Real Estate is a BAD Investment

Hm. Lots of assumptions in there. Again, your perspective pretty much depends upon the assumptions you make.

Wasn't this exact same thing posted a while ago?

For the past 10 years, the S & P is -2.7% , the dividend rate was 1.8%, for a total return of - 0.9 % -not including taxes on dividends. I am not bullish on real estate, but you have a long, drawn out dissertation based on some very wobbly assumptions.

the flaw is in 'timing' of asset cycles. i closed in early 2002 (signed late 2001) and sold in mid 2006? Explain to me how renting would have been the better choice?

i do not have time to break out all that you assumed. But where are you getting an 8% return on the s&p? Lets see if i remember the first 10 years of 2000 amounted to nothing, however had you bought a home even including the crash a the beginning of 2000 you would still have a nice profit today.

So to say it is indisputable is ignoring the period that you are owning through. my parents bought a house in 1972 for almost no money that today is worth 800-900k. assume they paid 50k for a house or maybe a bit more, but also assuming they had a mortgage for some part of the value, lets say they put down 20k, are you going to tell me that same 20k would be worth 900k today. also with the 500k exemption for selling they would only pay tax on lets say 400k.

s&p was at 110 in summer of 1972, now it is 1156 for a 9.5x gain. assuming 900k they have a gain of 850k which is 17x gain.

So it would seem to me even though slighly longer then your 30 years that owning the house actually turned out better. Because over the years they would have bought and sold stock and paid varying amounts of cap gains. Now they sell the house get 1/2 tax free and the rest long term.

But i would challenge you to really talk to what the return of the stock market is against the housing market, because just like the stock market, the housing market is all about timing.

My last apartment bought in 1994 by my brother at the bottom of the market was sold 10 years later for a little over 5x the original purchase price. Taking 80k and turning it into 435k.

what happened if you invested in S&P 10 years ago. it was at 1400 in 2000. it is now at 1150.

what happend if you bought an apartment 10 years ago. $500 per sq foot in 2000. $1000 now.

how long do you think it will be before S&P gets to 2800?

Your biggest assumption is the SP500 returning 8% each year. This is a pipe dream. Ask anyone in the private sector how their 401ks have done the last 10 years and they will tell you "I should have bought a house with the money." Don't ask a a government worker, his salary and 401k (pension) is guaranteed and paid by the taxpayers. Timing is everything my friend, it is all about when you buy and when you sell. BTW, buying a house with little or no $$ upfront is pretty much like renting the house from the bank.

Are you doing this again?

Owner occupied real estate is NOT an investment: it is the capitalization of rent payments.

The definition of an investment is something that increases cash flow. Owner-occupied real estate does NOT increase cash flow.

Never has, never will.

is buying AAPL an investment? it goes up and down without producing any cash flow.

Duplicate threads are lame. Why not just bump the original idiotic thread?

@ ekartash: Is buying AAPL an investment? Absolutely. I just sold all of my Apple stock for a down payment. It went up 2800% over the time I had it... so yes, you could say so.

And you know what? I would buy it again in a heartbeat. Apple is one of the most solid companies out there.

was this a copy and paste job? OP, i agree now please pay me my rent (rising), thanks ;)

In addition to the assumption flaws others have noted here, there's a huge gap you're missing about owning which is the tax write-off of mortgage interest. Assuming your income is high enough that you're pay equal to or greater in income taxes then your amount of mortgage interest (should be for almost everyone) then you get pretty much all that back that you would have otherwise paid to the gov't.

Thus, on my apt, my total monthlies are about $3k of which about 2/3rds is interest (mortgage, building, HELOC, etc). My apt would rent for about $3k/mth. I get back $2k/mth in taxes by owning which I would not get in renting. So my real monthly cost on my apt is about $1k/mth vs. $3k/mth. Yea, that really makes renting financially better.

Oh, and I have a bunch of equity in my apt some of which was 20% downpayment and most of which is increased value in the 8 years we've owned. I took a low (4%) HELOC to get a bunch of that equity out and have invested it in other things which could include your mythical 8% S&P 500.

What happened if you would have bought the island of Manhattan for 60 guilder worth of beads in 1626 versus rented the entire borough for the past 350 years?

