Real estate vs stocks (sp500) , this convinced me to just buy and hold

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newguy123
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Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by newguy123 »

Long time lurker here and I finally convinced myself to just buy and hold SP500

The results are pretty eye popping to me , I did this research because I was trying to figure out which performed better over the long run stocks (VFINX) vs real estate. There are other factors to this such as prop taxes , location , possible rental income etc, but I just wanted to see how real estate appreciation did the last few years versus sp500. Using my parents as a real life example as they stayed in the same home for 35 years. Also I know my parents did not have 110,000 cash to toss into VFINX in 1985 which is why they had to get a mortgage so the compare is kind of moot.

Anyways here is what opened my eyes to just buy an index fund and just hold.

My parents bought a brand new house in 1985 with 110k (mortgaged). Now in 2021, that house is now worth $670,000

I did a back test and 110k in SP500 mutual fund (VFINX) in 1985 would be worth $5,379,696 today.


This is starting to make me think , maybe it would be better for people younger to just rent and hold the stock index instead of buying a house :confused
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nalor511
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by nalor511 »

newguy123 wrote: Tue Jan 12, 2021 2:12 pm Long time lurker here and I finally convinced myself to just buy and hold SP500

The results are pretty eye popping to me , I did this research because I was trying to figure out which performed better over the long run stocks (VFINX) vs real estate. There are other factors to this such as prop taxes , location , possible rental income etc, but I just wanted to see how real estate appreciation did the last few years versus sp500. Using my parents as a real life example as they stayed in the same home for 35 years. Also I know my parents did not have 110,000 cash to toss into VFINX in 1985 which is why they had to get a mortgage so the compare is kind of moot.

Anyways here is what opened my eyes to just buy an index fund and just hold.

My parents bought a brand new house in 1985 with 110k (mortgaged). Now in 2021, that house is now worth $670,000

I did a back test and 110k in SP500 mutual fund (VFINX) in 1985 would be worth $5,379,696 today.


This is starting to make me think , maybe it would be better for people younger to just rent and hold the stock index instead of buying a house :confused
The comparison is moot, because real estate is super uper different depending on exactly where you are. If you bought a $110k condo in manhattan in 1985 it would be worth millions now. Is that better? Real estate is a lot more management (at best) than index funds. But my personal opinion is that you are probably correct.

Less about the end $ (for me), though, and more about ease-of-management. Your parents' house was not an investment, it was housing.
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Steve Reading
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Steve Reading »

newguy123 wrote: Tue Jan 12, 2021 2:12 pm
My parents bought a brand new house in 1985 with 110k (mortgaged). Now in 2021, that house is now worth $670,000

I did a back test and 110k in SP500 mutual fund (VFINX) in 1985 would be worth $5,379,696 today.
:confused
Aside from the fact that this is a sample size of 1 house, did you consider all of the rent your parents didn't pay for 35 years that they would have had to pay had they put the $110K in S&P 500?
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sp_admiral
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by sp_admiral »

You're forgetting about the cost of rent for those many years.

You can try a more accurate comparison using one of the online rent vs buy calculators (https://smartasset.com/mortgage/rent-vs-buy). They allow you to specify the rate of return for any amount invested in the rent option.
Marseille07
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Marseille07 »

I'm not really sure what you're comparing. Renting means your rent money goes into someone else's pocket. Paying a mortgage means you're building equity in your house, which you can later sell.
alex_686
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by alex_686 »

Steve Reading wrote: Tue Jan 12, 2021 2:17 pm Aside from the fact that this is a sample size of 1 house, did you consider all of the rent your parents didn't pay for 35 years that they would have had to pay had they put the $110K in S&P 500?
This is one strong argument. Secondly, you are kind of cherry picking your time frame. Which brings me to a critical 3rd point.

You should compare like apples to apples. Real estate has lower expected returns and risks than stocks. So over the long run, yes stocks will look better. Also, I assume your returns are occurring tax free, which implies that they are trapped in some type of tax advantage space. You can also magic away any liquidity needs you needed in those 35 years.
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newguy123
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by newguy123 »

sp_admiral wrote: Tue Jan 12, 2021 2:22 pm You're forgetting about the cost of rent for those many years.

