…Home ownership is regarded as some sort of Holy Grail of financial planning… based upon the conventional belief that owning real estate is the #1 path to (at least) financial security – if not affluence – but is there really substance to this belief? This article says, “No, not today” and explains why.
Residential real estate in Manhattan is arguably among the most coveted real estate in the world. It is a small island, in the commercial heart of one of the world’s largest, most affluent, and most powerful cities so, obviously,
investing in Manhattan real estate is a great investment, right? If someone bought some residential real estate in Manhattan 100 years ago, they would have made a fortune on it by today, right? Wrong!…
…In other words, net of taxes, the Manhattan real estate-holder would be significantly worse off financially than the gold-holder, and that is a best-case scenario: buying the most-coveted real estate on the planet and paying cash for it.
The vast majority of real estate that is being bought today (at record prices) is not coveted nearly as much as Manhattan real estate and the vast majority of home-buyers can’t pay cash for their properties. They take out large mortgages so, by the time the average purchaser is finished paying off their mortgage, they will have spent anywhere from two to four times the original purchase price – when interest and other charges are included. If buying the best real estate on Earth for cash (the original purchase price) is not a great investment, then what kind of investment are you getting paying two to four times the purchase price – for less valuable land? Not a very good one.
The obvious rebuttal from a homebuyer looking to live in the real estate unit that they purchase is that real estate is a great investment because they can deduct what they would have otherwise been forced to spend on rent from the cost of their home (including interest), but does it hold water? Well, at one time, when real estate prices were rational/reasonable and the supply of real estate was finite, disciplined homeowners could make home-buying a successful financial strategy but those days are long gone. Today, prices are not merely at all-time highs, they are at absurd, bubble extremes…
In this market, first-time buyers are forced to take on huge mortgages…[and, as a result,] any investment return in such a real estate purchase is eaten up long before 30 years (or even 20 years) of mortgage interest is added to the (record) purchase price of the house – along with the property taxes and upkeep that are required during the term of the mortgage – and that is if, somehow, the largest/most-unstable real estate bubble in history doesn’t collapse.
Real estate makes little sense (and cents) as an investment even for homebuyers planning on living on/in their real estate…Today, real estate, even in a prime market, is not a good investment. It is a wealth-trap, pure and simple. Grossly excessive prices combined with grossly excessive supply is a recipe for investment disaster and this bubble has been pumped up to insane extremes by the longest stretch of record-low interest rates in history.
What about the future?
Well, prices cannot possibly be sustained this high over the longer term and interest rates cannot possibly be sustained this low…[so,] when these market turn and interest rates start to normalize [we can expect to have a] crash unlike anything seen in the history of real estate markets, and, for people who don’t want to gamble their financial future in the real estate casino, they have an obvious choice: gold.
What is the best way to become wealthy today? Buy real estate and hope that (somehow) the bubble doesn’t burst? No. Rent and invest in gold. As 100 years of history clearly shows, real estate is not “as good as gold”.
Editor’s Note: The original post by Jeff Nielson has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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What’s the difference between stupidity and idiocy?? The comments about RE are clearly, blatantly, obvious. The comments about gold range from ‘utter stupidity’ to ‘unmitigated idiocy’. GOLD HAS NO ~ REPEAT NO!~ ‘value’ apart from jewellery trinkets, gold teeth and a few electronics components. For some people the difference between ‘value’ and ‘price’ just cannot be grasped. They could be labelled ‘stupid idiots’. One might as well be holding Monopoly Money, which has NEVER suffered price fluctuations, or cryptocurrency, safe because it doesn’t actually EXIST, ‘bank-cheques’ which may have SOME actual use as toilet paper, etcetcetc. The give-away is that ALL such ‘tokens-of-exchange’ can be BOUGHT FOR CASH! Wonder why?
