If a person has $X.
House option:
X is enough to cover the down payment for a house and a bit leftover to start the mortgage payments. The person has NO interest in living in the house, but would be able to rent it.

Stock Option:
Put X in stock, let it grow. Don't worry about bad renters, ruining your house, etc.

Which is better?
If stocks are better, what is a decent return rate to get?

Stocks are high right now, while interest rates are low. I'd lean towards the house, it is more likely to be a stable investment, but it isn't as easily liquefied should cash be needed quickly.

Eli

If you're renting out the house what would your return be (considering it will be vacant)?

Remember the interest on your mortgage is tax deductible.

This is very simplistic. Stocks are high? High compared to what, prior levels? Guess what, they've been "high" for most of the history of the stock markets, because stocks on average grow by about 7-9% over the long term (historically speaking). And besides, housing prices are just as "high" if not higher. Interest rates are fairly low historically speaking but that doesn't make a house a good investment. It just makes it cheaper to borrow money. If you borrow money at low interest rates to buy cheese, that doesn't make it a better investment. You can also borrow money to invest in the stock market. Anyway, generally speaking single-family homes are not superior investments. Over the long term, historically speaking, "real estate" as an asset class has achieved returns considerably lower than the growth achieved in the stock market (around 3-5% over the long run). Of course this is also an oversimplication that's besides the point.

Not enough information to give an answer. They each have great things about them.

On a purely financial basis, the house would be the better investment over a long term. You get income from the property AND capital appreciation. Plus the gov't provides tax breaks in the form of depreciation. Further you get much more leverage with a house vs stocks.
More people over time have gotten wealthy in real estate than in stocks.

You can't possibly have a basis upon which to make that statement.

Stocks are high when you look at valuations like PE, price to book, and dividend yield. Your statement about them being for most of the history if the stock market is simply ill-informed. Stocks were cheap in 1934, in 1950, in 1973, and in 2000 (latter part of the year). When I began following stocks (about 1973/1974) the average P/E was between 7 and 8. Its now into the mid 20s.

That's true. But who's to say it won't be in the 30's ten years from now?

Yeah, actually I do.

You must sell stocks for a living.
Historical precedent is usually a good (not perfect) indicator of the the future. Historically stocks return about 8% over any 20 year period. Historically they trade with some inverse correlation between interest rates and P/Es. The high valuations you see today are partially due to the very low interest rates we've had for 7 years. Rates have been going up. Ergo prices and P/Es will come down. If we head into a recession (which I think is very likely over the next 12 months) prices will decline dramatically as earnings hit the toilet.

Actually quite the contrary, I'm in real estate. But anyway, while your points are all accurate, don't you think this is already priced into the market?

No. I think the market is not always efficient. Was it right that some router company had a higher market cap than GE in 1999? Was it right that companies with literally no business plan were launched as succesful IPOs?
There are fads and manias on Wall St like everywhere else. Now we are seeing an LBO mania along with too much money sloshing around looking for someplace to go.

The house would have to be a good price and in an area where the property value is likely to increase, perhaps significantly over the next few years.

If I had money I would have invested in several new communities in Israel and I would have turned a VERY nice profit. At the beginning they were giving mortgages for $150 a MONTH!!! Now in some places it is 5-6 times that amount in a few years time.....

Then again, I also would have invested in Apple when it bombed, and Google when it went public. I knew both of them would significantly increase in value, but stocks are always a gamble. If the house is in a good neighborhood it is not likely to remain vacant, and you can always use it as collateral for loans and other credit.

It takes a certain amount of skill and time to select the right tenant and manage the property, along with the ability to deal with unexpected occurrances such as a broken furnace etc.

They are two very different kinds of investments, and there aren't enough numbers to decide between them. Also, afaik, mortgage is only tax-deductible on your primary residence, not an investment property. There are also other vehicles to invest in real estate if you don't wish to be a landlord, like a REIT. Oh, and buying stocks can give you income and capital appreciation, you just have to buy stocks that pay dividends (ie not tech stocks).

