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.
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.
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?
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.
Regarding housing as an investment. When do you sell? Will you sell given a built in 6% haircut
Some people can't handle the daily swings of equities. Sounds like you haven't had a decent downswing to humble you yet.
You have to live somewhere, I can either spend $3k in rent or $3k on a mortgage
Except that the value of your house fluctuates; your house could be half as worth overnight, you will still be 3k mortgage but the renter would pay the market rate rent.
If hosting prices drop in half overnight, so does your index fund. That means some sort of economic collapse.
Owning a home is a status symbol for some. It doesn’t seem as common to brag / show pride over your index fund...
I love owning and collecting rent checks. Tax deductible also.
Don't you end up paying taxes on the rent?
RE is less volatile than stocks with similar returns, but the barrier to entry is high. That's why most people shy away from it. In the long term though, after your mortgage is finished, your rental cash flow will explode way beyond what stocks can offer. They're also a good way to diversify a portfolio. Equities would correlate more towards the unemployment rate and GDP while RE has inelastic demand and correlates to something like homelessness. There's a good bit of cross over depending on the type of RE you dive into (offices, gas stations, etc) Typically, one goes up while the other goes down. If both are going down, then shit must be real bad.
This is exactly opposite to conventional wisdom! Real estate is less diversified, illiquid and cyclical over long run as opposed to indexing. The only advantages are preferential tax treatment (which is diminished with new tax laws) and leverage.
What new tax laws are you referring to here?
Nothing is guaranteed. Stock can collapse and companies go out of businesses. Real estate you can borrow money much easier than stock or other investment. The yield of each investment is what it is for a reason.
Isn’t renting also expensive in places where housing is expensive?
Not at the same rate. You can rent a 2m$ 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.
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.