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[Gruco]

You'll have to clarify what you mean by "5% guaranteed annual tax-free dividend".

The rental value accrues tax free. As a counterfactual, one would earn more than the rental value, pay taxes on it, and then pay rent.

Putting a huge amount of money into a single leveraged asset is always going to be questionable. There is an expensive condo building on the corner of my block. The city just put up an apartment building on one side and is now building a hotel on the other side, blocking all of their lake views. I'm sure those owners lost a ton of property value.

Oh I agree, this is what I was getting at with my comments on the downsides. It's big, it's leveraged, it's illiquid. It's also pays ridiculously reliable dividends and has absurd tax benefits. These are the tradeoffs.

FWIW, I'm not a home owner and am glad I resisted peer pressure to buy in the mid 2000s. But I also have moved a lot. Even so, the limits on tax advantaged accounts only take you so far.

If I had 300k sitting around and knew I'd be staying in place, I'd rather buy a house than a taxable fund. I'd also rather borrow to buy a house than borrow to buy on the stock market.

I guess my main point is that mortgages and housing are often conflated as the same transaction, for obvious practical reasons. But what you're really getting is a reliable, tax efficient investment, which is so good that you're willing to take on more debt to get there(and even that is subsidized!)

I agree with you that it's not for everyone, but especially once tax efficient investments are in place and one is looking to settle down, there really isn't any other investment one can make that has the same mix of yield, tax-advantages, and low variance.

 

[RumblingRosco]

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[otake]

I'm surprised to hear that perspective. If anything, I think that people overestimate it. I hear tons of people repeating that line about "throwing your money away" renting, without understanding the concept of opportunity cost in the downpayment.



You'll have to clarify what you mean by "5% guaranteed annual tax-free dividend".



Putting a huge amount of money into a single leveraged asset is always going to be questionable. There is an expensive condo building on the corner of my block. The city just put up an apartment building on one side and is now building a hotel on the other side, blocking all of their lake views. I'm sure those owners lost a ton of property value.

I guess it's all relative.

I can only speak for myself. I've been investing one way or another for 10 years. This year, I'm seeing a 16% return on my stocks and index funds and a 6% return on my bonds. While this may sound great I've been doing this long enough to know that it's misleading. I have been in the negative very often. Investments are quite volatile and the gains are only there if you sell. You have to have a lot of money invested to live off dividends, like way more than $80K.

With a house it can be quite different, depending on the market. In my area, it is often cheaper to own than rent. two bedroom apartments can rent for $1500 a month. If I take that $45K and use it to buy a 3 bedroom home, my mortgage, insurance and taxes will roughly be $1300 a month. Right there I'm using $45K to save my self $200 in cash flow and I own an asset. Will that $45K get me $200 in dividends every month? Highly unlikely.

If I don't purchase that home and maybe find a cheaper rental there's no guarantee rents won't go up. Actually, the market tilts towards increasing rent while earnings tend to stagnate.

Therefore, while using cash to buy a home DOES have opportunity cost. They are not as big or impact as the inflation protection and cashflow stability provided by homeownership.

 

[PantherLotus]

I can't believe I hadn't thought of capital gains on selling the house. Glad I posted. Thank you!

 

[otake]

I can't believe I hadn't thought of capital gains on selling the house. Glad I posted. Thank you!

If you have great credit, you can get 4% or lower. I got $3.875 on the home I'm buying now. $3.625 on the home I bought 5 years ago.

 

[Gruco]

--Don't forget to factor in the capital gains tax you will pay on the appreciated value of your current home. If it cost $200k when you took the mortgage and you sell for $250k, that $50k increase will be taxed at the federal and state level as capital gains at the time you sell. You'll want to factor that into the amount you plan to put into the down payment of the new place so you don't get caught counting on having it and getting clobbered when the tax bill come.

Capital gains from a primary residence are exempt from federal tax up to $250,000 in gains, and I believe 500k if married. Provided you have been at the residence at least for two years. It will be true for many states as well, but obviously everyone should look in to their own circumstances.

 

[GhaleonEB]

Capital gains from a primary residence are exempt from federal tax up to $250,000 in gains, and I believe 500k if married. Provided you have been at the residence at least for two years. It will be true for many states as well, but obviously everyone should look in to their own circumstances.

That's the first I'd heard of this, so good to know. Googling just now, that does seem to be the case. I keep hearing horror stories about people selling and not taking into account the capital gains (my aunt got hit hard when selling a house many years back.) Was this a recent change?

Fake edit: it wasn't her primary residence, so that might have been it.

 

[Walter White Walker]

That's the first I'd heard of this, so good to know. Googling just now, that does seem to be the case. I keep hearing horror stories about people selling and not taking into account the capital gains (my aunt got hit hard when selling a house many years back.) Was this a recent change?

