Why do people buy houses for investment?

AppDynamics XhgR22
Sep 17, 2018 42 Comments

It's well known that stock markets especially index funds are a proven way to grow wealth and offer better liquidity. Houses need maintenance, property taxes and hard to buy or sell quickly? Renting always works out cheaper in pretty much any part of the world, especially in places where housing is super expensive. Then, what are some reasons for this sub optimal yet hugely popular investment practice even in this age of electronic and algorithmic trading? Eager to gather viewpoints.

comments

Want to comment? LOG IN or SIGN UP
TOP 42 Comments
  • Qualtrics / Ops
    qualtricdo

    Qualtrics Ops

    BIO
    Came from non tech to tech.
    qualtricdomore
    Leverage. You get low interest rates and accrue equity for a low cost of capital.

    If you actually had the 800k for a house to out in the market, that's a great idea. The way you make property through real estate investing is using low down payments to accrue equity at a 3% cost of capital.

    You could leverage in the market as well I guess?
    Sep 17, 2018 0
  • GoodRx BobAxelrod
    Some people can't handle the daily swings of equities. Sounds like you haven't had a decent downswing to humble you yet.
    Sep 17, 2018 0
  • Amazon Fj7;& I
    You have to live somewhere, I can either spend $3k in rent or $3k on a mortgage
    Sep 17, 2018 4
    • Roku / Eng
      Elmusk

      Roku Eng

      PRE
      Yahoo
      Elmuskmore
      Except that the value of your house fluctuates; your house could be half as worth overnight, you will still be 3k mortgage but the renter would pay the market rate rent.
      Sep 18, 2018
    • Amazon Fj7;& I
      If hosting prices drop in half overnight, so does your index fund. That means some sort of economic collapse.
      Sep 18, 2018
    • Roku / Eng
      Elmusk

      Roku Eng

      PRE
      Yahoo
      Elmuskmore
      The index fund can be liquidated by click of a button, how about the house?
      Sep 18, 2018
    • Salesforce YacGGRT65
      So technically nobody should’ve lost money in 2008 crash in the stock market then right? Because selling right before the market drops is just 1 click
      Sep 18, 2018
  • Amazon / Eng Troll Food
    Nothing is guaranteed. Stock can collapse and companies go out of businesses. Real estate you can borrow money much easier than stock or other investment. The yield of each investment is what it is for a reason.
    Sep 17, 2018 0
  • Salesforce YacGGRT65
    You can ask my $150k gain in 2 years for $200k down.

    It’s not always a good investment. Some will say your own house is a liability and becomes an asset only if you manage it like one that gives you cash flow. If it’s your own house then you’re strictly relying on appreciation and you can only realize it by moving. But the above comment about leverage sums it up well
    Sep 18, 2018 7
    • New DuQvV7x
      @oySal6 that statement is provably false
      Sep 19, 2018
    • EA oySal6
      Huh? For example both EA & Salesforce doubled. And yes I invested in many equities and they have performed fantastically. Why are you guys so salty?
      Sep 19, 2018
    • New DuQvV7x
      You: “a lot of stocks more than doubled”

      Nasdaq has 3000+ stocks.

      You named 2. You’d need at least 298 more for the claim of “a lot” to hold true.
      Sep 19, 2018
    • EA oySal6
      It’s the same idea as picking the right real estate property that will give you a good return. There are ~4,000 stocks in the Nasdaq and on aggregate they have performed similarly to the 150k on 200k house example.
      Sep 19, 2018
    • Salesforce YacGGRT65
      You put your whole portfolio on 2 stocks?
      Sep 19, 2018
  • Amazon / Eng $-&&
    RE is less volatile than stocks with similar returns, but the barrier to entry is high. That's why most people shy away from it. In the long term though, after your mortgage is finished, your rental cash flow will explode way beyond what stocks can offer.

    They're also a good way to diversify a portfolio. Equities would correlate more towards the unemployment rate and GDP while RE has inelastic demand and correlates to something like homelessness. There's a good bit of cross over depending on the type of RE you dive into (offices, gas stations, etc) Typically, one goes up while the other goes down. If both are going down, then shit must be real bad.
    Sep 17, 2018 3
    • Facebook jTWx26
      This is exactly opposite to conventional wisdom! Real estate is less diversified, illiquid and cyclical over long run as opposed to indexing. The only advantages are preferential tax treatment (which is diminished with new tax laws) and leverage.
      Sep 17, 2018
    • Cisco Jr29
      What new tax laws are you referring to here?
      Sep 18, 2018
    • New / Product
      ʕ•ٹ•ʔ

      New Product

      PRE
      Amazon
      ʕ•ٹ•ʔmore
      jTWx26, no you're wrong.
      Sep 18, 2018
  • Uber / Product
    Wutwutwut

    Uber Product

    PRE
    Uber, Salesforce, Google
    Wutwutwutmore
    Isn’t renting also expensive in places where housing is expensive?
    Sep 17, 2018 2
    • Square / Eng nom🍔
      Not at the same rate. You can rent a 2m$ house in south bay for 4k, but you won't find a 400k condo in Seattle for 800$, and a 4m$ house in Palo Alto won't fetch 8k.
      Sep 18, 2018
    • Uber / Product
      Wutwutwut

      Uber Product

      PRE
      Uber, Salesforce, Google
      Wutwutwutmore
      Duh! But it is not like an expensive place to own will be cheap to rent. Own everything that appreciates and lease everything that depreciates.
      Sep 18, 2018
  • LinkedIn FruSw3183
    I love owning and collecting rent checks. Tax deductible also.
    Sep 17, 2018 1
    • New / Eng RhpJ71
      Don't you end up paying taxes on the rent?
      Sep 18, 2018
  • This comment was deleted by original commenter.