You can try a more accurate comparison using one of the online rent vs buy calculators (https://smartasset.com/mortgage/rent-vs-buy). They allow you to specify the rate of return for any amount invested in the rent option.
Thanks, I just plugged in 7% annual rate of return and the current numbers for rental/prop values in my area. Renting and investing the money seems to be the wiser choice than buying by a long shot, weird I never thought of it this way before

Edit nevermind, now I think of it you guys are right, at some point the mortgage is paid off and then all the income can be invested and no rent is paid.
Last edited by newguy123 on Tue Jan 12, 2021 2:32 pm, edited 1 time in total.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by z3r0c00l »

Leverage is a huge difference too, you are not borrowing 80% of a stock portfolio. That plus costs, it costs almost as much to own as to rent in many cases when you include mortgage, insurance, and repairs. I don't think owning a home should be seen as an investment at all unless you are very wealthy and need to park millions somewhere, or if you are buying multiple units to rent out. Then it is a side job more than an investment. Home ownership is really an expense unless you luck out on timing. My parents did luck out on timing, twice for that matter, but don't assume that will happen again.
Pablov
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Pablov »

I agree with all the responders. Sample size of 1 is not representative, you are not including the rent they did not have to pay (although you didn't count for carrying costs either), etc. But, the conclusion you reach is the proper one. Real estate investing, over long periods of time, does not match the returns of the market.

Jeremy Siegel talks about this at great length in his book "Stocks for the long run" and gives real proof (historical records going back ages, representative samples, etc.) David Swensen also talk abut it in "Unconventional Success"

Best of luck.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Pablov »

z3r0c00l wrote: Tue Jan 12, 2021 2:31 pm Leverage is a huge difference too, you are not borrowing 80% of a stock portfolio. That plus costs, it costs almost as much to own as to rent in many cases when you include mortgage, insurance, and repairs. I don't think owning a home should be seen as an investment at all unless you are very wealthy and need to park millions somewhere, or if you are buying multiple units to rent out.....

Leverage goes both ways though. Good on the upside but very bad news on the downside.
And I totally agree that your home(your primary residence) should not be seen as an investment.
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Marseille07
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Marseille07 »

I'm not even sure if the conclusion is sound. I know people having 40~50 units and making 20K/mo easy from the rent money in HCOL cities. It's entirely a different ballgame, and certainly more difficult than simply throwing monies into the S&P 500. But it can be done and be very profitable.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by alex_686 »

Pablov wrote: Tue Jan 12, 2021 2:36 pm And I totally agree that your home(your primary residence) should not be seen as an investment.
Why not? It can have a big impact on the success or failure of your investment plan. Besides, it is the only way you can make a apples to apples compression between renting and buying.
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newguy123
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by newguy123 »

Marseille07 wrote: Tue Jan 12, 2021 2:40 pm I'm not even sure if the conclusion is sound. I know people having 40~50 units and making 20K/mo easy from the rent money in HCOL cities. It's entirely a different ballgame, and certainly more difficult than simply throwing monies into the S&P 500. But it can be done and be very profitable.
I am trying to do a compare for just passive investment.

Buying a house versus renting and investing the money. It is pretty hard to do a compare because there are outliers like previously mentioned NYC or Silicon valley real estate which went through the roof the last few decades. Overall though, I am starting to lean more towards renting and holding VFINX as a passive way to build wealth. From the numbers I ran through sp_admiral's calculator, it is actually a faster way to build wealth for younger people. Of course this is the last 30-40 years, the next 30-40 years could be different


For simplicity, lets say a 21 year old gets 200k today from his parents. He could buy a house for 200k or rent for 1200 a month. The conclusion would be that over the next 30-40 years it would be better for him to invest the 200k and just continue to rent. There are other factors (such as owning a house etc) , but just from a net worth perspective at the end, it seems like this is the way to go.
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Sasquatch1
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Sasquatch1 »

You need to set this up for a better comparison.

