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Optimal Finance Daily - Financial Independence and Money Advice
3387: Why Your House Is A Terrible Investment by JL Collins on Real Estate Myths
00:10:30
JL Collins dismantles the myth of homeownership as a wise investment by outlining its hidden costs, risks, and poor returns compared to other financial vehicles
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Just visit GoDaddy.com to get started. That's GoDaddy.com premium features require paid subscription. See terms on site. This is Optimal Finance Daily. Why your house is a terrible investment by J.L. collins of jlcollinsnh.com James Altucher calls home ownership a part of the American religion. So I know I'm treading dangerous ground here. But before you get out the tar and feathers, let's do a little thought experiment together. Imagine over a cup of coffee or a glass of wine, we get talking about investments. Then maybe one of us, let's say you, says, hey, I've got an idea. We're always talking about good investments. What if we came up with the worst possible investment we can construct? What might that look like? Well, let's see now, pulling out our lined yellow pad, let's make a list to be really terrible. It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner. It should be illiquid. We'll make it something that takes weeks, no wait, even better, months of time and effort to buy or sell. It should be expensive to buy and sell. We'll add very high transaction costs, let's say 5% commissions on the deal coming and going. It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for. It should generate low returns, certainly no more than the inflation rate, maybe a bit less. It should be leveraged. Oh, this one is great. This is how we'll get people to swallow those low returns if the price goes up a little bit. Leverage will magnify this and people will convince themselves it's actually a good investment. No, don't worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out. It should be mortgaged. Another beauty of leverage. We can charge interest on the loans. Yup. And with just a little more effort, we should easily be able to persuade people who buy this thing to borrow money against it more than once. It should be unproductive. While we're talking about interest, let's make sure this investment we're creating never pays any. No dividends either. Of course. It should be immobile. If we can fix it to one geographical spot, we can make sure that at any given time, only a tiny group of potential buyers for it will exist. Sometimes, and in some places, none at all. It should be subject to the fortunes of one country, one state, one city, one town. No, one neighborhood. Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous. A plant closes, a street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes its owner's net worth, but does so even as they're losing their job and income. It should be something that locks its owner in one geographical area. That'll limit their options and keep them docile for their employers. It should be expensive. Ideally, we'll make it so expensive that it will represent a disproportionate percentage of a person's net worth. Nothing like squeezing out diversification to increase risk. It should be expensive to own, too. Let's make sure this investment requires an endless parade of repairs and maintenance, without which it would crumble into dust. It should be fragile and easily damaged by weather, fire, vandalism and the like. Now we can add on expensive insurance to cover these risks, making sure, of course, that the bad things that are most likely to happen aren't actually covered. Don't worry, we'll bury that in the fine print. Or maybe just charge extra for should be heavily taxed, too. Let's get the feds in on this. If it should go up in value, we'll go ahead and tax that gain. If it goes down in value, should we offer a balancing tax deduction on the loss, like with other investments? Nah, it should be taxed even more. Let's not forget our state and local governments. Why wait till this investment is sold? Unlike other investments. Let's tax it each and every year. Oh, and let's raise those taxes anytime it goes up in value. Lower them when it goes down. Don't be silly. And it should be something you can never really own. Since we're going to give the government the power to tax this investment every year, owning it will be just like sharecropping. We'll let them work it, maintain it, pay all the costs associated with it, and as long as they pay their annual rent. Oops, I mean taxes. We'll let them stay in it unless we decide we want it for that. We'll make it subject to eminent domain. You know, in case we decide that instead of getting our rent, I mean taxes, we'd rather just take it away from them. Boy howdy, that's quite a list. Any investment that ugly would make my skin crawl. In fact, I'm not sure you could rightly call anything with those characteristics an investment at all. Then too, the challenge would be to get anyone to buy this turkey. But we can. In fact, I bet we can get them to not only buy, but to believe doing so is the fulfillment of a dream, indeed, a national birthright. We'll run the thought experiment on just how we might make that happen in an upcoming post. What other characteristics should our worst possible investment have that I might have missed? Here are two more from Mr. Risky Startup. It should increase stress, lead to more divorces, but then be impossible to divide. End quote and DM Dave quote you only need one motivated, read desperate seller to set the price for the whole neighborhood. Imagine your so called investment suddenly gets scuttled with when your neighbor decided to sell his particle board mansion at 20% below assessment. End quote. Oh wait, I'm sorry, this was supposed to be about houses. So a few weeks back I was at an awards banquet and sitting at our table of 10. With me was a woman I know. She began talking about how she was encouraging her young son to buy a house. You know, stop throwing away money on rent and start building equity. I suggested that since her son was single, living alone and without children, maybe he didn't actually need a house, that if he didn't need one. And since they're lousy investments and here I gave her a few reasons why this is so. Maybe he should just consider some alternatives instead. Or at least run the numbers. First, this didn't sit well and it was a short conversation. You just listened to the post titled why youy House Is a terrible investment by J.L. collins of jlcollinsnh.com time.
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While I'm sure he has ruffled some feathers, I think JL points out some very valid reasons why a house isn't a good investment. Many people feel that buying a home is a good investment because of the potential to appreciate in value. And while this does happen when you consider all the costs of maintenance, taxes, insurance, etc. The return typically isn't as good as investing in the stock market. I decided to buy a house as my primary residence, but I don't look at it as an investment. I see it as a lifestyle decision. The way I see it, I'm going to have housing costs whether I rent or own. And while I understand that owning is riskier from a financial perspective, I was in the financial position to take that risk and I bought a home well below my means. In order for real estate to be an investment, it needs to create cash flow through renting out the properties. I'm convinced that true real estate investing, where you rent out your properties, is the fast track to financial independence. But those high rewards come with substantial risks. I know a lot of people on both sides of the fence, those that have been burned by deciding to become a landlord, and those where it has worked out wonderfully. But either way, there is a steep learning curve and it's a substantial amount of work. So thus far, I've been hesitant to become a real estate investor myself. So that concludes another installment of Optimal Finance Daily. Thanks as always for joining. Have a great rest of your day and I'll see you again tomorrow where your optimal life awaits.