Fake edit: it wasn't her primary residence, so that might have been it.

It's been that way for at least 17 years which is when I sold my first house and got about $75,000 more than I had paid for it.
Edit - found on a legal site "The law applies to sales after May 6, 1997".

 

[GhaleonEB]

To add to the discussion about mortgages, and paying them down. We can crunch the numbers and discuss opportunity cost until we're blue in the face, but a lot of the decisions we make about homes and debt have less to do with spreadsheets and more to do with how we want to live our lives. When my wife and I were looking for a house, it wasn't because we wanted an investment, it's because we wanted a home with a yard and a garden, and a project. (Let me tell you, a house built in 1940 is one heck of a project.)

We're also averse to debt, and put a huge premium on value financial flexibility. For these reasons the opportunity cost tokkun described earlier - making lump-sum investment and living off the income to pay rent in retirement vs. a mortgage paid off - is actually wildly unappealing to me. I'd rather have no housing cost at all (aside from taxes) than hope an investment pays off x years down the road. I know odds are good it would pay off (I'm making that same bet with my retirement accounts), but given the option of locking that in vs. taking the long investment, I'd lock it in every time. Couple that with the features ("benefits" would be highly subjective) to owning vs. renting, and the life we wanted, I'd never choose another route.

None of those decisions came from crunching numbers in a spreadsheet. Of course, me being me, I did crunch a lot of them in a spreadsheet, particularly the opportunity cost of paying down the mortgage early, and concluded our desire to hit our goals outweighed the opportunity costs. But it was good to at least be aware of it.

All of which is to say, I continually hesitate to give mortgage advice based on spreadsheets and numbers. First decide the life style you want. Then factor in the financial impacts and pros/cons of your options.

 

[Unknown Soldier]

I just love living in my house. It's mine. I own it. No one can jack up my rent or kick me out. I'm not beholden to a landlord.

I mean sure now I have yard work and that kind of sucks. But at least I'm working on my yard which is my property. I'm not mowing the landlord's lawn. I'm mowing my lawn.

 

[RSTEIN]

I just love living in my house. It's mine. I own it. No one can jack up my rent or kick me out. I'm not beholden to a landlord.

Your mortgage rate or property tax rates could be jacked up though. The value of your house could fall. Interest rate deduct-ability/capital gains rules could change against you.

 

[Gruco]

It's not that simple anymore.

Tax law has finally caught up, so there's some annoying as shit calculations when dealing with a home you've rented out. You have to take percentages and from there you can figure out what is taxable and what is not.

I had a whole graduate class on the taxation of real property transactions. It's a bitch.

I mean, this is something of a second order problem, since it really is that simple for the way most people use their homes. But your point is well taken. People who live in multiple residences or have a business/rental purpose to the property should check the regs in more detail.

 

[PantherLotus]

Thank you for the follow up on capital gains for primary residence. I'm looking at around $60K gains so that's great to know!

 

[tokkun]

The rental value accrues tax free. As a counterfactual, one would earn more than the rental value, pay taxes on it, and then pay rent.

Alright, but I don't exactly consider income from being a landlord to be equivalent to the passive income you get from bonds, as there are risks and headaches associated with being a landlord. IIRC, one of the regulars in this thread (Wormdundee maybe?) had some big legal problem with one of their tenants.

I guess it's all relative.

I can only speak for myself. I've been investing one way or another for 10 years. This year, I'm seeing a 16% return on my stocks and index funds and a 6% return on my bonds. While this may sound great I've been doing this long enough to know that it's misleading. I have been in the negative very often. Investments are quite volatile and the gains are only there if you sell.

Same is true of houses. People only think they aren't volatile because they do not have the ability to view changes in their house's current selling price on a minute-to-minute basis like you can with stocks. But just because you can't see it doesn't mean it's not real.

You have to have a lot of money invested to live off dividends, like way more than $80K.

In the example I posted above, a $50K downpayment (20% on the US median house price) grows to about $300K in today's dollars in 30 years with a 6% real rate of return.

With a house it can be quite different, depending on the market.

That is why I always preface these diatribes on housing investments with the disclaimer that real estate markets are local. The advice is based on data using median prices. There will certainly be some places where there is more financial incentive to buy than rent, and vice versa, as real estate markets are not that efficient.

If I don't purchase that home and maybe find a cheaper rental there's no guarantee rents won't go up. Actually, the market tilts towards increasing rent while earnings tend to stagnate.

Agreed, no one knows how housing or rent prices will change in the future. But the error could also go in the opposite direction.

