How To “Lie” With Personal Finance – Part 2 (Homeownership Edition)

Remember the blog post from a few months ago, How To “Lie” With Personal Finance? I got a fresh set of four new “lies” today! Again, just for the record, that other post and today’s post should be understood as a way to spot the lies and misunderstandings in the personal finance world, not a manual to manufacture those lies. Of course!

This one is about the rent vs. homeownership debate. Is homeownership a wise financial decision? I’m not going to answer this question here. It’s a calculation that’s highly dependent on personal factors. I lean toward homeownership over renting but that’s because of our idiosyncratic personal preferences – our ideal early retirement lifestyle involves having a stable home base in a good school district. For us personally, the monetary side of homeownership has also worked out pretty well (“My best investment ever: Homeownership?!”) and I like to hedge against Sequence Risk in early retirement by taking a small chunk of our net worth – just under 10% – and “investing” it in an asset that lowers our mandatory expenses because we don’t have to pay rent. But I can certainly see how some other folks, whether retired or not, would prefer to rent. I certainly don’t want to talk anyone out of renting. But on the web, you sometimes read pretty nonsensical arguments against homeownership. And just for balance, there’s also a prominent lie in favor of homeownership. This is going to be interesting; let’s take a look…

1: Confusing Price Returns and Total Returns

James Altucher is an entrepreneur, crypto expert and TV/internet celebrity. A few months ago, he wrote a blog post Don’t Buy A Home and here’s the quote you’ll find often as an argument against homeownership brought forward by the “radical renters:”

“The Case-Shiller Housing Price Index has returned 3.7% between 1928 and 2013. The stock market has returned an annualized 9.5%.” Source: James Altucher’s “Don’t Buy A Home!”

5.8% extra return for equities? Who wants to own a home then? But there is a flaw in this logic! Unfortunately, too many personal finance experts and even highly competent and respected FIRE bloggers/podcasters have fallen victim to this same fallacy. What’s wrong with this calculation? How do I even start picking apart this lunacy? I like to add a little bit of humor to help bring home my point. To this end, let’s look at the following totally fictional(!) conversation. And to make sure, these are totally fictional personal finance bloggers and all similarities with actual living people would be perfectly coincidental:

Vanguard: Hello, this is Mike at Vanguard World Headquarters, how may I direct your call?

Caller: Hi, this is Karen    … and this is Brian! (in the background)

Vanguard: Hi Karen and Brian, how may I direct your call?

Caller: We are Vanguard customers! We are huge fans! We even know a guy who once talked to Jack Bogle!

Vanguard: Oh, that’s marvelous! How may I direct your call?

Caller: Actually, we’re downstairs!

Vanguard: Oh, I see, do you need a visitor pass? Who will you be meeting here?

Caller: Oh, no, we were thinking about moving in here.

Vanguard: (shocked) What???

Caller: Yes, we brought our moving van. We are downstairs. Do you have a loading dock?  …   Brian in the background: Yeah, we’re double-parked with our U-Haul! Where’s the loading dock?

Vanguard: Why do you think you can move in here?

Caller: Oh, we are personal finance bloggers and we proved that investing in Vanguard index funds is so far superior to owning your home. You know, homeowners hardly make any return but we make 12% a year with our Vanguard funds! Unfortunately, those “home boners” have one crucial advantage, haters that they are: they get to live in their house, while we have to pay rent. So, we thought that we only need a free place to live now. Or a really cheap one, maybe up to $800 a month?! …     800 Canadian! (Brian in the background)  …      Then we can make the math work again.

Vanguard: Oooohhhh-Kayyyy???

Caller: You know, we like to “math shit up,” it’s our motto on the blog!

Vanguard: Mess Shit Up?

Caller: No, no: Math shit up!

Vanguard: There is a fine line between “math shit up” and “shit math out,” I guess   [ERN: please excuse the foul language, but this is just how some people talk!]

Caller: What did you just say?

Vanguard: Uhhm, nothing. Bless your heart, Karen and Brian!

Caller: Don’t try to sweet-talk me! We do have a sizable portfolio, you know? We are Saskatchewan’s youngest retirees! So can we move in now?

Vanguard: Uhhm, you know, I don’t know how to tell you this, but…

Caller: What?

Vanguard: Actually, we are fully booked right now!

Caller: What?

Vanguard: Yup, fully booked!

Caller: Oh, bummer! Maybe we can crash in one of your conference rooms? They should have a TV, right? At our old place in Toronto, we got free cable TV from our landlord!

Vanguard: Uhm, unfortunately, we just gave away the last conference room. Broom closets are booked as well. Sorry!

Caller: What?

Vanguard: Yes, sorry, but I heard that two blocks down the road, TD Ameritrade has some openings and they … uhhmm … (suppressing laughter) … they even have units with a city view and free cable TV!

Caller: Oh, wow!

Vanguard: Yeah, and tell them that Mike from Vanguard sent you! Good luck!

Caller: OK, we are so moving back to TD. Thanks for nothing, Vanguard. …   Brian in the background: Yeah, thanks for nothing! If Jack Bogle was still alive… !

Vanguard: Thanks for calling, Karen and Brian! 

Well, rumor has it that the folks at TD Ameritrade had much less of a sense of humor than Mike at Vanguard and they called the police. But that’s not the point. The point here is that your Vanguard (or TD, or Fidelity, or Schwab, or whatever) account is just that. It doesn’t entitle you to anything more than the interest, dividends and capital gains paid for your paper assets. In other words, …

… you cannot move into your Vanguard account, you dummies!!! 

My home, on the other hand, gives me a roof over my head. I save the rent I’d have spent otherwise. Ignoring that in my cost/benefit analysis will give me nonsensical answers, just like in the Altucher blog post and countless other posts in the blogosphere out there. For the finance/economics/accounting buffs it just boils down to this:

It’s impossible to compare the housing price return with the equity total return!

A landlord gets the rental income as an additional “dividend” (after subtracting costs, such as property taxes, etc.) but even I, the homeowner, get that same implicit return because it saves me the money I’d have to spend on rent (again, net of the costs of homeownership, more on that later). In fact, that implicit return is even counted in the GDP calculations to the tune of almost $1.7 trillion per year. Trillion with a “t”!!!

LieWithPF_Part2 Table01
The implicit “rental income” homeowners receive is counted in GDP! Source: Bureau of Economic Analysis.

Once we factor in this additional trillion-dollar income into the real estate returns we get much more attractive returns for real estate. And that will make a very sizable difference, more on that below!

How to spot this “lie” in the field: 

Everyone who says “real estate is a great investment when you’re landlord, but a horrible investment as a homeowner!” Notice the contradiction in this phrase?

Any reference to the “Case-Shiller Home Price Index” to gauge the housing investment return is suspect. That index, by construction, is a pure price index that ignores the benefits of homeownership (and just to be sure, it also ignores the cost of homeownership, more on that later, see item 3 below). So, comparing the S&P 500 Total Return index (dividends included) with the Case-Shiller Index (no rental income included) is useless.

Also, I’m in no way saying that the Case-Shiller index is bad. It has its role when a price index rather than a total return index is called for, say when you’re constructing price-to-rent ratios, or a homeowner affordability index, etc. Just like the Shiller CAPE Ratio (yup, that same Robert Shiller; the guy is pretty amazing, isn’t he?!) has to be based on the S&P 500 Price Index rather than the Total Return Index. But you still have to use the S&P 500 Total Return Index when tracking your investments in the stock market!

