Hey Jessireal estate owners
If I leave you with anything today, it's the saying that the most significant returns in investment are when you bet on something that is no longer true and waiting for the rest of the world to realise it. In 2008, a few funds were shorting the housing market, made billions. In the last ten years, we've seen those investing in Netflix gather insane returns compared to those who invested in Blockbuster.
As technology improves at such an exponential rate, it will continue to catch people and investors off-guard. A lot of what was once true or partially true is no longer true. But because we as humans have access to infinite stupidity, it is hard to convince us otherwise until we get burned.
One of the reasons there is a 1% and a 99% and the gap between the two widens is because while the rest all do the same thing, the minority on the other side of the trade picks up all the yield.
There's no better example of this than the real estate market.
A recency bias
Growing up my father was always big on real estate, to him that's how you built wealth in his era to an extent it was true, but because of the moderate success in the fact that real estate has always gone up in nominal currency measurement terms, their biases have been reinforced.
He would constantly pressure me to buy a home and to look at various opportunities, I couldn't get myself to pull the trigger on the rationale of a "starter home" it didn't make sense to me.
It was a blessing in disguise never buying a home, and I am so glad I didn't make such a non-sensical decision.
Nominal gains versus inflation
Before I dive in, I am not going to tackle things like house flipping or property rental i am only going to look at private homeownership. Most people are sold and believe the lie that their housing price goes up when it's not actually true a large part of that is currency debasement and asset inflation while a small part of it is actual demand. We conflate this with actual gains because people only use one method to measure home value, and that's the price.
To actually increase a home's value, you have to reinvest in it, costing you more, repairs, extensions, upgrades etc. To make it more attractive to the next buyer, but this is only paper gains since you've turned your home into a golden handshake and a money pit.
As you reinvest, many people overinvest in their home, and then they are locked in at a sale price that will never be realised, and they only lose money in the future.
Maintenance and margins
As you maintain a home, repair it, pay taxes, pay for all the other expenses of a home, it eats into the margin you gain as appreciation on the price. So if your home increased by $10 000 adjusted for inflation and you spent less on maintaining the home over that same period of increase, then you may slightly be in the black.
So if you want to make a gain on your home you need to spend less than the price appreciation each year, which depending on where you live is likely not possible.
An asset versus a liability
Many people miscategorise their home as an asset when in actual fact its a liability. Your home only becomes an asset when it generates you a return, if you're AirBnBing it or renting it and bringing in regular income, that's an asset.
If you've used your home as collateral to access capital to start a business, that generates an income that services that debt and provides you with an income above that, then its an asset.
If all your home does is cost you money, it's a liability.
Unrealised gains and illiquidity
Another popular argument is the one that you can sell your home and realise the gains. If you sell your home, you also need to deal with a cost of fees that eat into your margin. You may also lose out on opportunity cost as selling an illiquid asset like this can take some time.
Your home value also depends heavily on what your neighbours value the home at, the moment one person sells 15% under your preferred market price to get a sale; you will find it tough to realise that same price again.
In addition, selling your house leaves you homeless, so a large percentage of that capital needs to be reinvested in a new home, so do you really make a profit?
You also need to calculate the interest on the loan and then factor that into your resale value to see if you made a gain.
Then finally paying a mortgage for 10,15, 20 years means your disposable income capacity is reduced. This means you have less money to use on other opportunities and effectively lose out on possible better gains somewhere else as you locked yourself into this money-losing commitment.
My rules for real estate
I know this is going to sound crazy, but running the math based on what I've mentioned above, I wouldn't buy a home that is more than 10% of my total net worth. Having it only account for such a marginal part of your portfolio means you offset the losses your home brings you.
If you can't buy it twice cash, you can't afford it, this rule has served me well through my consumer purchases, and I don't see why a house is should be any different.
Maybe I am crazy, but I don't see a home as an investment, I see it as a liability. I pride myself on being a value investor, and I can't find any intrinsic value in buying a home, only to sell it to a greater fool at a later state.
I am looking to build wealth, and this is not going to get me there. Sure there are plenty who would disagree, and if I listen to all of them, I wouldn't have gotten into Bitcoin.
So let me make my mistakes and fail to the upside :).
Have your say
What do you good people of HIVE think?
So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."
Let's connect
fanbaseIf you liked this post, sprinkle it with an upvote or esteem and if you don't already, consider following me @chekohler and subscribe to my
| Browse & Earn Crypto | Stack Sats For Free | Earn Interest On Crypto |
|---|---|---|
 |  |  |
I'm of the mindset that you buy a property to rent it out and create a cash flow. You obviously need your own place to stay but most people need an 85% loan to value mortgage which is mad. You'd like a section of Henning Wehn's stand up show when he talks about how pointless the property ladder is (it literally is a ladder that goes nowhere) but can't seem to find it on YouTube, think it's on eins, zwei, DIY.