Therefore, while using cash to buy a home DOES have opportunity cost. They are not as big or impact as the inflation protection and cashflow stability provided by homeownership.

Care to justify those claims with data? How do you quantify inflation protection and cashflow stability?

 

[Gruco]

Alright, but I don't exactly consider income from being a landlord to be equivalent to the passive income you get from bonds, as there are risks and headaches associated with being a landlord. IIRC, one of the regulars in this thread (Wormdundee maybe?) had some big legal problem with one of their tenants.

I'm not talking about tenants, I'm talking about residing where you own. One accrues rental value, tax free, by being there. People tend to overlook this because there's no money exchanging hands, which is the basis of my argument for why housing is often under-valued.

 

[Natetan]

Slightly off top question, but since people are talking about housing I'll ask.

Was the financial crisis in 2008 dramatically worse than other bad economic periods since the depression? I guess I mean in terms of stock market value. A link to an article or preferably some real data would be appreciated.

 

[GhaleonEB]

Your mortgage rate or property tax rates could be jacked up though.

Only if you have mortgage with a flexible rate. And yeah, taxes could go up. They tend to independent of tax hikes just through appreciation.

The value of your house could fall.

This doesn't matter if you plan to live in the house. We've been in ours for 12 years, so we bought before the real estate bubble burst, lived in it while our mortgage was deep under water, and are living in it now as it appreciates rapidly again and is now way above our purchase price. None of that has affected us because we plan to keep living there.

Interest rate deduct-ability/capital gains rules could change against you.

This is just a general tax risk, and all of the taxes we pay are at risk of changing. (My wife and I haven't taken the deduction the past few years because the standard deduction was better than itemizing.)

Point taken that "it's mine" comes with caveats, but I think the point he was making was to distinguish it from renting, not make a house seem like it was magical and free from pitfalls.

 

[RSTEIN]

This doesn't matter if you plan to live in the house. We've been in ours for 12 years, so we bought before the real estate bubble burst, lived in it while our mortgage was deep under water, and are living in it now as it appreciates rapidly again and is now way above our purchase price. None of that has affected us because we plan to keep living there.

It does matter if an emergency pops up and you're forced to sell or need to relocate for whatever reason. Took a very long time for housing to recover after the the 80s bubble. Add in the broker commission on the sale, land transfer taxes on your previous sale, the current house, the next house, and legal/moving fees, you could easily be under water. Renting provides you with flexibility. After you rent for a year you automatically go month to month.

This is just a general tax risk, and all of the taxes we pay are at risk of changing. (My wife and I haven't taken the deduction the past few years because the standard deduction was better than itemizing.)

That's true but owning exposes you to significantly more tax/policy/economic risk.

Point taken that "it's mine" comes with caveats, but I think the point he was making was to distinguish it from renting, not make a house seem like it was magical and free from pitfalls.

The poster said he was not "beholden" to anyone as a renter, just pointing out one is beholden to a lot of external, unpredictable forces as an owner.

I own plus have several investment properties so I'm definitely on the side of owning.

 

[Alcander]

It does matter if an emergency pops up and you're forced to sell or need to relocate for whatever reason. Took a very long time for housing to recover after the the 80s bubble. Add in the broker commission on the sale, land transfer taxes on your previous sale, the current house, the next house, and legal/moving fees, you could easily be under water. Renting provides you with flexibility. After you rent for a year you automatically go month to month.

The bolded is certainly not true everywhere.

 

[Unknown Soldier]

Your mortgage rate or property tax rates could be jacked up though. The value of your house could fall. Interest rate deduct-ability/capital gains rules could change against you.

Mortgage rates can be fixed or variable and you choose when you buy the house.

Property tax rates may increase marginally year over year but it's not something that suddenly jumps for no other reason than no politician wants to commit political suicide.

The value of any investments you make could fall. Coincidentally, most of the time when housing values fall the stock market falls too.

Changes in the tax code of that magnitude would be opposed by virtually everyone and I don't see anyone actually successfully passing a bill that ends the mortgage interest tax deduction or the capital gains exemption. There are too many powerful lobbies that would oppose something like that.

 

[GhaleonEB]

It does matter if an emergency pops up and you're forced to sell or need to relocate for whatever reason. Took a very long time for housing to recover after the the 80s bubble. Add in the broker commission on the sale, land transfer taxes on your previous sale, the current house, the next house, and legal/moving fees, you could easily be under water. Renting provides you with flexibility. After you rent for a year you automatically go month to month.

I'm familiar with the risks. I came close to getting laid off in 2009, a couple years after we bought our house, after the bubble was bursting; I was given a buy-out offer, which I declined, rolling the dice that I would not get laid off in the following round. I lucked out.

