With low interest like we have today you are still building equity, even in the first 5 years. ie: A 25 year mtg of 175K @ 4.85% will build 25000$ in the 1st 5 years. Another great way to build equity is by turning an ugly house into a good looking one. But of course that requires some work, so technically it's not the same as investing into the stock market, which is mostly passive. Nevertheless it's a good way to spend some 'TV time' if you're just starting out in life and want to build capital.
<i>In ownership you are building equity while you're residing. This must be factored into the models.</i> Home equity is a form of savings. Renters also save, by investing the money they don't have to pay in interest. If you model home equity, you must also model opportunity costs. Martin
One look at the savings rate in this country and you'll quickly realize that any money that is "saved" by renting and invested....ends up being spent. To assume a market rate of return is unrealistic, to assume a treasury rate is better, and for most people, the money will just be spent, so no return is best. Since, this is ET, home of the super investor and excess returns, I have no doubt that the financial geniuses on here will have no problem making a great return on the couple hundred bucks they save per month. (Even including transaction costs, taxes, and other fees!)
take any major city - and buy a house - say it costs you $800,000 to 2 mill? divide it into 5 or 6 apartments. each tenant pays 1000, 1200, 1500, 2000, whatever. 3-5% property tax, insurance, roof repairs, bathroom repairs, spare occupancy, bounced cheques etc = roughly 40-65% of the rental income you might get. the remaining30-35% isnt remotely enough to cover a mortgage of any amount unless your mortgage is $200,000. unless you inherit such a property - there is no way this ever makes financial sense. even if you did inherit it - it still doesnt make sense (take the 2 mill and put it google stock). even if it doubles in price in 15- 20 years this still makes no sense imho. point being - if you can't justify ownership on this basis - real estate probably isnt a good investment. coupled with the fact that the us hosuing market is on the precipice of doom - personally - im not real excited about real estate.
To me the whole point of rental properties is to have someone pay off your properties over a long period of time. So, with that in mind, at some point in time, I will own several properties free and clear. I will either sell these properties and make capital gains or I will keep them as they will provide me with income FOREVER. I have time and inflation on my side, not to mention this nasty habit people have of wanting to live indoors. I have control over my investments and don't depend on the vagaries of the stock market when I can afford it the least. Not to say that RE should be the only investment category or that it's easy or foolproof, but certainly it's something worth considering, particularly as prices come down and the financial ratios begin to make more sense.
i'd say the freedom you havecounts for alot.renting you still have to answer to someone. plus that wonderful fact that they can sell your home with only a few months notice(depending on lease,where you live etc).
The personal savings rate includes home equity! The money being "saved" through home ownership is being spent via home equity loans. I use financial models to guide my own choices. I'm not going to build a model based on the assumption that I'm an idiot. Nor am I going to use statistics about the average American to determine how I should act. Martin