I agree there arent enough numbers or info to give concrete advice.

Mortgage interest is tax deductible on investment property as an expense of owning it. So are repairs, which are not deductible on your own residence.
Some tech stocks do pay dividends.

It is my understanding that for mortgage interest to be tax deductible it needs to be a mortgage on your primary residence. Can you please show me where it says different? I did some poking around and was onyl able to confirm what I thought.

Is it possible that mortgage interest for an investment property is tax-deductible for a corporation only?

I don't understand, interest of any sort is a tax deductible expense.

what's considered long term? What amount of time?


What does that mean "in"?
Are some people not "in"? Who?



What's REIT?

That's not the info I'm seeing:

http://law.freeadvice.com/tax_law/income_t..._deductable.htm





REIT = Real Estate Investment Trust. It's basically a company that makes its money from real estate, and is untaxed. The reason it is untaxed is because it has to distribute most of the money it makes (90%) to its investors every year. Those investors then pay taxes on those earning, but those taxes are charged at the personal rate, not the higher corporate rate.A RIET allows you to invest in the real-estate market without having to personally manage property.

Go look at the Federal Form Schedule E, which is where rental property is listed. On there are a number of deductions, among them for mortgage interest. Note that the 1040 is for individual taxpayers.
I have been doing my own taxes for almost 20 years and have owned rental property for 14 years so I think I know what I am doing here.

In the bad old days of high taxes all interest was deductible. Reagan changed that and the deductibility for credit card interest etc went away. I'd be happy to see the deduction for mortgage interest for personal residences go away too.
All interest is deductible if it is a business expense. So in my little shop I have credit card charges and those are deductible against the gross profit of my business. But my personal credit card interest charges are not.

I'm sure that you know what you're talking about, or I would be asking you questions.

Not all investment property is rental property - if you purchase land speculatively, in the hopes that a developer will buy you out down the road, for example, mortgage interest would not be tax deductible, would it?

If you are buying it for anything other than your personal use (i.e. you are trying to make money off it) then it is investment property.

This is a very important point. With a house, you get 10x leverage (with a 10% deposit).

In the stock market, you would have to invest in options or futures to get that kind of leverage, because you can't buy stocks on a margin. Options and futures have a much higher risk though (I think) than real estate.

Yes.
Of course, leverage works down as well as up. As some people who bought property in the last 2 years are about to find out.

That's a common misconception. The only difference between real estate and the markets is that in real estate you don't get liquidated as long you make your payments, even if the value of your collateral dwindles down. That is not necessarily a less risky or more advantageous position.

That's interesting btw...How does the bank protect itself from the scenario where the collateral (i.e. house) let's say goes down in value by half, and only at that point the person stops making payments and the bank repossesses. If it sells it in on the market then, it takes a hit of (original_value-deposit) - original_value/2. How does it hedge against this?

That's only in theory, and in theory stocks also provide you with income (dividend, remember those?) and equity appreciation.

It doesnt. In part because the scenario you laid out seldom happens.
Banks generally lend 80% of collateral value on single family residences. Above 80% they get either PMI (private mortgage insurance) or some gov't guarantee through FhA or VA. If the borrower defaults and the house goes to foreclosure, they sell it for the amount of their lien. If their lien is more than the value of the house, then they turn it over to their REO dept to sell and take the loss.
But if the value of the house declines by 50% the bank will not automatically repo the house as long as the borrower is making payments. This is unlike stocks where the margin lender will call the loan. Traditionally people will not default just because the value of their property has gone down. This is why stocks are riskier than real estate. Further, real estate has tax advantages that stocks do not. On the flip side, transaction costs for stocks are far less while liquidity is much greater. That is why real estate ought to be a long-term investment. I'll add that mortgage interest is generally much lower than margin interest.
I will add that they do hedge in the sense that mortgage originators will sell off their loans and have them securitized to spread the risk. That is an achievement in banking from the 1980s.