110 was not paid in one. They most likely didn’t have that money on top of at the time feeling like they weren’t even sure How they’d make the notes like a lot of people felt.

To make the comparison you need to dollar cost average into the S&P

For instance. Figure out what their note was and what they put down. Enter the down payment as the starting point for the index investment, with the monthly additions being the note, then compounded year over year at 7%. Compare that total to what the home is now worth.

They bought that house with leverage. I do still think the investment would be worth more than the house however you can’t make the comparison as if they bought the house cash. That gives your index and un realistic return as the 110k had that much more time in the market than if they dollar cost averaged.

Then you could complicate it more with trying to figure out the cost of renting and other benefits of the home ownership like mortgage interest deductions .
Frank the Tank
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Frank the Tank »

I'm not what it is about this topic (which seems to come up frequently), but it doesn't have to be an all-or-nothing "buy stocks and rent housing" or "no stocks and buy housing" decision.

Our household does both: we have invested 20% of our household income in stock/bonds every year since my wife and I first started full-time work in 2003 and also own a house paying extra principal on our mortgage every month (with our first house bought in 2004, which we then sold in 2018 and then rolled over that equity into a new larger house).

Looking back, that was the right balance for us. If we had deferred investing in stocks until later on in our career, we wouldn't be getting the benefit of super-compounding returns that we're now seeing today (especially over the past year). At the same time, if we had waited a couple of years later to buy a house, we would have bought at the absolute peak of the mid-2000s housing bubble... and if we had waited even longer, we would have seen home prices go up much higher again. At the end of the day, our mortgage provides a fixed housing cost (or, even better, actually has gotten cheaper with refinancing) and, with two school-aged children where public school district quality is priority #1 for where we live, assurance that we're not going to get kicked out of our house for reasons outside of our control by a landlord. At the same time, we were simultaneously fully maxing out our tax-deferred accounts with stocks and bonds.

Now, there are obviously going to be different life circumstances that impact whether buying a house makes sense. If you're not going to stay in a house for more than 5 years or need to move to different metro areas frequently, then the transaction costs of buying and selling houses alone (much less the pricing risk) would lead to renting likely being the better decision. On the flip side, a family with school-aged children and no interest in moving to a different metro area (like us right now) are going to be better candidates to buy a house. After our move in 2018, I can tell you that my desire to willingly move to another home as long as our kids are living with us is less than zero. (I think renting proponents often don't take into account the very real time and emotional costs on top of financial costs of moving homes when you have children. It's not the same as changing apartments across town as a single person with roommates in your early-20s.)

Basically, once you reach a certain level of income, you should be able to do both: invest in the market early and often and buy a house within your means.
MinnGuyInvesting
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by MinnGuyInvesting »

alex_686 wrote: Tue Jan 12, 2021 2:44 pm
Pablov wrote: Tue Jan 12, 2021 2:36 pm And I totally agree that your home(your primary residence) should not be seen as an investment.
Why not? It can have a big impact on the success or failure of your investment plan. Besides, it is the only way you can make a apples to apples compression between renting and buying.
I will NEVER understand the argument that your primary residences should not be seen as an investment.

For probably 50% of American it's likely:
- Their #1 source of positive net worth
- Their #1 "investment" they ever made in their life
- A most reliable way to lock in future cost of living
- Probably the biggest slice of their net worth

To ignore the wealth and financial advantages of making a key investment like this is frankly silly, and I would argue detrimental to one's financial future to ignore it. It's elitism to tell half of America they aren't doing things right.

This is coming from someone who owns / owned rental properties. No matter the level tenant I have, my primary residence will incur far less need for repair and maintenance than any similarly classed real estate, and appreciate just as fast. Yes, a rental will bring you more monthly cashflow than a primary, but to ignore the wealth accumulation is plain silly.
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Sasquatch1
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Sasquatch1 »

MinnGuyInvesting wrote: Tue Jan 12, 2021 3:57 pm
alex_686 wrote: Tue Jan 12, 2021 2:44 pm
Pablov wrote: Tue Jan 12, 2021 2:36 pm And I totally agree that your home(your primary residence) should not be seen as an investment.
Why not? It can have a big impact on the success or failure of your investment plan. Besides, it is the only way you can make a apples to apples compression between renting and buying.
I will NEVER understand the argument that your primary residences should not be seen as an investment.

