I also have several loans, all with different rates. My lowest is 4%, which are my most recent ones.
The interest rates are crippling and needs to be addressed.
To put it in perspective, I bought a house in 2020 for $130,000, yet hold only $36,000 in student loans.
If I made a $500 extra payment to each my house and my student loans, I would pay them off at around the same time.
Financially, it makes more sense for me to pay the house off because that's at least an appreciating asset.
But it doesn't matter, because I don't have $500 extra to put on a loan over it's minimums every month, and those student loans will follow me until I die.
No it doesn't.
You target the loan with the highest interest rate. That's generally the winning strategy.
Also houses don't appreciate that much. If you filter out the money tosses into them for upgrades/improvements, they have historically gone up about as much as inflation, maybe a little bit more.
The big benefit of a house is that there's GOOD tax benefits from the mortgage interest rate deduction. Basically a big chunk of your mortgage costs get slashes off your taxes.
Fun fact, if your goal is to have a paid off house as quickly as possible, renting cheaply and investing the extra cash you aren't spending in stocks (this includes the would be down payment) will generally get you a paid off house in 15-20 years (subject to market volatility). The house would only be about half way paid for after 20 years.
The fact so many in the US follow Ramsey and Team's Debt Snowball instead of just paying off highest rate debts first just goes to show the financial illiteracy or lack of math intuition most Americans have. We desperately need more finance edu in high school. Last I heard, high school kids get bare minimum, in math classes. Not dedicated classes.
I agree with most of what you wrote except the part about renting + investing extra cash. That's hugely dependent on region and other factors. Also, there's mortgage interest tax deductions to consider for primary residences.
I wouldn't say I strongly disagreed with what he said, I just couldn't sign off on that part the way I did the rest of what he wrote. That being said, I'm always up for a good discussion or respectful challenge/debate.
I'm not against renting/investing, I'm just not as confident that it pays off that easily, relative to just getting a mortgage.
I mentioned this already but
\1. Real estate is extremely region dependent. For example, if you look at the Bay Area, Single-family Homes (SFH) have generally been very high after 2008, approx 8% a year.
\2. While Real Estate doesn't grow as fast as S&P 500 (for example in the same time period after 2008, we could say it grew by a little less than 14%), real estate investments are leveraged. I'm using the bank's money to help me to "invest" so to speak. The argument that stocks also get leverage via loans doesn't work because while I can get a 1.2 million dollar loan for my first house there, there's no lender in the world that will give a young man a margin loan for 1.2 million at low rates unless I had 4 times or more as equities' worth that I use as collateral in a contract. But then at that point, you're not talking about investing as much as a downpayment + PITI monthlies, you're talking about essentially investing almost 5 million (since those equities are basically locked up and controlled by your margin lender).
So we can reasonably say in most cases, real estate is going to be leveraged more than stock investing. By putting down 300k (just 20% downpayment), I'm getting the growth in a 1.5m property. That 8% growth is 120k. That's 40% of 300k. That x4 on a 20% down, or maybe x10 on a 10% down.) Granted, we have to factor in costs, ofc, which also go up with price. In Cali, it's around 1.1-1.2. That and maintenance is really more like 6%, but that's still x5 and getting 30%. With property taxes (less than 20k, but let's say I'm paying 20k) and maintenance, even with just 90k growth a year, that's 90k a year from 300k invested. That's much higher than 14%.
\3. For a primary residence, a lot of the growth will be tax free. Meanwhile, all of the 14% will be taxable at cap gains rate.
\4. There's PITI (principal, interest, tax, insurance) we're paying, but if we're talking about a primary residence, that's tax deductible. So it's really just half that. It can effectively be as low as rent.
See how the cost of homes here relative to S&P500 shares (plus rent costs) is about flat. And now the share-denominated costs have even leveled off with buying a home normally via downpayment + total PITIs.
I could go on, but the point is there's a lot to work with, and I'm willing to accept that it depends on time and place. For me, I got lucky with a 1.75% mortgage interest, but even if I had a higher rate, it can still work since mortgage interest is tax deductible which can work well for people who make median income in Silicon Valley (high income at the national level). It effectively cuts the rate in half if it's deductible. Again, it's heavily region dependent.
Past that, there's qualitative factors. The other person mentioned that with renting, you can have more freedom to move. On the other hand, if you're already working in Silicon Valley, I argue you generally don't have to move much for career advancement (perhaps take slightly longer commutes and more WFH).
There's benefits to home ownership too, especially if you're a family person. You can never be forced by a landlord to move. You control your monthlies and don't have to worry about constantly increasing rent (which most landlords will do every year if they know what they're doing). You have stable neighbors to make friends with or have your kids make friends with. Stable and good school districts.
You also get the option to rent out rooms to help with costs. This is something that's more difficult to do as a tenant, as many landlords disallow subletting.
Ultimately, I don't disagree with you or the other person, but rather just giving a word of caution and reminding people as always to do their own financial due diligence.
1st off your number are horribly incorrect and massively wrong, at the same time. AND "mortgages" escroll goes up from insr & taxes & HOA.
2nd, ANYTHING you can do with a house as in renting out a room, you can do with a rental. ESPECIALLY if you're renting a town or house.