I think purchase would be a much better deal....

why do people even respond to this clown? he just posts the same thing over and over again..no doubt a a buyer trying to jawbone the market down...people dont seem to realize that what is said here on streeteasy will have no impact on the actual market.

do people really believe they can distort the market by posting an opinion on a public forum?? The market is and always will be, bigger than all of us!

By owning the house and then renting it to yourself, you save money by cutting out the middle man, and the government doesn't charge you tax on the "imputed rent." The government also exempts you from capital gains tax when you sell it at a profit, and SOME of the interest expense is tax deductible.

This is a moronic analysis. I MADE and BANKED HUGE net profits (off of real estate. The key is to know when to sell (top of the bubble) and when to buy (not at the top of the bubble).

I call bullshit. The OP is obviously some loser who doesn't know how to make money and probably lived in a rental for the past 10 years.

Let's make some financial assumptions that are borne out by decades of empirical evidence:
WHICH DECADES? CERTAINLY NOT THE PAST 2.

1) Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation.
REALLY?

2) The S&P 500 increases at a real rate of 8.0% per annum.
AGAIN, REALLY?

These being true, it is ALWAYS better to rent property than to buy, if you invest the down payment in the S&P 500. Watch:
YOU CAN'T LIVE IN THE S&P and the S&P is HIGHLY RISKY COMPARED TO LIVING IN AN APARTMENT THAT YOU OWN AND CAN AFFORD THE MORTGAGE ON.

Say you make $100,000. This implies that you can spend up to $2,333.33 per month in total housing expenses (28%).
WHERE THE HELL IS THIS ASSUMPTION FROM?

An 80/20, 30-year fixed $375,000 mortgage at 6% gives you monthly mortgage payments of $2,248.31.
MUST HAVE LOUSY CREDIT AT THIS RATE

Assume that taxes and common charges amount to a VERY CONSERVATIVE 10% of total mortgage payments, or $224.83 per month.

A $375,000 mortgage implies a purchase price of $468,750, and a down payment of $93,750.

If rented an apartment for the amount of the mortgage payment, you will have paid $903,455.33 in rent over 30 years if it increases 0.7% per year.
K
If you invest the down payment in the S&P 500 for 30 years, $943,374.08 at the end of 30 years, for a total net profit of $39,918.75.
WITH A FAIR PROBABILITY OF NO GAIN AT ALL. MOST INVESTORS BUY HIGH AND SELL LOW IN THE MARKET AND MUTUAL FUNDS CAN LOSE. THERE HAVE BEEN LONG PERIODS WHEN THE DOW HAD LOSSES, DO YOU HAVE THE STOMACH FOR IT?

To that, however, add your yearly maintenance and tax payments $2,697.96, increasing 0.7% per year and accruing 8.0% per year over 30 years, and you will have earned an additional $330,084.36, making your total profit $370,003.11.

Now do the same thing for your house. If your $468,750 home appreciates at a real annual rate of 0.7%,
SINCE WHEN?
at the end of 30 years you will have a home worth $577,863.68, for a profit of $109,113.68. Add to that the original loan of $375,000 - the rest of the equity you will have built - and you get a gross profit of $484,113.68. But you would have paid $434,393.21 in interest, so your real profit is $49,720.47.
ARE YOU ADDING THE TAX BENEFIT ON INTEREST EXPENSE AND REAL ESTATE TAXES?
In addition, you will have spent $90,343.15 in tax and maintenance, making your GRAND TOTAL PROFIT a whopping NEGATIVE $40,622.68.
STUPID. THERE ARE SO MANY FAMILIES WITH SO MUCH MONEY BASED ON REAL ESTATE.

That's right! You rent for the amount of your mortgage, all values go up linearly in line with historic data over time, and you will wind up with a total profit of $370,003.11. Whereas if you buy a home you will wind up with a loss of $40,622.68.

This of course excludes special assessments and all the transaction costs associated with owning real estate: brokers' fees, conveyance tax, etc.
WORRYING ABOUT 1x BROKER FEES OVER 30 YEARS? WHAT ABOUT STOCK TRADING COSTS, ILLIQUIDITY, RISK OF NEEDING TO SELL BUT STILL NEEDING A PLACE TO LIVE?