For probably 50% of American it's likely:
- Their #1 source of positive net worth
- Their #1 "investment" they ever made in their life
- A most reliable way to lock in future cost of living
- Probably the biggest slice of their net worth

To ignore the wealth and financial advantages of making a key investment like this is frankly silly, and I would argue detrimental to one's financial future to ignore it. It's elitism to tell half of America they aren't doing things right.

This is coming from someone who owns / owned rental properties. No matter the level tenant I have, my primary residence will incur far less need for repair and maintenance than any similarly classed real estate, and appreciate just as fast. Yes, a rental will bring you more monthly cashflow than a primary, but to ignore the wealth accumulation is plain silly.


This is due vastly because people choose not to invest at all and don’t plan for the future. However everyone needs a house. It’s largely due to default.

If you look at it as an investment. Basically compare it to buy and hold there’s usually ways to get a much better return.

I think this is why the saying is common.
mr_brightside
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by mr_brightside »

We once 'pocketed' $385K after buying / selling our primary residence during a boom cycle (early 2000s). We lived there just shy of 4 years.

I don't expect that will ever happen again, as mentioned a highly location-driven phenomenon.

Indeed, leverage is a thing.

---------------------------
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by z3r0c00l »

MinnGuyInvesting wrote: Tue Jan 12, 2021 3:57 pm
alex_686 wrote: Tue Jan 12, 2021 2:44 pm
Pablov wrote: Tue Jan 12, 2021 2:36 pm And I totally agree that your home(your primary residence) should not be seen as an investment.
Why not? It can have a big impact on the success or failure of your investment plan. Besides, it is the only way you can make a apples to apples compression between renting and buying.
I will NEVER understand the argument that your primary residences should not be seen as an investment.

For probably 50% of American it's likely:
- Their #1 source of positive net worth
- Their #1 "investment" they ever made in their life
- A most reliable way to lock in future cost of living
- Probably the biggest slice of their net worth

To ignore the wealth and financial advantages of making a key investment like this is frankly silly, and I would argue detrimental to one's financial future to ignore it. It's elitism to tell half of America they aren't doing things right.

This is coming from someone who owns / owned rental properties. No matter the level tenant I have, my primary residence will incur far less need for repair and maintenance than any similarly classed real estate, and appreciate just as fast. Yes, a rental will bring you more monthly cashflow than a primary, but to ignore the wealth accumulation is plain silly.
Right I don't think these homes are investments, they are forced savings accounts at best. Anyway, is it really an investment if you use it until you die?
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Carguy85 »

Dang. Here I go wondering again how much more I would likely end up with if I “locked in rent” for 30 years and let $500k ride in the SP500 vs having it tied up in a house... of course a a few grand less a month would be invested due to rent payment. Quite an exaggerated example of lump sum vs DCA!
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Brianmcg321 »

newguy123 wrote: Tue Jan 12, 2021 2:12 pm Long time lurker here and I finally convinced myself to just buy and hold SP500

The results are pretty eye popping to me , I did this research because I was trying to figure out which performed better over the long run stocks (VFINX) vs real estate. There are other factors to this such as prop taxes , location , possible rental income etc, but I just wanted to see how real estate appreciation did the last few years versus sp500. Using my parents as a real life example as they stayed in the same home for 35 years. Also I know my parents did not have 110,000 cash to toss into VFINX in 1985 which is why they had to get a mortgage so the compare is kind of moot.

Anyways here is what opened my eyes to just buy an index fund and just hold.

My parents bought a brand new house in 1985 with 110k (mortgaged). Now in 2021, that house is now worth $670,000

I did a back test and 110k in SP500 mutual fund (VFINX) in 1985 would be worth $5,379,696 today.


