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Understanding the concept of Opportunity Cost and how it applies to everything in life. - Buying a house: Is this the best return I can get on a downpayment. (

Understanding the concept of Opportunity Cost and how it applies to everything in life. - Buying a house: Is this the best return I can get on a downpayment. (Spoiler: It is not). - Accepting a specific job offer: Is this the best way to spend 8 hours a day? - Not making a successful trade, is as much as a loss than losing money explicitely on a trade. - If you own something, you should consider what could you do with it's cash value if you sold it instead. - If you have a paid off home, could you sell it and get a better ROI with the cash equivalent and rent instead? (The answer is yes and you should do it).

mvdtnz 1y ago
It's really sad when you hear about people living this way. Life isn't about profit maximisation.
- aspanu 1y ago
  As usual, I'd like to bring up that it is until you have enough profit for it to no longer be only about that. Also regardless of the quality of the examples, it may be the case that the point (opportunity cost is important to consider) is still valid.
  - hintklb 1y ago
    Thanks for clarifying. Being mindful of opportunity cost allows people to retire early, to spend more time with their loved ones, do better financial decisions. I have seen too many of my loved ones work until their 70s because they didn't think about those concepts enough. That is what is sad.
    - globular-toast 1y ago
      Don't forget though there are things you won't be able to do at 50 even if you're retired. I'd hate to think of someone being a virgin hermit finally coming out the shell at 50 thinking the world is their oyster now. Some things you have to do when you are young.
      - esperent 1y ago
        Probably far fewer things than you think, though, as long as you're healthy. You can still have love affairs, travel the world, go to festivals, climb mountains, learn to dance well into your 70s or even 80s, as long as you are healthy. Sure, you might be climbing a small mountain instead of Everest, but small mountains are beautiful too.
        bennyelv 1y ago
        True, but the chance of you being healthy diminishes strongly over time, and the chance of you being as healthy as your younger self is probably zero.
        esperent 1y ago
        Health in old age is something that you invest in, much the same as wealth. Of course you can suffer an accident, or lose your investments from bad luck. But in both cases you're guaranteed bad results if you don't put the effort consistently and starting when you're younger. For health, this means making exercise, good sleep, and good diet a part of your daily routine. Much like investments, you can go as deep on that as you like, but if you start early all you need is basic knowledge.
      - hintklb 1y ago
        I'm not sure what you are talking about? I did way more in my 30s and 40s than most of my peers that are not mindful of anything. The whole point of opportunity cost is to be mindful of what you are spending your time and efforts on. It is not only about money
      - bluecalm 1y ago
        My experience is that most decisions aren't of the type. It's not that you're choosing fun at 20 or longer fun at 50. Investing or not. Renting a cheaper place for a while or buying a bigger house right now. A lot of the time you will get more money and more fun if you do it right.
- hintklb 1y ago
  So It's really sad to think about the value of time or things? Don't you implicitly do that every time you chose an activity over another? When you chose a job over another? when you chose to spend your time with a friend or with your wife?
  - mvdtnz 1y ago
    I choose the things that bring me joy.
  - __loam 1y ago
    This kind of opportunity cost thinking can lead to things like overwork or ignoring your family. It makes sense up to a certain point but viewing your whole life through an overly simplistic heuristic can be a negative thing.
    - hintklb 1y ago
      I literally use opportunity cost as a reason to spend MORE time with my family. It is not about money strictly speaking but it is about maximizing what matters to you.
- Dilettante_ 1y ago
  Maybe that's not something that's terribly fulfilling to you, but if one takes joy in the process itself then the act of saving a dollar on icecream can bring both more hedonic and eudaimonic pleasure than having the icecream would have, and pay off materially. Especially in the very-long term. In your head it's Ebeneezer Scrooge, but it can just as well look like ...err, Scrooge McDuck maybe? I struggle to really find a good example for what I'm talking about. But if you make a challenge to yourself, being frugal can be very fun and fulfilling, even moment-to-moment. Different people play different games!
  - mvdtnz 1y ago
    [flagged]
    - deleted 1y ago
      [deleted]
- goodpoint 1y ago
  It's more than sad - it's unhealthy.
  - hintklb 1y ago
    And so is your sad judgement of other people.
- augment_me 1y ago