How to do this right:

I found a great San Francisco Federal Reserve Bank working paper, aptly titled “The Rate of Return on Everything, 1870–2015” where the authors calculate returns of different assets: Stocks, Bonds (government intermediate bonds), Bills/Cash (short-term instruments, money market) and real estate for 16 economies (!!!) and over the 1870-2015 time span (145 years!!!). And again, this study, written by very well-known researchers, tries to make the numbers comparable, so that we can look at the investment returns side by side, without hiding costs and benefits of the different asset classes. An apples-to-apples comparison! There is a whole section on how they construct the returns on the housing asset, taking into account both the rental yield and the maintenance cost, depreciation, etc.!

Side note: The proper citation for the academics among us: Jorda, Oscar, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2017. “The Rate of Return on Everything, 1870–2015,” Federal Reserve Bank of San Francisco Working Paper 2017-25. Available at

The results are quite intriguing. Over the entire universe of 16 countries, it turns out that housing had higher returns (measured as the geometric, compounded mean) than equities. And lower annualized risk as well!

LieWithPF_Part2 Table02
Over the entire 16-country sample, housing had higher returns than equities! Source: Federal Reserve Bank of San Francisco Working Paper 2017-25.

Unfortunately, though, the results look a little bit less attractive for U.S. housing vs. U.S. equities. This table below shows that the equity vs. housing outperformance at 2.36% over the entire sample and as large as 3.43% Post-1980.

LieWithPF_Part2 Table03
Equity vs. Housing returns by country. Now we see a 2.36% to 3.43% p.a. return advantage for equities in the U.S., but there’s a caveat!!! Source: Federal Reserve Bank of San Francisco Working Paper 2017-25.

That said, there’s one part of the study I don’t really quite agree with. In the table above are only the arithmetic mean returns and not the true geometric (compounded) mean returns that should be used in the context of personal investment returns. So I went to the site of one of the coauthors and downloaded the return source data to redo some of the return calculations. I replicate the arithmetic returns in the SF Fed study down to a few basis points. Why there is a small discrepancy, I can’t tell. But it’s close enough. But also notice that the differences in the geometric return is a lot smaller than in the arithmetic returns. For the stats geeks, it’s due to the significantly higher variance in stock returns!

LieWithPF_Part2 Table04
Equity vs. Housing returns: arithmetic vs. geometric real (CPI-adjusted) means for different time intervals. Source:

So, we’re now down to somewhere between 0.9% and 2.2% measuring the return advantage of equities over housing. A far cry to the 9.5%-3.7%=5.8% that Altucher uses. But notice that in every single country, housing had better risk-adjusted returns than equities, measured as the Sharpe-Ratio, see below:

LieWithPF_Part2 Chart03
Sharpe Ratios of Equities vs. Housing. Housing beats equity in every country! Source: Federal Reserve Bank of San Francisco Working Paper 2017-25.

Update 10/17/2019: As some people pointed out, the risk measure for the national housing market will clearly understate the risk of one specific house. Your primary residence is just that one single home, not the nationwide average. So, if we account for that idiosyncratic risk in your one single home you’d have a higher expected risk and thus a lower Sharpe Ratio. But even then the Sharpe Ratios for housing are still really attractive in most countries.

So, is housing still a bad investment since in the U.S., housing slightly underperformed stocks? Was James Altucher merely wrong quantitatively but still correct qualitatively? Probably not, because homeownership will still beat stocks if we account for the leverage normally used in housing investments. Which is a great segway to the next Housing Lie…

2: Messing up the leverage and “Return on Equity” calculation

For the next “lie” look no further than the next paragraph in that Altucher post.

“Let’s pick another time period: 1975-2013. A $100 investment in a home would have returned $100. A $100 in the stock market would have returned $1,600. This does not include the interest rates you pay. 30 year rates right now are 4%. If you borrow $100,000 to buy a house, you aren’t paying $100,000. Over 30 years, you’re paying an additional $234,000 in interest payments. So your net return is probably close to zero or negative.” Source: James Altucher

And I’ve seen this piece of misinformation on quite a few personal finance blogs and podcasts as well. Notice what James does here? He subtracts the cost of a mortgage but the return series he quoted is for an unleveraged housing asset (and the return series was missing the implicit rental yield, too, see lie #1 above). Why would I subtract a mortgage payment from a house that I own free and clear? How sneaky! This is again a way to fudge the numbers and make housing look less attractive. In fact, as we will see below, a house with a mortgage is almost certainly going to raise the return on your capital, not lower it.

How to do this right:

When I calculate a return on an asset, whether it’s a rental or an owner-occupied property or any other non-housing asset, I have to make up my mind what I like to calculate:

  1. The ROA. The return on the asset. The unleveraged return. In the real estate world, it’s sometimes called the “Capitalization Rate” or “Cap Rate” in short. It takes the Net Operating Income (NOI) = gross rental income minus all the costs (maintenance/upkeep, taxes, vacancies, etc) and divides by the current market value. Also, very importantly, these costs don’t include any financing costs. The idea here is that before we ever calculate a return of a leveraged asset we’d like to know how well the asset would perform unleveraged. This unleveraged return is also roughly what the researchers in the Fed Study were after, see Lie #1 above.
  2. The return on equity (ROE), does take into account leverage and borrowing costs. This is the measure I compare to my stock investment. (Side note for all the real estate geeks out there: I understand that there are slight differences between ROE, ROI and Cash-on-cash return. I’m using the ROE here, but qualitatively I could make a similar point with the other concepts as well…)

If I have no mortgage I’d certainly calculate version 1 because without leverage and any borrowing costs the two are the same anyway. If I do consider getting a mortgage I’d certainly want to compute both as well. First, the Cap Rate will inform me whether it’s even desirable to use any leverage. If the Cap Rate is not much higher than the mortgage rate I will not even want to borrow anyway – and maybe not even buy at all! But when calculating the ROE from the Cap Rate, I can’t just subtract the borrowing cost.  To do the return on equity calculation right is no trivial task. I always use this formula, see below. It links the three return variables: 1) the unleveraged return (=Cap rate+capital gains), 2) the borrowing rate and 3) the ROE:

ROE formula01
Return on equity is not just “r-i” as Altucher seems to insinuate.

If you’re not into formulas, here’s a diagram of how this leverage equation works in the real world. If your return is less than the financing cost, the profit from the leverage, Debt times (r-i), is spread into the equity portion to give you the ROE. If r>i then ROE>ROA!

LieWithPF_Part2 Chart05
How leverage works in the real world!

Notice the difference here? I still receive a return of r on my capital. But I add(!) to that the net return (r-i) on the part that’s financed. Let’s look at a real example. Imagine you have a property that returns 6%, the interest rate is 4% and the debt-to-equity ratio is 4 (e.g., 20% equity + 80% mortgage). Altucher’s la-la-land fake return is 6%-4%=2% and that’s completely wrong, of course. Your actual ROE would have been 14%, constructed as the unleveraged return on my equity, 6%, plus 4 times the net return on the debt-financed portion: 4 times 2%=8%! 14% is seven times bigger than Altucher’s number!

ROE formula02
Numerical example to showcase the huge difference between the true ROE and Altucher’s fake ROE.