This is starting to make me think , maybe it would be better for people younger to just rent and hold the stock index instead of buying a house :confused
Well, my mortgage has always been cheaper than anything I could rent in the area I live. So it was more cost efficient to buy, as it allowed me to invest more. So it all depends.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by exodusNH »

Carguy85 wrote: Tue Jan 12, 2021 5:44 pm Dang. Here I go wondering again how much more I would likely end up with if I “locked in rent” for 30 years and let $500k ride in the SP500 vs having it tied up in a house... of course a a few grand less a month would be invested due to rent payment. Quite an exaggerated example of lump sum vs DCA!
If you were a thinker, you'd have let $500K ride in the S&P and then got yourself put in prison for 30 years.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by ChinchillaWhiplash »

usually buying a house is not a great investment. Most “buyers” take out a 30 yr mortgage and pay interest. Most of the time the amortised amount is about double the original price of the house. This is at lower interest rates between 3-5%. Property tax paid every year. Homeowner’s insurance paid every year. Maintenance costs, etc. By the time you actually own the house outright, you have sunk a lot more into it than the original purchase price. Unless you buy with cash or have a 0% interest mortgage, you would probably come out much better investing in the stock market.
MinnGuyInvesting
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by MinnGuyInvesting »

ChinchillaWhiplash wrote: Tue Jan 12, 2021 6:12 pm usually buying a house is not a great investment. Most “buyers” take out a 30 yr mortgage and pay interest. Most of the time the amortised amount is about double the original price of the house. This is at lower interest rates between 3-5%. Property tax paid every year. Homeowner’s insurance paid every year. Maintenance costs, etc. By the time you actually own the house outright, you have sunk a lot more into it than the original purchase price. Unless you buy with cash or have a 0% interest mortgage, you would probably come out much better investing in the stock market.
1. Most people buy houses that are nicer than what they would rent. Normally these financial decisions are never an apples to apples comparison.

2. For some, whether you call it a forced-savings account or an investment, it's the only way they actually contribute to their networth.

3. The question if you don't buy is where are you going to live for 30 years and how do you lock in that cost while your family deals with changes. (Kids coming in and out of the picture). For those who want to minimize risk and optimize performance, staying single, never dating, no kids, living in a one bedroom efficiency with no vacations is really the way to go!
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by protagonist »

newguy123 wrote: Tue Jan 12, 2021 2:12 pm Long time lurker here and I finally convinced myself to just buy and hold SP500

The results are pretty eye popping to me , I did this research because I was trying to figure out which performed better over the long run stocks (VFINX) vs real estate. There are other factors to this such as prop taxes , location , possible rental income etc, but I just wanted to see how real estate appreciation did the last few years versus sp500. Using my parents as a real life example as they stayed in the same home for 35 years. Also I know my parents did not have 110,000 cash to toss into VFINX in 1985 which is why they had to get a mortgage so the compare is kind of moot.

Anyways here is what opened my eyes to just buy an index fund and just hold.

My parents bought a brand new house in 1985 with 110k (mortgaged). Now in 2021, that house is now worth $670,000

I did a back test and 110k in SP500 mutual fund (VFINX) in 1985 would be worth $5,379,696 today.


This is starting to make me think , maybe it would be better for people younger to just rent and hold the stock index instead of buying a house :confused
There are few absolutes in this world, financial or otherwise, but one that seems to come close is the relationship between risk and reward.
100% S+P provided more financial reward over the past 35+ years than did your parents' house, but that also probably came with significantly more financial risk. I can't prove that, but I certainly suspect it.
Likewise a 50/50 portfolio would have provided you with likely less money in the long run than 100% VFINX, but it also would not have been as risky.
protagonist
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by protagonist »

z3r0c00l wrote: Tue Jan 12, 2021 5:33 pm

Right I don't think these homes are investments, they are forced savings accounts at best. Anyway, is it really an investment if you use it until you die?
Homes are liquid, like stocks...you can sell them at any time at market value and cash out, or hold them until you die. Market value (as with stocks) is unpredictable but you hope it will be at a profit.
Do you consider stocks investments if you hold them until you die? If not I may not be an investor after all.
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Nate79
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Nate79 »