  You can see it from other aspects than just money. For example, renting instead of owning frees up time and gives you much more predictable expenses. From not needing to fix the house to being able to be unemployed with predictable monthly costs. Home ownership in the west is seen as some sort of pinnacle and goal because of the perceived security it provides, but its also possible to see it as golden handcuffs that force you to stay at safe, predictable jobs for 20 years.
  - BoxOfRain 1y ago
    >From not needing to fix the house Someone unfamiliar with the 'landlord special' I see!
    - bluecalm 1y ago
      It's a good point that renting often sucks, especially renting from private individuals. I wish EU countries were more focused on civilising renting market instead of just home ownership.
  - hintklb 1y ago
    exactly the way I think. Home ownership is what you do when you act on autopilot. If you think this through, it is essentially spending more money and more time on something very materialistic that doesn't matter that much. Renting allows you to spend more time and resources doing things that really matter. I think most people would come to that same conclusion if they really think about this from first principle, but as a society we have been pushed and molded to believe that home ownership is the pinnacle of success and personal accomplishment somehow. I have been attacked left and right for even suggesting that owning a home is maybe not as big of a deal for personal happiness as we think. In the west and in the US it has been pushed as a core component of people's identities.
    - augment_me 1y ago
      Yeah... I have had a hard time with my friends on this topic. In general, in my country (Sweden), the system is kicking the can down the road. You have 65% of the people in the country owning, with an common housing mortgage at 85% of the purchasing price. Avgift(you pay a rent equivalent to your apt association)+interest+amortization requirement make up around 30-50% of the average income. Average loan amortization rate is 25 years, with a 35 year roof. Govt has approved 90% loans at the end of this year, meaning you will only need 10% as down-payment when you take a multi-million SEK loan, which will achieve nothing except for continued price growth and larger loans, and push up the average amortization rate closer to the roof. The banks dont care, they would be fine with a 0% down payment rate, as they are immediately selling these loans and the associated risk to the pension funds. Every year, you have new political patches to make the pyramid scheme palpable. Last year they had that homeowners can get services on their homes subsidized by 66% by the govt. The year before that they had that you can write off your taxes using loans as "economic losses". The year before that they capped the property tax, etc. You can as a housing owner (in an association) build your own in-house electricity distribution, essentially letting the renters pay for all the government electricity infrastructure. You can negotiate lower costs for internet, water, power in bulk with distributors. As you can guess, since the homeowners with loans are the majority, its political suicide by any political party to not kick the can down the road. So no action is taken. When I talk about this with my friends, they have not thought about this. Honestly, I would be more happy if they said "Oh yeah, I know, I believe that there is such a majority of people with loans that the government will have to bail us out, or increase inflation to eat the loans", but there isn't. Even if we ignored the inevitable crash, and looked at the situation as-is in the current moment with all of the patches to improve house-owning, its STILL cheaper to rent. Its mind-boggling.
- bluecalm 1y ago
  It's not but it's also not about dumping money into a sink or instant consumption. You can live a fulfilling life while making good financial decisions. As money gives you freedom and more choices I would argue it's easier to live fulfilling life this way.
lmm 1y ago
I'd say you may be missing the concept of Risk-Adjusted Return, which changes a lot of those calculations.
- hintklb 1y ago
  And I would agree. There are a ton of second order effect and more complex concepts that I have learned about over the years. Opportunity cost is still the key one I go back to so often.
mizzao 1y ago
Home ownership is a huge economic subsidy for the upper-middle class in the US: mortgage interest deduction, cheap leveraged borrowing, real-estate investment, up to $500k of free capital gains, and an inflation hedge. It's pretty hard to beat compared to alternative investments.
- hintklb 1y ago
  That was the case initially. Now the prices have skyrocketed due to offer and demand, and frankly because of the narrative that "Buying is always good", which ironically makes it a subpar investment. Real estate is now a subpar investment. Especially today, and even with those advantages. It is also not diversified at all, absolutely not liquid and does not return even close to the SP500 (Even if you take the leverage into account, and leverages go both ways by the way...).