So, there you have the power of leverage (provided the cap rate is higher than the borrowing rate!) and this is also the reason why, for example, my own internal rate of return on my previous homeownership “investment” was 15.85%, even though the unleveraged return was a paltry single-digit percent figure!

Further reading: Paula Pant/Afford Anything has a great post that goes through a very detailed Cap Rate calculation scenario. And an example of how you can create crazy-high ROEs with leverage!

Side note – a variation of this lie: Imagine the housing return on equity is 10%. I’ve seen people subtract the opportunity cost from that, i.e., the foregone return on an equity investment, let’s make that 8%. So, you’re only left with 2%. If you leave it at that, you obviously and correctly conclude that the housing investment is better than equities. But some very sneaky (or very, very incompetent) folks out there now compare the 2% to the equity return again. Because 2% – 8% = -6% <0 they conclude that equities are a better investment. Notice the flaw in that calculation? You’ve now subtracted the equity return twice! Your asset would need to have double the equity return to be considered better!

3: Ignoring pass-through costs

And another gem from the Altucher post is – you guessed it – in the next paragraph. Jimmy Altucher wants to go three for three:

And, of course, this does not count maintenance, or property taxes, which could be up to another 4% per year.

Wow! I didn’t know that if you’re renting you avoid all the hassles of homeownership: you don’t pay property taxes, you don’t pay for repairs and all the other hassles of homeownership! Of course, this all requires renting from a landlord with a charitable mood who is nice enough not to pass all those costs onto you, the renter. I tried to reach out to James Altucher and ask for suggestions about where to find such landlords but I haven’t heard back yet!

But seriously, for most renters, probably 99.9% of you, of course, the costs of homeownership, ALL OF THEM(!!!), are indeed passed through to your rent. Your landlord may not tell you that out of your, say, $1,500 monthly rent payment …

  • $123.45 will go to pay property taxes (all just sample numbers)
  • $234.45 is set aside for repairs
  • $1.23 is used to amortize the cost of setting up the LLC that owns the property
  • $5.43 is set aside for the local and/or state business license
  • $45.67 is used to pay an accountant to do the landlord’s business taxes
  • … and many more costs!

Too bad this is never itemized like that but that doesn’t change the fact that the renter will pay a ton of money to the landlord to reimburse him/her for the long laundry list of costs.

How to do this right:

Again, I’m not saying that we should ignore the various costs of homeownership. They are factored into the housing return, see the SF Fed study above. But when you take into account the cost of homeownership, do it consistently; the cost will impact both homeowners and renters. One could even argue that renting involves more costs because of the higher costs the landlord faces, e.g., setting up an LLC, hiring a CPA, vacancies, delinquencies, tenants trashing the place, the cost for acquiring new tenants, credit checks, etc.

4: Overconsumption is not a good investment

After beating up the radical renters let’s also make sure we point out the #1 lie of the “real estate mafia” comprised of developers, brokers, bankers, probably even politicians who try to convince you that buying the biggest house you can afford is a great idea. Makes sense, right? If a home is a good investment, then a bigger home is an even better investment! Just like $2,000,000 in VTSAX is better than $1,000,000 in VTSAX, right? Sorry, but the “too much of a good thing” caveat applies here. One beer may taste great, but ten beers may be a health hazard, and in the same way, too much house will most definitely wreck your finances.

How do I reconcile this with my writings above? Very simple, let’s look at the diagram below. On the x-axis, I plot the cost of housing, per unit. So, if home-ownership beats renting, then renting would show up as a wider rectangle than owning (larger cost). The size of the home is a completely different dimension. Literally, because the size of the property is on the y-axis, i.e., the height of the rectangle. Costs of renting/owning would then be the area: width times height. If I own a house that’s too big (cost=A+B) it may still be inferior to renting an appropriately-sized house (cost=A+C). Of course, ideally, I would simply want to own a house that’s exactly the right size and spend only as much as area A, instead of A+C. But that’s not always in the cards.

LieWithPF_Part2 Chart01
Own vs. Rent calculations are about the cost of owning vs. renting per unit. Owning too large a primary residence can still be a bad financial decision!

Of course, there is one way to turn a house that’s too big into a money-maker, after all. It’s called House-Hacking. Rent out the extra space and one could potentially live for free. In the example below, your housing cost is areas A+B and your gross rental income is B+C. Your net cost of living in your own small space is A-C (i.e., area B drops out of the calculation completely, SMART!!!) and this might be really small or even negative.

LieWithPF_Part2 Chart02
Turn a money pit into a money-maker. The benefits of “house-hacking” explained in one simple chart.

How to spot this “lie” in the field: 

This lie is pervasive! Banks have calculators to determine how much house you qualify for; based on your income, not on your actual needs! Realtors often size you up and try to put you into the biggest house possible to maximize their commission. Don’t fall for this lie! Too big a house is overconsumption. Whether it’s rented or owned!

How to do this right:

Read any FI/FIRE blog and educate yourself on how to be happy with less. Check out Coach Carson’s post on house hacking.


Whacky math is everywhere around us and some of the whackiest I’ve seen surfaces in the rent vs. own discussion. It sometimes takes almost a forensic accountant to determine where people fudge the numbers. James Altucher certainly fudged his numbers very artfully! That makes you wonder: what’s the motive of Altucher the other radical renters? Are they secretly investing in private equity multi-family housing deals and trying to talk potential tenants out of buying their own home! Nah, that’s preposterous! I have a different theory, though. I found a link to a cool survey of what homeowners and renters regret. 8% of homeowners would rather be renters but 45% of renters would rather be homeowners. Maybe a lot of renters just realize that they missed out on homeownership and try to ex-post-rationalize their bad decision. By hook or by crook. Don’t listen to the crooks!

Hope you enjoyed today’s post! Please share your own favorite personal finance lies!

113 thoughts on “How To “Lie” With Personal Finance – Part 2 (Homeownership Edition)

  1. Excellent post. I am a homeowner myself and with interest rates as low as they are its hard to say no to such cheap leverage (not to mention the other lifestyle benefits). Also, minor correction but I believe that in your diagram for “Numerical example to showcase the huge difference between the true ROE and Altucher’s fake ROE.” the expression to calculate ROE should be 0.06 + 4 * (0.06 – 0.04) = 0.14.

      1. ERN, I usually like your content, but this was one of your sillier articles.

        I suppose the biggest problem I have is with point #4.

        In large parts of the US there isn’t the option to buy much smaller than a 3bd 2ba house. If you need less then that, you’re renting an apartment. You mention ‘house hacking’, but frankly that’s a millennial weasel word for ‘living with roommates’, with all the loss in quality of life that brings. At a certain age, one wants their own private space.

        I’ve done it all. I own now. I rented before. I lived with roommates up until my 30s. Renting gives one housing along with a lot of implicit ‘insurance’ that provides you flexibility to move when needed and maintenance being ‘the landlord’s problem. Yes, you pay a premium for this over what you would pay for an equivalent mortgage and other expenses, but I’d point out that rent covers one’s expected expenses, as a new home owner lets just say that these can be spikey and unexpectedly large.

        If you intend to live in the same place more than 10 years, owning will almost certainly be a better choice in the long term, but part of the fun of early retirement is not being tied to one location. I can easily see myself renting during the early part of my retirement.

