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Example: House costs $100k You buy house with $20k savings and $80k debt In this example that $80k of debt is called "leverage". Is this what you mean with

Example: House costs $100k You buy house with $20k savings and $80k debt In this example that $80k of debt is called "leverage". Is this what you mean with your question or did you mean to ask something else?

spacemark 2y ago
Right, my question is more about how the average person can actually use that leverage. So you've got $80k in leverage, it grows (presumably), but how do you actually use it? You have to sell the house, right? So you can only cash in on that leverage when you reverse mortgage or otherwise downsize, right?
- baobabKoodaa 2y ago
  Correct. Just like any leveraged investment, you realize the gains (or losses) after you sell. (And yes you are also correct it's possible to realize the gains without selling by taking a reverse mortgage.)
- elevatedastalt 2y ago
  Yes, but thanks to leverage you have effectively created higher returns for your retirement portfolio than you would have been able to without the leverage.
  - spacemark 2y ago
    Higher returns than what though? It sure sounds like the only financial advantage to owning a home vs other investments is the leverage. Yet the S&P will return far more even considering the 80% leverage in most cases.
    - elevatedastalt 2y ago
      > Yet the S&P will return far more even considering the 80% leverage in most cases. Could you explain your line of thought (or back of the envelope math)?
      - spacemark 2y ago
        If you take all the money that you have spent on a down payment, closing and selling costs, taxes, and maintenance, subtract rent, and put the remainder in a market index fund, for the vast majority of situations you will have FAR more money by retirement. Like it's not even close. I guess I'm just a bit tired of the messaging that real estate is such a great financial investment. Historically it's better than a lot of options but not even close to the best investment vehicle. Houses are homes first, not money makers, and if we continue to emphasize the latter, we will never solve the housing affordability crisis.
        baobabKoodaa 2y ago
        Let me put it to you another way: if homebuyers didn't have access to cheap leverage, then a stock market index fund would appear much more appealing than house as an investment. But when homebuyers have access to cheap leverage (and stock investors don't), the balance tips more in favor of home buying. And when I say "more in favor", I mean when compared to no leverage. Perhaps you're making an argument that even with leverage, most people would be better off investing in the stock market rather than real estate. And perhaps that is true. But leverage does tip the balance in favor of real estate.
        spacemark 2y ago
        I'm saying even with leverage you would make far more money investing in index funds. The math is very clear. In the best real estate decades (which may be behind us), index funds may not win. But on average, over multiple decades it's not even close.
        baobabKoodaa 2y ago
        > The math is very clear. Can you show the calculations you made? I would expect the result to depend a lot on the assumptions you put in, particularly regarding leverage ratio, interest rates, stock market returns, and real estate returns.

spacemark 2y ago

Right, my question is more about how the average person can actually use that leverage. So you've got $80k in leverage, it grows (presumably), but how do you actually use it? You have to sell the house, right? So you can only cash in on that leverage when you reverse mortgage or otherwise downsize, right?

baobabKoodaa 2y ago
Correct. Just like any leveraged investment, you realize the gains (or losses) after you sell. (And yes you are also correct it's possible to realize the gains without selling by taking a reverse mortgage.)
elevatedastalt 2y ago
Yes, but thanks to leverage you have effectively created higher returns for your retirement portfolio than you would have been able to without the leverage.
- spacemark 2y ago
  Higher returns than what though? It sure sounds like the only financial advantage to owning a home vs other investments is the leverage. Yet the S&P will return far more even considering the 80% leverage in most cases.
  - elevatedastalt 2y ago
    > Yet the S&P will return far more even considering the 80% leverage in most cases. Could you explain your line of thought (or back of the envelope math)?
    - spacemark 2y ago
      If you take all the money that you have spent on a down payment, closing and selling costs, taxes, and maintenance, subtract rent, and put the remainder in a market index fund, for the vast majority of situations you will have FAR more money by retirement. Like it's not even close. I guess I'm just a bit tired of the messaging that real estate is such a great financial investment. Historically it's better than a lot of options but not even close to the best investment vehicle. Houses are homes first, not money makers, and if we continue to emphasize the latter, we will never solve the housing affordability crisis.
      - baobabKoodaa 2y ago
        Let me put it to you another way: if homebuyers didn't have access to cheap leverage, then a stock market index fund would appear much more appealing than house as an investment. But when homebuyers have access to cheap leverage (and stock investors don't), the balance tips more in favor of home buying. And when I say "more in favor", I mean when compared to no leverage. Perhaps you're making an argument that even with leverage, most people would be better off investing in the stock market rather than real estate. And perhaps that is true. But leverage does tip the balance in favor of real estate.
        spacemark 2y ago
        I'm saying even with leverage you would make far more money investing in index funds. The math is very clear. In the best real estate decades (which may be behind us), index funds may not win. But on average, over multiple decades it's not even close.
        baobabKoodaa 2y ago
        > The math is very clear. Can you show the calculations you made? I would expect the result to depend a lot on the assumptions you put in, particularly regarding leverage ratio, interest rates, stock market returns, and real estate returns.