clearly cheaper to own than rent (typically where there is slow but steady increases in prices - mid-west US). For other markets, you need 3-5% asset price increases just to break even with renting after 10 years (bay area).
  - aianus 7y ago
    My landlord was definitely losing money (on a cash flow basis) renting to me in Toronto -- rent did not cover mortgage interest + condo fees + property tax. He was just gambling on real estate appreciation and using me to cover most of his carrying costs; I would rather gamble on stocks.
    - 7y ago

cmuguythrow 7y ago

1-2% returns on rentals is far too low (REITs return ~12% and require no headache) but even if that was true, housing is one of the few places where a "Regular Joe" with just a little bit of research can actually gain a market advantage and "beat the market". I can link you properties right now that can be bought and instantly rented for 15+% returns with no work and >20% with some fix up work. This is possible because of 1. easy to access leverage vs. other asset types and 2. difficulty of scale, which prevents the Blackrocks of the world from just buying up all of the property that could actually return 20% and making the market efficient. If I had to guess, the reason you are seeing 1-2% returns is because you are looking at really "hot" markets where the prices reflect an assumption of future appreciation.

aianus 7y ago
> difficulty of scale, which prevents the Blackrocks of the world from just buying up all of the property that could actually return 20% and making the market efficient What exactly is stopping House Flipping BigCo from doing what you're proposing at scale?
- opportune 7y ago
  Housing asset management only scales linearly because you need several people to physically inspect/validate each property before purchase to make sure there are no serious issues. Also you need to assess the rental conditions for each property on a case by case basis, and contract everything out to property management. A lot of REITs invest in medium-large sized complexes to avoid the potential headaches. I’ve lived in a few of these and found them to be quite well managed.
brianmc21 7y ago
This guy knows real estate. It isn't an efficient market. Efficient markets have very little to no alpha. Real estate has been my best side job ever. Currently looking at a 40% annualized returns since 2015. All thanks to the same principals used to invest in public fixed income and equities.
thorwasdfasdf 7y ago