  - jamil7 1y ago
    I've looked at this a bunch of times, from a pure return perspective, yeah equities usually win. But there's enough benefits to homeownership outside of that lens that I think either side can make a pretty compelling argument (I say this as someone who rents). It also highly depends on which market we're talking about.
    - bombcar 1y ago
      The main thing is to look at it BOTH from a financial standpoint AND from a lifestyle choice, etc. Too many people are too quick to dismiss renting because of the “conventional wisdom” - or think that only small apartments can be rented. On the other hand, owning comes with comforts that can be hard to put dollar amounts on, for some.
      - michaelrpeskin 1y ago
        yes - I often think about what I would do if I "won the lottery" or similarly got a significant amount of cash. Even though I have a low mortgage rate (refied in the middle of COVID), I'd probably still pay off my house. I know it makes absolutely no rational economic sense, but not having a mortgage payment and knowing that I own my house would give me a piece of mind that as you say is hard to put a dollar amount on. I know there are people out there that like maximize returns with leverage and all of that - and the math all makes sense! - but I'd prefer the simplicity of not dealing with it.
klntsky 1y ago
A house is something that fulfills your direct needs, unlike S&P500. You 'miss the opportunity' in exhcange for feeling safe about your future, which leads to more rational choices long term.
- bluecalm 1y ago
  Or less rational like tying yourself to a place, missing opportunities in professional and personal life or opportunities to experience a different life. Buying early in life is in my view almost always wrong.
ponector 1y ago
>> Buying a house: Is this the best return I can get on a downpayment. (Spoiler: It is not). It may be the best return. You never know the future, what direction asset prices are going.
- bluecalm 1y ago
  Yeah but it goes for housing as well. The property owners have been winning politically for a very long time now. It doesn't mean they will keep winning in the next decade. My view is that it's very hard to envision a world where stocks crash and real estate doesn't but it's very easy to image real estate getting cheaper while stocks do just fine. The latter scenario may happen with just a few policy changes or even without them if demography gets bad enough.
jwr 1y ago
> If you have a paid off home, could you sell it and get a better ROI with the cash equivalent and rent instead? (The answer is yes and you should do it) Could you explain how that makes sense? I can't see it working except if you are willing to accept a huge risk by putting the money into financial markets. Banks offer around 0% in my country, and with 4.5% inflation keeping cash just burns a hole in your pocket.
- bombcar 1y ago
  It’s a uniquely American (which can include Canada) situation - some very nice places to live have extremely strong rental inversion markets; where it costs $4k a month to rent a place that would easily have $10k a month in mortgage and property tax. Landlords are willing to “subsidize” renters because appreciation has been so high. But it’s really only terribly high when leveraged and often the accounting is soft. The buy/rent discussion isn’t a clear cut one, and it’s more than financial, but it’s certainly not a “buying always wins” scenario as many seem to think it is.
  - pton_xd 1y ago
    Yep, this is exactly the situation in the Seattle area. Here it makes little sense to take on a mortgage when renting is so comparably cheap. But go anywhere else like say Atlanta where rents are roughly equal to a mortgage payment and the opposite is true.
    - hintklb 1y ago
      Generally you are right. VHCOL (Seattle, SF Bay Area), HCOL (California,...) and MCOL areas are better for renting and LCOL areas are better for buying. There are two factors really: - Rent to Buy ratio (or as you put it, rent compared to the mortgage) - Speculation on house price growth.
darick 1y ago
> - Buying a house: Is this the best return I can get on a downpayment. (Spoiler: It is not). This depends entirely on how much the mortgage costs compared to the rent you'd otherwise be paying no? It is very much case by case depending on where you live and therefore completely wrong to state as a general rule? In my area mortgages are far cheaper than rent, even if you account for 10% annual returns on your house deposit when renting, you would still come out far behind in the long term
- hintklb 1y ago
  it's a complicated calculation based on a lot of factors. Not only mortgage/rent difference, hence the calculators that are available.
snowwrestler 1y ago
If you sell the house you live in, you can keep $250k ($500k if you’re married) of capital gain without any federal taxes at all. So an equity investment would need to return 17.6% better just to match that tax advantage. This gets left out of a lot of comparisons in my experience.

