Originally Posted by Spaceman Spliff
otc, why aren't you pro-real estate btw? i was leaning slightly towards saving my money towards a down payment for some sort of property to be rented out, but, if i'm being honest with myself, i really only have this idea in my head because a lot of my other fiscally responsible 20-something year old friends are doing the same.
Rental property is a whole different thing (it is more like investing in a part time business).
A residence for your self though...it's not a good investment. You might get lucky, but the average returns on a house are significantly lower than average stock market returns. A lot of americans have the idea stuck in their head that houses are great investments, and that they are the thing to do...but they haven't run the numbers, and they aren't making a fair portrayal of the amount of completely diversified risk they are taking on. Houses are pretty illiquid and start to have great sentimental value...people don't buy and sell them based purely on investment value since it becomes strongly tied to their everyday life (how many people held onto their homes through the crash and lost a ton because they liked their neighbors and had grown accustomed to the house). If you like where you live but recognize it is time to sell, good luck cashing out of your house...sure you can sell it for more than you paid, but if you are trying to stay in the same area, everything else nearby will have appreciated by the same amount...so your gains only matter if you can move somewhere cheaper.
I'm not saying I am against ownership, but you have to recognize that you aren't making an investment...you are paying a premium to live where you want, in the kind of house you want (with the ability to do what you like to it), for the long term
. For an unmarried 20 something, it doesn't make a lot of sense (unless you are so terrible with your money that "building equity" is the only way you will manage to save anything). Assuming reasonable appreciation, you've got to stay in a place for at least 7 years to even break even vs non-ownership. You factor in the taxes, the maintenance, the emergency repairs, the buying and selling commissions, and it doesn't look so great. You probably don't know where your life is going to be in 7 years. What if you get married and have a kid and your 2BR condo doesn't have enough space? What if one of you gets a great job or decides to go to grad school on the other side of town or in a completely different city? You can't sell because you will end up with less money than you have put in...so you rent it out. Now you are playing landlord and may have to modify your mortgage since banks don't really like it when you don't live in the property anymore.
If you have found somewhere you would like to raise a family, somewhere you foresee yourself working and living for a while...then it can be great. 20 years in to your 30 year mortgage and your monthly payments are looking pretty good compared to renting (and in 10 more, you've got no payments). You can renovate the place to fit your life, and you will have it long enough that while it probably won't beat the stock market, it will beat inflation or a savings account.