[Galanwe]

> If you take the money you'd use for a down payment and mortgage and invest it instead (after paying rent) you end up in about the same place.

That is not the right way to see it.

If you have the cash to buy upfront, then yes, real estate is not that good an investment, unless you have a loaded portfolio already and want to diversify a bit, get some high inflation hedge, etc.

The real value of buying a home is leverage. That is, most people cannot go to a bank and borrow $500k. The bank will just not make a blank loan like that without any idea of what you're going to do with it.

Buying a home though is well understood and borrowing is made relatively easy.

For most people, buying a home is the only way they have to actually get significant leverage from borrowing.

[wwweston]

Love that the two most solid pro-homebuying points I've ever encountered (jedberg's about the psychological benefits, yours about leverage) immediately surface in an HN discussion.

It's probably worth making a closer comparison though:

* Buying a House on Loan: commit to paying off a $450k loan over 30 years at 5% interest, with an immediate $50k down payment and the home itself as collateral. So ~$2500/mo payments, another 400k in interest by the time you're done. Your home probably appreciates by that much in most markets, which gives you a million dollar asset at the end. In some good markets, it may appreciate by 3-4 times, which would mean you have a 1.5-2 million dollar asset.

* Pure Financial Investment: put $50k into a fund, add sustained regular $2500/mo contributions. Let's imagine that the fund averages a conservative 5% annual return and we do this for 30 years. The outcome should be... a bit above 2 million dollars.

All investment involves risk and variable outcomes, but the BHL plan probably has a more varied outcome. Parity may be as common as substantial profit.

The PFI plan, on the other hand, performs really well even considering conservative 5% returns: over 2 million dollars (minus 400k you would have probably paid in rent). Bump it to 8% returns and we're looking at 3 million, a performance even many good real estate markets couldn't match.

Its major problem is that you need to be disciplined about putting the chunky contributions in, which means you need to consistently have rent-payment-level disposable income to make this work. Many working people don't.

Leverage lets housing costs go to equity and interest payments, which is key leverage for people who don't have disposable investment income. But less key for people who do.

[iteria]

A house is an inflation hedge. Any calculation about investing the difference has to subtract the rent you are paying and rent goes up every year. There is no where where you can pay a rent anywhere close to what I'm paying for my mortgage in my area and I'm only 5 years into this. Of course I lucked out by locking in that sweet sub-3% rate, but still, I find it hard to believe that over time if you took the money you'd put into a house and subtracted out rent, you'd end up winning in the long term.

A house in a long term play. I didn't buy until I know where I wanted to anchor. That's the deal. I didn't want to be in a situation where late age destitution came because I couldn't afford where I wanted to live anymore. I got to see that play out with older relatives who did go the rent only route. Course I have to pay property taxes, but as it stands it's less than $200/mo and I don't imagine it'll rise above that taking inflation into account. That is something I can afford in retirement even on social security.

There is maintenance, but living in a neighborhood full of elders, a lot of it is truly optional. And honestly I think the only maintenance I've paid thus fair is the yard only because I don't want to do it myself. For me financially this is a hell of a deal with the only trade off that I must stay here. And... I'm settled enough that I'm willing to do that. I moved all over in my early career to find where I wanted to be.

[lesuorac]

> A house is an inflation hedge.

So are Stocks ...

> I find it hard to believe that over time if you took the money you'd put into a house and subtracted out rent, you'd end up winning in the long term.

You are not alone. The thing is this is such a common argument that there are a zillion rent vs buy calculators [1].

That said, yeah sub 3% the math often does work out in terms of buy (assuming you don't sell before 7 years which the average person _does_ sell before). But sub3% and holding for 30 years is actually rare.

It basically comes down to that the down payment gives renters such a headstart in gains that the homeowner takes forever to overcome it. But keep in mind they're also comparing a similar rental house to the bought house. So If you'd rent a smaller 1 bedroom apartment but only going to buy a 4 bedroom house then you're really behind in the math.

[1]: https://www.google.com/search?q=rent+vs+buy+calculator

[sanderjd]

The problem I have with buy vs rent calculators is that the speculative questions often end up dominating the decision. How much will rent go up in the place you rent? Nobody knows. How much will the value of the property appreciate during the period you own it. Again, this is unknowable. So you put in a range of guesses for these, and you can get it to come out as a good or bad investment depending on what you guess.

My guesses were ludicrously wrong when I did these back in 2018, relative to what has actually happened in both the rental market where I live, and the value of the house I bought. I concluded that the reason to buy was only about the non-financial aspect, and that we'd probably lose a little money all told. But it has turned out to be a six figure win in practice. Rent has gone way up, we were able to refinance to one of these very cheap loans during covid, and the property value spiked around the same time. I never would have guessed any of that. And any of it could have gone the opposite way.