This is a little bit apples and oranges comparison, it is not easy to compare directly. But let's say they put 10% down initially and they would have spent on rent what they made a mortgage payment. Turning $11k in $670k over 35 years would be a return of about 12%. Not bad. This doesnt include the 5 years of no mortgage payments once it was paid off.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Carguy85 »

exodusNH wrote: Tue Jan 12, 2021 6:06 pm
Carguy85 wrote: Tue Jan 12, 2021 5:44 pm Dang. Here I go wondering again how much more I would likely end up with if I “locked in rent” for 30 years and let $500k ride in the SP500 vs having it tied up in a house... of course a a few grand less a month would be invested due to rent payment. Quite an exaggerated example of lump sum vs DCA!
If you were a thinker, you'd have let $500K ride in the S&P and then got yourself put in prison for 30 years.
LOL I’m thinking the cost of a divorce would likely then have to be factored in.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by furlin »

The opportunity cost on the down payment was huge. 20% down in 1985 would be about 660k today if invested in the 3 fund portfolio.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by oldfort »

newguy123 wrote: Tue Jan 12, 2021 2:51 pm For simplicity, lets say a 21 year old gets 200k today from his parents. He could buy a house for 200k or rent for 1200 a month. The conclusion would be that over the next 30-40 years it would be better for him to invest the 200k and just continue to rent. There are other factors (such as owning a house etc) , but just from a net worth perspective at the end, it seems like this is the way to go.
All real estate is local. Where I am, the rent on a 200k house is going to be more than 1200 a month.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by JustinR »

newguy123 wrote: Tue Jan 12, 2021 2:12 pm This is starting to make me think , maybe it would be better for people younger to just rent and hold the stock index instead of buying a house :confused
This is actually correct.

In most markets, it is more financially optimal to rent an apartment and invest the savings rather than buy a house.


Apartments come with economies of scale for the landlord that are passed onto the renters. And you're able to rent as small or large as you want to. It's a completely different situation than renting a house, which is what most people will be making comparisons on.

If you're young and don't need a house, you should seriously consider renting an apartment and investing the rest. You'll grow your portfolio much faster that way.

PS. If anyone ever tells you that renting is "throwing money away," you can basically ignore any financial advice they ever give you. It's garbage "common wisdom" that any random financially illiterate person will tell you. You've probably heard it a million times throughout your life from your parents/aunts/uncles/friends/coworkers.
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Sandtrap
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Sandtrap »

newguy123 wrote: Tue Jan 12, 2021 2:12 pm Long time lurker here and I finally convinced myself to just buy and hold SP500

This is starting to make me think , maybe it would be better for people younger to just rent and hold the stock index instead of buying a house :confused
There are more than several things here that do not fit in the same pot of soup.

1. Buy a home/house vs rent.
2. Invest in SP500 (funds) or "invest" in hard real estate (owned), as in a house/home.
3. Invest in a home/dwelling where one lives
4. Invest in a dwelling, Real Estate, that is a "true investment" because it is rented out and brings in an income stream.
5. Investing in the SP500 (equity fund) for 20 years with a certain result.
6. Buying a house/home and after 20 years expecting a certain appreciation of value.

j :D
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59Gibson
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by 59Gibson »

newguy123 wrote: Tue Jan 12, 2021 2:51 pm
Marseille07 wrote: Tue Jan 12, 2021 2:40 pm I'm not even sure if the conclusion is sound. I know people having 40~50 units and making 20K/mo easy from the rent money in HCOL cities. It's entirely a different ballgame, and certainly more difficult than simply throwing monies into the S&P 500. But it can be done and be very profitable.
I am trying to do a compare for just passive investment.