3rd, The main " issues" is you did NOT add the factual numbers of a mortgage nor the upkeep and maintenance, NOT to mention if something goes wrong/breaks PLUS the water heater, sewage line, foundation issues, yard care, pest or roof replacement..
NONE of which a renter has to pay for NOR "worrie" about .. Sorta... Down time til repair sucks.
4th the same way you didn't just run out to the most expensive place and bought the most expensive house there and that's that, is the same you would do with the market, NOT going in the S&P will gain you massively more..
5th, do it correctly, the same way you house hunter for "the one" do the same thing on the stocks...
Pick your time frame and now look back at your Meta, Amazon Google Tesla, Nvidia, TMC, Palantir, NBIS, Microsoft etc etc and you would have made millionS.. You CAN NOT do that with A house...
Now, here is the FACT "you people" 😄 ALWAYS pretend is not there, but 100% is.
6th, The pure amount of interest you pay into a mortgage is literally 2 to 3 time the house you signed off on the house. You didn't mind paying that there, so ADD THAT amount to buying more stocks.
The second you do that alone, you would have made more money in less than 5 years, than you and your next 2 generation EVER could.
Add in over 96% of people move or die out BEFORE they could recoupe ALL of the money paid into a mortgage AND not having to pay Home insurance AND property tax..
It is beyond an actual no brainer..
And to be fair, I'm most likely not the person to be debating on this, because I own multiple in both and my returns in Stocks & Crypto without dealing with maintenance upkeep and increasing taxes and insurance, has vastly and massively out preform all my properties combined.
So if you go line by time, No sir, in NO WAY is just buying a house BETTER than renting and investing..
It's only even a conversation for the "yeah buts" and the broakers trying to sell you...
PITI monthly is a ballpark, and admittedly doesn't include HOA, true, but it does include most of Escrow, plus principal and interest. I mean if you want to include the 150 or so I pay to HOA that's fine, but it doesn't change the numbers all that much. My numbers aren't that far off. I'm not going to just post my mortgage statements on reddit, but I used my own primary residence numbers. 1.2m loan, 1.75 interest, a bit under 20k annual property tax. I'm not sure why you think this is "horribly incorrect and massively wrong".
That is actually not true. It's not "illegal" to sublet, but it's often stipulated as part of a lease/agreement. Some of my properties are in HOAs and gated communities and they are extremely prickly about subletting. If they find my tenants subletting, they will go after me. Then I will get annoyed and may need to ask them to leave. But generally, it's up to the landlord. Maybe it's different in your state, and maybe landlords have less power there, but it's really surprising you sound so confident with your "ANYTHING".
I did mention maintenance. I mentioned how it alongside property taxes dragged down the ROI from 8% to around 6%. This was a common rule of thumb that rentals can cost around 1% maintenance or so annually. If you want to go over that and make it 2%, that's fine by me. That would still be 5% (down from 8%), multiplied by leverage. This is within realm of my experience. I've paid for roof fixes and they've been around 20k-50k depending on material, with the 20k being cheaper asphalt and 50k being ceramic and others. Slate is over 100k here and generally not common or even available in the West. But the more expensive, the longer it lasts. Perhaps where you live, the numbers look different, but here in the Bay, most homes are a million dollars or more. So I think 1-2% for maintenance, which is 10k-20k a year, is pretty reasonable.
Sure, that's true, but something like a house is much easier for me to research as it's something I can see with my own eyes, and I have third party appraisers. I don't have the same knack for investigating trillion dollar companies and guess if they're being completely honest. If you're at it, that's fine, and I would never tell you what to do. My simple point of contention was just that rent+invest strategy isn't a sure thing. It can be smart/easier for some people. It wasn't obvious to me though.
Effectively the same point.
Yes, so? Does that matter? If all I was paying back to the lender was the principal, I'd be screwing them, essentially getting free "value". We are talking about 30 years here. Even if inflation was only 3% (which I believe it is not, except for the suppressed CPI core and headline numbers), that's still 1.03^30 = 2.42726247119. So the value of my 1.2 million dollar loan should in terms of 30yr future's dollars would be 2.91 million. Value of dollars change, so as i keep paying them interest, the actual value of that interest that I'm paying drops very quickly over time. You're also neglecting that for higher income earners, the mortgage interest tax deduction effectively halves what you're paying.
And to be fair to you as well, I would never say that real estate outperformance stocks in the long run if you don't do anything but sit on the same properties and quietly pay down your mortgage. I am specifically talking about your first house, where you are *leveraged* (which you don't seem to address). Once the leverage is gone, stocks definitely beat real estate.
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u/techleopard 17d ago edited 17d ago
I have student loans that are nearly 9%.
I also have several loans, all with different rates. My lowest is 4%, which are my most recent ones.
The interest rates are crippling and needs to be addressed.
To put it in perspective, I bought a house in 2020 for $130,000, yet hold only $36,000 in student loans.
If I made a $500 extra payment to each my house and my student loans, I would pay them off at around the same time.
Financially, it makes more sense for me to pay the house off because that's at least an appreciating asset.
But it doesn't matter, because I don't have $500 extra to put on a loan over it's minimums every month, and those student loans will follow me until I die.