        1. It was tongue-in-cheek. I wouldn’t call it silly.
          Almost everything you write about is 100% what I think and what I wrote:

          I said that owning a small place is not always in the cards. That’s why I lived with roommates in my grad school days because you can’t buy a 200 sqft house in most places.
          House-hacking is not necessarily living with roommates. Lots of people buy a duplex (or triplex or quad-plex), live in one unit and rent out the other unit(s).

  2. Even though US housing has seen similar ROAs as US equities it is a difficult to make use of those results when considering the rent vs buy question. When you buy a house you are doing exactly that: buying one house, not a diversified portfolio of US real estate. Just like with buying single stocks, buying a single house exposes you to all kinds of non-market, and therefore uncompensated, risks.

    I also don’t know if ROE is the best measure to gauge the financial merits of home ownership. These are very geographically specific and should boil down to determining the true cost of housing in your city / neighborhood. These costs should include both sunk costs as well as opportunity costs.

    For a rental property these costs are quite transparent as they are is the cost of rent and utilities. For a purchased property it is more complicated. It certainly includes the interest portion of the mortgage, property taxes, utilities and depreciation/maintenance costs. It should also include the opportunity cost of the downpayment, compounded at the difference between the total market returns and the expected price returns on the property. Finally, it should include the difference in total monthly cost of buying vs renting, again compounded at the same rate as the downpayment.

    Evidently, one key assumption in this calculation is that the rent scenario involves investing the money that would have been put into the downpayment as well as any additional monthly cash flow difference. Compounding at (total market returns – housing price returns) makes an apples-to-apples comparison on how cash directed in these different directions would grow with time. For a US investor this rate could be the difference between the S&P 500 Total Return Index and the Case-Shiller Housing Price Index.

    Actually doing this calculation can be a little tricky since these costs vary across the rental and housing stock. A truly fair comparison of costs would only include face-offs between identically attributed rental and housing units. This isn’t usually reasonable to do since the types of units available for rental or purchase are often quite different in terms of size and location. This difference isn’t just incidental. I would argue that it is one of the primary drivers for people wanting to buy instead of rent.

    1. Granted: your own personal residence has higher risk than the overall U.S. housing market. I’ve heard some horror stories about houses turning into real money pits. We should probably scale up that housing risk to account for that.

      Agree that there are many different bells and whistles. Since Altucher vastly simplified and (over-simplified) his math and I don’t want to write 10,000 words on this topic I was forced to slightly simplify and go through only the basic ROA vs. ROE math. I suggest you take a look at my post from before where I go through the careful math of my past homeownership experience and I provide both an IRR and also an opportunity cost calculation (“what if I had invested all the differential cash flows in the S&P 500?”), taking into account all costs, sunk costs, ransaction costs, maintenance, HOA fees, taxes, etc.:
      Both calculations show that the housing investment blows out of the water the equity investment, even if the raw return on the housing asset was really quite modest!

      Regarding your comment “For a US investor this rate could be the difference between the S&P 500 Total Return Index and the Case-Shiller Housing Price Index.”
      No, it’s not. Did you read the section on the difference between price returns and total returns? Is your name James Altucher? Or Karen? Or Brian?

      Also, I agree that there’s a different cost to the renting vs. owning stock. Rental properties depreciate faster (owners take better care of their stuff), rental properties require more legal/accounting/etc. costs, insurance is more costly, etc.
      So, these are all additional rationales to owning over renting.

  3. Great post as always. We also wrote a post on house hacking on our blog too and showed exactly how we were able to pay off our mortgage in 2.5 years thanks to renting out 3 of the 4 bedrooms. I have a sneakyyyyy suspicion you’re referring to Millennial Revolution 😂😂😂 nice name selection of Karen and Brian too 😉

      1. As a millennial living in Canada myself, I’m a big Millennial Revolution fan. I agree that some of their math is flawed and they don’t go into as much detail as you, but I’m not sure going after them this blatantly was the right call. They figured out a way to retire early and we should be celebrating fellow FIRE member and really anyone in the personal finance space who has figured it out. For those who have never heard of MR, they clearly would breeze right through the jabs but for those of us that know them, it’s a very clear slap in the face to them. I don’t live in Toronto but if I was in their shoes I can understand why they have a bias against home ownership seeing how insane the real estate market is there. If I was a homeowner in Toronto today with a paid off home I’d be selling my place and moving to a much more affordable city and that would be my house hacking solution to propel me to FI (same thought process for Seattle). I think real estate can be situational and viewed different depending on what market you’re in and how much teeth you have in the game. Again, I agree with all your points and you’re one of my favourite blogs out there, just shedding some light as to why others, like MR, may be thinking the way they do.

        1. I celebrate FIRE myself and I celebrate everyone who’s pursuing/living FIRE. With your logic, my fellow homeowners and I have the right to be celebrated as well. Instead, some of the radical renters call us names and call us stupid. And all that based on “flawed math” as you concede yourself. So, if people have the right to spread these falsehoods and be rude and belligerent about it, I think I have the right to write a more nuanced and mathematically accurate post and be a little bit sarcastic about it in the process. Unless there’s a “protected list” of people that shall never be criticized even if they’re wrong, I’ll just keep doing what I’m doing here. I’ve been doing this on Safe Withdrawal Rates, Emergency Funds, Own vs. Rent, Index Funds vs. Stock Picking, Robo Advisers (did I miss anything???) since 2016 and readers seem to enjoy it.

          Also, in no way would I want to do the same as the radical renters, i.e., be dogmatic about homeownership and call the other side stupid for renting. In fact, I mention at the outset “But I can certainly see how some other folks, whether retired or not, would prefer to rent. I certainly don’t want to talk anyone out of renting.” Again, just for the record, I have been a renter myself before and at the time it was the right thing for me.

          1. Not to mention that they are prominent public figures in this community and both implicitly and explicitly providing advice to people, and presumably making money off of that. They have an ethical duty to attempt to get things right. They should be called out when they don’t and they should be mocked when they persist.

            There is nothing wrong with being incorrect, in fact, being publicly wrong is an undervalued service, because it contributes to understanding when the correctives come out. But there is something wrong with persisting in promoting misunderstanding.

              1. Totally agree with the points and the points within the post itself as I too am a homeowner who reached FI for our family in our early 30s. And yes I appreciate that you really do “math shit up” (I’m an Econ degree too so I appreciate all the analysis) and go into all the detail you do. I’m not questioning any of that. Just saying the jab came off a bit harsh, that’s all.

  4. I would quibble with only one minor detail: it’s not apparent that all the rental costs, property tax, etc., are passed through to the renter. Economists have a concept of economic vs. legal incidence, usually with regard for taxes, but can apply to any expense in this setting (not telling you anything you don’t know, but for the sake of readers). Namely, he who writes the check might not be he who ultimately pays the cost of the tax (or expense). It’s more complicated than that, and is a function of supply and demand elasticities, or in laymen terms, he who is less able to escape the tax is more likely to pay most of the burden, and the amount of burden is an empirical function of relative elasticities of buyer and seller.

    For landlords, I’ve seen estimates that they pay about 75% of the burden of property tax. I think the best way to think of it is that if property taxes were increases by $100, the rent should only increase about $25, all else equal. Of course, other empirical work may come to a different conclusions, and it may vary by locale, but it makes sense: the landlord is less able to pick up the property and move, whereas the renter has more options. So it is probably a mistake to say all costs are passed through.

