My real estate investing beliefs that get me in trouble

How many times have you heard someone say:

"Owning real estate is better than renting because, when you rent, you're throwing money away."

It's such a common sentiment, it can actually be awkward if you try to offer a dissenting view point. The problem is, the conversation quickly gets heated in many cases, because the person with whom you disagree has usually made a significant financial investment in real estate, and they want to defend that investment. Because I'm relatively young, and haven't invested in real estate, I'm quickly labeled as naïve.

Well, I have reasons for the way I feel, and here they are.

There are 6 situations where I think a real estate investment makes sense, and none of them involve avoiding "throwing money away". There's some overlap, or, as we would say in consulting, this list is not M.E.C.E. (mutually exclusive and collectively exhaustive):

1. The home you want to live in, has no equivalent that can be rented. For example, there aren't many $10M homes that can be rented. If that's where you want to live and you can afford it, buy it. If you want to live in the building right next to your office to have a walking commute, and that building only has condos for sale, it may make sense to own.
2. Your investment portfolio can absorb the down payment without being overwhelmed. If the $40K down payment on an urban condo is a reasonable % of your portfolio, it can be a great form of diversification, as real estate and securities are somewhat uncorrelated (+0.24 r-squared between US REIT's and the S&P, according to Investopedia). You can get a lot of the benefits of exposure to real estate through financial engineering without actually owning a home (e.g. buying into a REIT), but home ownership preferred by many.
3. You have a unique opportunity that looks HIGHLY likely to prosper. If you have a friend with a lengthy track record of success, who offers you the opportunity to join him in a project, perhaps that deserves a disproportionate allocation in your portfolio. The key is, anytime you're buying real estate, someone else is selling. What do you know that they don't? If your friend is letting you in on his project, is it because he needs capital, or because he sees this as riskier than previous projects? If someone needs to move in a hurry, perhaps because of their career, you may find yourself with a unique, below-market investment opportunity.
4. You live in Florida, and you're at risk of going bankrupt. Not even necessarily imminent Chapter 11 danger, but if it's a possibility worth considering, buy property :-)
5. You lack the financial acumen/discipline to put together a diversified investment portfolio. It's nothing to be ashamed of. Buying a house usually requires the tenant to lock up a large amount of capital for a long time, and continue to pay down their debt over time. Many of these same tenants may have ended up consuming, rather than investing, a good amount of the capital were it not placed in an illiquid real estate investment.
6. The stigma associated with renting. This is the worst reason to invest, but it is a fact that your friends and family may consider you a failure if you are still renting beyond at a certain age. Perhaps this is because they assume you should have saved enough $ by that age to be able to allocate a reasonable % of your savings to cover a down payment on your home.

Am I missing something? Let me know in the comments.

Comments

[Scott Barrett]

I agree with Alex 100%. I hate when people tell me I am throwing money away or go into the "tax breaks" of home ownership. I rent now for $3000/mnth but it would be at least $7000 monthly morgage for me to buy my place. Add to that property tax, all of the maintenance costs now being absorbed by my landlord, and the $300k down payment I would have to take directly out of my portfolio in order to purchase. Doesn't come close to making financial sense right now.

-sb

[Nick]

The rent vs. buy debate is almost always heated when I am involved simply because I get so angry when anyone claims rent is "throwing money away". The lack of financial acumen regarding the simple math of an interest-only mortgage combined with opportunity cost of down-payment and maintenance costs etc... vs. rental cost is what really gets on my tits. Unfortunately, a ten year housing bull market has made the majority of financial ignorami look like geniuses when they sank their life savings into a condo despite the obvious risks.
The only other thing going for owing property is that it allows you more leverage than any other investment product. A 10% down-payment makes you 10x levered. Try asking BofA for that sort of loan for your day-traded tech portfolio. Just remember to check out the concept of negative equity before you buy that Florida apartment off-plan.

[house for sale Philippines]

Thank you very much that's good that we do know this at any time any of us could get this and believe.

Mitch

[Debt Cancellation Taxes]

Overall, it is better to own than to rent. But in this market make sure that you have the guts to buy!