That said, I don't think we're actually arguing with one another at this point, just taking turns noting different pros and cons of owning.

Yes, life happens. That can apply to any and all living situations. For example, courtesy of the housing shortage in my state, rentals are getting very expensive and no-cause evictions are going through the roof so owners can get new tenants in at far higher rents. So renting can also get you hauled out on your ass and/or with dramatic upward swings in housing costs without notice. There's flexibility, and risk.

The primary thrust of my tangent (and boy did this go sideways) was to not evaluate home ownership in purely financial terms, and the points you've raised reinforces that.

 

[tokkun]

I'm not talking about tenants, I'm talking about residing where you own. One accrues rental value, tax free, by being there. People tend to overlook this because there's no money exchanging hands, which is the basis of my argument for why housing is often under-valued.

Oh, I guess I was confused by the fact that you said it was overlooked. My experience is that this is the number one thing people cite in why they think buying is a good investment.

You are way off in saying that it is equivalent to a 5% return-on-investment. 5% is a reasonable figure for the first year, but it won't compound at a 5% rate because rent is not growing that fast. The historical rent growth rate is 3%, and that is before inflation, so in real terms it's more like 1%.

Comparatively, historical real returns on the stock market are 6-7%. With compounding, the difference between 1% and 6% becomes huge over the course of a typical 30-year mortgage period.

A 5% first-year return compounding at 1% will return 1.4X your initial investment in 30 years. A 6% annually compounding investment will return 5.7X your initial investment.

 

[tokkun]

Slightly off top question, but since people are talking about housing I'll ask.

Was the financial crisis in 2008 dramatically worse than other bad economic periods since the depression? I guess I mean in terms of stock market value. A link to an article or preferably some real data would be appreciated.

I found this article to be very enlightening.
http://www.businessinsider.com/historys-worst-bear-markets-2014-7

The data is about a year old now, but if you were to extend it out to the present, 2007 would look even better, given that returns have been huge in the past year.

If you look at it from a purely stock-based perspective, you can argue that 2007 was actually a great opportunity for investors who follow the type of advice given in this thread. You could have gotten significant tax lost harvesting in down period and gotten a huge discount on new stock purchases. It was then followed by one of the largest bull markets in history.

You might wonder from that data why people focus so much on 2008 when 2000 was a much worse bear market. First off, 2008 hit the average joe a lot more, since it impacted house values, and the average person has much more wealth in home equity than in the stock market. It also had a bigger impact on credit markets, which in turn had negative impacts on the ability of individuals and businesses to borrow. This in turn hurt the job market. There was also the double-whammy that the housing bubble was built on these variable-rate mortgages, such that people who had purchased houses often could not afford to hold their investments because they couldn't cover the mortgage payments when the higher rates kicked in.

 

[Gruco]

Oh, I guess I was confused by the fact that you said it was overlooked. My experience is that this is the number one thing people cite in why they think buying is a good investment.

You are way off in saying that it is equivalent to a 5% return-on-investment. 5% is a reasonable figure for the first year, but it won't compound at a 5% rate because rent is not growing that fast. The historical rent growth rate is 3%, and that is before inflation, so in real terms it's more like 1%.



Comparatively, historical real returns on the stock market are 6-7%. With compounding, the difference between 1% and 6% becomes huge over the course of a typical 30-year mortgage period.

A 5% first-year return compounding at 1% will return 1.4X your initial investment in 30 years. A 6% annually compounding investment will return 5.7X your initial investment.

I'm not entirely following your argument here, but it doesn't make any sense whatsoever to suggest that the flow value is specifically higher for the first year, unless the cost of rent as a share of the cost of housing is falling in the long term. One can reinvest that in any way they choose - for example, in the stock market. Properly accounted for, it should compound. I think you might be confusing the growth rate in the flow payment for the flow payment itself?

Anyway, (Annual Rent/House Cost) defines the flow payment. The demand for housing defines the capital gain. As long as the rental and housing markets are in long term balance, one collects forgone cost of rent as flow payment and the 3% you allude to here as a capital gain. I conservatively estimated this as at inflation, but if you want to argue that it is a point over inflation I am okay with that too It's probably somewhere in between. All of this of course has to be netted against maintenance and property taxes.

The 5% I mention is reasonable for the market (major US metro) that I've been looking at. People should look at the ratio of rent to housing prices in their local area of course - the failure of many to do this lead to some bad choices in the mid 2000s. Again, this has nothing to do with the growth in the cost of rent.

Anyway, this reinforces my point, that there's a lot of confused accounting on this subject. Perhaps it'd help if I laid down some counterfactual scenarios?

 

[aronnov reborn]

probably a silly question but i'm still learning quite a few things.