So the calculators were honestly pretty useless. It's all too unknowable.

[mancerayder]

Stop - have you also accounted for 750K loan amount in mortgage interest tax deduction, and the SALT cap of 40k?

Are we looking at markets where we had massive appreciation in real estate values in the last 5 years? Because while you might say they were outsized and abnormal, the stock stock market was, too. The years of ZIRP made everything nuts.

[mizzao]

Don't forget the mortgage interest deduction as well, which is a huge subsidy for those who can afford to buy.

[alistairSH]

The one thing missing from that calculation... the rent goes up over the 30 year period while the mortgage is fixed (subject to changes in tax rate and insurance as value hopefully increases).

9 years into my current home and my 20 year mortgage is substantially less than renting a similar house in the same subdivision. And because it's 20 year, the interest rate is lower, and when I retire, I'll only have to cover tax and insurance at a fraction of the future rent.

[jp191919]

Exactly. After 8 years there is absolutely no way I could rent a comparable house in my area for what my mortgage costs.

[mancerayder]

And people aren't including the interest deduction on income - up to 750K loan amount worth. This is a form of subsidy that renters are handing over to mortgaged owners.

[tootie]

I always consult this calculator: https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...

It forces you to make some assumptions on market returns and such, but it gives a pretty clear picture. The biggest variable is how long you expect to live in the same place (longer favors buy) and the next biggest is the ratio of average rent to average housing payment. The inflection point being that if you live in one place long enough to pay off the mortgage, then it obviously starts to be much more advantageous to buy, but that requires you predicting your life 30 years in the future.

[pc86]

> but that requires you predicting your life 30 years in the future.

This is true, but the vast majority of people - especially in the US - don't move around the country or even state every few years. One of the biggest, perhaps the biggest, pro of renting is that you're not tied down to one place for very long.

It's pretty rare that someone buys a house then is suddenly forced to move hours away.

[lokar]

I think people sell their (occupied) house after about 10 years on average, for whatever reason.

[lorecore]

Moving around a lot incurs its own costs. Time, transportation, movers, deposits (which you're unlikely to get fully returned), new furniture... I think it's an additional "hidden" cost to renting that doesn't get talked about much.

[tootie]

The cost of moving from owned home to owned home is far higher. Brokers, lawyers and all the associated closing costs can be huge. And you still have to pay movers and worry about new furniture.

[lorecore]

Yes, but you decide when to move from your owned home. My point is landlords can and do cause moving “churn” when you rent above and beyond when you’d move voluntarily.

[barchar]

It's not true that paying off the mortgage makes it more advantageous to buy, home equity creates portfolio drag.

[bombcar]

It is possible to find weird inversions where it never makes sense to buy - prices are too high and rents are too low. CA has these places, where property tax arbitrage by renters can be less than the new property tax would be if sold.

[barchar]

Many high cost-of-living places have this property. People bid up owner occupied home prices even when rents can't support them.

[vardalab]

You forgot to include the actual living costs if you invest. You're not gonna be able to contribute $2,500 a month. You would be able to contribute not that much , around here rents are $2,500 a month.

[wwweston]

That point is in the analysis after the bullet points (in phrases like "minus 400k you would have probably paid in rent" and "you need to consistently have rent-payment-level disposable income to make this work. Many working people don't.").

I considered putting it up in the bullet points. Apparently deciding against that lost my expressions of this point to some readers, including yourself.

But yes, this is why the analysis after the bullet point mentions the profile of people who don't have $2500 disposable income. The leverage matters more to people in this situation.

Having seen this conversation play out more than a few times and even turn a tad fighty, I think this is the fault line:

* people who do this kind of analysis frequently and generally have high disposable income often see that they can leverage compound interest rather than pay it, so the Pure Financial Investment plan seems like a slam dunk to them, and for their profile they're probably right.

* people who generally don't have high disposable income see that they can use leverage to make their rent payment do double duty, which seems like a huge win for them, and for their profile they're probably right.

What I did leave out is how a mortgage can bound your living costs. Another commenter correctly pointed out rents can expand dramatically. Where incomes track rents, I don't think this makes a dramatic difference, and that's why I didn't include it, but it's true this isn't guaranteed, and mortgage can function pretty well as a hedge.

[blks]

Then analysis that includes buying a home should as well include investing $rent amount every month in addition to mortgage.

[hbarka]

They forgot to mention that they will move back to mom’s house.

[skeptic_ai]

Exactly lol

[crooked-v]

The 'Pure Financial Investment' one is overlooking that you still need a place to live for those 30 years.

[Galanwe]

Your calculation is bogus, you are 1) assuming infinite money 2) assuming infinite time.