mvdtnz 1y ago

It's really sad when you hear about people living this way. Life isn't about profit maximisation.

aspanu 1y ago
As usual, I'd like to bring up that it is until you have enough profit for it to no longer be only about that. Also regardless of the quality of the examples, it may be the case that the point (opportunity cost is important to consider) is still valid.
- hintklb 1y ago
  Thanks for clarifying. Being mindful of opportunity cost allows people to retire early, to spend more time with their loved ones, do better financial decisions. I have seen too many of my loved ones work until their 70s because they didn't think about those concepts enough. That is what is sad.
  - globular-toast 1y ago
    Don't forget though there are things you won't be able to do at 50 even if you're retired. I'd hate to think of someone being a virgin hermit finally coming out the shell at 50 thinking the world is their oyster now. Some things you have to do when you are young.
    - esperent 1y ago
      Probably far fewer things than you think, though, as long as you're healthy. You can still have love affairs, travel the world, go to festivals, climb mountains, learn to dance well into your 70s or even 80s, as long as you are healthy. Sure, you might be climbing a small mountain instead of Everest, but small mountains are beautiful too.
      - bennyelv 1y ago
        True, but the chance of you being healthy diminishes strongly over time, and the chance of you being as healthy as your younger self is probably zero.
        esperent 1y ago
        Health in old age is something that you invest in, much the same as wealth. Of course you can suffer an accident, or lose your investments from bad luck. But in both cases you're guaranteed bad results if you don't put the effort consistently and starting when you're younger. For health, this means making exercise, good sleep, and good diet a part of your daily routine. Much like investments, you can go as deep on that as you like, but if you start early all you need is basic knowledge.
    - hintklb 1y ago
      I'm not sure what you are talking about? I did way more in my 30s and 40s than most of my peers that are not mindful of anything. The whole point of opportunity cost is to be mindful of what you are spending your time and efforts on. It is not only about money
    - bluecalm 1y ago
      My experience is that most decisions aren't of the type. It's not that you're choosing fun at 20 or longer fun at 50. Investing or not. Renting a cheaper place for a while or buying a bigger house right now. A lot of the time you will get more money and more fun if you do it right.
hintklb 1y ago
So It's really sad to think about the value of time or things? Don't you implicitly do that every time you chose an activity over another? When you chose a job over another? when you chose to spend your time with a friend or with your wife?
- mvdtnz 1y ago
  I choose the things that bring me joy.
- __loam 1y ago
  This kind of opportunity cost thinking can lead to things like overwork or ignoring your family. It makes sense up to a certain point but viewing your whole life through an overly simplistic heuristic can be a negative thing.
  - hintklb 1y ago
    I literally use opportunity cost as a reason to spend MORE time with my family. It is not about money strictly speaking but it is about maximizing what matters to you.
Dilettante_ 1y ago
Maybe that's not something that's terribly fulfilling to you, but if one takes joy in the process itself then the act of saving a dollar on icecream can bring both more hedonic and eudaimonic pleasure than having the icecream would have, and pay off materially. Especially in the very-long term. In your head it's Ebeneezer Scrooge, but it can just as well look like ...err, Scrooge McDuck maybe? I struggle to really find a good example for what I'm talking about. But if you make a challenge to yourself, being frugal can be very fun and fulfilling, even moment-to-moment. Different people play different games!
- mvdtnz 1y ago
  [flagged]
  - deleted 1y ago
    [deleted]
goodpoint 1y ago
It's more than sad - it's unhealthy.
