Real Estate Is A Fools Investment

12 days ago
6 Min Read
1138 Words

Hey Jessireal estate owners

If I leave you with anything today, it's the saying that the most significant returns in investment are when you bet on something that is no longer true and waiting for the rest of the world to realise it. In 2008, a few funds were shorting the housing market, made billions. In the last ten years, we've seen those investing in Netflix gather insane returns compared to those who invested in Blockbuster.

As technology improves at such an exponential rate, it will continue to catch people and investors off-guard. A lot of what was once true or partially true is no longer true. But because we as humans have access to infinite stupidity, it is hard to convince us otherwise until we get burned.

One of the reasons there is a 1% and a 99% and the gap between the two widens is because while the rest all do the same thing, the minority on the other side of the trade picks up all the yield.

There's no better example of this than the real estate market.


A recency bias

Growing up my father was always big on real estate, to him that's how you built wealth in his era to an extent it was true, but because of the moderate success in the fact that real estate has always gone up in nominal currency measurement terms, their biases have been reinforced.

He would constantly pressure me to buy a home and to look at various opportunities, I couldn't get myself to pull the trigger on the rationale of a "starter home" it didn't make sense to me.

It was a blessing in disguise never buying a home, and I am so glad I didn't make such a non-sensical decision.

Nominal gains versus inflation

Before I dive in, I am not going to tackle things like house flipping or property rental i am only going to look at private homeownership. Most people are sold and believe the lie that their housing price goes up when it's not actually true a large part of that is currency debasement and asset inflation while a small part of it is actual demand. We conflate this with actual gains because people only use one method to measure home value, and that's the price.

To actually increase a home's value, you have to reinvest in it, costing you more, repairs, extensions, upgrades etc. To make it more attractive to the next buyer, but this is only paper gains since you've turned your home into a golden handshake and a money pit.

As you reinvest, many people overinvest in their home, and then they are locked in at a sale price that will never be realised, and they only lose money in the future.

Maintenance and margins

As you maintain a home, repair it, pay taxes, pay for all the other expenses of a home, it eats into the margin you gain as appreciation on the price. So if your home increased by $10 000 adjusted for inflation and you spent less on maintaining the home over that same period of increase, then you may slightly be in the black.

So if you want to make a gain on your home you need to spend less than the price appreciation each year, which depending on where you live is likely not possible.

An asset versus a liability

Many people miscategorise their home as an asset when in actual fact its a liability. Your home only becomes an asset when it generates you a return, if you're AirBnBing it or renting it and bringing in regular income, that's an asset.

If you've used your home as collateral to access capital to start a business, that generates an income that services that debt and provides you with an income above that, then its an asset.

If all your home does is cost you money, it's a liability.

Unrealised gains and illiquidity

Another popular argument is the one that you can sell your home and realise the gains. If you sell your home, you also need to deal with a cost of fees that eat into your margin. You may also lose out on opportunity cost as selling an illiquid asset like this can take some time.

Your home value also depends heavily on what your neighbours value the home at, the moment one person sells 15% under your preferred market price to get a sale; you will find it tough to realise that same price again.

In addition, selling your house leaves you homeless, so a large percentage of that capital needs to be reinvested in a new home, so do you really make a profit?

You also need to calculate the interest on the loan and then factor that into your resale value to see if you made a gain.

Then finally paying a mortgage for 10,15, 20 years means your disposable income capacity is reduced. This means you have less money to use on other opportunities and effectively lose out on possible better gains somewhere else as you locked yourself into this money-losing commitment.

My rules for real estate

I know this is going to sound crazy, but running the math based on what I've mentioned above, I wouldn't buy a home that is more than 10% of my total net worth. Having it only account for such a marginal part of your portfolio means you offset the losses your home brings you.

If you can't buy it twice cash, you can't afford it, this rule has served me well through my consumer purchases, and I don't see why a house is should be any different.

Maybe I am crazy, but I don't see a home as an investment, I see it as a liability. I pride myself on being a value investor, and I can't find any intrinsic value in buying a home, only to sell it to a greater fool at a later state.

I am looking to build wealth, and this is not going to get me there. Sure there are plenty who would disagree, and if I listen to all of them, I wouldn't have gotten into Bitcoin.

So let me make my mistakes and fail to the upside :).

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."

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