    What this means for Altucher is that he is right in only this one tiny regard, to some extent (if only for property taxes); but, man, he sure spreads a whole bunch or wrong everywhere else.

    One last tangential thing: I think the real estate return calculations should include some measure of activity costs, both for management (which can be explicit) as well search (which are not). Time is valuable, and the time spent “searching” for and “managing” passive index funds is 0. I’ve never seen anyone try to study and approximate this (mostly because if varies by people, who different values of their time).

    1. Yeah, we did spend a lot of time searching for a house. It was a full-time job for a few days.
      But then again, we like the stability of living on one stable location and not having to move again for many years. Would be different if we had lived in a rental and move every few years. That would also cost us!

      Can’t say I agree with your quibble. That’s all based on faulty logic. Sure, a complete surprise tax hike today will take some time to end up in rents. That’s because rents are very sticky in the short-term. But notice two things:
      1: the EXPECTED portion of the tax hike has already been priced into the rent before. So, when some “quantitatively-challenged” economists run regressions on how much of the tax hike is passed through they are ignoring the portion that’s already priced in before the tax hike.
      2: the surprise over and above the expected portion will take some time to end up in the rent. But it will be priced eventually. But also notice that this cuts both ways: if the tax hike is less than expected it will also take some time for the lower than expected tax hike to put a damper on future rent increases.

  5. First time reading your blog and blimey… This is a fantastic post. Really respect the level of research and wording of your arguments. Saved this one as it’s already a classic! Best – J

  6. I love it. Just read this post and the prior “how to lie” post regarding personal finance. When people get sloppy with the numbers, it’s good to know I can rely on my fellow Gopher Grad to set them straight.

    Like you, we are now traveling extensively in our post-FIRE life, but we like to have a place as a home base for part of the year, as well. We’re happy to be homeowners, and we made the nubmers work by purchasing a very affordable home with low baseline costs.


  7. I love the depth of the post and the calculations. You really spent some time to produce such quality, well done.

    I’m sure you know some people buy the biggest house just to boost their egos though! They don’t even run the math because “you can’t go wrong with bricks and mortar”.

    Fun fact: Here in the UK, we have a government scheme for first-time buyers where you can buy a part of your house and rent the rest from the developer (to any percentage of your liking depending on income). The rent is usually at a small interest. Mine is at 1.8% of the rental part.

    That way you can benefit from house price growth without going all-in. It really makes you think how much of the housing market you want to “hedge”.

  8. Great post as always Karsten, but I would also like to share some contrarian points: geomtric mean should only be used if the investment proceeds will be reinvested in the same investment type. I don’t think we can assume this for the “saved” rent in the homeownership example. I’m also unhappy about the leverage argument. Leveraged RoE, as it is described by the formula mentioned in the article, assumes that the share of leverage was constant over the investment horizon. But majority of home owners will fully amortize the leverage portion over time, therefore the leverage is not constant but decreasing over time, which will lead to a way lower leverage effect. B.t.w it is also very easy to leverage an equtiy investment at reasonable costs via the use of structured products. It’s just not common to do that. Transaction costs and their impact on return should also be regarded since they are significantly higher for direct real estate investments. And as a last point, the study looks at average returns over the whole market. While someone can replicate the whole market in equities quite easily, this is not possible for real estate investment. The average real estate investor owns one house and faces therfore way more risk due to limited diversification than the study suggests (adressing sharpe ratio etc.). But thanks for bringing that study to my attention, I will take my time and read it very carefully. At the first glance some data looks questionable to me. Also impressive how the retrieved equtiy return for Portugal since 1870….when there was no equity market in these days. But maybe that will be explained when I give it a detailed read. There are also many studies in the market who show almost zero average return for housing – who is right?

    1. Thanks for the very thoughtful comment.

      geomtric mean should only be used if the investment proceeds will be reinvested in the same investment type. I don’t think we can assume this for the “saved” rent in the homeownership example

      Great! Apply the arithmetic mean to housing (which is higher than the geometric mean) but use the geometric mean for equities, because there you certainly reinvest in the same thing, i.e., dividends are reinvested, etc. But then the homeownership vs. stock investing equation becomes even more lopsided.

      Leveraged RoE, as it is described by the formula mentioned in the article, assumes that the share of leverage was constant over the investment horizon. But majority of home owners will fully amortize the leverage portion over time, therefore the leverage is not constant but decreasing over time, which will lead to a way lower leverage effect.

      And that’s why this equation should only be used as a rule of thumb. Over time, the D/E will converge to zero. But we’re missing the point. The big issue here is that ROE is not simply ROA minus interest rate. I just wanted to make the point that ROE can be higher than ROA with leverage.
      But again, the right way is to use an IRR analysis with all the costs/benefits over time. I invest in Real Estate Private Equity funds and when they show you the numbers, that’s (almost) the only number I really care about. Yeah, Cap Rate is interesting, cash-on-cash is interesting, but I really want to see what’s the IRR projection for the investor!

      B.t.w it is also very easy to leverage an equtiy investment at reasonable costs via the use of structured products. It’s just not common to do that.

      It depends on the definition of “structured products”… I’m not a big fan of leveraged ETFs (high fees) or buying equities with a margin loan. The expenses are actually really substantial! But you’re right: equity index futures are a really cheap way of getting leverage. Not that I recommend this in general, though. It’s very risky and should be left to people with a lot of training in finance.

      The average real estate investor owns one house and faces therfore way more risk due to limited diversification

      True! I should rephrase that. Again, the average return is not impacted, only the risk. And an individual homeowner faces more idiosyncratic risk!

  9. I am a forensic accountant and this post is excellent.

    One side point (which may not be the case as I haven’t read the underlying paper you cited): the volatility of housing returns might be understated as it’s not possible to buy the ‘standard’ house (or house index) – unless you are a real estate tycoon! Most people will buy one home which may have greater return volality than the aggregated housing return (I’m thinking buying a home next to a levee in New Orleans or a shack in San Francisco 50 years ago). Of course, on the whole, when considered with the leverage opportunity and the general increase in house prices, this would work out in the favour of a homeowner.

  10. I was sitting around Mathing up some shit and realized all I needed was to get some tent poles off Ebay for my YIELD SHIELD! I can use that somabish as a tent to live in! I think I can heat it with some compound interest!! I’m gonna write a book on that and become a famous seller of nonsense like Dave Ramsey or MMM or Karen and Brian! Mathin shit up has 2 features. Firstly the math can’t just be random. Math is simply a language of precisely and often cleverly defined logic. Handing Math to K & B is like handing an assault weapon to a 4 year old. People are basing their 40 year retirement future based on the Math. The second aspect is shit. The identity is SHISHO shit in shit out. Homey don’t play that.

    Great article. I made one mistake when I retired in that I didn’t leverage my home’s equity and put that into the market. I considered it long and hard but was afraid my wife might want to move and unwinding the extra risk would have been a monumental hassle especially in a down market. I mathed the shit up and could have claimed a free year of retirement on the deal and add some righteous credit risk to my portfolio’s diversity profile. The nice thing about leveraging a house you’ve lived in and properly maintained is you know for sure what you own, what it’s cost you and what it likely will cost you.