1) When you say "add sustained regular $2500/mo contributions", you forget that compared to buying your place, you also have to pay rent, most likely at the same amount you would pay back your mortgage assuming same quality of life. So either you have a free $2,500 to spare (in which case you could also have invested that amount in the buying case, or borrowed more), or you have $0 to invest.

2) You cannot just take the expected value of two different returns distribution and assume you would earn it in both cases. That would assume you have infinite time to wait for the average rate of returns to converge. If your life depends on said returns, you cannot just say "oh nevermind I'll wait another 15 years to withdraw". In your example, stock market returns are immensely more volatile than real estate.

[pc86]

The house gives you a place to live, so the PFI plan is either a huge miscalculation (not a great place to start when you're making a numerical argument) or intentionally disingenuous. Interest rates are closer to 6.7% which means your $2500/mo doesn't even cover your principal and interest of $2600 which is to say nothing of PMI (which will be required since you didn't put 20% down), homeowner's insurance, HOA fees, or property taxes. If you're getting a $2500/mo mortgage, what's rent for a similar house? Could be $2k/mo, could be $3500/mo. And don't forget that other than insurance and taxes, your mortgage payment is capped for 30 years. After the initial post-purchase increase, taxes are usually capped to some degree as well. For most people rent is capped for at most 1 year. So every year you rent you will have less money to invest, and eventually you'll have to start taking money out of that account because your rent has surpassed what your mortgage payment would have been 5, 10, 15, 25 years ago.

When you run the numbers honestly it's really, really hard to get similar gains renting as you can buying, especially 30 years in the future.

[notnaut]

I understand it’s more complicated than this, but it seems really really confusing at a basic level.

In one situation you are paying someone else for a place to live, and when you stop doing that after 30 years, you’re out on the street.

In the other situation you are paying someone else for a place to live, and when you stop doing that after 30 years, you have a house.

[jandrewrogers]

Renting gives you a giant pile of additional money you can save and invest so that after 30 years you could buy a house in cash if you wanted to. The person with the house does not have this cash, they have a house instead.

After 30 years you either have a house or enough cash to buy that house. In many cases, the rate of return on the cash is sufficiently greater that it is significantly more than the value of that house.

[what]

Eh, not really? If you have money to invest after rent, you’ll also have money to invest after mortgage payments.

[jandrewrogers]

Rent is much cheaper than the total monthly purchase costs in many locales. Literally thousands of dollars per month of net cash per month to investments in the renting scenario. And that cash appreciates at equity rates rather than debt rates. This is on top of being able to invest the down payment instead of spending it on a house.

I have decades of data on this in a few locales (including Bay Area and Seattle) based on my own experience and despite buying and (still) owning homes several times. It never pays out better than renting and investing. The math doesn't math. I still buy places occasionally but I am honest about this reality.

For the kinds of places I rent the finance math is so heavily tilted toward renting that it is a no-brainer. I'm not alone in this; I know many people of means that choose to rent even though they could buy any house they wanted.

[mvkel]

Invested capital rises with the S&P (for example). A house's value rises with the rate of inflation (on average)

[wwweston]

> The house gives you a place to live

A careful re-reading of my comment will reveal that I did mention rent as a factor in at least two places: one as an opportunity cost to be reckoned with for people following the PFI plan (with which my example still comes out looking good), one as a cost of living substantial enough for many working people that they do not have significant disposable income, which makes leveraging their largest living cost appealing.

> Interest rates are closer to 6.7% which means your $2500/mo doesn't even cover your principal and interest of $2600 which is to say nothing of PMI (which will be required since you didn't put 20% down), homeowner's insurance, HOA fees, or property taxes.

Using a 5% interest rate was one of several simplifying assumptions that I chose to be generous to the Buy Housing on a Loan plan.

You are correct that interest rates are presently and historically higher than that, and that mortgage insurance, homeowners insurance, property taxes, and some maintenance costs that under the BHL plan can add up to significant housing costs that aren't going to equity and therefore aren't well-leveraged. In other words, the BHL plan actually comes off worse than I made it look.

(If there's a counter side of that, it's that landlords can and will pass on those costs so they're reflected in rents... but sticklers will notice that landlords who are done with amortized costs or who financed at lower rates can choose not to do that and may have incentives to depending on the market.)

That's in absolute terms. There's a relative point too: the higher the interest rates, the more the field tilts towards the PFI. It magnifies debt/leverage, making that path more expensive, and it magnifies return from invested income, making that path more rewarding if you can swing it.

> And don't forget that other than insurance and taxes, your mortgage payment is capped for 30 years.

I did leave out the bounding effect that a mortgage can have, and that's arguably an important missing point.