I'm currently invested in my works 401k. I have a question about a mutual funds performance and fees. When you see a mutual funds growth/return etc does that take into account of fees? Or is that before fees are applied?

for example. I have some money in T.Row Price Mid Cap Equity - PMEGX
http://beta.morningstar.com/funds/XNAS/PMEGX/quote.html

Is the growth and everything they show with fees included? Or is all that before taking the hit on fees?

and yes i know. Index Funds, Index Funds, Index Funds

 

[tokkun]

I think you might be confusing the growth rate in the flow payment for the flow payment itself?

That was my intent, so maybe I did a poor job of communicating my point.

The point was trying to demonstrate was that although a 5% annual dividend might sound impressive on its face (for instance when compared with bond appreciation rates in the 2-3% range), it is actually much different from getting a 5% rate of return on an investment (or 6-7% in the case of historical stock market returns).

A risk-free 5% annualized return would be a tremendously good investment, whereas one that starts at 5% but only grows at a 1% rate is much less impressive over the long run. That's all I meant to say.

 

[Gruco]

That was my intent, so maybe I did a poor job of communicating my point.

The point was trying to demonstrate was that although a 5% annual dividend might sound impressive on its face (for instance when compared with bond appreciation rates in the 2-3% range), it is actually much different from getting a 5% rate of return on an investment (or 6-7% in the case of historical stock market returns).

A risk-free 5% annualized return would be a tremendously good investment, whereas one that starts at 5% but only grows at a 1% rate is much less impressive over the long run. That's all I meant to say.

Ah I see, sorry if I misunderstood! That's a fair point. Buying a house is obviously very different from buying the market because it's not scalable.

edit3 - Okay, comparison, spending 300k in the market vs 300k on a house. Market is 6% real, pre tax, House is 6% real (5% rent and 1% capital), tax free. Over 30 years. The tax savings, reinvested in the market earning 6% (pre-taxes) would result in 180k-250k (post tax) over 30 years. Depends on tax assumptions. Material but nothing crazy.

 

[SecretMoblin]

probably a silly question but i'm still learning quite a few things.

I'm currently invested in my works 401k. I have a question about a mutual funds performance and fees. When you see a mutual funds growth/return etc does that take into account of fees? Or is that before fees are applied?

for example. I have some money in T.Row Price Mid Cap Equity - PMEGX
http://beta.morningstar.com/funds/XNAS/PMEGX/quote.html

Is the growth and everything they show with fees included? Or is all that before taking the hit on fees?

and yes i know. Index Funds, Index Funds, Index Funds

It's always before fees/taxes as those can vary.

I did some back-of-envelope calculations with the expense ratio alone and if you had invested $10k at the fund's inception, you would have lost about 13-14% of the earnings to fees and opportunity cost, taxes would eat an additional chunk of that depending on how the 401(k) is set up.

Costs for that fund are still quite low compared to ones that have a similar profile, though, and it's outperformed the market by a good bit (not that it necessarily means much).

 

[otake]

Alright, but I don't exactly consider income from being a landlord to be equivalent to the passive income you get from bonds, as there are risks and headaches associated with being a landlord. IIRC, one of the regulars in this thread (Wormdundee maybe?) had some big legal problem with one of their tenants.



Same is true of houses. People only think they aren't volatile because they do not have the ability to view changes in their house's current selling price on a minute-to-minute basis like you can with stocks. But just because you can't see it doesn't mean it's not real.



In the example I posted above, a $50K downpayment (20% on the US median house price) grows to about $300K in today's dollars in 30 years with a 6% real rate of return.



That is why I always preface these diatribes on housing investments with the disclaimer that real estate markets are local. The advice is based on data using median prices. There will certainly be some places where there is more financial incentive to buy than rent, and vice versa, as real estate markets are not that efficient.



Agreed, no one knows how housing or rent prices will change in the future. But the error could also go in the opposite direction.



Care to justify those claims with data? How do you quantify inflation protection and cashflow stability?

Your 6% real return is highly speculative. Home prices rising or falling doesn't matter if you don't sell. Rent tends to rise with inflation, a fixed mortgage protects you because a big portion of housing costs are fixed.

Like I said before, lots of people write about real returns in the stock market. I've been doing it for 10 years and .... well whatever. I can only write about my experience.

 

[tokkun]

Ah I see, sorry if I misunderstood! That's a fair point. Buying a house is obviously very different from buying the market because it's not scalable.

edit3 - Okay, comparison, spending 300k in the market vs 300k on a house. Market is 6% real, pre tax, House is 6% real (5% rent and 1% capital), tax free. Over 30 years. The tax savings, reinvested in the market earning 6% (pre-taxes) would result in 180k-250k (post tax) over 30 years. Depends on tax assumptions. Material but nothing crazy.