    • AppDynamics XhgR22
      OP
      You end up paying a lot of interest and property tax when you buy, which is going down the drain just like your rent. Arguably you do get tax breaks, but the initial down payment you make while buying when invested carefully can fetch better yields too, which could offset the cost of renting.
      Sep 17, 2018
  • New / Product
    ʕ•ٹ•ʔ

    New Product

    PRE
    Amazon
    ʕ•ٹ•ʔmore
    That is because RE is the proven asset to grow your wealth with leverage and less volatility. Mortgage is a very special way of borrowing money because it is related to your common needs; housing. Buying a house allows you to address both housing and investment.
    Sep 18, 2018 0
  • New WblC45
    Your assumption that “renting always work out cheaper in pretty much any part of the world” is far from correct. Anyway, make your analysis for both renting and buying in the city area where you want to leave and decide. Typically buying is better because of leverage. The advantage of renting is the option to change apartment/city/country fast with no attachment if need to be.
    Sep 18, 2018 0
  • Pinterest PhUx63
    Owning a home is a status symbol for some. It doesn’t seem as common to brag / show pride over your index fund...
    Sep 17, 2018 0
  • Apple / QA
    Tim Cock

    Apple QA

    PRE
    Telenav, Nitrio
    Tim Cockmore
    Because a bank will never give you a loan to buy stocks.
    Sep 17, 2018 3
    • Apple / Eng MakingIt
      Sure they(brokers) do. It’s call margin.
      Sep 17, 2018
    • Credit Karma fgfgdhdhdh
      Loans to buy on margin are even cheaper than real estate loans. Just watch out for the dreaded margin call.
      Sep 17, 2018
    • Square / Eng nom🍔
      Margin is dynamic, real estate loans are stable. Very different beasts.
      Sep 18, 2018
  • New DuQvV7x
    This question keeps coming up. I hope this conclusively answers it.

    If you better understand how leverage works for you, this would not be an issue.

    Lets do simple numbers. For this, We will assume that the stock market returns 10% YoY and that rentals return 5% YoY (rental receipts, appreciation & depreciation - expenses).

    Investment: 100k will grow to 200k in 7.27 years (100k increase at 10%)

    Rental: 500k will grow to 600k in 3.29 (100k increase at 5%)

    WHAT KIND OF VOODOO MATH IS THIS?!

    Its called leverage. I can buy a 500k property with just $100k in hand, and I finance the rest.

    Of course, you can also juice your investment return using margin but the rules of that are more complex

    [NOTE] This applies exclusively to rental RE
    Sep 19, 2018 2
    • EA oySal6
      Rental RE is a real investment. But isn’t this example a bit disingenuous? Most of that 5-600k besides the cash flowing 5% is still locked into the property, and if your cash flow looks good, wouldn’t you hold that property 30+ years?
      Sep 19, 2018
    • New DuQvV7x
      The 5% is net ROI, not cash flow.

      Yes, there’s a liquidity difference between stocks & RE. Properties can be sold, but a seasoned RE investor would simply borrow against said asset.
      Sep 19, 2018
  • IBM / Eng Leetcode
    Yeah for most people, they’re happy enough with index funds. Possible reasons for real estate: Sometimes real estate return better than stocks. Imagine if you had houses in SF. Some people like tangible investments. Mortgages allow for leverage. Some people are handy and enjoy fixing houses.
    Sep 17, 2018 1
    • Apple / Eng MakingIt
      Regarding housing as an investment. When do you sell? Will you sell given a built in 6% haircut
      Sep 17, 2018
  • New WblC45
    You should also take into account that you realize the ROI once you SELL the property. While you own and live in it, it is negative cash flow. Also if you rent, the rent amount may not cover loan interests, taxes, maintenance, potential gains on downpayment (if it were invested in stocks).
    Sep 20, 2018 0
  • Uber / Eng
    meowimacat

    Uber Eng

    BIO
    Im a cat 🐈! Meowww...
    meowimacatmore
    They can rent out the house and make more $$
    Sep 18, 2018 0
  • IBM / Mgmt
    🧠 .

    IBM Mgmt

    PRE
    Google, Apple
    BIO
    Hi!
    🧠 .more
    People buy houses as an investment because of people like you, who would rather rent and invest in S&P. Meanwhile, they collect your checks.
    Sep 18, 2018 0
  • Glooko / Other azizlight!
    That consistent monthly check...
    Sep 17, 2018 0

Salary
Comparison

    Real time salary information from verified employees