Is Real Estate Actually a Good Investment on Average?
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So here is a way to see the current market in America.
Because real estate is high, it's the riskiest place to invest today. Bonds are actually safer. That's rare. Bonds are crazy dangerous. Investing in bonds is "betting against the market". The kind of thing you do only during a market collapse (expected.)
So someone considering home ownership vs. renting today's top consideration would be how could a house beat the stock market. And the answer is, there's no reasonable way for it to come close. That means that using your nest egg to invest, and paying rent, will dramatically outperform home ownership to many, many percentages greater than the home value vs. inflation number would show.
Because stocks are so predictable over time, they are the baseline used for holding assets. If your investment (home, bonds, gold, peanuts) can't meet or beat that baseline, it's a bad idea. You use that baseline in every aspect of financial planning. It's how you gauge all loans, for example. When you do that, it shows that home ownership is expected to "lose" money, because your assets are tied up and there is the "cost of lost opportunity."
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Everyone will say "but stocks are risky, they are a gamble." That's true, EVERYTHING is risky, everything is a gamble. Stocks are, by orders of magnitude, the lowest risk option, however. Stocks are lower risk (for their entire history) than holding any other kind of asset... real estate, gold, cash, oil, bank accounts, CDs, money markets, bonds... they all have higher risk than stocks.
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So like anything real estate can make money. So can the lotto. Real estate is much safer than the lotto. But it's all a sliding scale. Stocks are the farthest to the conservative side. Bonds are closer to the casinos.
But as crazy as bonds are, in 1929 it was for one brief moment, the bond holders alone who made bank as everything else collapsed. But they only made that bank if they were confident enough to dump the bonds immediately and get back to stocks. Because if they waited as little as five years, their entire bond windfall was wiped out. Even at its all time historical best, bonds had a "safe to hold" time frame of less than 60 months.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Can I afford a Ferrari? No, I can't afford that.
Comparing luxury cars to basic housing is not appropriate here.
In 19th century, lot of people migrated to USA to earn for basic living.
In 1st half of 20th century, lot of people from my country (Croatia) migrated to USA (and Latin America) to earn for basic living.
They did not "choose" not to buy homes, they just did not have a chance to buy it (not even with bank loans)
Comparing that with Ferraris is ... (I want to stay polite) -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
But just this one more now:
Can you answer to what market are you comparing real estate market?
Beacuse bonds and shares are completely different things with very different risks (if you are comparing to that)IN the financial world, all of these are financial vehicles. They are specifically always compared to each other because it is the sole comparisons to make.
Bonds are the highest risk. Real estate the middle. Stocks the lowest. Stocks are the only major investment vehicle to routinely outpace inflation and make money through the vehicle alone. Real estate and bonds are "losing" investments that you can only make money (on average) through trading against the deltas rather than the value of the assets. So with stocks, you can make money by investing. With real estate or bonds you assume you can only make money through trading.
The poor, especially in America, are always taught the opposite because it heavily helps investors control the profitability of the markets. They want the poor classes to hold bonds and real estate so that highly profitable and safer stock assets are available for the rich to trade. In the investment world, that real estate and bonds are super high risk that can't beat inflation is common knowledge, But if you learn investing in high school they will always claim stocks are risky. But stocks on average are the safest asset to hold by no small margin.
I am financial expert (not IT expert), I don't need basic financial explanation.
You say real esatate "lost against an index by 5-10%"
I ask "to what market are you comparing real estate market"
You do not answer to my question directly - instead you send me "walls of text"
It seems like you do not want discussion? -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
So like anything real estate can make money. So can the lotto. Real estate is much safer than the lotto. But it's all a sliding scale. Stocks are the farthest to the conservative side. Bonds are closer to the casinos.
Scott, I agree with lots of prejudices about real estate you are talking about.
But also, you write a lot of purely wrong statements here. Stocks are not conservative, and bonds are not casinos - on contrary:1. Bonds are lesk risky investment then stocks (that's why stocks offer chance for bigger profits, that is why owners capital is more expensive than financing with bonds)
2. Real estate is less risky then stocks (on average). That is why income on real estate is so low.
Another ilustration - you will always get better mortgage loan ratio for average real estate (long term loan/value), then you can get margin loans for stock trading (long term loan/value)If you claim different please make your arguments clear.
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As my more general contribution to this topic:
If someone is not financial expert, he may prefer to invest in his own home because:
- It has real value for him (that's why it is called real estate) - he can live in it.
- He understand what he is buying (non-financial people may not understand what they are buying when they buy Tesla stocks or bonds at a certain price)
It is wise that people invest in things they understand, not in things they do not understand.
Even Warren Buffet once said that he did not wanted to invest in IT companies because he did not understood that business.I think these two points above are also big reason why lot of folks like to invest in ownership of home. (also some others, like to be certain you can stay at a certain place for long time...)
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
It is wise that people invest in things they understand, not in things they do not understand.
As a Wall St. guy, I don't think I'd agree here. That's a way to limit people to a very small scope. Things that people understand don't tend to make them money.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
It has real value for him (that's why it is called real estate) - he can live in it.