- hintklb 1y ago
  And so is your sad judgement of other people.
augment_me 1y ago
You can see it from other aspects than just money. For example, renting instead of owning frees up time and gives you much more predictable expenses. From not needing to fix the house to being able to be unemployed with predictable monthly costs. Home ownership in the west is seen as some sort of pinnacle and goal because of the perceived security it provides, but its also possible to see it as golden handcuffs that force you to stay at safe, predictable jobs for 20 years.
- BoxOfRain 1y ago
  >From not needing to fix the house Someone unfamiliar with the 'landlord special' I see!
  - bluecalm 1y ago
    It's a good point that renting often sucks, especially renting from private individuals. I wish EU countries were more focused on civilising renting market instead of just home ownership.
- hintklb 1y ago
  exactly the way I think. Home ownership is what you do when you act on autopilot. If you think this through, it is essentially spending more money and more time on something very materialistic that doesn't matter that much. Renting allows you to spend more time and resources doing things that really matter. I think most people would come to that same conclusion if they really think about this from first principle, but as a society we have been pushed and molded to believe that home ownership is the pinnacle of success and personal accomplishment somehow. I have been attacked left and right for even suggesting that owning a home is maybe not as big of a deal for personal happiness as we think. In the west and in the US it has been pushed as a core component of people's identities.
  - augment_me 1y ago
    Yeah... I have had a hard time with my friends on this topic. In general, in my country (Sweden), the system is kicking the can down the road. You have 65% of the people in the country owning, with an common housing mortgage at 85% of the purchasing price. Avgift(you pay a rent equivalent to your apt association)+interest+amortization requirement make up around 30-50% of the average income. Average loan amortization rate is 25 years, with a 35 year roof. Govt has approved 90% loans at the end of this year, meaning you will only need 10% as down-payment when you take a multi-million SEK loan, which will achieve nothing except for continued price growth and larger loans, and push up the average amortization rate closer to the roof. The banks dont care, they would be fine with a 0% down payment rate, as they are immediately selling these loans and the associated risk to the pension funds. Every year, you have new political patches to make the pyramid scheme palpable. Last year they had that homeowners can get services on their homes subsidized by 66% by the govt. The year before that they had that you can write off your taxes using loans as "economic losses". The year before that they capped the property tax, etc. You can as a housing owner (in an association) build your own in-house electricity distribution, essentially letting the renters pay for all the government electricity infrastructure. You can negotiate lower costs for internet, water, power in bulk with distributors. As you can guess, since the homeowners with loans are the majority, its political suicide by any political party to not kick the can down the road. So no action is taken. When I talk about this with my friends, they have not thought about this. Honestly, I would be more happy if they said "Oh yeah, I know, I believe that there is such a majority of people with loans that the government will have to bail us out, or increase inflation to eat the loans", but there isn't. Even if we ignored the inevitable crash, and looked at the situation as-is in the current moment with all of the patches to improve house-owning, its STILL cheaper to rent. Its mind-boggling.
bluecalm 1y ago
It's not but it's also not about dumping money into a sink or instant consumption. You can live a fulfilling life while making good financial decisions. As money gives you freedom and more choices I would argue it's easier to live fulfilling life this way.

