Is Real Estate Really a Bad Investment?

2 min read
Jimmy Moncrief Read More

I read three sites everyday:

  1. Wall Street Journal
  2. Business Insider
  3. BiggerPockets

I encourage everyone to do the same.

BusinessInsider recently ran an article that stated:

Trish Regan: “Then why buy a home? People trap their savings in a home. They’re running an opportunity cost of not having that money liquid to earn a better return in the market. Why do it?”

Robert Shiller: “Absolutely! Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing. So, new ones are better…

“So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000’s. And I don’t expect it to come back. Not with the same force. So people might just decide, “Yeah, I’ll diversify my portfolio. I’ll live in a rental.” That is a very sensible thing for many people to do.

“If you think investing in housing is such a great idea, why not invest in cars? Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won’t want our cars. It’s the same with our houses. So, they’re not really an investment vehicle.”

Homeowners understand that you can’t sell a home with 30-year-old roofing, carpet, and kitchen appliances. Sure, the home price might go up, but investors must adjust prices for years of maintenance and renovations.

Source: BusinessInsider

My first reaction is to scream at the computer (as I’m sure yours is too). However, let’s be honest and look at the facts:

Yes – housing does require maintenance expenses…

well…

…I’ll pretty much stop there because that’s the basis of his argument.

Comparing a house (non-discretionary) with a car (very discretionary) is like comparing apples to oranges.

It’s actually kind-of frightening that a Yale professor would compare something that appreciates (housing) with something that depreciates (cars).

Using this logic, you would have been an idiot to buy the entire island of Manhattan for $1,000 (2006 dollars). Which is what happened when the Native Americans sold Manahaten to Peter Minuit.

Instead of going over mundane facts, it would have been much more intelligent to simply look at both sides – which includes the benefits, like if you own the real estate you have locked in your housing costs for approximately 30 years (protecting yourself from inflation).

But no- they left that out.

So instead, I’ll just repeat a story I heard from a friend of mine that has lived in San Francisco for the past 13 years.

Me: So I hear Twitter is going public?  Real estate prices and rent will probably spike just like when Facebook went public.  Agree?

My friend: Hell yea.  It sucks!  My rent has gone up 350% in 5 years!  It will probably go up 50% next year.  Do you know how hard it is to survive with that kind of rent increase?

So what side of that trade do you want to be on?  The landlord or the renter?

 Another Ridiculous Example

Someone else that I follow closely is Ramit Sethi of Iwillteachyoutoberich.com. He hates real estate and recently wrote an article breaking down basically exactly what Shiller said above.  So why am I repeating this?   Because the comments to his post were fascinating.

ramitII

What do you mean you “agree,” Ramit?  Your own readers have single-handedly dismantled your argument!

Conclusion

In conclusion, I’ll simply leave you with a conversation my wife and I had recently.  Someone offered to buy a rental house we own.  I told my wife and she simply responded: “what would we do with the money, put it in savings and earn 0.01%?”

Why would you sell an investment (and pay capital gains tax) that’s earning you an after-tax yield of 17% to earn 0.01%?

Agree to Disagree. Let me know in the comments

I read three sites everyday: Wall Street Journal Business Insider BiggerPockets I encourage everyone to do the same. BusinessInsider recently ran an article that stated: Trish Regan: “Then why buy […]