It also ignores the tax effect on dividends. But dividends and capital gains tax rates are currently the same (and can't be predicted in the future).
GOING UP!
The only further benefit from owning is the $250,000/$500,000 tax exemption. But it is doubtful that $410,625.79, which is the absolute value of the difference between the owner's loss and the renter's gain.

Guys, it's indisputable: renting is FAR better in the long-term than buying. All the figures and assumptions I used are real and verifiable. Do your own calculations: rent for the price of your mortgage payment, invest the down payment and maintenance and property taxes in the S&P 500 at the real rate of increase of 8.0%, increase your property value, rent, taxes and maintenance payments at the real rate of 0.7%, deduct the mortgage interest paid, and you will see IT IS ALWAYS MORE BENEFICIAL TO RENT.

Do your own calcs, or criticize the model. I'm waiting....

EXBREEZY, YOU ARE A COMPLETE IDIOT AND LOSER. YOU ARE LIKE THE ECONOMIST WHO SEES A DOLLAR ON THE STREET AND DOESN'T PICK IT UP.

ekartash, you fell into my trap!

1) From January 1, 1950 through December 31, 2007, the average capital gains from the S&P 500 was 8.66%.

http://www.moneychimp.com/features/market_cagr.htm

That does not include reinvested dividends.

"If you were to go all the way back to 1928 and dissect the S&P 500 into rolling twenty-year periods, there would be fifty-nine of them (1928-1947, 1929-1948, etc.). The average annual rate of return over those periods was approximately 12 percent."

cdn.digitalcity.com/coaches/historic-market-returns-murray05262006.pdf

That's where the 8% real return on the S&P 500 comes from, on a rolling average basis, which corrects for specifically-targeted dates.

2)0.7% real gain on real estate is from Robert Shiller of Case-Shiller fame:

http://en.wikipedia.org/wiki/Housing_bubble

"Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields, from Irrational Exuberance, 2d ed. Shiller shows that inflation adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004."

3) Market rents are constrained by market factors: 40x monthly rent in income. Therefore, if incomes go up 0.7%, rents can at most go up 0.7% because constraints.

"Rents, just like corporate and personal incomes, are generally tied very closely to supply and demand fundamentals; one rarely sees an unsustainable "rent bubble" (or "income bubble" for that matter)."

http://en.wikipedia.org/wiki/Housing_bubble

And that constraint on the demand side is 40x monthly rent in income, 28% total household income in housing expenses.

4) Historical averages do not equal future returns: that is true in the short-term. But it is also true that over long periods of time everything returns to its equilibrium. And the 12x annual rent = sale price is real, and constant over time specifically because of those market constraints:

The 12x ratio (if that's what you're talking about) exists because of the ratio of prices to income. If you make $100,000, you can you can rent a property that cost you $2,500 ($100,000 / 40). You can buy a property that will cost you $2,333.33 in total cost ($100,000 * 28%).

Let's just use rents vs. mortgages to make it easy. At 6% interest, you can afford a $400,000 mortgage, giving you payments of $2,389.20 You can afford annual rent of $30,000. $400,000 / $30,000 = 13.3.

Very close to the 12x, right? And 6% is a very low interest rate and I greatly simplified the math. If you - like ccdevi - claim that the rent to purchasing price ratio is 18x annual rent, then making $100,000, being able to afford $30,000 a year in rent, you could afford a $540,000 house, but that would give you monthly mortgage payments of $3,237.57. Your monthly pay is $8,333.33, giving you monthly housing costs of 39% of your monthly income.

OH WAIT! I FORGOT! NOBODY WILL LEND YOU THAT MUCH MONEY BECAUSE THE RATIO IS 28% TOTAL HOUSING COSTS TO INCOME!

You say: "If the stock market and real estate go up the same annualized % over the long term (which I think is much more reasonable, especially for manhattan where they are so highly correllated)"

If you the market prevents you from spending more than 40x annual rent / 28% percent of household income on housing expenses, HOW CAN RENTS / PRICES GROW AT 8% UNLESS INCOMES DO?