lmm 1y ago

I'd say you may be missing the concept of Risk-Adjusted Return, which changes a lot of those calculations.

hintklb 1y ago
And I would agree. There are a ton of second order effect and more complex concepts that I have learned about over the years. Opportunity cost is still the key one I go back to so often.

mizzao 1y ago

Home ownership is a huge economic subsidy for the upper-middle class in the US: mortgage interest deduction, cheap leveraged borrowing, real-estate investment, up to $500k of free capital gains, and an inflation hedge. It's pretty hard to beat compared to alternative investments.

hintklb 1y ago
That was the case initially. Now the prices have skyrocketed due to offer and demand, and frankly because of the narrative that "Buying is always good", which ironically makes it a subpar investment. Real estate is now a subpar investment. Especially today, and even with those advantages. It is also not diversified at all, absolutely not liquid and does not return even close to the SP500 (Even if you take the leverage into account, and leverages go both ways by the way...).
- jamil7 1y ago
  I've looked at this a bunch of times, from a pure return perspective, yeah equities usually win. But there's enough benefits to homeownership outside of that lens that I think either side can make a pretty compelling argument (I say this as someone who rents). It also highly depends on which market we're talking about.
  - bombcar 1y ago
    The main thing is to look at it BOTH from a financial standpoint AND from a lifestyle choice, etc. Too many people are too quick to dismiss renting because of the “conventional wisdom” - or think that only small apartments can be rented. On the other hand, owning comes with comforts that can be hard to put dollar amounts on, for some.
    - michaelrpeskin 1y ago
      yes - I often think about what I would do if I "won the lottery" or similarly got a significant amount of cash. Even though I have a low mortgage rate (refied in the middle of COVID), I'd probably still pay off my house. I know it makes absolutely no rational economic sense, but not having a mortgage payment and knowing that I own my house would give me a piece of mind that as you say is hard to put a dollar amount on. I know there are people out there that like maximize returns with leverage and all of that - and the math all makes sense! - but I'd prefer the simplicity of not dealing with it.

klntsky 1y ago

A house is something that fulfills your direct needs, unlike S&P500. You 'miss the opportunity' in exhcange for feeling safe about your future, which leads to more rational choices long term.

bluecalm 1y ago
Or less rational like tying yourself to a place, missing opportunities in professional and personal life or opportunities to experience a different life. Buying early in life is in my view almost always wrong.

ponector 1y ago

>> Buying a house: Is this the best return I can get on a downpayment. (Spoiler: It is not). It may be the best return. You never know the future, what direction asset prices are going.

bluecalm 1y ago
Yeah but it goes for housing as well. The property owners have been winning politically for a very long time now. It doesn't mean they will keep winning in the next decade. My view is that it's very hard to envision a world where stocks crash and real estate doesn't but it's very easy to image real estate getting cheaper while stocks do just fine. The latter scenario may happen with just a few policy changes or even without them if demography gets bad enough.

jwr 1y ago

> If you have a paid off home, could you sell it and get a better ROI with the cash equivalent and rent instead? (The answer is yes and you should do it) Could you explain how that makes sense? I can't see it working except if you are willing to accept a huge risk by putting the money into financial markets. Banks offer around 0% in my country, and with 4.5% inflation keeping cash just burns a hole in your pocket.

bombcar 1y ago
It’s a uniquely American (which can include Canada) situation - some very nice places to live have extremely strong rental inversion markets; where it costs $4k a month to rent a place that would easily have $10k a month in mortgage and property tax. Landlords are willing to “subsidize” renters because appreciation has been so high. But it’s really only terribly high when leveraged and often the accounting is soft. The buy/rent discussion isn’t a clear cut one, and it’s more than financial, but it’s certainly not a “buying always wins” scenario as many seem to think it is.
- pton_xd 1y ago
  Yep, this is exactly the situation in the Seattle area. Here it makes little sense to take on a mortgage when renting is so comparably cheap. But go anywhere else like say Atlanta where rents are roughly equal to a mortgage payment and the opposite is true.
  - hintklb 1y ago
    Generally you are right. VHCOL (Seattle, SF Bay Area), HCOL (California,...) and MCOL areas are better for renting and LCOL areas are better for buying. There are two factors really: - Rent to Buy ratio (or as you put it, rent compared to the mortgage) - Speculation on house price growth.

darick 1y ago

> - Buying a house: Is this the best return I can get on a downpayment. (Spoiler: It is not). This depends entirely on how much the mortgage costs compared to the rent you'd otherwise be paying no? It is very much case by case depending on where you live and therefore completely wrong to state as a general rule? In my area mortgages are far cheaper than rent, even if you account for 10% annual returns on your house deposit when renting, you would still come out far behind in the long term

hintklb 1y ago
it's a complicated calculation based on a lot of factors. Not only mortgage/rent difference, hence the calculators that are available.

snowwrestler 1y ago

If you sell the house you live in, you can keep $250k ($500k if you’re married) of capital gain without any federal taxes at all. So an equity investment would need to return 17.6% better just to match that tax advantage. This gets left out of a lot of comparisons in my experience.