Please post the formulae you are using.

 

[tokkun]

Your 6% real return is highly speculative. Home prices rising or falling doesn't matter if you don't sell. Rent tends to rise with inflation, a fixed mortgage protects you because a big portion of housing costs are fixed.

Like I said before, lots of people write about real returns in the stock market. I've been doing it for 10 years and .... well whatever. I can only write about my experience.

I agree that no one can predict the future. I'm just using longterm historical data, which seems like the next best thing.

There is a major caveat on this whole discussion, which is that house appreciation is pretty bimodal in history. If you look at 100 years, it is pretty low. If you only look at the last 25 years it is much higher. So your assumptions matter a great deal, even when using historical data. I think there are basically two arguments to explain the pattern:

A. The higher appreciation in houses is the the result of permanent changes like population growth and urban renewal (if you believe this is permanent) and are therefore the new normal.

B. The higher appreciation was a result of the same factor that caused the 30-year bull market in bonds - continual reductions in interest rates. Ergo, in an environment where interest rates can really only go up, appreciation will revert to the longer-term mean.

I do not have a strong sense of which of these is true.

 

[aronnov reborn]

It's always before fees/taxes as those can vary.

I did some back-of-envelope calculations with the expense ratio alone and if you had invested $10k at the fund's inception, you would have lost about 13-14% of the earnings to fees and opportunity cost, taxes would eat an additional chunk of that depending on how the 401(k) is set up.

Costs for that fund are still quite low compared to ones that have a similar profile, though, and it's outperformed the market by a good bit (not that it necessarily means much).

Thanks for the info! This is the part that ticks me off when they post these numbers. What's it matter if they out perform the market since it's all before fees anyways? It's like there's no point to do anything but Index.

What happens though when everyone starts putting money in Index Funds? would the market even move?

 

[Randolph Freelander]

Fascinating discussion about housing. My two cents.

tl;dr: Put less of a down payment into a house and recalculate.

For me, I didn't put 20% down, I put 10. This is real life. For the sake of discussion, I allowed the stock market to grow at 8.67% per year, while the home value to track just above inflation (I used 3%). After 30 years, the equities grew to half the value of the home. If I put down 20% instead of 10%, the equities and home value would be equal (which, incidentally, is how I arrived at roughly 8.67% market growth for the purpose of this exercise). The takeaway is that it will take a long time for the equities to catch up to the house because of the leverage.

During this 30 years, if you're not paying a mortgage, you're paying rent. Unlike your mortgage's P+I portion, the rent is not fixed and is growing (at the very least) with inflation.

The costs of my home are mortgage P+I, property tax, HOA, maintenance, and PMI (since I have less than 20% equity). If I were to rent, I would have all of these same costs and add to them the profit motive of the landlord, plus (for that matter) a portion covering my equity stake.

P+I is roughly 63% of my monthly ownership costs, I'll round that down to 60%. If I let my rents grow by 2.5% per year, I would also let my ownership costs grow by 1% (the 40% that isn't fixed growing at the same rate of inflation as rent). In this calculation, over the course of 30 years, the cash outflow for rent is 26% greater. This is savings that an owner can plow into investing.

Owning isn't for everyone, renting isn't for everyone. Certainly, you are far more mobile if you're not tied down with a house. But I don't know that I can ever be convinced that renting is financially more prudent, again, given that renting should cost you the same or more as owning for a similarly situated home, with the rent growing more with time compared to the costs of ownership.

 

[SyNapSe]

Thanks for the info! This is the part that ticks me off when they post these numbers. What's it matter if they out perform the market since it's all before fees anyways? It's like there's no point to do anything but Index.

What happens though when everyone starts putting money in Index Funds? would the market even move?

I read your question earlier and have been wondering. It'd be pretty hard to show the results w/o fees because they're taken from the fund itself. It's one of the tricky things about something like the 12b-1 fee. You would never see anything on your statement that would let you know to look into it.

Of course, a sales load wouldn't be included but the ER gets pulled right from the fund typically.

Edit:. They're taking from your account not the fund itself, duh. I googled and morningstar send to indicate it includes expenses and dividends reinvested I think

 

[Walter White Walker]

Owning isn't for everyone, renting isn't for everyone. Certainly, you are far more mobile if you're not tied down with a house. But I don't know that I can ever be convinced that renting is financially more prudent, again, given that renting should cost you the same or more as owning for a similarly situated home, with the rent growing more with time compared to the costs of ownership.

