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Comment by whack | Hacker News Reader

I have little interest in tying myself down by buying a house, but the part that's most appealing to me is the mortgage structure. You get to borrow money at a ~3.5% interest rate, in order to invest in something that produces 5-7% yearly returns. On average, this is going to make a ton of money in the long term.

Is there any way to do something similar with stocks, without paying an insane amount of money in interest rates or fees?

Edit: I know returns aren't guaranteed, I'm referring to expected returns. I'm perfectly willing to take on risk, in order to make positive-EV bets. I tossed out the 5-7% number as a very rough approximation - assuming that you buy a house with a buy-rent ratio of < 20, in which case the returns that you make by not having to pay rent, will be 5% or more.

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Why do you assume housing provides a 5-7% yearly return?

Past performance is no guarantee of future performance.

You're also ignoring the carrying costs of a house.

> carrying costs of a house

Indeed, taxes and insurance can dominate the mortgage.

Not to mention a new roof.

Or fixing it up in order to sell it at a reasonable price (not in SF area).

Owning a home can create real returns even if the home only appreciates at the long-term inflation rate, because of leverage. With a 20% down payment and 2.5% appreciation, you're going to see a return of 12.5% on that down payment.

Of course there are monthly payments and maintenance too, but you'd have to live somewhere even if you didn't own a house. To account for those properly in calculating the real return, you really should diff them against the rent on an equivalent property. And don't forget the interest tax deduction.

Finally there is the wonderful fact that capital gains on your primary residence can be kept tax-free up to $250,000 ($500,000 if you're married).

Owning a home can destroy real money if you have 20% down and prices fall by 10%.

At that point, if you need to sell, you've lost your down payment, as in WA at least, it costs approx 9.3% to sell a house (unless you're in an insanely sellers market, which you're not if you're down).

With a house you're hoping to just maintain equity by avoiding rent, not make 5-7% yearly returns

I'd be super careful with this. When I make 4x the median American income and have almost zero hope of ever being able to afford a home (until I get my FU money that is), that ought to tell you something about the sustainability of the current market.

As long as there are a lot of people with enough money to afford homes at the market-rate price, the market will remain sustainable. You may make 4X the median income, but there is no shortage of people who make a whole lot more than that. I see no reason to believe that will change anytime soon.

Given the number of homes in the Bay Area, yes there is a shortage of people making more than that. What there isn't a shortage of is wealthy speculators, a significant percentage of whom don't even live here.

They still count, because they buy homes here. They are consumers in the market, and they make the market sustainable.

Speculators make bubbles, not sustainable markets. The problem is too many people are vested in property values, so when 2008 happened, everyone bent over backwards to prevent prices to come down to what their true sustainable value was. Bailouts, properties taken off the market, presidential speeches, all to prop up the status quo. Banks didn't pay the price, and so it continues.

Real estate returns are historically flat. Only recently have they risen so quickly. If the bank thought they would get 5-7% on the house, why wouldn't they just buy it themselves instead of giving you a 3.5% loan?

You're ignoring the cash flow that real-estate-owners get from collecting (or not paying) rent. Once you factor that in, 5-7% returns are the norm.

Of course, and the interest rates are much lower than mortgages (which makes sense since stocks are more liquid than houses). However, you can only get ~4x leverage.

https://www.interactivebrokers.com/en/index.php?f=marginnew&...

Take a look at the UK for a great example of how well that turned out. You can get a buy to let mortgage at around 3% (using your existing home as collateral), and achieve rental income of 10%+. I think you were even able to claim back tax on the interest up until this year.

Sorry to pile on, but I wanted to throw out the fact that there's currently a huge transaction cost to exchanging real estate in the US too -- the largest factor of which is real estate agent commission (typically 5% in California, 6% in some states).

That's quite an assumption you're making on the interest rate tradeoff. No guarantee of 5% annual on RE, even if you're in an area controlled by bunch of NIMBY's.

The best model for that is to be a bank with the 3/6/3 model.

Borrow at 3%, lend at 6%, on the golf course by 3 PM.

Now doing something similar with stocks.... that's kind of Warren Buffett's model. He uses insurance companies like Berkshire and Aflac to create cash flows to buy stocks.

I guess you could use options to do something similar.

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