That’s if you can get a damn property without leveraging up to your eye balls! Personally I don’t have that kind of cash on hand or income for that I’d probably have to ration a can of beans a month just to make those payments
But also I can wait for the right time to pounce as soon as valuations are in my ranges as this house of cards comes down I’ll pick my spot but for now trying to compete with others and their debt for home, not going to happen! I refuse to be the greater fool
Wow A German stand up comedian That’s a first for me will try to check it out! Didn’t think Germans were all that funny to be honest
Haha, yeah I'd have to sell a lot of things (soul included) and that may not even get anywhere near! So I just buy BTC instead lol.
Yeah man, Henning Wehn is the German Ambassador for Comedy, his own words, not an easy role haha
your right i also try to invest in thing that are new and not many people know of yet
if taking the bite first and eating more then other on your investment because if big fishes notice that then they take all of it
Exactly, if you take small bites of many things that people don't know of one of them is bound to bring you massive upside to pay for the bets that failed, its how venture capitalists have become so successful today, it does take a lot of work and research to pick these opportunities though
This all makes sense financially and I had my family sold on this very concept until our landlord decided they wanted to sell the house that we were (until that point) happily renting...
It's not so bad when you're younger and don't have the responsibility of kids as you can hop from rental to rental fairly easily. You don't mind the insecurity so much. Tougher later on when you have a family. Trickier still when you add a dog, cat and some hens!
Yes I agree with you there, if the home provides you with other benefits such as stability or efficiencies like less travel and free time then you could write off that against the expenses. This is more of a generalisation on how a home should not be seen as an asset, how not to overinvest in your home, and how much is your perceived stability worth to you
I agree with most, though I think it depends on location and local conditions.
I think at best, a house is a store of value as even when it goes up, it will be similar to the inflation rate after maintenance and interest on loans etc.
However, there are other factors to consider. For example, my family has moved to a house and monthly costs will be about 10% less than what we were paying in an apartment we owned, but we sold at a high point and got a good deal on the house too. Renting would be cheaper monthly, but only very slightly, with only maintenance and interest the difference.
This means that there is also lifestyle things to consider, including the space factor for my daughter, who has changed markedly in the time we have moved. Part of this is natural, part is because she has the space to play outside by herself and take some responsibilities we didn't have earlier. While not directly economic, I wonder what effect this has in her opportunities later too - will taking different responsibility early change the way she approaches the world in comparison to those around her? Hard to say, but all of this should be factored into it in some way, as the environment we create becomes influential over our thoughts.
On that, what if space affected the way we think about availability. What if living in cramped quarters created a more "scarcity mindset" than having space? Not saying it does, just came to mind. :)
You bring up a good point and I agree buying a home comes with other considerations perhaps closer to your job, closer to better schools, more space, safer area all that can benefit your in terms of travel to work saving time, more leisure time, could be money saving and qualify of life
However to me these are all emotive rationale and im considering things purely on numbers basis! I mean sure if you move and you double your income you offset a lot of the costs but then we get into the weeds of every situation where it can be the exception
Is it a store of value? Yes I would agree depending on the area and home condition as you say but is it the best or most reliable probably not!
I am also quite apprehensive on property having lived in a country where my parents and grandparents had their homes taken from them by the government so yeah something so rigid and tangible carries risks we often don’t think about due to being in a politically “safe zone”
Running the numbers as I like to do, just in general it doesn’t seem like a good investment in the current macro conditions
Yes, I know this. But I also think that due to the way we work, we often make immediate economic decisions that are potentially damaging to our long-term economic conditions.
Depending on where it is. in a city (close to) is pretty robust - in a small town with one industry that supports it - there is no floor on the drop when the company inevitably fails or moves.
This is definitely a location, location, location thing ... But, it can essentially and probably will happen everywhere in time, we just have to wait long enough. I can't see it happening in Finland in my lifetime, but who knows these days with the retarded social movements people ascribe to.
We bought just before Corona arrived - we were unlucky in some respects, lucky in others - since we were able to sell our apartment at a good price, but we probably could have got the house a little cheaper. All in all, we are up in the changeover there though. Then, it is going to also factor in culture, where people are going to change their habits over time. There are tens of thousands of apartments that are near identical being built around the cities - not many standalone homes. But, the ones that are standing can end up getting a lot of demand when the swing happens in the other direction - which in some places it is because of Corona and people needing office space, something that most apartments (in Finland) just don't have - let alone enough space for a couple to work comfortably from home at the same time. There will likely be more remote work in the new normal, and some will change their home spaces to suit.
I agree with you on we live in a world where immediate economic gains drive a lot of malinvestment (of resources and time in the future), I talk about it often. I have seen many people think their wealth is in their homes and end up with nothing, I encourage people to deleverage and not have 60-90% of their wealth in a home.
Indeed all you mention their location, access to amenities, political stability, capital inflows in the region are all speculative value adds that you need to price into the purchase.
It's like buying equity in a company, how much are you willing to pay to get access to their free cash flows that may be used to pay you divident or increase the price of your investment in the future. We don't know if the company will continue to do well, but we hedge that future risk price it in and make the purchase.