Well, sweetheart, THEY CAN'T!

"I'm not going to waste my time to go find the numbers for a pointless "discussion" with you, but I think this post of yours once and for all proves that your opinion is basically worthless."

Because you can't. You're in over your head. You're blind to the fact that the market is constrained by 40x/28%, and that real income rise only 0.7% per year on average, and therefore housing prices can rise only that much.

Your claim is so ridiculous that if you take the example of the $468,750 and increase it at a real rate of 8% per year, after 30 years it will be worth $4,716,870.42. But if your $100,000 income only rises a real 0.7% per year, it will be $123,277.58 after 30 years.

WHO MAKING $123,277.58 CAN AFFORD A HOUSE WORTH $4,716,870.42?

Them there's the numbers, baby, if you do what you are claiming.

I'm compelled to agree with the math here. Certainly, as with anything subject to speculation (tulip bubble, anyone?) and easy-money-induced inflation, real estate can be profitable but it is largely subject to interest rates and over long periods of time the basic constraints (40x/28%) are present and limiting as compared to actual investments with asymmetric risk/reward equations (stocks, options, commodity futures, etc.).

That we are on a NYC real estate forum frequented by industry professionals and others with vested interests in real estate, the hostility displayed in many of the responses is not surprising.

I would like to ask anyone advocating the purchase of a single family apartment in the city, or anywhere really:

Considering that mortgage interest rates are virtually as low as they can go - where are prices going to go when (NOT IF) rates go higher?

"NOBODY WILL LEND YOU THAT MUCH MONEY BECAUSE THE RATIO IS 28% TOTAL HOUSING COSTS TO INCOME!"

Wrong. If you couldn't get a mortgage at that ratio, then it sounds like you have some other problems.

Investing in the stock market has historically been a good idea, but this would require purchases and sales spread over time. History has proven that it is impossible to time the market. Investing or selling a large sum at the wrong time can wipe out any potential earnings. Real estate is also more difficult to time, but the ramifications of missing the bottom or not selling at the top are not as pronounced. This entire discussion is an exercise in empty keystrokes.

Broadwayron,
Let's up the ratio to 35%, or if you like to 50% which is where it was during the housing boom (and see where that got us), the point remains that there is a definitive earnings and thus value limitation on single family real estate. It's called income.

exbreezy, as others have pointed out, the problem with thinking about long-term rates of return on real estate as an asset class is that one single property purchase at a time -- the way most people buy real estate -- may or may not be representative of that entire asset class.

But here's another flaw in your argument:

>>If you the market prevents you from spending more than 40x annual rent / 28% percent of household income on housing expenses, HOW CAN RENTS / PRICES GROW AT 8% UNLESS INCOMES DO?

>>Well, sweetheart, THEY CAN'T!

On a global or even a national level, that's true.

However, in periods of hypergrowth in the NYC market, what has happened was that money came in from outside: purchases were made by foreigners looking for a safe haven from currency wars, parents buying for kids, etc.

So the income of the average New Yorker decoupled from property prices.

It feel like that's what happened in the recent bubble.

Whether it will recouple or not is something that none of us have the crystal ball to see.

ali r.
DG Neary Realty

Why do people compare the purchase of Manhattan to anything? What if someone else bought Staten Island at the same time for 60 Guilder? I am sure there were investments at the time that didn't pan out (can anyone say South Seas India Company? I thought you could.)

What about buying real estate vs. buying gold? http://streeteasy.com/nyc/talk/discussion/5195

@ Roro "I'm compelled to agree with the math here. Certainly, as with anything subject to speculation (tulip bubble, anyone?)"

Please name one person who lived in a tulip?
Please name one New York family that made a multi-generational fortune in tulips?
Please name one bank that lets you borrow for 30 years before you pay off your tulip?

urnfna,
Given the choice between math (you know, numbers and facts and all that) or REALTOR talking points, I'll go with the math.

I bet you bought David Lereah's book didn't ya? ;-p

Ok, fine, math.