That's why you rent an apartment and not a house. For the average house around me if I owned or rented one I'd be looking at paying two to three times a month what I pay for rent. Plus my rent includes water/sewer/garbage which wouldn't be included in the house payment even if you're renting, the energy bills are dirt cheap compared to those you pay living in a house, and I pay less than $100 a year for renters insurance.
It helps I have reasonable neighbors, though, who aren't obnoxious plus a good structure where I don't hear anybody too often. Sucks the rent goes up each year but then part of that is escalating property taxes and water/sewer/garbage as well which affects homeowners too. And since selling off my last house no frickin' yard work which was such a time sink.

 

[Randolph Freelander]

That's why you rent an apartment and not a house. For the average house around me if I owned or rented one I'd be looking at paying two to three times a month what I pay for rent. Plus my rent includes water/sewer/garbage which wouldn't be included in the house payment even if you're renting, the energy bills are dirt cheap compared to those you pay living in a house, and I pay less than $100 a year for renters insurance.

All of those are in, though. You're paying for every single thing you're getting while you're renting, it's just built into the single cost (most of the time). With owning, some stuff is built into your mortgage payment, some parts of paid separately, but you're paying for the same things either way.

That said, sure, if you're buying something fundamentally different than what you might rent (house vs. apartment, bigger vs. smaller, etc.), the costs will be different. However, for me, my housing costs are roughly in line with what I was paying in rent at my last apartment (they're actually 10% higher, but then, I did buy more.)

Spoiler

I also don't mow my yard. Townhouse for the win. I'll gladly pay more in HOA fees to avoid outside upkeep.

 

[SecretMoblin]

Thanks for the info! This is the part that ticks me off when they post these numbers. What's it matter if they out perform the market since it's all before fees anyways? It's like there's no point to do anything but Index.

What happens though when everyone starts putting money in Index Funds? would the market even move?

Honestly that particular fund outperformed index funds enough that even after fees you would still likely come out ahead. The fund is only 20 years old, though, and the next 20 years could paint a very different picture... The attractiveness of index funds is that there can be so much variance over the lifetime of a fund that you want to try and reduce the expenses you have some control over, namely the fees and taxes.

But taking chances on concentrated/focused funds or individual stocks will forever be a strategy for the same reason casinos and lotteries exist -- people want to outsmart the market and make it rich on a gamble, and everyone to a certain extent wants be part of the few who certainly will. Mark Cuban shouts "fuck diversification" from the rooftops and why shouldn't he? He got rich riding the edge of the dot-com bubble and doesn't care what will give the average person a good return on their money, and that approach has a romantic quality that a dispassionate approach doesn't have.

 

[GTI Guy]

Folks seem to like Vanguard in this thread.

Anyone have any thoughts on WiseBanyan?

https://investorjunkie.com/42668/true-costs-robo-advisors/

They are the cheapest out there even beating Vanguard. Is there a reason to not go with them?

 

[Hockeylover01]

This is for all the canadians here. I am looking at moving my emergency account into a better savings account (got mine at bmo atm). I have been seeing ads everywhere for eqbank, https://www.eqbank.ca/ and I am wondering if 2.30% is too good to be true for just an online savings account or if any of you use eq . Thanks

 

[Smiley90]

This is for all the canadians here. I am looking at moving my emergency account into a better savings account (got mine at bmo atm). I have been seeing ads everywhere for eqbank, https://www.eqbank.ca/ and I am wondering if 2.30% is too good to be true for just an online savings account or if any of you use eq . Thanks

it looks legit and if Equitable the bank is the same as Equitable the insurance company they're definitely legitimate. It looks like the main downside would be having no ATM's, but otherwise that looks pretty damn good, not going to lie. Thanks for posting, I'll have to look into that too! I barely keep any cash in my account anyway though, but still.

 

[Walter White Walker]

Folks seem to like Vanguard in this thread.

Anyone have any thoughts on WiseBanyan?

https://investorjunkie.com/42668/true-costs-robo-advisors/

They are the cheapest out there even beating Vanguard. Is there a reason to not go with them?

Meh. I see no reason for an advisor at all for most people, robo or especially human. Also, this:

Thanks to the rise of robo-advisors, investing for the future is now more accessible than ever. You don't have to spend a lot of time or money hiring a financial advisor to create a complicated asset allocation to receive the best returns possible.

Why on Earth would you want to create a complicated asset allocation to begin with? There's no reason to believe a whole bunch of complexity is going to lead to better returns. Whoever wrote that sentence is full of crap. I look to both Warren Buffett and Jack Bogle who are like, "Get a passive fund that follows the S&P 500 plus a bond fund and there you go, all done folks". I admittedly don't totally follow that advice as I also have international stock ETF's (plus a total US ETF instead of just the S&P 500) but still, I only have 4 ETF's and I'm in my 40's. Even the bond thing is debatable when you're young so you could get by for years with just one fund.

