Ask HN: Purchasing real estate property doesn't seem to make financial sense | Hacker News Reader

Ask HN: Purchasing real estate property doesn't seem to make financial sense

12 pointschenster44 comments

Simple math:

Suppose I purchase a home for $1 million, with a 20% down payment and a 30-year mortgage term.

    Interest rate = 5%
    +
    Property tax = 1%
    +
    Maintenance = 1%
    -------------------------------------------------
    = Total annual ownership costs of 7%

Over the 30-year ownership period:

    Average annual home appreciation in America is 5%
    -
    Annual inflation rate is 3%
    ----------------------------------------------------------
    = Net annual gain of 2%

These figures are approximate, and in reality, interest rates and inflation tend to be higher.

Problem #1: Tax & Maintenance

Over 30 years, one would end up be paying over $1 million just in interest and taxes, not including other expenses like maintenance & insurance.

Even if the house is fully paid off, the 1% property tax plus 1% maintenance offset the 2% annual gain, resulting in a nearly break-even scenario. Given the current inflation rate (roughly 7%), owning real estate may not be profitable.

Problem #2: Capital Gain Tax & Costs to Sell

Also, remember there are capital gains taxes for profits over $500,000 upon selling the house, and closing costs typically amount to 5%-6%.

Problem #3: Inflation

After 30 years, the property value would appreciate to about $4.3 million. Looking good? Not so fast! By taking inflation into account, that $4.3 million is roughly just $1.9 million of 30 years ago, so the net profit is -$100,000.

Conclusion

Adding the costs of maintenance approximately 1-2% annually over 30 years, the total expenses would likely reach around $400,000. This brings the overall profit to -$500,000 after three decades of homeownership. Not a favorable outcome.

In my opinion, tax benefits are minimal (with a maximum annual deductible of $10,000), and the capital gains tax on $2.8 million would be roughly $850,000 (including federal and state taxes), resulting in a total profit of -$1,350,000.

Nonetheless, why would anyone choose to invest in something that could potentially incur losses of up to $1.3 million over 30 years?

I'm not going to make an argument for or against owning real property, but you need to do better financial math if you want to make a argument from economics.

a) You want to have two (or more, potentially) scenarios to choose from. Maybe Option 1: rent for X years (with assumptions) vs Option 2: purchase a house for X years and then sell it (with assumptions). In both situations you start with no housing, and end with no housing, and you can compare the financial state after X years. Or maybe you don't care about your housing, so you could do Option 1: purchase a house and rent it to someone for X years, then sell the house vs Option 2: do nothing for X years vs Option 3: invest the starting funds from Option 1 in a S&P500 fund for X years and then sell it. Again, you'll be in the same situation after X years, except with more or less cash.

b) If you're going to compare dollars, you need to cast them all to the same time frame. Today's dollars and next year's dollars are not comparable units, because of time value of money. This requires assumptions about appropriate rates. Look into net present value.

Re a): Or option 3: Buy something that's much less than a million dollars, and live in that for 30 years.

Re b): They did attempt to account for inflation.

Homes are not only for investment contrary to what people want you to believe. You are correct that most homes will cost you a ton in maintenance/overhead/taxes etc over the years. You buy a home to live. Something to call your own. Something where you don't need a landlord to tell you what you can or can't do (be careful of shitting HOAs though in the US). Something where you most likely grow/build a family.

If you own a home, yes be ready to spend shit ton of money on shit ton of expenses and then sometimes, more things will break which you didn't plan for. So plan for those.

Scale it down... you don't buy a million dollar home with a mortgage. That is crazy. Buy a smaller, inexpensive "starter home", and move every few years, so the increase in property value both upgrades you to a more valuable home, and pays off more of the debt. Maybe 3 homes and 15 or so years later, you have that million dollar home and zero mortgage. And you got to erase the capital gains taxes during the process because you get that $500K write-off every time you move, not just at the end.

Now re-do your math for 15 years after that, and the final number will look better for the same 30 year time frame.