Buying a house versus renting and investing the money. It is pretty hard to do a compare because there are outliers like previously mentioned NYC or Silicon valley real estate which went through the roof the last few decades. Overall though, I am starting to lean more towards renting and holding VFINX as a passive way to build wealth. From the numbers I ran through sp_admiral's calculator, it is actually a faster way to build wealth for younger people. Of course this is the last 30-40 years, the next 30-40 years could be different


For simplicity, lets say a 21 year old gets 200k today from his parents. He could buy a house for 200k or rent for 1200 a month. The conclusion would be that over the next 30-40 years it would be better for him to invest the 200k and just continue to rent. There are other factors (such as owning a house etc) , but just from a net worth perspective at the end, it seems like this is the way to go.
OP,
It's not an easy question to answer- there are a lot of non financial factors that go into purchasing. As a rough guideline I think can be helpful but not necessarily definitive is.. Rent in HCOL, Buy in LCOL, MCOL wash either way. In MCOL areas If purchase price is 14Xor less yearly rent Buy, 15-19X close either way, 20X+ then Rent. There are other factors but this gives you a basic guideline. Your ex. of $1200/mo on 200k property would tell me it could be better to buy, but not by much. Then you need to look at how long you plan to stay in the property, condition and so forth..
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by balbrec2 »

Marseille07 wrote: Tue Jan 12, 2021 2:23 pm I'm not really sure what you're comparing. Renting means your rent money goes into someone else's pocket. Paying a mortgage means you're building equity in your house, which you can later sell.
Interest rates were much higher in 85. On a typical 30yr mortgage you would probably being paying for that house twice,
at least. And don't forget taxes. Subtract all of these expenses from your gain in appreciation. I bet just as a quick guess
that 110k house really cost around 300k when all is said and done.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Top99% »

I think the idea of residential housing being a good investment was largely born during the period of high inflation in the 1970s and 1980s. Housing did provide a very good hedge against inflation in those years. Now and then I look up the Zillow prices of the houses my family and I have lived in since the 1970s in FL, NC and TX. _None_ of them have significantly out-paced inflation let alone the stock market. Several of them have lagged inflation. The house I am currently living in here in Austin TX still hasn't reached its inflation adjusted sales price in 1985 although it is finally getting close. So, I just view a house as a place to live in where I can modify it to my taste.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by CurlyDave »

For me, the real answer to the age-old stocks vs. real estate question is a resounding: BOTH!

The leverage and imputed rent from owning my own residence are harder to take into account than any simple comparison allows. And, no one has yet mentioned another feature of an owned house: end of life reverse mortgages. In some ways this type of loan has longevity protections just like an annuity -- as long as you live in the house the lender has to keep paying you and can not sell it.

Another unmentioned feature of owned real estate: sweat equity. I can put my own labor into improving a house, I can't offer to cut the lawn at Vanguard for an extra 1/2 % return on my VOO.

Having money in both real estate and stocks is true diversification. And if I want to build a hobby shop in the garage of my own house no one can tell me not to. Try that in an apartment.
exodusNH
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by exodusNH »

balbrec2 wrote: Wed Jan 13, 2021 8:38 am Interest rates were much higher in 85. On a typical 30yr mortgage you would probably being paying for that house twice,
at least. And don't forget taxes. Subtract all of these expenses from your gain in appreciation. I bet just as a quick guess
that 110k house really cost around 300k when all is said and done.
I think people forget this. I was too young to pay attention to that sort of thing. But I came across paperwork later that showed that my parents had a car loan in the late 80s that was at 14%.

Citizens Bank was paying 5% interest on a regular savings account up until 2001-2002ish. I was purging a bunch of old bank statements in 2020 (thanks pandemic boredom!) and had my mind blown in the amount of interest I was earning.

https://www.rocketmortgage.com/learn/hi ... year-fixed

Peak mortgage rates were in 1981 at an average of almost 17%. The 80s ended with an average of 10%. Even in 2000, the average was 8.5%!
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by checkyourmath »

Super awesome topic! You are 100% correct even with cherry picked numbers. The idea of housing as an investment is a completely generational ideology. The housing market is like the loch ness monster in terms of technology adoption. The transaction cost is still so high that it is essentially built to fail. I have always thought that the next recession would force the industry to change, but we were never given an opportunity to culturally shift.(mortgage forbearance)

Random equation that I have always loved from renting.

