Houses have always been a lousy investment for me. Once you factor in all the costs (property tax, insurance, repairs, 6% real estate commissions, the time the house sits empty waiting for a buyer, etc.) the returns are not that good at all.
Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.
Anyone buying a house with a mortgage generally is taking a 5:1 leverage (a 5% down loan is 20:1 leverage) position on the house. Making $100k on a $200k investment, with 5:1 leverage means making 100k on a 40k investment, which isn't a 50% return... it's a 250% return. And it's tax free, assuming it's your primary residence (up to 250k cap gains). You have to spend an obnoxious amount on costs to not have it make sense.
Obviously. Which is why 20:1 leverage (5% down) is kind of foolish, since you can quickly become underwater on a house purchase if the value shifts. At 5:1 leverage though, you still maintain enough equity to weather any valuation swings if you have a need to leave and sell the house.
This post is somewhat misleading. If you put 0% down (yes, it is possible in many places), effectively you have infinite leverage. But let's use your 5% example. If you house price falls by 50%, nothing happens to you -- even with huge negative equity. You keep making monthly payments. There is no "weathering" to be done. Sure, at the end, you might have a giant paper loss, but you still have a roof over your head -- that you own.
I agree mortgages cannot be called in, unlike margin trading on stocks, but if you’re wildly upside down on a house then it literally traps you in the house unless you take those losses. If housing prices fall 50% it is also likely that economic conditions may mean you cannot afford the same house anymore. In a situation of missed payment, they can certainly foreclose on your house.
While there is some "leverage" in mortgage, you actually need to pay the whole sum, and with interest too, so taking a $200k loan means you pay usually something like $250k for it in the end, and this means you have to make $50k profit to not lose. And houses age too. If the location is superb you can justify it as an investment, otherwise it's pure nonsense in every way. Thinking normal housing as an investment is one of those reasons why we can't have nice things.
If I take a leveraged position on a stock via margin trading and the stock goes to $0 (or, more realistically, it dips in value enough that I get a margin call) then I owe the whole balance, not just what I put up as capital. This is true of literally any leverage. And on top of that, I pay a margin rate in the form of an interest payment based on the amount of money I have outstanding beyond my capital. Sounds familiar, right? Because it's exactly identical. The only difference between a mortgage and a margin interest payment is that a mortage is amoritized across the term and is a fixed period, whereas margin interest is indefinite and acts more like a HELOC (i.e., you only pay interest on the amount that you have outstanding... and that amount can vary over time).
I absolutely hate the idea that "paying X in interest means that's money you have to earn in addition to make it worthwhile". No, it's not. It's money you are paying to free up extra capital elsewhere that can be invested more efficiently. Unless you're spending well beyond your means (which, admittedly, some people do), then paying interest on a mortgage payment should mean making much much more elsewhere by investing money you would have spent on buying a house in cash.
You HAVE to pay back your debt if you want to pocket all your profits. If your down payment is 25k and you buy 250k house, you need to borrow 225k for your "leverage". Now you get lucky and years later, AFTER you have paid 25k + 225k + interest + fees which amounts to at least 300k, prices have gone up and you can sell that house for 400k. Nice you think! I will make 375k profit just by investing 25k! NO, that's not how "leverage" works at all. At that point you have paid at least 300k to get 400k which makes not that great considering it's been 20 years or so.
The logic you are using is flawed beyond all reasoning to be honest. People who are in a position to both pay back their mortgages AND invest heavily elsewhere are already rich.
You don't make 375k in profit off a 25k investment (in your example) if you sell a house for 400k. You would make 125k in profit using your numbers (minus fees, interest, etc). It's exactly how leverage works, and the equivalent in margin trading is 100% identical. The only difference with a mortgage is that you slowly deleverage yourself over time as a consequence of paying off the loan (principal that goes to value of the loan).
As an example, if you sold a house 5 years into owning it, at current interest rates, you would only have paid down approximately 6% of the 30 year loan, so the 'leverage' of a 20% down loan would still be ~4.8:1.
What you're skipping in this equation is that the amount of leverage drops every month when you make your payment. The average leverage is a lot lower than the starting leverage. That's what makes a mortgage pretty different from a leveraged trade.
> Unless you're spending well beyond your means (which, admittedly, some people do), then paying interest on a mortgage payment should mean making much much more elsewhere by investing money you would have spent on buying a house in cash.
There's no free lunch. Often, investments will get you a better return than your interest fees. Often they won't. And "much much more" is downright wrong.
In today's 7% interest rates, yeah it's potentially a wash. In the era of 3-4% rates, it's free money. 'much much more' is absolutely correct at 3-4%, which a lot of people currently have mortgages at today.
The returns might look better if you factor in imputed rent (assuming this is your primary residence). There are definitely investments with higher growth, but the (untaxed!) imputed rent is solid income over the lifetime of the house.
> Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.
Most people might not do the proper accounting, but not in the direction you suggest.
Maybe they made 100K gross profit but after deducting all the expenses they only made $1000. Ok, was that bad? No, it's great because the comparison is to renting where they would've lost tens of thousands of dollars.
It depends on where you live. In CA renting is usually cheaper than a mortgage for the same property. Here in New Mexico my mortgage (2.6%) is cheaper than renting the same thing. With higher mortgage rates it’s not that clear but it still looks favorable knowing that mortgage stays stable for the next 15 years vs rents constantly increasing.
To be clear, no one is getting a 2.6% mortgage these days. Your post isn't a very good comparison. It is better to compare renting today vs taking a new mortgage today.
Where? In most places, rent is capped by the median income. Also, many people here are about middle income, so they are living in way above average homes. Yes, there, rents can really run away because you have higher income people, but middle class housing will barely budge.
Generally, to break even you've gotta stay at least 5 years. The transaction costs of selling a house are enormous.
Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance.
I just had to replace the roof on my house. Wow, that was a whopping bill. The roofer told me if I'd delayed another year, the bill would have been a lot higher, as he would charge $150 per sheet of plywood replaced. As it was, only one was water damaged bad enough.
"Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance."
If you manage to pick Microsoft in 2014, Apple in 2000, Tesla in 2015 and BTC in 2010, you are definitely way better off not buying a house but keep renting.
There are a lot of stocks that pay off better than housing. The 10 year return on the S&P 500 is 167%. It would be higher if you leveraged it with margin.
you have to live someplace though. Over the 30 year life of that roof it is cheap enogh but that is a large one time cost if you only are there for 5 years.
I bought a metal replacement roof. I was sold because there's a new kind of metal shingle. It's stamped to have the shape of asphalt shingles, and it has a coating of grit on it to match the color and make it safer to walk on. It's lighter and fireproof, too. (Lighter makes the house more earthquake resistant.)
Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.