Wy would someone do that? My observation is that incomes also tend to grow in rough parity to rents in many markets -- in fact, local income growth is probably the primary variable local rents are dependent on (at least in a functioning market). This means during prime earning years decades from retirement, rent changes might be an acceptable simplification. But you're probably right that the closer you get to retirement, the more important bounding costs is. And there might even be other situations where the tradeoff starts to make sense even for earners with significant disposable incomes.

[namanyayg]

You can live in a house, but you can't eat stocks

[barchar]

Eagh, the leverage really isn't that cheap, and you can think of renting as giving you cheap leverage too (it's just your borrowing the house instead of the money).

[bombcar]

The leverage only matters in an appreciation market (which we’ve been spoiled with in the USA since boomertimes). If you distill the math on assumed zero appreciation (or zero “real” appreciation) it becomes not so terribly pretty.

It’s really a form of various hedges wrapped up with a bow, that for many people is desirable (and since we HAVE had appreciation it doesn’t “turn out bad” most of the time anyway).

Anyone who says “renting/buying” is the only way to go is missing something.

[barchar]

Renting also has hedges embedded, and every hedge can be a risk position.

In particular the interest rate options in foxed mortgages are pretty expensive and it only hedges the cost of a particular house not housing in general.

Housing cost is correlated with local incomes so in some ways it's doubling down. In particular recessions are deflationary in the immediate aftermath.

[notnaut]

Uhhhh where are you getting that $2500 a month to invest? That’s your landlord’s money, dawg. And they’re gonna expect at LEAST another $100 year over year if you don’t want to move.

[funksta]

Leverage is great when prices are increasing, but not when prices are moving in the opposite direction. The recent 40-year trend of decreasing interest rates lulled a lot of people into the belief that real estate leverage is an unalloyed good.

[brabel]

> I bought my current home in 2011 for $420k, and the Zillow currently estimates its value at $757k.

Well yeah, in the last 20 to 30 years in most countries the story has been the same. My parents bought a house in Brazil in the early 90's for 30k and we're now selling it for 400k. My relatives in Australia bought a house in Adelaide for 400k around 5 years ago. Prices exploded there and it's now around 700k. They got 300k dollars in a few years while actually earning less than that in salaries over the same period.

On the other hand, me, in Europe, managed to lose money on a house I bought 10 years ago because I overpaid (at the time it was really hard to buy as competition was huge) and after COVID, prices in my region fell 20% and never recovered... Also, I invested too much on a new building in the property which people in this country don't actually value a lot, so the investment did not pay off.

But before that I had made 60k on an apartment in just 2 years. So, while I know too well that the housing market can be unpredictable, I would continue to bet on it going up in most markets since the conditions which made prices increase have not changed.

[tmnvix]

> I would continue to bet on it going up in most markets since the conditions which made prices increase have not changed.

I think they have. As mentioned above, the past 40 year trend of declining interest rates appears to be at an end. It was the most significant factor in rising prices in my opinion.

[bombcar]

You also have to factor out inflation over those periods of time, as often it turns out the return is relatively anemic, but the time periods are long.

[at-fates-hands]

>> Leverage is great when prices are increasing, but not when prices are moving in the opposite direction.

This.

I worked for a medium sized company in the early aughts. It was a family owned business. The eldest brother was the owner and we often had lunch and he would tell me that once I make x amount, then I should buy this kind of real estate. When you get to this xx amount, then buy this kind of real estate. Fuck the stock market, only real estate goes up in value every year like clockwork. At the time he had several rental properties and three or four houses located all over the country.

That was until 2008.

Its funny, I ran into him at an architecture conference a few years back and one of the first things he said to me was, "Remember that real estate advice I was giving you? You can completely ignore that now!" and we both had a good laugh about how drastically the market had changed since 08'.

[schumpeter]

Sounds like your friend did something wrong with his investments. I had rentals before 2008, and bought more during the crash in South Florida for pennies on the dollar. It was a great time to buy.

[hardtke]

In some states (California being one) the original mortgage on a house purchase is non-recourse. This means that the bank cannot come after your personal assets in the event of default. Yes your credit gets dinged but the leverage of a home loan is fundamentally different than a margin loan in the stock market.

[Eridrus]

This is only relevant when rates are low. Rates are currently higher than the growth you can expect in housing prices.

I have done repeated financial models of this over the last 15 years and it has never made sense to buy a house for me.

When rates were low, if I had bought a house and then stayed in it a long enough time to counteract transaction costs, it could have been ok, but in expectation, basically everyone buying a house would have been better off investing the money from their downpayment & repayments into the stock market.

[bombcar]

Transaction costs are killer and never factored in correctly, I’ve found.

[musicale]

> most people cannot go to a bank and borrow $500k

Unless they can get admitted to a private university and a professional school.