I don’t think anyone would disagree that there is value in knowing where you can sleep every night, but for years, I’ve felt that Americans have been brainwashed to believe that home ownership is “the American Dream Investment.” It would be great if someone would put the pencil to the issues that “Bobby” raises so if there are unaccounted benefits to owning vs renting they’re made concrete. Some will say that renters have to pay all the costs of ownership anyway. Others will say ownership is a money pit that bears no resemblance to an investment. Owners rarely take into consideration that the lender gets paid twice — once when the mortgage debt creates the money, and again in monthly installments from the buyer. So, even if home ownership is a rip-off, if we could have only one of three things and had to choose between a mortgage, a stack of gold bars or a paperboard box on a big city sidewalk, I think most of us would choose the mortgage.
Every day I interact (here in Oz) with local Blackfellas. Most of the the time they ‘value’ the benefits of mod-cons (including the dole, pubs and mobile-phones). But during discussions on various subjects it’s often pointed out that for (a claimed) 60,000 years they had NONE of such benefits. Never a mortgage to be seen in a landmass of 8 MILLION sq.km. which provided all their needs; never a single $ of profit made from gold in a landmass FULL of the stuff. Never a rapacious government, nor ‘profiteers’ whose sole reason for being is to gain benefits from the efforts of other without producing ANYTHING of intrinsic ‘worth’. etcetcetc. Your “only one of three things and had to choose ” analogy is a FALSE ASSUMPTION engineered and conditioned-in by those very non-producers. As an American, I suggest you contemplate the ‘values’ upon which your founding fathers ~ The Pilgrims ~ operated, and built, a stunningly-successful nation, “with liberty and justice for all”. Free land for the taking, work that WAS only work if it was productive, neighbours that were always on hand to help and protect without any thought of ‘pay’. WTF happened to you America?? And Australia (where I arrived as a 4yo post-war refugee) has gone down the same gurgler. I sometimes wonder whether this is ‘god’s’ way of preparing me for the grave. If so I won’t be sad to go, especially as I note the rest of the garbaged world is not far behind me.
Worst article I have seen on this site. Desirability of property and profitability of investment property are very different. No mention that the inflation rate is far higher than the interest rate of most loans. No mention that the renter covers the mortgage if you do it right. No mention of the tax savings. No mention that housing priced in other commodities are actually quite cheap. Listen to the advice of this article if you are financially ignorant and want others to tell you how to invest your currency.
hehehehe. And EVERY ‘advantage’ and wrangle you list (and more) can be changed with a stroke of a pen by someone who doesn’t give a stuff about you ~ and in fact doesn’t even know you exist. Watch closely TSHTF (sooner rather than later). Do you REALLY think the (ANY) ‘System’ has been created for YOUR benefit?? The Taxman and the Mafia protection rackets operate in the same way, and even share a motto:- ‘Give us your money or we’ll hurt you’. And gutless, brainless taxpayers do as they’re told, distracted by the built-in games of peek-a-boo!
ps. I long ago discovered the BEST ‘tax-saving’ methodology. DON”T fucking-well PAY tax! (yes! it CAN be done! It’s only the morons that do as they’re told that allows the Taxman to exist at all! (And here I thought slavery was abolished 150 years ago!) But for all that, the last 15 or so years I’ve contributed about $40k p.a. to worthwhile causes. (that’s AUSTRALIAN dollars, ‘worth’ rather more than the American script.)
Does the tax law change? Sure. But it doesn’t change quickly in regards to real estate. Plenty of time to prepare. Take the 1031 exchange change proposals that are going on in congress. If it impacts you, you have had plenty of time to prepare for it. Own an AirBNB? You can be legislated out of business overnight. But that is why you need multiple exit strategies. If you do not want to pay income tax in the U.S., then there are few opportunities better than real estate investing. My mentor says, and I agree, that if you are investing unreal estate and you are paying income tax, then you are doing it wrong. Like every other business, there is a price to play. That price is property taxes and government regulations. However, I would bet that most politicians own or have exposure to real estate and thus it is in their best interest to keep the status quo.