I'm not saying real estate is always the right answer - it isn't. There is no guarantee that values will rise like they have over the last decades, and there are costs along the way. But even so, you probably end up in a better place when you start out at a reasonable scale.

> you don't buy a million dollar home with a mortgage. That is crazy. Buy a smaller, inexpensive "starter home", and move every few years

But there are 0 houses under 1 million in my area.

Start with a townhouse or condo or move or get a better job.

condos are a million in tech metros

You shouldn't analyze an owner occupied house as the same type of investment that a real estate investor does.

The biggest reason is the source of funds you're using is your rent money. You can't invest your rent money in stocks, bonds, or real estate. But you can 'invest' it in an owner occupied property. You just don't have the flexibility that a normal investor has and as a result the return will be lower.

Also the best dodge I ever saw was a friend did a 100% refi of his house at 2.5% to buy a rental property outright.

Remember, you need a place to live, so you can't compare buying a house to spending nothing.

The question that matters is whether buying a house makes better financial sense than renting a place to live.

Now, there are a few hacks here. You could rent a room in a house with 7 housemates, which will invariably be cheaper than buying your own place. You could also choose to live in a tent, or van, ro something very cheap. If that works for you and makes you happy, then sure.

But if you're serious about maybe buying a house, then I think of it like this:

If interest + property taxes + maintenance are less each month than you would have been paying in rent, then you are betting off buying your own place, and anything you pay down onto the capital is just a form of forced savings.

I think the reason is you can leverage yourself a lot more than you can with other consumer investments. A bank won't loan you a mortgage to put into QQQ but they will to put into a property.

There are some additional considerations:

- In California Prop 13 limits your taxes to a value much below inflation if you stay in a house for the 30 years

- In California rent prices rise rapidly. A mortgage payment stays fixed; up until a year or two ago the rate was significantly below inflation.

I'm not an expert but from what I understood, most landlords don’t rent apartments and houses as charity.

And you need to live somewhere.

A house is a constantly decaying pile of materials in need of constant maintenance, on which you pay taxes. They should never be considered "investments", in my opinion.

The same is true of cars.

True, but auto depreciation curves are _much_ steeper than home depreciation curves.

My understanding is there's a 30% hit just driving it off the lot.

> They should never be considered "investments", in my opinion.

100% agreed. The idea that you should be able to buy property, do nothing with it (or worse - use it and incur depreciation), and still resell it for a profit, is a major flaw in our economic system.

The fact that we accept this for property is part of the reason why we have a housing crisis that likely is never going to go away. We might have been able to address this with more supply, but we now have to battle investors who are incentivised to perpetuate the housing shortage to prop up their investments.

    why would anyone choose to invest in something
    that could potentially incur losses

It's a house. They'd LIVE IN IT, or they'd rent it out.

First, buying a home also gives you a place to live that you can call you own. People will happily pay a premium for that feature.

Second, personal finance is not a mathematical optimization problem. You need to consider the effects that certain financial moves have on (fallible) human decision making.

You are more likely to pay their mortgage _every_ month than you are to contribute to a different investment. A home is also more illiquid than an investment account so it is harder to cash out for toys/vacations. Sure, foreclosures and home equity loans happen, but, for a lot of people, financing a home has a great chance at improving their net worth over their lifetime.

Because you can live in your investment. It’s the only investment that keeps you warm, protects you from the elements, and lets you raise a family in it.

Living in a present-day million-dollar home for a net cost of $500k over 30 years is a great deal. That’s a little over $1000/month on average. Where can you even rent an apartment at that price these days?

Also there are a ton of tax deductions that were left out of your calculation. PMI, mortgage interest, even certain types of maintenance are tax deductible. Not to mention green energy upgrades, depending on where you live.

Those sound small but would probably be enough to flip your -500k calculation into a significant positive over 30 years.

It's definitely cheaper to own than rent in the long run, but like 15+ years.

House appreciates and keep up with inflation, but not a great investment vehicle because the nearly break even ROI. It's not all sunshine and roses contrary to common wisdom.