How many people have lived in a tulip?
How many families have made multi-generational fortunes in tulips?
How many years will a bank allow you to borrow on your tulip purchase?

here's some hostility:
mfox is a idiot--buy trough, sell peak in any market will make one wealthy
and urnfna--your questions are dumb, esp the one on intergenerational fortunes--there are so many more families with dynastic wealth where money was made NOT in real estate, but in corporate, industrial and financial investing--the tulip thing??banks lend based on harebrained schemes all the time--latest one...real estate!!--livng in a tuip?? whaaa??..people make economic choice of renting vs buying
and ali--just as parents and foreigners invest in ny re, so do they divest; and so do they do both in financial markets as well--both financial and re assets are subject to this--not specific to re or ny re
roro and exbreezy's math is least bad analysis--seeks to smooth peak/trough characteristics of real estate vs financial assets--ties perf to income, something demonstrated with little variation over time

there are so many more families with dynastic wealth where money was made NOT in real estate, but in corporate, industrial and financial investing

How many of those families rent their homes?

banks lend based on harebrained schemes all the time--latest one...real estate!!--livng in a tuip?? wh

Really, real estate is a scheme? When did someone first start buying real estate?

Your question: How many families have made multi-generational fortunes in tulips?

My response: there are so many more families with dynastic wealth where money was made NOT in real estate, but in corporate, industrial and financial investing

your next question: How many of those families rent their homes?

my next response: wtf are you smokin moron?

i think ill find someone with a brain to dialogue with--have a great weekend

You think I'm a moron without a brain smoking something, but you consider tulips and real estate analogous?

Live in a tulip?
I knew an old lady who lived in a shoe.
Could not keep her legs closed.
Social sevices has her on speed dial.

Was there a bubble in shoes a few hundred years ago in another country? If so, perfect comparison to real estate in New York.

Wbottom, thanks for the insight and hilarious smackdown of the feeble minded real estate salespeople.

urnfna, I wasn't sure whether you were a moron. Thank you for erasing any doubts I had. Go read up on bubbles.

Oh, and just in case you are on "full retard" mode, and think that I am bringing up flora at random: http://en.wikipedia.org/wiki/Tulip_mania

Really Roro, after my posting about the shoe, you thought I didn't know when there was a tulip bubble? So let me ask you, do you live in a tulip? Did you grow up in a tulip? And if so, was it a recent tulip or one from a few hundred years ago that is still around?

urnfna,
You're right, real estate never goes down, is always a great investment, and is in no way related to income.

And adjusting for inflation is for only total idiots who don't know that real estate is the only asset class in which bubbles cannot occur because you can live in it, DUH!

What's more, I realize now that single family residences are sure-fire money-makers and are the basis for many multi-generational fortunes.

On top of all this housing prices will never decrease on a national level, and even if they do it can never happen in Manhattan because we are exceptional and protected and not subject to ridiculous notions of mathematics and history.

/sarcasm

Roro, are you quoting me, because I don't see the little "" marks?

Or maybe I didn't say any of that.

Maybe I have difficulty with people equating real estate with tulips. Maybe I have trouble with the fact that the best so-called bubble you can analogize real estate prices with is for a perishable good that had a mania prior to the founding of the United States of America. Maybe I have trouble when for living conditions people can buy or rent (in which case someone else owns) real estate, but the choice for the tulips is owning the tulip, or not bothering - because no one needs a tulip.

You want to equate tulips with Pets.com stock, go ahead, I won't stop you.

This is total nonsense. The price of property vs. rents has to be taken into account.

Even if all your assumptions hold (which they don't), imagine you can buy a condo for 50k or rent for 4k a month. Obviously buying would be better. I am not saying this is a realistic scenario, just an example to demonstrate that your statement is too general.

And yes, you already posted the same bs before.

Ali: "So the income of the average New Yorker decoupled from property prices."

Yes, exactly. And this very decoupling also happened on the national level, and it was the prime reason for the bubble bursting. Florida bubble burst 6 years ago, and the prices there are still falling. That painful example doesn't instill too much confidence in the ability of RE prices to defy fundamentals ad infinitum... Sooner or later, re-coupling shall occur.

Property prices cannot stay decoupled from incomes forever. Either prices will fall or the incomes shall rise. Either way, it's better to wait instead of overpaying and making someone else rich (sorry, sellers, no can do).