Hacker News Reader

Comment by sokoloff | Hacker News Reader

> I know so many who bought their house for $70k-$100k in the 70s and now see their neighbors sell for $1m-$1.5m. It's insane.

Yet those returns (10x-20x) are lower than having invested the purchase price in the S&P500 (with dividends re-invested), which returned a 21x to 30x total return over that same time period (depending on which exact spot you chose to be the "70s")

https://dqydj.com/sp-500-return-calculator/

The house also provided a place to live, so you need to goose the house effective returns a bit there, but that place to live also came with overt property taxes, maintenance expenses, etc.

View on HN

Unfortunately, homes have a lot more protection from taxation of the returns than mutual fund investing: you can only put a small amount each year into a tax-protected account, and if you don't, any rebalancing or dividends produce a taxable event.

In contrast, the capital gains from owning a home are exempt for a certain amount, and "imputed rent" (the savings from not having to rent a similar house at current rates) is untaxed, like any other cost-saving purchase. [1]

(One small advantage the other way is that you don't have to pay "property taxes" on mutual funds, though you do have to pay management fees, which, even for index funds, are of similar magnitude.)

[1] IIRC the original income tax did cover imputed rents of sufficient magnitude.

> you don't have to pay "property taxes" on mutual funds

In my view, the tenant is paying the property taxes on the space they rent to live in, so the mutual fund investor (who is also a tenant) is paying property taxes, just on their housing not on the funds.

It's rolled into the rent, but there's no reason to me to think that the landlord is paying it when the tenant is the one bringing the money into the system.

I beg to differ. You, as the landlord, don't necessarily set the rent price--the market does. If the market is going for lower than your monthly upkeep cost (including property tax) then you will be paying the tax and other expenses.

It is implausible for this to happen at scale. Presumably all properties in competition for the same clients will have comparable tax and each landlord will implicitly factor taxes into their prices. This should have an effect, similar to collusion (by with no malice), of effectively raising the cost.

The taxes get factored into the price of the land and the house, not rents. If demand for housing falls such that rent does not make owning a house worthwhile, it gets sold (or force-liquidated through foreclosure), and the new owner at a lower cost basis will let it out at market rates.

> The taxes get factored into the price of the land and the house,

So you have checked with every property owner and verified this?

I actually rent now, from my father (because he makes bad real estate decision despite having his real estate license). After talking with my landlord, who I know well and often talk to, I learned that in this area there are laws about how low rents can be. In his specific situation he is not allowed to rent the property for less than 125% of the price of his mortgage payment which must include the property taxes. Apparently, this is to insure there is money repairs.

So as for houses in Omaha I am fairly certain you are factually in error. I suspect other jurisdictions have other things going on in general, but it seems reasonable that most people do simple things like take their expenses into account which includes tax.

S&P 500 might have been a better return, but I can't borrow hundreds of thousands of dollars at < 5% interest invest in the stock market.

Also, do you think property taxes and maintenance expenses aren't passed on to renters in the form of higher rent?

Of course they are, but they are excluded from the "so and so bought for $70-100K in the 70s and just sold for more than a million" calculus. The latter was my point about needing to include them in the comparison.

Well, there are a number of things that complicate the comparison:

1) Mutual funds get hit with a lot more taxable events (any rebalance or dividend), and only a small fraction of that can be shielded.

2) Even if you could borrow to invest, stocks fluctuate a lot more and you would be subject to margin calls.

3) You are implicitly paying maintenance/insurance costs as a renter, true, but only as a renter do you benefit from division of labor and tax-deductibility of such expenses.

4) For the specific time history: It would have been difficult in the 70s to buy something like an S&P index mutual fund; Vanguard started then but you're unlikely to have heard of them. Then again, you wouldn't be borrowing at 5% either!

> I can't borrow hundreds of thousands of dollars at < 5% interest invest in the stock market

Of course you can [0], and it's even cheaper than mortgage interest (because it's much easier to margin call a stock a portfolio than a house!).

[0] https://www.interactivebrokers.com/en/index.php?f=1595

He can only do that if he has 6-figures of net equity in his IB account.

It's easy to make money if you are already rich. The parent post is an excellent example of that. If all of those poor plebes who bought homes in the 70s had instead inherited their home and invested millions of their own dollars in the stock market just like those smart rich people they would be way better off today.

One interesting thing I learned: as a homeowner, your home doesn't depreciate. As a landlord, the home you own is an asset and you take depreciation on it. That's a massive tax benefit.

> That's a massive tax benefit.

Which is subject to depreciation recapture upon sale, so it's more of an immediate cashflow benefit than a long-term structural benefit. (It can also be seen as a form of "hand-out" to renters, but it's unpopular to complain about that, so few people do as compared to those who object to mortgage interest deduction.)

In Canada there is the "Smith Maneuver" which involves a Home Equity Line of Credit (HELOC) where you borrow against your equity and invest it, and write off the interest payment on the HELOC.

So technically you're using low-cost mortgage lending (2.15% rates are possible) to invest and get 5-7% returns on average, plus writing off the interest payments.

Sounds very safe.

> The house also provided a place to live, so you need to goose the house effective returns a bit there, but that place to live also came with overt property taxes, maintenance expenses, etc.

indeed. there are also more transaction costs involved in real estate, too. driving around to look at properties, real estate agents, significant paperwork, etc.

Well the mortgage got them that initial capital in the first place to buy a home. Banks weren't giving them a loan to buy an index fund so it's not really a fair comparison, especially if you ignore opportunity cost of paying rent as you state.

Reply on news.ycombinator.com