In my view, owning a home primarily acts as a safeguard against inflation, it represents a "safe" investment option for "lazy" individuals who reluctant to learn more complex investment strategies that could yield higher, riskier return.

> It's not all sunshine and roses contrary to common wisdom.

No it’s definitely not. Things break, seemingly in a coordinated manner. One year your maintenance costs might be basically 0, another year they could be 5 figures.

> In my view, owning a home primarily acts as a safeguard against inflation, it represents a "safe" investment option for "lazy" individuals who reluctant to learn more complex investment strategies that could yield higher, riskier return.

Yeah go find an actual homeowner in person and say that to their face. As a homeowner I can tell you that there’s nothing “lazy” about the home-buying process. It’s stressful, emotional, and challenging. I too dabble in “complex” investing strategies and I can tell you that something like covered calls or “The Wheel” is way easier and more predictable than the typical home-buying process.

At the end of the day, investing is about allocating risk. You keep some % of your money invested in low-risk, stable-return assets. A house is a great example. And you ESPECIALLY don’t invest money loaned on margin in high-volatility assets.

That and your example are kind of ridiculous.

Owning a home works out financially better than renting which is what you should be comparing it to. You can't compare it to a financial investment because its unrealistic to have $0 housing budget and put it all in the S&P 500 or anything else like that. I think you're getting hung up on the "owning a home is an investment" catch phrase and taking that literally.

Your example is based on averages, which in the real world don't exist. In a growing area, single family detached homes (i.e. not townhomes or anything with shared walls) are going to out-appreciate others types of homes. And location matters more than anything. Good schools, low crime, close to amenities, shopping, etc. and those houses will go up faster than townhomes or condos in a higher crime, worse school area. You can also help the appreciation on a home by doing improvements to it and the property. Convert a 3rd floor attic to live-able space by adding a bedroom and bath and you could see a house bump up into the next range of comparables for that neighborhood/area.

> Living in a present-day million-dollar home for a net cost of $500k over 30 years is a great deal. That’s a little over $1000/month on average. Where can you even rent an apartment at that price these days?

Can you clarify?

A $1 million purchase at 5% interest on $800K is $4,300 / month. Plus maintenance and taxes.

Where does the $1,000 vs renting apply?

No I was just talking about that “net cost” number the original post came up with. After all expenses, interest, and sale of the house, they were claiming they would lose $500k over the lifetime of owning the house.

I see. Thanks for clarifying.

$500K is BEFORE sell the house with capital gains. If you do decide to sell, the number is $3750/month average costs per month to living the house you own after 30 years. Still better than renting, but not as most of home owner had imaged.

I think you need to revisit your math. None of your final numbers make sense.

The main reason I know people invest in real estate is because it's considered a relatively safe store of value, even if it incurs losses. "Location, location, location" is the mantra of real estate as well, as some places will be developed and appreciate in value while others might depreciate. Of all the investments which can suddenly disappear for various reasons, real estate can at least be rebuilt upon if the property burns down.

You need to use other methods to increase the return. Start a home business, and deduct the office expenses. Rent out a room or a basement and collect income this way. Also, you haven't accounted for the cash you've saved on rent. Owning a house is also a decent way to protect your equity from inflation. Given the likely high immigration rates in the future, housing values will continue to rise as demand increases. ymmv.

This calculator might be of interest, since it does this, compares with renting and allows you to investigate other adjacent scenarios:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...

The $20,000 a year or 2% is very high. Let's put that at 7.

Inflation works for you as the amount you borrowed is worthless as time goes on.

You can reverse mortgage it later not sell but live in it the rest of your life and have a % of the value.

Your calculation mixes present day value and past value and tries to compare it

The math can work out for both renting and owning, you just have to do the math and see which of the two options works for you.

In todays environment homes are so expensive that it can be a questionable investment. At other times in the market that wasn't always the case.

