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The house next door to me cost $13,500 brand new in 1954. Today it is worth $500,000.
Sounds great.
However, $13,500 invested in the S&P 500 in 1954 with dividends reinvested is worth $5,000,000 million today.
I will just assume you meant $5,000,000
There are a few factors that make your direct comparison faulty
You did not factor in the dividends of the house (as others have pointed out)
You did not factor that taxes have to be paid on the dividends the stocks within the fund paid.
The S&P 500 rebalances every quarter (note, not all stock types are rebalanced each quarter, sometimes it is annually) . If a company drops out, those shares are sold creating a taxable event
The S&P 500 is a market cap weighted index. Each quarter the fund rebalances each stock that had share issued or shares bought (buyback). As an example, when a company does a buyback, the fund needs to sell shares of that company to lower their owned percentage. This is a taxable event.
The $13,500 house in 1954 being worth $500,000 today is about a 6.1% return. Not bad considering the growth is not taxed during its growth (frequently never). However, there are much higher growth areas in real estate from the 50's until now
The S&P from January 1954 to December 2014 grew at a CAGR of 11%. Factor taxes paid on the stocks + the dividends on the house, the house compares favorably.
I have a number of rental properties. I know the exact cost of owning vs renting because I do the books. I do factor opportunity costs and maintenance reserves. They all compare favorably to other investments, if it didn't, I would sell. That is why landlords tend to say the rent covers the expenses (plus some profit) and renters tend to say the rent is determined by the market. It is true that the rent is determined by the market but they overlook the fact that if there was not an adequate return, the landlord would sell.
There are other tax advantages to real estate investors not available in stocks. Most notably, depreciation. If someone says that is not an advantage because depreciation has to be recaptured, they do not understand all there is to it.
There are some tax advantages to Owner Occupied homeowners not available to renters. Most notably property tax and mortgage interest (if any) deductions. If someone says that the only gain is the amount over and above the standard deduction, they do not understand all there is to it. Oh, and one that always gives me a smile, interest is throwing away 75₵ for every dollar paid in interest (I suppose this assumes a 25% tax rate) as they don’t understand all there is to that either.
I am not solely a real estate investor. I generally have about equals part in real estate and stocks/commodities, so I feel I understand both. I don't favor one significantly over the other
As for the original post:
Quote:
Originally Posted by statisticsnerd
I'm 30 and don't plan on getting married and starting a family anytime soon. However, everyone and their aunt is telling me to buy a home. The reasons I get all the time are: I'm throwing money away on rent, interest rates are at rock bottom and will only go up, and a house is a good investment.
Well, being an accountant I ran the numbers and buying a home really isn't attractive at all from a financial standpoint. Here's the figures (I live in the Houston area btw):
Rent for a 1 bedroom apartment + all utilities + rental insurance costs = $950/month
Assuming I buy a $150,000 home, here are the estimated monthly expenses:
$300 property taxes (high property taxes around here)
$250 average for all utilities (Houston is hot!)
$100 insurance
$250 all maintenance costs, including having the grass cut
So, in housing expenses alone, I will be "throwing away" $900/month, just $50/month less than I am throwing away with my apartment. That's not even counting interest on the mortgage. As far as "a house is an investment" goes, houses historically have only appreciated in value at the rate of inflation. Your money will earn MUCH higher returns over time in quality stock index funds. You have to consider the opportunity cost of putting your down payment into something that will provide a very low return, as well as the commission when you decide to sell the house.
Then there is the flexibility aspect of renting. For a single person, homeownership just isn't that great of a deal unless you really just want a house for emotional reasons rather than financial.
I think it has been beaten up enough but I did want to call out that you supposedly are an accountant and have a forum name of statisticsnerd yet you did your comparisons on two different things (rent an apt vs buy a house)? That makes as much sense as you saying a Cadillac gets better fuel mileage than a full size dump truck.
He's always said (along with Warren Buffet) that homes are bad investments.
A couple of years ago Warren Buffet said he'd buy one hundred thousand homes if it was manageable. In 2013 Bershire Hathaway Home Services popped up. Maybe it is a bad investment but he still wants a piece of the action.
There are a few factors that make your direct comparison faulty
You did not factor in the dividends of the house (as others have pointed out)
You did not factor that taxes have to be paid on the dividends the stocks within the fund paid.
The S&P 500 rebalances every quarter (note, not all stock types are rebalanced each quarter, sometimes it is annually) . If a company drops out, those shares are sold creating a taxable event
The S&P 500 is a market cap weighted index. Each quarter the fund rebalances each stock that had share issued or shares bought (buyback). As an example, when a company does a buyback, the fund needs to sell shares of that company to lower their owned percentage. This is a taxable event.