I'm not sure that that is why it is called that. In the colonies, a "real" asset literally means that it was authorized by the crown. I have "real" estate, the paper that says I own it is called a real and it comes from the Real "royalty", the Spanish crown approved it. I'm not sure if that is the source of the word, but given that real estate was handled under a real meaning royal, I don't think it means real in the English sense as all assets have real value but not royal value.
That he CAN live in it is misleading. He can equally live in a rental. The only value to him comes from the investment value. That humans tend to be emotional about their homes causes bad financial decisions and is actually often said to an important reason to rent not buy, buying only has a good chance of being healthy for you and not crippling your life if you can be unemotional and remember that it is just an investment option and you have to be flexible with it to not get burned.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
I think these two points above are also big reason why lot of folks like to invest in ownership of home. (also some others, like to be certain you can stay at a certain place for long time...)
Those are big emotional reasons why people foolishly invest without evaluating logically, yes. Absolutely.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
Even Warren Buffet once said that he did not wanted to invest in IT companies because he did not understood that business.
That's hilarious because IT is just "business". To say he doesn't understand IT means the same as saying he doesn't understand business. IT involves tech, but IT itself is purely a business aspect and a part of every business. Whether his companies are IT themselves or just have IT as part of them, every investment involves IT and IT is a part of all aspects of business.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
How do rentals come into being?
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I know that was a big part of the 2008 crash. .....
is that where most rentals have come from?This is what was being answered. Dash was thinking that rentals were a rare thing historically and came about potentially as recently as 2008. Not that they were invented then, but that the rental market arose after 2008.
I never - not for one millisecond thought that.
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I suppose renting literally goes back to kings and queens - cause they owned everything, the peasants had to pay the kingdom..
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
It's not "almost a majority", it's not even half. Saying "last place is almost first place" is in any situation weird and misleading.
I know a girl who is almost pregnant!
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
That he CAN live in it is misleading. He can equally live in a rental. The only value to him comes from the investment value. That humans tend to be emotional about their homes causes bad financial decisions and is actually often said to an important reason to rent not buy, buying only has a good chance of being healthy for you and not crippling your life if you can be unemotional and remember that it is just an investment option and you have to be flexible with it to not get burned.
The term "real value" in economic terms means tha you can actual use that asset in life - you can live in a house, or you can use gold as a metal...
If you compare it to financial assets - financial assets do not have "real value" - they only have financial value. If nobody wants to buy shares or bonds that you want to sell, you can't use it.
That is definition of economic term "real value" (it is not my personal term) -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
The only value to him comes from the investment value. That humans tend to be emotional about their homes causes bad financial decisions and is actually often said to an important reason to rent not buy, buying only has a good chance of being healthy for you and not crippling your life if you can be unemotional and remember that it is just an investment option and you have to be flexible with it to not get burned.
First sentence is completely wrong.
I agree with second sentence. -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Those are big emotional reasons why people foolishly invest without evaluating logically, yes. Absolutely.
Of course. But people have right to pay/buy things they like to own, or things they feel safe to invest. They do not have to invest in something that proves to be most profitable in the long term.
People are not hired proffessionals when they decide about their private investments. It is OK that they spend money where they like to spend it.
(I am not saying that they should not learn to invest smarter) -
@Dashrender said in Is Real Estate Actually a Good Investment on Average?:
I suppose renting literally goes back to kings and queens - cause they owned everything, the peasants had to pay the kingdom..
Generally pretty good reasoning.
Basically, in feudal age, aristocracy lived from renting their land to peasants. In industrial age, different manufacturing businesses become more important as value (and source of income and profit) than pure ownership of land and things soon changed to capitalism (capitalism was economically more efficient than feudalism) -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
Even Warren Buffet once said that he did not wanted to invest in IT companies because he did not understood that business.
That's hilarious because IT is just "business". To say he doesn't understand IT means the same as saying he doesn't understand business. IT involves tech, but IT itself is purely a business aspect and a part of every business. Whether his companies are IT themselves or just have IT as part of them, every investment involves IT and IT is a part of all aspects of business.
I thing most people will say that Microsoft or Google are IT companies.
And most will not say the same thing for Volkswagen, or Coca Cola.
I do not find that "hilarious", although I understand what you are talking about. -
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
I thing most people will say that Microsoft or Google are IT companies.
Yes, and most people aren't qualified to be business people. Anyone claiming to be a business person but not knowing the first thing about business is pretty ridiculous. Knowing what IT is is about as fundamental to being in business as it can get.
That average non-business people don't know business functions that basic is kind of sad, but not unexpected. The average person is pretty oblivious to the world around them. But the amount of excuse someone being in business has to not know this is absolutely zero.
Average people don't know about corporate taxes, sales taxes, tax filing requirements, accounting, bank loans and other uber basic business knowledge that we expect even entry level business people to know really well.
Ergo, he's saying he doesn't know anything about business. Which is true, actually. He's an investor, but a business man. However, it means he knows nothing about any of his businesses, including business itself. He just doesn't realize that he knows as little about all of them as he does about that.