    1. Haha, that made my day! Why didn’t I think of the Yield Shield reference! 🙂
      Yeah, having some leverage or even just the option of leverage on the house is pretty sweet. Maybe a HELOC as an emergency fund? Might still be possible even now in retirement. But a 3.25% 30-year mortgage and putting that into the market before the big rally would have been sweet. Well, water under the bridge now… 🙂

      1. I am guilty of 4 – overconsumption of house ownership – as I have a house that is much bigger than my needs. However,
        1) I like living here
        2) It is mortgage free
        3) I consider it as one of my contingency margins. I can downsize or release equity if things go very badly in the market.

        1. I hear ya! But also keep in mind that being frugal EVERYWHERE can seem way too boring, so if you splurge selectively and a house is one of the categories and watch the other categories: absolutely, go for it! 🙂

  11. i never wanted to own a house and was a happy renter until i married a woman who owned a house. i essentially married into a house as i believe that function commutes. we paid a more than discount price at 98k for a big freakin’ stone fortress and have owned it outright for 4-5 years now.

    here’s the other thing that is enormous to me outside of any math. if we want to get 7 dogs we can do that. (we don’t play that HOA crap, this is a real free standing house). we don’t have to ask permission to do any damned thing to our house. wanna put in a dungeon? done. all this freedom to pretty much do as you please has tremendous value for us. put any number on it you like, but it has value. we weren’t born into this life just to survive but to live.

    1. What, you have only one dungeon? Ah, that’s for beginners! 🙂
      No but seriously, your point is a great one. The freedom to do what you like in your own house is worth at least a couple of % per year to us!
      And by the way, that same reason is also why people like to rent. If you don’t care much about the flexibility and you don’t want your neighbors to have much freedom either, then you should absolutely be a renter. Or maybe be an owner where you have a very strict HOA.
      So, that’s the beauty: people will self-select into the home they like the most.

  12. Great post!

    We never really worried much about the rent vs. buy math in retirement. A decent portion of our retirement budget is consumed by the “enjoyment” category, things like travel, dinners out, concerts, etc. If it was true that owning was a worse financial decision than renting we would happily allocate the difference into the “enjoyment” budgetary bucket… having the home we want the way we want and where we want.

    That, to me, is one of the weaknesses of the renting is better than owning argument. Unless you view housing in a very utilitarian way (basically just a place to sleep, wash, eat, and store your stuff) the spectrum of housing options is more limited for renting, particularly for single family homes.

    Having both rented and owned in a variety of cities and countries during our working life we know what we like, and owning gives us the ability to customize our home the way we want it to be.

    1. Very true. We feel exactly the same. Again, renting was good at a different time/stage of our life. But now we’re settling down we prefer the stable home base in this one location. And here are very few choices for rentals. 🙂

  13. While I may lose a few percent with home ownership, the peace of mind I get without a monthly rent payment is unmeasurable.

  14. I didn’t dig into the numbers, but I have a few questions:

    1-Does “Housing” consist of primary residences, or investment properties? Is it a mix? If so, what’s the mix?

    The investments/upgrades in your primary residence tend to be different than those in an investment property (I’m thinking tearing down walls, bonus rooms, new flux capacitors, the latest ziggity zag, etc.)

    2-Do these figures take into account the current average or median homeownership duration or was it based on a sliding scale of length of home ownership at the time? [And, to be fair, the length of equity ownership as well.]

    The median amount of home ownership in a primary residence has absolutely gone down over the years, increasing total transaction costs with each move (which is one of the highest costs related to housing). That invisible 6% realtor’s commission and all other costs and fees associated with buying/selling a house.

    Great article, just my thoughts!

    1. Great questions.
      It’s a mix to comprise the entire home market. Roughly 2/3 of households are owners but 3/4 of the VALUE of houses is owned (because the average owned property costs more than a rental per unit).

      2: I don’t think they do. Because this is for the macroeconomic aggregate, the best you can hope for is that they account for the macro-aggregate costs of changing ownership and then spread it equally across, i.e., assume a house is sold every X years and spread the cost over X years of returns.

      And I totally agree that if the tenure is too short, it’s best to rent! Nice reference!

  15. I didn’t dig into the numbers, but I have a few questions:

    1-Does “Housing” consist of primary residences, or investment properties? Is it a mix? If so, what’s the mix?

    The investments/upgrades in your primary residence tend to be different than those in an investment property (I’m thinking tearing down walls, bonus rooms, new flux capacitors, the latest ziggity zag, etc.)

    2-Do these figures take into account the current average or median homeownership duration or was it based on a sliding scale of length of home ownership at the time? [And, to be fair, the length of equity ownership as well.]

    The median amount of home ownership in a primary residence has absolutely gone down over the years, increasing total transaction costs with each move (which is one of the highest costs related to housing). That invisible 6% realtor’s commission and all other costs and fees associated with buying/selling a house.

    Great article, just my thoughts!

  16. You may have better math skills than the average blogger but your disparaging of a fellow blogger is way out of line. Just plain bad form.

    1. Someone before commented on this and I just copy/paste his comment because I couldn’t have said it better:

      “They have an ethical duty to attempt to get things right. They should be called out when they don’t and they should be mocked when they persist. There is nothing wrong with being incorrect, in fact, being publicly wrong is an undervalued service, because it contributes to understanding when the correctives come out. But there is something wrong with persisting in promoting misunderstanding.”

    2. I enjoy both this blog and the MR blog. I doubt they will be too bothered by this piece as it is all publicity that generates traffic for their blog. Let’s face it they are not going to have to worry whether the 4% rule works for them or not as their side hustles are generating huge income for them – and good luck to them toot – they have a communication style that appeals to many.

      Their pieces on renting actually made me really think about it because, here in the UK, house ownership is seen as very desirable indeed. I run a small trust fund due to a family tragedy and use it to pay the rent of the beneficiary of the trust who is on a very low wage. The question of “when” I should use this trust fund to buy the beneficiary a house has turned into a question of “if” instead. It is great to have both sides of the argument to weigh up this tough decision especially in the current housing market in the south of the UK where if you do not have the bank of mum and dad you are very unlikely to be able to afford to buy a house and even affording rent is a real challenge for many ordinary working people.

      1. Well, if your are running a trust for someone you are required to consider all the pros and cons just like you’d do if this was your own money. If you think that renting is cheaper than owning then absolutely, go for it. Renting might be the better option in some of the very overpriced areas. At least in the short to medium-term.

    3. There is nothing wrong with calling out on someone’s BS. There are a lot of completely useless bloggers and they should be called out.

  17. ERN,

    You can leverage Equities too. You’re comparing leveraged real estate to unleveraged equities. This is apples to oranges. You committed the same fallacy that you accuse others of

    Being semi-sarcastic here, of course. hah. but how can one compare leverage real estate to leverage equities? (potential future post?) On a more serious note, this is a great post that more concretely depicts what I’ve always thought; love the visualizations, I have never thought of it that way


    1. To be more clear, that was mostly tongue-in-cheek. I acknowledge that there is not true apples-to-apples comparison between directly owned residential real estate and equities

    2. No, I’m not. Equity investments are already leveraged internally. You can look at the ROA and ROE at the level of the corporations and see the difference. So, buying a stock or index fund on leverage would be Leverage-squared.
      So, back to your question: I’d look at the volatility of the leveraged position. What’s the standard deviation of your equity+leverage vs. house+leverage.