The $13,500 house in 1954 being worth $500,000 today is about a 6.1% return. Not bad considering the growth is not taxed during its growth (frequently never). However, there are much higher growth areas in real estate from the 50's until now
The S&P from January 1954 to December 2014 grew at a CAGR of 11%. Factor taxes paid on the stocks + the dividends on the house, the house compares favorably.
I have a number of rental properties. I know the exact cost of owning vs renting because I do the books. I do factor opportunity costs and maintenance reserves. They all compare favorably to other investments, if it didn't, I would sell. That is why landlords tend to say the rent covers the expenses (plus some profit) and renters tend to say the rent is determined by the market. It is true that the rent is determined by the market but they overlook the fact that if there was not an adequate return, the landlord would sell.
There are other tax advantages to real estate investors not available in stocks. Most notably, depreciation. If someone says that is not an advantage because depreciation has to be recaptured, they do not understand all there is to it.
There are some tax advantages to Owner Occupied homeowners not available to renters. Most notably property tax and mortgage interest (if any) deductions. If someone says that the only gain is the amount over and above the standard deduction, they do not understand all there is to it. Oh, and one that always gives me a smile, interest is throwing away 75₵ for every dollar paid in interest (I suppose this assumes a 25% tax rate) as they don’t understand all there is to that either.
I am not solely a real estate investor. I generally have about equals part in real estate and stocks/commodities, so I feel I understand both. I don't favor one significantly over the other
As for the original post:
I think it has been beaten up enough but I did want to call out that you supposedly are an accountant and have a forum name of statisticsnerd yet you did your comparisons on two different things (rent an apt vs buy a house)? That makes as much sense as you saying a Cadillac gets better fuel mileage than a full size dump truck.
owner occupied homes pay no dividends.
my home was 169k in 1987 and if i still owned it 550k today. this is in queens in nyc.
on the other hand 169k in the fidelity insight growth model i followed as well as quite a few of us here is worth 3.4 million.
i can subtract out every penny of rent i would have paid as well as long term capital gain taxes and still have enough for 2 homes today easily, may be even 3 . .
just the s&p 500 would be 3 million.
don't forget we didn't count expenses , renovations over the years and taxes on that house all those decades either but we did count rent so housing costs are non existent in this equation . ..
Forget trying to compare. The investment someone else is paying for . The home you live in is paid for with all your own money eventually.
This can be a completely meaningless statement though. Let's say you own two houses, live in one and rent out the other. You collect rent and paychecks and deposit it in the bank. Then you write one set of checks for the expenses of your home, and another set for the rental expenses. Which money paid for which? It's a meaningless question because money is fungible. It's like asking whether the dollars that covered my last food purchase came from the previous paycheck or not, when I have direct deposit of all of them in the same account. It's simply a silly question.
Also consider, what if you don't renew the tenants' lease, move into the house, and rent out the first? Did anything really change (assuming the houses are similar)?
"Who pays for" one of them is not the issue. The question is one of the net cash flows of having one investment versus another, not who pays for it.
yes and no. don't forget what if instead of that identical house you didn't buy the house but bought other assets like stocks and bonds .
after all an investment asset is an investment asset. in my case i rented and didn't buy a similar house i invested that same money in a different asset.
however in the real world there is a difference.
the home you live in generates no income. it can be a great cost cutter adding to cash flow . but that home you live in is an expense and represents your housing costs.
until the day comes you sell it all it does is cost you money.
while cost cutting and income generation may cause the same increase in cash flow it is only true for a while.
once costs bottom out cost cutting is limited. growing assets is unlimited and income can increase long after costs stop dropping .
ideally you want both . that is why wall street looks at profits which can come from cost cutting and earnings which represent real growth.
iyour analogy is really what we do when we rent and invest elsewhere regardless if it is another house or not ..
This can be a completely meaningless statement though. Let's say you own two houses, live in one and rent out the other. You collect rent and paychecks and deposit it in the bank. Then you write one set of checks for the expenses of your home, and another set for the rental expenses. Which money paid for which? It's a meaningless question because money is fungible. It's like asking whether the dollars that covered my last food purchase came from the previous paycheck or not, when I have direct deposit of all of them in the same account. It's simply a silly question.
Also consider, what if you don't renew the tenants' lease, move into the house, and rent out the first? Did anything really change (assuming the houses are similar)?
"Who pays for" one of them is not the issue. The question is one of the net cash flows of having one investment versus another, not who pays for it.
I can't figure out which you are advocating for, renting or owning or if you're just arguing for entertainment. I do appreciate the abstract thought detours. I am both a landlord and a tenant. In both situations, I get the better side of the deal.
I can't figure out which you are advocating for, renting or owning or if you're just arguing for entertainment. I do appreciate the abstract thought detours. I am both a landlord and a tenant. In both situations, I get the better side of the deal.
It depends on the situation, sometimes renting comes out ahead, other times owning. The point I wanted to make was simply that it should be figured using the cash flows and the math, not some notion of "who pays for what".
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