Every now and again my parents ask me “so, have you thought about buying a house and settling down?”
Every time my answer is the same “it’s not the sort of investment that interests me”. And that’s the polite way of putting it.
Here are the reasons I can’t bring myself to buy a house:
1) Middlemen trying to scam you. In real estate, everywhere you look there is a middle-man trying to take your money. Attorneys to the left of me, accountants to the right. According to Zillow, the average closing costs are 2% to 5% of the cost of the house. Let’s say you’re going all out and getting a $500k house. That’s up to $25k of your money that’s just disappeared in “fees”. Alternatively, you can log into Interactive Brokers and buy $500k of a real estate investment trust for a commission of just a few bucks.
2) You have to put up a chunk of your own cash as a deposit. If we say 25% for this $500k house, that’s another $125k out of your account. The reason this annoys me is that I’m a strong believer in having your money work for you, not vice versa. This money you just plopped down will be the laziest money you’ve ever invested. It will do absolutely nothing because your house is not a productive asset. Your house is a wasting asset. If you do not continually spend money on your home, it will eventually be worth nothing. If you buy a stock you can hold it your entire lifetime without having to spend another dime on it.
3) You’re going to be spending money on it all the time. Just when you think everything works fine you’ll need to fork out a wad of cash for a new boiler. Then there’ll be a problem with the plumbing. Then the electricity. Then your basement will flood and you’ll realize what crappy insurance you have. Oh yeah, I forgot to mention that you have to pay insurance every month too. More paperwork. Whenever anything goes wrong in my current place, I call the landlord and he fixes it for me. I’m the boss.
4) Poor growth history. Ok, you might say it’s worth paying all these fees because you’re getting a good investment. Wrong. Robert Shiller, a Yale economist and coiner of the phrase “Irrational Exuberance” found that between 1890 and 2004 real house returns were just 0.4% a year. All that money that you could have compounding away in a productive asset (like a company) is doing virtually nothing for you. People who seem to think that real estate is a better investment conveniently tend to focus only on what has happened to house prices during their lifetime. They are confusing their own luck (investing in real estate during the biggest boom in history) with skill.
5) Your house will become an albatross around your neck. A long time ago a friend of mine was living with his girlfriend, when he came to me and said “you know, if we weren’t living together we’d probably have broken up by now”. And he only RENTED. If he had bought a place with his girlfriend there’d be no way to get away from her. What happens if your marriage goes south? What happens if you just fancy going to live in India for a few years? A house is an anchor that is very difficult to pull up if you ever decide you want to set sail.
6) Taxes. Unless you live in a caravan, your house is rooted to the ground. This makes it a very easy thing to tax. If a government changes tax policy on liquid assets, then people can move those assets pretty quickly. If a government changes tax policy on houses, that’s just tough for you. You can’t move a house unless it has wheels. But tax breaks are also one way that real estate closes the gap with stocks. The main tax advantages of real estate (mortgage interest deduction and no federal tax up to $500k on your principal residence) are pretty awesome. But just remember, stocks aren’t taxed every year, houses are.
7) High leverage. Every time I argue with real estate professionals about houses vs stocks, the effect of leverage invariably comes up. Everyone knows that you can get a huge amount of leverage when you buy a house. In fact, because houses are so expensive, you pretty much HAVE to use leverage. If house prices go up, this will benefit you. Real estate evangelists seem to think that this means the returns on homes will always be better than stocks, because stocks are frequently bought without leverage. Well, this argument is idiotic. With houses, you are pretty much forced to use leverage, which has its advantages and disadvantages. With stocks, you can CHOOSE to lever up if you want. Pretty much all brokerage accounts let you lever 2:1 (Reg T), and larger accounts let you use portfolio margining (up to around 7:1, equivalent or better than in real estate).
8) Low Diversification. Most people who own houses have way too much of their net worth invested in a single residence. If anything happens to this investment, they are out of luck. Because houses are so expensive, and pretty much demand leverage, you will find yourself pulling your hair out if it absolutely anything happens to it.
9) Terrible liquidity. A house will probably be the most illiquid thing you will ever buy. Selling it will take time and money, so you’d better be 100 percent sure you are buying the right home. If you mess up, you will have just lost a boatload of money. I like the fact that when I buy a stock, I can sell it a week later. Or a month later, or whenever I want the money back.
As a rule, I like my life to be easy and stress free. All the paperwork, middle-men, obligations, and stress that come from owning real estate is just not my idea of fun. If you invest in real estate, you need to know what you are doing. You need to have trusted partners. You need to do your research. Even then, if you use the same leverage as you would with stocks, you will underperform the stock market. With stocks, information is everywhere. If you want a passive investment… just whack your cash in an S&P500 ETF… and relax.