I think many homeowners don't do this, they price the home based on what the bank is willing to give them and because the majority of homeowners don't take the time to run the numbers on a value basis, they just bid up prices like a passive index fund. Whatever money the bank allows gets ploughed into the property price.
I totally get the motivation, but there you already mention the cost-benefit, you're getting more space to both work from home and you made an investment decision that has the potential to offset the losses. I eventually have to do this I know, I am just building up capital reserves.
I am also not tied to purchasing in any one country least of not my own, as I also work remotely I have the luxury of spending less as the location doesn't matter as much, more the value/size amenities I can get for my money
Oh, btw, I have found this post really interesting to read as it has brought up lots of points for me to mull over, Thanks!
I like it when you said selling your house leaves you homeless hahaha that just about sums it. Many people see goldmines in real estate investing and with the analysis you've done I'm just about changing my stance on it
Posted Using LeoFinance
I can understand using the equity in your house to get a second property to rent and generate a return that services your debt or leveraging that loan to start a business that generates income, but just sitting on a house that's well over 50% of your net worth is a dumb idea.
Yet year after year people sell to buy a bigger house, in a nicer area drive themselves deeper into debt thinking they making a good investment, it baffles me sometimes
Posted Using LeoFinance Beta
Yeah it kinda baffles but then some people sees value in owning a house as their ultimate investment I guess this is because they have a lot of money to throw around. When better forms of investment lies in something even more profitable
In my experience from what I was taught and learn from talk with my peers they see it as a “safe” investment because it’s something tangible because they crippled by the thought of risk and don’t know how to handle money or actually being an active investor
They sit on savings and a home and lose money each year and that’s what banks want you to do
The miseducation of finance is done on purpose these myths are there thag a home is an investment because it benefits a select few
I think @nealmcspadden and @scaredycatguide should read this
Lol always good to bring more people in to shoot holes in my arguments! Hides behind the fact that his a millennial renter 😜
And if you're house "goes up in value" and sell it you still have to buy in to the same market to get a replacement house. So you don't really gain and very likely lose with all the taxes etc to sell and buy. Housing should have never become an investment I believe it's a need we we have not a want.
Ah you make a good point about selling and buying back into the same market, yes if you perhaps a older person with a massive house and you want to downgrade as the kids have moved on and would like a smaller place, perhaps you can edge out a little profit, but how many are really doing that or thinking like that?
If your home is also your place of income like people had work shops fixed cars, grew produce, manufactured things in their garage started businesses then there's still a productive gain on the land and I can see it as an investment
Posted Using LeoFinance Beta
If you can't buy it twice cash, you can't afford it
Halelujah! I agree with you and I have the same mindset. A lot of people overinvest in a house thinking that they will profit when instead they are bleeding money. If you buy a house and rent it... Well that's another story! I was just watching yesterday a guy who sold his house to get rid of the mortgage realizing that now with the pandemic is not so smart to pay interest. Many will keep those cash to buy property when real estate will crash. Then, maybe then, you can speak about taking a property as an asset. When you pay a really small price for it. I liked this article, hopefully more will read it!
!ENGAGE 20
Over investing in homes seems like the normal thing to do but if I told you invest 90% of all your wealth in the stock market you'd tell me I'm crazy but it's the same thing, position size is position size regardless of what you invest in.
I'm in two minds about the housing crash like it's supposed to happen yes, but there are way too many things reliant on it, if housing crashes people lose homes, jobs, banks go bust, pensions go bust so there's a vested interest to keep it going. Some countries won't have the funds to do it, so they'll just poop the bed faster than the US and Europeans will
All I can do is watch it all play out, perhaps some countries will take the knock head on and we can pick up cheap homes there with our crypto :)
I think you have a point. It would be sad and not good to take advantage of other's people misfortune. I was mostly thinking about the new places like houses apartments being built now which are insanely expensive. Those will be a good thing to have when the price crashes. Unfortunately there will always be people who will lose their house in times of distress. That is sad.
Unfortunately, any good deal is someone's loss, and that' the nature of this universe we;ve created and I guess we can't feel too bad as we all participate willingly in these systems. We can choose to reject it but it seems like the "harder" thing to do, I hope I'll be able to figure out how to "win" eventually or be able to reject it completely and go off-grid lol we'll see what happens
Ah going off grid😍😍😍😍 This is the ultimate win in my opinion. A big forest, a log cabin, silence, books, cashflow and freedom
LOL if you ever find a good place to settle down off grid drop me a DM and I’ll be there like a bear 🐻
Ohhh definetely I will share! Off grid living would make a lot people be more in tune with themselves!
These are points that makes sense which is difficult to argue against.
LOL then you should meet my father and he will quickly tell you why real estate is the best investment in the world and how anyone who doesn’t do it is an idiot
Also his not very good at math so I stopped trying to argue with him
😀 I can imagine the old folks have different view of things compare to us in this era
Yes i agree not saying all the think is wrong but some information they learned is outdated and things they thought were true are no longer true which opens up massive risk!
It’s like one big hot hand fallacy
ENGAGEtokens.