 

[PflargBlarg]

This is for all the canadians here. I am looking at moving my emergency account into a better savings account (got mine at bmo atm). I have been seeing ads everywhere for eqbank, https://www.eqbank.ca/ and I am wondering if 2.30% is too good to be true for just an online savings account or if any of you use eq . Thanks

Hmm, Tangerine's rates are just as good (sometimes better) so you might want to look at that too.

 

[tokkun]

What happens though when everyone starts putting money in Index Funds? would the market even move?

I get articles about what a disaster it would be if everyone indexed popping up in my news reader all the time. No doubt written by someone who makes money selling stock advice.

Yes, in theory the market would be inefficient if all investment dollars went through total market index investment. But it is a purely academic thought exercise because it will never happen. Like asking what would happen to the earth's orbit if everyone in China jumped at the same time.

 

[Hockeylover01]

I have another question for canadians (thank you for the answers to my banking question). I am looking to get into the vanguard etfs and am getting confused about which one is the total international stock etf. If anyone could link me the code for it I would greatly appreciate it

 

[Gruco]

Please post the formulae you are using.

Principal P, return r, tax rate t.

Investing in the market earns Pr(1-t) annually. Buying a house earns Pr annually. So each period, one can take the tax savings of Prt, and reinvest it in the market at the rate Pr(1-t). I used 15-20% tax rates for a taxable account. 10% could be justified if capital gains are getting deferred for a long period. Technically, I should split the rental and capital components, which would allow the tax savings to grow over time slightly and make this look more attractive, but it wouldn't make a big difference. I also abstracted from time-value of money considerations for heavily deferred gains. Of course, one could invest in a taxable account, buy stocks which don't pay many dividends, and donate them all to charity or your heirs at death, in which case the taxable investment rate is effectively zero.

This is all sensitive to the ratio of rent to housing prices, net of expenses. It can vary a lot. If too high or low the r's won't be the same.

 

[Cyan]

I'm not sure why you'd assume taxes on UGL for indexing, but tax-free gains for a property. In both scenarios you're paying taxes once you liquidate, though you do get an exemption of... $250k I think?... for selling your home. If you're not selling it, are you taking out a line of credit or something to access the capital? Because obviously if you're just living there and hanging onto it it's not like it matters much how much it appreciated. Besides property taxes going up.

Honestly a lot of things about this comparison don't make much sense to me. "Buy a home so you don't have to pay rent forever" probably makes good sense for some folks, but it's not a retirement strategy in itself.

 

[Smiley90]

Hmm, Tangerine's rates are just as good (sometimes better) so you might want to look at that too.

https://www.tangerine.ca/en/rates/index.html

... how? where?

 

[Gruco]

I'm not sure why you'd assume taxes on UGL for indexing, but tax-free gains for a property. In both scenarios you're paying taxes once you liquidate, though you do get an exemption of... $250k I think?... for selling your home. If you're not selling it, are you taking out a line of credit or something to access the capital? Because obviously if you're just living there and hanging onto it it's not like it matters much how much it appreciated. Besides property taxes going up.

Honestly a lot of things about this comparison don't make much sense to me. "Buy a home so you don't have to pay rent forever" probably makes good sense for some folks, but it's not a retirement strategy in itself.

I don't think anyone has suggested it was a retirement strategy in itself, so I'm not sure what you're getting at there. The argument is that it is a good idea in the right circumstances and had important advantages as compared to renting and investing in the stock market. The counterfactual to buying is to rent and put your money in the the stock market. My motivation is to push back against the claim that renting and investing in the stock market is a better deal than buying, which I think can be true in many circumstances but often gives a distorted picture of the actual difference between these choices.

Not paying rent saves you after tax income, hence it's tax free.

The gains exemption is substantial and doubles if married.

Flows from stock come in the form of (taxable) dividends and (taxable deferred) capital gains. Flows from housing come from (tax free) implicit rents and (tax free) capital gains. Both of these should be added together to conduct any meaningful comparison.

So taxable to tax-exempt returns is the right comparison. I've detailed this in multiple posts on this page and frankly at a bit of a loss as to how I'm being unclear at this point. I'm happy to continue to explain though.

 

[Cyan]

I see. Given that we started out assuming a $50k down payment (heh), I suppose it makes sense to assume the capital gains are tax-free. And if you live in an area where that's plausible it might make sense to buy.

 

[Gruco]

If your house appreciates by over 500k, your wealth may be such that you'd want to consider investment vehicles outside the scope of this thread

But yes, even if the math works out it still comes down to whether the lifestyle is right for you and what your local market looks like.