Beyond the investment yield of the property, there is also another aspect of the ownership as a hedge against rental rate inflation.

Purchasing a home are a hedge against housing in the area you want to live in becoming too expensive.

You're making several assumptions about how real estate investment works in real life. As someone who dabbled in real estate and might do more in the future, I'll see if I can help:

1. All real estate is local. The US is FAR from a homogeneous market. Most real estate investors buying single-family homes are NOT buying $1 mil houses in coastal states. They are buying 5- and low 6-figure houses in suburbs of growing or stable inland cities.

2. Analyzing real estate investments is not at all like analyzing a purely financial instrument like a bond. Practically none of the numbers are set in stone and every single deal is different from the next in every way you can imagine. It takes a lot of education, practice, and some experience to get good enough at this to not lose your shirt.

3. All successful real estate investors are also good at networking. They go to meetups, they have mentors, they hang out with each other and share information. They form amicable business relationships with real estate agents, contractors, and property managers.

4. There are many kinds of real estate investors, each with their own set of goals, skills, and strategies. It is virtually impossible to just copy whatever someone else is doing and do it well because you are not them. Some investors are at it full-time and end up being multi-millionaires. Some investors want extra income to supplement their full-time job or pay for their kids' college tuition. Some are retired and want a way to grow their nest egg. Some just want the park their cash in an appreciating asset for a few years. Some are good at finding properties well below market rates, some are good at negotiating, some are good at renovating homes at low cost, some are good at being landlords. ALL are good at analyzing deals. You have to figure out what you are good at and whether those things can help make you successful.

If this is something that truly interests you, I would suggest reading a few introductory real estate investment books from well-regarded authors and hanging out on the Bigger Pockets forums. There is a staggering amount to learn and it's not for everyone.

Thanks for sharing. How about purchasing home for primary resident? Most people who buy home for personal residence believe they are making a sound investment. I contend that the opposite is the case.

Most personal finance experts recommend viewing your primary residence as a liability, not an investment. Although housing prices generally increase over time, it's never a guarantee. Plus, you are always paying something on it over the course of ownership, such as mortgage interest, taxes, maintenance costs, renovation costs, utilities, etc. Over the time that you live in the house, those costs can (and often do) outpace the gains made by a rising real estate market.

There is a sub-branch of real estate investment, however, that has come to be known as "house hacking" where you explicitly DO treat your primary residence as an investment. Typically this includes buying a home larger than you need and renting out the extra space to roommates. Or buying a duplex and renting the other half. Purchased right, these can cover the cost of the mortgage, meaning you're sort-of living in your own home rent-free.

Another thing people do is move into a run-down house bought at a discount, live in it for two or three years, fix it up the whole time, sell it at a profit, and then move onto the next one.

Neither of these are usually palatable to those with families, but they are pretty popular as a way to get into real estate investing for those that are young, motivated, and have otherwise stable jobs.

A lot of people in America use the word “investment” to mean something more holistic than just “financial investment”. A house is commonly referred to as:

- An investment into the future (guaranteed housing, assuming they can pay the bills)

- An investment for their children (safe neighborhoods, good schools, etc)

- An investment into the community (homeowners tend to stay in their house for much longer, and are more interested in participating in community politics as a result)

You seem to be fixated on houses as a financial investment. They aren’t a great investment, you’re right. But you also can’t keep yourself warm and children sheltered with a million dollars in stocks.

Not everyone views essential basic human needs as an investment vehicle.

Homes are not supposed to be an investment

Your numbers are very specific, in Sweden for example you can get lower interest rates and have very low property tax, but your point still stands- buying a house to live in is expensive.

You missed two things though: - If you buy more than one property as investment you can rent it out, covering your expenses.

- You didn't mention risks, those are non negligible over 30 years. City plans change, surrounding population change, areas grow and fall in value etc.

where....do you live in this scenario???

Southern CA

err, my point is, are you calculating the rent you'd pay renting an equivalent place? Cause you need to do that, and account for inflation as well.

Reply on news.ycombinator.com