1/squareroot(number of roommates) = amount saved on rent

The other random part about this topic no ones will discuss is younger generations are essentially forced to move around the country as gypsies. I loved being a gypsy because I end up making more money, but it isn't ideal for establishing a family or "developing equity". I definitely feel for folks just entering the work force because they are forced to buy Tesla at a PE ratio of 1600. Don't worry you can diversify away from risk using magic. If I was 21 years old and forced to buy Tesla in some index I would pass unless you think in 30 years from now you can sell it to the next 21 year old when the PE ratio is 16,000. In the meantime prepare yourself for the opportunities that are about to come. I know I sound like some conspiracy theorist or permabear or a pragmatic realistic, but a lot about investing saved income comes down to luck. I was lucky in 2008 because that is right when I started investing. Everyone will give you advice on buying, but you really need to think about what your future will look like when you decide to sell. The same superstars that bought individual stocks in 2000 and 2008 are essentially doing the same thing in 2020. Buckle up then make sure to never lose your money or the 200k someone gives you!
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by CurlyDave »

checkyourmath wrote: Wed Jan 13, 2021 10:09 am ... I definitely feel for folks just entering the work force because they are forced to buy Tesla at a PE ratio of 1600. Don't worry you can diversify away from risk using magic. If I was 21 years old and forced to buy Tesla in some index I would pass unless you think in 30 years from now you can sell it to the next 21 year old when the PE ratio is 16,000...
The P/E ratio is 1600 because people think that E is very low and can increase, not because they think P/E can rise.
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newguy123
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by newguy123 »

Top99% wrote: Wed Jan 13, 2021 8:59 am I think the idea of residential housing being a good investment was largely born during the period of high inflation in the 1970s and 1980s. Housing did provide a very good hedge against inflation in those years. Now and then I look up the Zillow prices of the houses my family and I have lived in since the 1970s in FL, NC and TX. _None_ of them have significantly out-paced inflation let alone the stock market. Several of them have lagged inflation. The house I am currently living in here in Austin TX still hasn't reached its inflation adjusted sales price in 1985 although it is finally getting close. So, I just view a house as a place to live in where I can modify it to my taste.
Your post pretty much sums up what I was trying to get at, you put it in better words than I can. The main reason I was researching this was because my younger brother wanted to buy a house and we were both having conflicting views about whether a house is a good investment. After looking at real returns over the last 35 years, I now agree with him that renting is the better option at least for him as long as he is investing the extra money he has. He was the one who brought up my parents, I didn't believe him at first as I always thought it would be pretty close in terms of real return, but real estate is off by a long shot (atleast for my parents case)

Either that or someone can make the case real estate is undervalued right now (LOL)
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by oldfort »

Then, there's the behavioral economics aspect of home ownership being forced savings. Most people won't save all their increased cash flow in the sp500, but will spend some of it on increased consumption.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Triplebeam175 »

I created a spreadsheet before buying a house that compares buying and renting and accounts for taxes, maintenance, expected stock returns, etc. I was surprised that buying did not blow renting out of the water.

The key is to keep the monthly mortgage/insurance/taxes in line with your renting cost. You can't go from a 1BR apartment to a 4000 sq ft house and assume the appreciation will make up for it. Think of the value of living in the house as a dividend .. you want to minimize the cost of the house to maximize the % return.

The appreciation of your house is only one aspect. When you buy a home, you're increasing cash flow down the line, which frees up cash to invest in stocks later. Plus you're building equity in the house over time and there are some tax benefits too.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by furlin »

If it were possible to do HFEA in 1985, one would have done much better financially if they rented and invested the down payment in HFEA. A 5% ($5500) down payment in June 1986 would be about 2.8 million today.

I'm not sure which is riskier though, HFEA (3x leveraged 55/45 SP500/20+ year treasuries) or buying a house with 20x leverage.
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Re: Real estate vs stocks (sp500) , this convinced me to just buy and hold

Post by Ramjet »

newguy123 wrote: Tue Jan 12, 2021 2:12 pm This is starting to make me think , maybe it would be better for people younger to just rent and hold the stock index instead of buying a house :confused
My house payment is less than my rent used to be

However, I did put 20% down
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