  18. ERN,

    I’ve really enjoyed your blog, especially your SWR series. The glide path info was very helpful for planning my retirement. I have to totally agree with what you said right off the bat there are many personal factors involved in the rent vs buy decision. Many bloggers don’t have kids, and seem to have mostly a goal of traveling. In that case I have to agree renting makes more sense. Many others have kids, or just don’t feel like having to move when the landlord decides to crank up the rent. We rented when it fit our lifestyle and switched to owning when we decided on what we wanted to do long term. Renting a place is not at all like owning a place, it’s just not apples to apples and too subjective.

    There’s also crazy things to figure as not paying rent keeps expenses low. That allows for roth conversions, ACA subsidies, and even tax gain harvesting. I have a feeling when you figure it all in things probably realistically come out pretty even.

    Recently it seems every blog is selling a book now, with each blogger reviewing the others’ books and how great they are. So you have to kind of expect them to distort things to whatever angle their blog/method pushes. I’ve always gone with the sniff test that tells me a landlord typically isn’t renting out a place to loose money.

    Anyway I hope you are enjoying your retirement and please keep up the great content!


    1. Excellent points, all of them! Couldn’t have said it better! Pick whatever what best suits your lifestyle. In no way would we ever declare renters crazy/stupid for their choice.
      I also like your angle on the book sales. I think this might be another reason why some bloggers want to stir up the pot a little bit and make these outlandish and sweeping (and also false) claims. Almost never there’s bad publicity. Whatever makes your blog/book sell… 🙂

  19. Thank you for another great article. Thanks especially for exposing the Yield Shield and Rent vs. Homeownership fallacies. I’ve been early retired for 12 years, and follow Millennial Revolution for entertainment value. But I am concerned about the readers who look to them for financial advice. K and B will be just fine since they generate a lot of income from their advice, but their readers may not have that income to fall back on. Unfortunately, when opposing views are presented in their comments section, K’s response is to either delete or disparage. I guess they have an image to protect rather than striving for truth.

  20. ERN – I think I’m going to have to link this inside my most popular post about the large loss I took on my last home. One point you make hits home, I can’t compare the opportunity cost of leaving the downpayment invested in equities. That’s an entirely different risk profile than a home downpayment, which guarantees me the savings on rent. Comparing it to an intermediate treasury bond is probably a more accurate comparison.

    1. Haha, your story is obviously a cautionary tale about home-ownership.
      And yes, I liken a home more to a bond that pays me stable dividends than an equity portfolio. So, that makes the comparison home vs. traditional assets a little more attractive for the home. Very true!

  21. Good post. I read Millennial Revolution for a while. It’s no Marginal Revolution.

    I have been reluctant to buy property for the same reason a vegetation does not eat mean. I don’t think real-estate should be a good investment; if the country was run by sane economists we would have land value taxes and a constitutional amendment baring zoning laws. Traditional real estate would not be a very good investment in this utopia. From a Georgist perspective, it is sort of an icky investment class to get into as land rents are high mostly because of laws that prevent efficient land use.

    But then, we do not live in a Georgist utopia.

    So if I can’t beat the propertied classes, maybe I should just join them.

    1. “So if I can’t beat the propertied classes, maybe I should just join them.”

      Very true. But notice it’s not just economists. Everybody: politicians, businesses, lobbyists, etc. are all invested (literally and figuratively) in housing. They will make sure housing will stay an attractive “investment”! 🙂

  22. I made a comment earlier but I think it got lost in the void somewhere.

    I completely agree with everything in your post. My thinking about property has swung wildly like a pendulum but luckily after reading your previous posts on property, it is now more neutral. Favouring having a home as a hedge.

    My thoughts are, is it only worth buying property if I am sure I will be in one place for many years to come? Otherwise there would be frictional costs involved buying and selling? Or does one just turn these in rentals instead?

    There have been recent controversy over apartments (are they called Condos in the US?) build quality in Australia. The most recent one being Mascot Towers in Sydney. Costing owners a lot due to structural problems. It may be a systemic problem.

    This is hard because most affordable and conveniently located properties in Sydney are apartments so it makes the decision harder. Any thoughts on these musings?

    1. I realize I’m a stranger on the internet, so take these thoughts with that caveat. I have both rented and owned property in different countries over my working life, and had uncles who were builders that I worked for while I was in high school and college.

      I wouldn’t buy a property if I didn’t expect to be living somewhere for at least three years. Less than that and the transactional costs are really burdensome. I’ve heard a lot of people articulate a minimum of 5 years, and that could also make sense for someone who was less picky about the features and amenities of an accommodation than I am.

      I also wouldn’t buy if I couldn’t afford to take a financial loss on a future sale — being stuck in a property because you’re underwater on the mortgage is no fun.

      As for your build quality question, any new property whether house or apartment (condo) has the potential to have flaws — some of which can be serious (foundation settlement and cracking, improperly installed or low quality systems, etc). I tend to lean toward buying properties that are 5-10 years old, old enough for most major construction and quality flaws (if they exist) to have manifested themselves yet young enough that the big replacement items (roofs, windows, HVAC systems) are still a decade or more away.

      Also, 5-10 year old properties are often decorated to a now “out of fashion” style that puts off many people who are chasing the “shiny object” of the latest design trends they see on TV (and why new properties often sell at premium per square meter versus older ones).

      Good luck – I’ve enjoyed visiting Sydney but housing there seems pretty spendy (at least based on the quantity of jokes about it on “Have you been paying attention?”).

      1. Hi Werner,

        Thank you for taking time to reply and share your experience and expertise. Strange or not, I found your comments very valuable and well thought out. I think ERN tends to attract a certain type of person, very thoughtful and rational.

        I am no expert on property but everything you say is exactly what I have been advised by others. Don’t buy if the intention is to sell it soon, similar to equities in some ways, where a longer investment horizon can shield oneself from short-term volatility.

        I’ve also been advised about the 5-10 year old rule of thumb as well. Would you say this applies to both houses and apartments? I tend to hear this advice moreso for apartments but once again, I consider myself very inexperienced with property (I have never bought any)

        What are your thoughts on houses vs apartments? My bias is towards houses because at the very least you have the land value whereas with apartments, you own only the airs inside the walls. With the recent cracking incident in Sydney, owners have described their apartments as having gone to zero because nobody would want to buy it. Whereas the value floor on a house is at least the land. This is without considering that house prices are too far out of reach anyway.

        I didn’t know obscure Aussie shows would be watched overseas. Which part of the world are you from?

        I would consider Sydney as a very HCOL area unfortunately.

    2. Thanks!
      Absolutely! I’d buy a home only if I’m planning to stay there for 5+ years. Better 10+ years.

      Build quality: I’ve also seen very shoddy work in single-family homes. Not sure if one can generalize anything here.

      The larger the building, the more publicized the screw-up will be. See this one:

      Little fun fact:
      I used to work across the street in the light-colored building on the left and in the reflection:

      1. Wow, it certainly sounds exactly like what’s happening in to some Sydney buildings right now.

        I agree that shoddy work can happen with single-family homes as well but playing devil’s advocate, shoddy work on family homes would be less devastating?

        The freestanding home always has value in the land so while you would take a big loss, it wouldn’t be completely wiped out. You can also repair/rebuild if you had the means.

        Not so with condos.

        Once again, just me playing devil’s advocate and bouncing ideas around. I’m certainly not dogmatic in my thinking and open to changing my mind. I do admit I am not very knowledgeable in this area.

