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Comment by chii | Hacker News Reader

bit odd you hasn't paid rent but instead paid a mortgage, would you have been better off financially?

Quite a lot of people aren't better off. In fact, a lot of them have underwater mortgages because they listened to the "house is an investment" crowd. Buying a house and losing your job / income source, can cause some pretty long term unemployment since it is hard to move with an anchor around you. As a country, we would have been a lot better off if a lot more people had been renters.

I have had passive and active (?) income for over 20 years now (started during uni); I write code and manage my company actively, but I have ventures which bring me money without even looking at them.

I have always done the same thing; build something up in a niche, wait until I think it reached it's peak, sell it. Most things I did made between $5k-$10k / month and so sold for a nice amount. With that money I bought a house. Sure you lose some 'freedom' (not really as you can rent something anyway), but you always have the security that you can live somewhere rent and mortgage free. If I would have to do it again, I'd buy several run down houses on big plots of land and one smaller modern house.

Anyway; crisis or no crisis; I don't care; I live for free; next to that there is very little you need (in times of downturn that is; if you make enough next to that you can do anything you like). House IS an investment, but only if you just pay cash (IMHO). With that $100k income/year OP had coming in, in college I would've saved over $50k off that. Few years and plop; cash house. Even if you don't want to live in it the rest of your life it's good to have; takes away heaps of stress later on. At least did for me.

Many of those with underwater mortgages who treated their house as a investment came out nicely. Like a business would, they defaulted on their loan, then a few years later put their saved payments toward a house down the street at half price. Even got another loan too. Of course this is more difficult to do if you need to move for work.

But with rent you have zero chance of accumulating capital - your just throwing money at the landlord. With a mortgage you have a > zero chance of making money over say 10-15 years.

after 10 years of renting you will have nothing

It depends on your locale and employment situation. Many home owners are "house poor." Their only asset is their house, and they have no savings or other investments. I moved to a locale where I could make 3-4x what I could in my hometown, rented for 10 years and with investments, stock options and savings am way ahead of where I would be if I would have bought a house where I started out. My parents on the other hand are trying to sell their house for almost the same price they paid for it 15 years ago. My cousins with homes are not financially doing well at all.

If I would have had the money and foresight to buy the brownstone in Brooklyn that I was renting, I wouldn't have even had to bother with the working and saving for 10 years part, but you don't need to rub that in on a Saturday morning.

With a mortgage you also have an opportunity of accumulating a loss.

A really simple calculation with the numbers from http://homeguides.sfgate.com/calculate-30-year-mortgage-bala... I will be nice and assume that the monthly cost of renting is equal to the monthly mortgage payment. Usually renting is cheaper. I'm ignoring the mortgage interest deduction, but also property taxes, homeowners insurance, maintenance, etc.

After 5 years of renting you have: 5 times 12 times -600 = -36000. After 5 years of owning you have: 5 time 12 times -600 + your equity. your equity is $100,000 - ~$93,000 + difference between what you bought it for and what you sold it for. And that last term can easily be negative. It only takes a 7% decline in value to wipe out the first 5 years of principal payments. If your property declines in value 10% and you sell after 5 years you come out behind.

The numbers for 10 and 15 years respectively are 16% and 29%. Now consider that the average home value in places like Stockton fell over 50% during the great recession.

But with renting you are 100% guaranteed to have a 100% loss

I'm not the parent but I have to say that's an over-generalisation. The costs involved with buying mean that the balance between renting and buying can be tipped firmly in favour of renting even for 10+ years. I ran several calculations earlier this year as I was considering buying for the first time (it seems easier for those who are already on the ladder) and this turned out to be true for me. I pay an incredibly low amount of rent for Silicon Valley's current rates.

Given the area and amenities I want from a property, I save significantly more money renting and can live somewhere I actually like; unless I decide to commit to the country for 10+ years -- and I would lose my entire cushion of savings for startup runway funding in the process -- renting makes a ton of sense, even though at the base level the equation of "paying money for someone else's mortgage vs paying money for my own" seems a no-brainer.

Tsss.. I'm alwyas disturbed by such analysis. See. When you buy a house, not even an investment, you get a place of your own which gives you quite a peace-of-mind (you know where you live, you can break some things inside it without fighting the landlord and should things go really bad, you can still sell it). Moreover, moving around when you have children is much more difficult (because those little kids like to have their friends). Etc. Not every body is made to follow his work wherever it is. There's a reason why humans settled and stopped being nomads.

This article sums up the case against quite nicely:

http://20somethingfinance.com/a-home-is-not-an-investment/

There was another article aimed at startup founders, but I couldn't find it - found this instead.

Did you mean this one? http://thezikomoletter.wordpress.com/2012/12/10/you-are-natu...

> the "house is an investment" crowd

They are. What people neglect to mention is that some investments, houses included, fail to pan out, and leave you worse off than you were before. Simply assuming that a mortgage builds useful equity is financially illiterate: If houses were a sure thing, everyone and every institution would buy them.

The really insidious idea is the idea that buying a house is what a mature, responsible person does, and that you can't be a mature, responsible person unless you're paying down a mortgage. This is marginally less potentially harmful to your future happiness than the idea that mature, responsible people smoke five packs of cigarettes a day.

To make your argument clearer: if you buy a house and don't bring a significant amount of your own money to the deal (let's say 20 to 30% of the whole), as during the first years of the mortgage you're mostly paying interest and almost no capital, you're actually throwing your money down the drain in exactly the same way as you'd do paying a rent, BUT with the added responsibilities coming with the mortgage on one hand, and owning the house on the other hand.

Nicely stated (wish I had done a better job of it). That's basically the trap. Some people can do that and a house makes sense. People like to own.

A lot of people bought a house and fell into the trap you describe. A lot of those people didn't have good job mobility in the local area[1].

1) I would love to see a study from about 2000 to now on all the folks that defaulted and what their down payment was combined with the job outlook for their profession.

Investment houses are an investment. Your primary residence is not an investment.

Case in point: I lost over $100k on my previous primary residence. I couldn't write that off on my taxes because it wasn't an investment. If it were an investment property, I could've.

> If houses were a sure thing, everyone and every institution would buy them.

We give tax breaks to individuals owning their own home that we don't give to institutions or individuals owning homes to rent. It's conceivable that this makes the difference between "sure thing" and a loss.

This isn't at all to say that buying a house is a guaranteed win - look at it carefully before making any sort of major decision like that - but there's not an automatic theoretical refutation.

Note that most countries do not provide tax breaks to homeowners, this is a uniquely US phenomenon.

There are many cases where renting makes more sense, but the factors are multiple: taxes, interest rates, up front equity, property values, closing costs, rental market, etc.

> Note that most countries do not provide tax breaks to homeowners, this is a uniquely US phenomenon.

I was certainly aware it wasn't universal - I should probably have called that out more clearly.

> There are many cases where renting makes more sense, but the factors are multiple: taxes, interest rates, up front equity, property values, closing costs, rental market, etc.

Right, that's pretty much exactly my position.

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