  23. ERN, I know you originally came from the Bay Area – what do you think about this calculator and the argument that price to rent ratios above 30 in many Bay Area cities make renting much more attractive relative to buying? The author uses certain return %s that the entire calculation depends on, if you narrow the gap between equity and home returns then the math changes again.

    There’s an argument that rapid appreciation and Prop 13 has left many homes better off being rented i.e. if they were suddenly sold, the old owners would owe huge capital gains and the property tax rate on the home would massively increase.

    1. Can’t vouch for the calculator, but it seems to have a lot bells and whistles and it considers all of the pros/cons and cash flows I can think of!
      I agree that, for a short-term stay in the Bay Area I’d rent now. But if you’re staying longer, consider the possibility that the Bay Area will catch up to the worldwide A+ metro areas (NYC, Singapore, etc.) and then there’s more room for much more appreciation.

  24. Great as always. This reminded me of a really good BiggerPockets article that helped me wrap my head around the interdependence on leverage and cashflow against loan interest and cap rates on rental property.
    I put the example into a spreadsheet and graphed some of the curves.

    1. Wow, that’s a great post. Thanks for the link! It has some of the same flavor as my ROE formula: you always make the ROA on your equity, and then add or subtract to that depending on whether you have positive or negative leverage! 🙂

    2. I didn’t go through a lot of math, but we bought a small three bedroom house when the rent on our two bedroom apartment was raised to higher than the house payments would be. The $500 a month difference now would pay for a lot of maintenance.

    1. Great article. I’ve given up pointing out the fallacy in some folks sh**ty Math with regard to homeownership. Instead we are collecting rent that covers 2x our costs on a rental property, enjoying the last decade+ of appreciation…
      And thankful that our renters can continue to cover rent with their earnings they have from the opportunity savings of not putting a down payment on a house.

  25. I was with you until number three. The pass through costs do not determine the price of the rent. The market does. If anything, a landlord who is determining their rent based on pass through costs instead of the market is good for the renter. Let me explain. Let’s say “Grandma Brown” bought her property twenty years ago. She’s retired now so she manages it herself. When determining rental rates for her property, Grandma Brown is very careful to account for her costs and makes sure they are passed through. Fortunately for her tenant, she is basing those costs on a twenty year old mortgage and property taxes locked in at that rate. Meanwhile, “Investor X” uses “Property Management Company Y” who determines the costs based on market rates. The influx of tech money has caused the property values to skyrocket in the last twenty years. The rental rates have risen quite a lot too. Unfortunately for Investor X, the market rate won’t allow him to cover the costs of the building he just bought. However, he’s not worried. He’s factored in the expected rapid appreciation of this area into his ROE calculations.

    Also, I think this sort of rental arbitrage is easier to come by than equivalently buying below market value. Owners are so much more likely to landlord themselves than they are to sell their properties without agents. Also, other factors can fall into renters favor. When a property owner sells, they usually choose the highest offer or the highest off that is unlikely to fall through. They could care less if the future owner will anoy the neighbors or have cash flow problems down the line. Meanwhile, a landlord is very likely to choose a lower maintenance, stable, friendly tenant who they like dealing with over the person who will pay them the most in the short term. This is even more prevalent with the current popularity of mother-in-law units.

    You did however mention the one thing that so often gets lost in the rent vs buy argument. It usually shouldn’t be an apples to apples comparison. It is much easier to rent a small basic place than it is to buy one. Personally, the property tax alone on the house two doors down from my apartment is about double my rent.

    1. Well, and you lost me at “Grandma Brown”
      As I have said, here and at other places, if you are lucky and you rent from a non-profit-maximizing, non-rational landlord, good for you. Count your blessings. You should keep renting and hope Grandma lives a long life.

      But the overwhelming majority of tenants rent from rational landlords. I invest in multi-family real estate myself, through private equity funds, and I can tell you these guys are very capable and set their rents to local market rates and pass all costs through to the tenants. If not, they’d go out of business really quickly.

      1. My point is that it’s quite a lot easier to rent below market than buy below market. Also, you make yourself a good buying candidate either by being able to make an all cash offer or having really good credit. These same things help with renting obviously, but you can make yourself a good rental candidate by simply being a nice person.

        The ability to pass through costs is very important when determining if buying a property is a good investment, but costs very often aren’t passed through because of the necessity to compete for renters on the open market.

        1. You lost me again at “it’s quite a lot easier to rent below market than buy below market. ”
          Do we have any hard numbers on that? What % of properties rent for below market and what % of properties sell below market price?

          Also, uou can buy below market value: at a foreclosure auction, through “we buy ugly houses” flyers, other off-market opportunities, wholesalers, etc.
          I don’t see a lot of opportunities to rent below market unless you’re a long-time resident in a rent-controlled property. But it’s hard to get your foot in the door there.
          So, inadvertantly, you made the case for buying over renting with this point about below market deals, completely unrelated to the pass-through issue, by the way!

          1. You seem to believe both the rental market and housing market work equally efficiently. I just don’t see how this can be the case when the vast majority of houses are listed on the mls and sold by a professional whereas, there is no set standard for rental listings.

            Most of the methods you mention for buying property below market rates are hard to accomplish for a retail investor just looking for a place to live. I seriously doubt most foreclosures in nice neighborhoods of large metropolitan areas end up auctioning significantly below market value. (If they actually do, please let me know.)

            However, I think the methods for renting and buying below market value are much the same: word of mouth, boots to the ground, and trying to find properties before they are on the open market.

            Methods I’ve used personally to find rentals: I’ve rented from a friend who preferred me as a tenant and less money to a stranger and more money; I’ve taken over a lease from a friend who needed to move out early; and I’ve found inexpensive places just walking around neighborhoods and calling the numbers on “for rent” signs. I’ve also been offered places in buildings where acquaintances or friends’ neighbors were about to move out. Yes, all of these things take time, but almost all of the homeowners I know spent months looking before finding property that they bought at market value.

            1. Yeah, and I never argued against renting if you find a good deal. I have personally talked people out of buying because they had unbeatable rental deals.
              So, I guess we just have to leave the discussion at this point and agree to what you said in your first comment: You lost me at #3. And that’s fine with me.

  26. Haha… I totally got the reference to Canadian bloggers who decided to not buy a house; and instead spend life traveling to cheaper countries abroad. I live in the San Francisco Bay area and have met countless folks who regretted not buying a house sooner.

  27. I decided to buy a house for retirement because I was experiencing shocking rental increases each year for a crappy apartment. (Yes, I have a mortgage in retirement.)

    The lifestyle is better in a house, but I feel a little trapped.

  28. I just thought I’d leave a quick note about how much I enjoyed your post. It was hilarious. I’ve always been curious about what the criteria is to claim you are the youngest retiree ever in a country?

    Thanks for your detailed analysis and well thought out points.

  29. In point number 2, the denominator of the ROA calculation is market value. Oddly, this formulation makes quickly appreciating properties look like a bad deal, because their market value quickly increases.

    I can think of two ways to correct for this. (1) Count the appreciation in the numerator (as part of the “income”), or (2) Ditch this approach entire and convert all future cash flows (including imputed rent,and selling and paying a realtor) to a NPV.

    1. I don’t find this troublesome at all. Your appreciation is “water under the bridge”
      If your property appreciates and your rental income hasn’t kept up, this might be a good time to sell and look for a better-valued property.

      But I agree: it’s always best to use today’s value + future expected flows. The same is also more sensibel in the equity space.

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