Not easy to get a 10% down mortgage and with a series 7 you can get 6X leverage at most prop firms. I know that takes a lot of time and knowledge and the prop firms charge hefty monthly maintenance fees but for the right person you can get good leverage in the market as well.




Only if they have adjustable rate or if they want to refinance. Right?

No, only if they want/need to sell. They will find their downpayment wiped out and may have to bring money to the table.
The mortgage issue has little to do with leverage. But you make a point that people in adjustables esp with stated income loans are going to be in trouble, prompting them to have to sell, prompting them to need money to close, prompting them to file Ch.7 because they aint got no money in the first place. Thats why the housing market collapse is going to be longer and steeper than anything people have predicted. It took 5-7 years to get there, it will take close to that to clean up.

Not only that but to my understanding, if someone bought a house two years ago for $600,000 and took out a $550,000 mortgage, and now the house is worth only $500,000 and they still owe say $545,000, the bank will be unhappy and may demand that the "gap" between the mortgage balance and a safe LTV be paid up ASAP by the borrower. Most people won't have that kind of money lying around.

From the NY Post of July 18, 2007;

NYC 'DEBT' RECKONING
HOME-FORECLOSURE FLURRY
By BILL SANDERSON
June 18, 2007 -- A silent crisis is ripping through many city neighborhoods as more and more homeowners are unable to pay down their subprime mortgage loans.

In Brooklyn's Bedford-Stuyvesant, one-fifth of subprime mortgages were more than 60 days in arrears as of April - and 10 percent of all subprime loans were in foreclosure, according to data provided to The Post by First Data LoanPerformance, a mortgage-tracking firm.

Other neighborhoods taking big subprime-foreclosure hits are East New York in Brooklyn; the Arverne section of the Rockaways and parts of Jamaica, Queens; Tottenville on Staten Island; and the Olinville and Bronxdale sections of The Bronx.

In the printed edition the Midwood of Brooklyn area was cited.
http://www.nypost.com/seven/06182007/news/...l_sanderson.htm

If we can keep the politicians from pushing "fixes" to this problem then everything will go along OK and the market will take care of greedy lenders and foolish borrowers. And the rest of us vultures will make money off the carcass.

They can't hedge against this; if they could, mortgages would command same interest rates as margins - around 4-5%.

so far, no one has answered my original question?

or my later question of what does "short term" connote based on a post by TRA above?

You are debating the pros/cons of investment types, but I want to know specifically for the scenerio above.

The answer to your original question depends on the knowledge, interest, and temperment of the investor.
Both types of investment can be excellent, and of course there are risks to both buying property and stocks.

I wonder, what do all those areas have in common ...

There can't be an aswer without specifics. If subject has $20k put away that he or she are desperate to "invest" and that's about all they've got, getting a house would not be such a smart decision because it's a more involved and complicated transaction then buying stock and they will risk ending up with a negative cash flow; besides, transaction fees on buying and selling a house are high enough to wipe out any kind of short term profit (if there will be any).

Stock is simple to buy and even simpler to own. Something conservative, or a commonly held ETF (such as SPY), and in the worst case they'll be as screwed as the rest of the country, and that doesn't hurt as much.

Let's say it's $200K in an area that houses are now costing $500K (all of this is general info, as you can tell I know very minimal about finances, but just trying to understand so picked some random numbers that I imagine would be plausible).
The person has no intention of buying a house for about 5 more years.

So, if the person took money and bought a house, they would have enough for the $100K downpayment, plus another $100K to put towards principle of the loan, is this correct?

Now, would a person be better off taking all $200K and investing in stock OR taking the $200K buying the house, and then renting it until the person is ready to move in?

Does it make a difference if the person knows s/he would want to live in house or not?

BTW, all numbers above are made-up to just give a clear-cut example with the hope(s) of getting a clear-cut answer.

Single-family homes are nice for living in but they're hardly a "good investment", PARTICULARLY if they will not be owner-occupied.

No, your understanding is erroneous. The bank lends x amount of dollars on property appraised for Y amount of dollars. The promissory note specifies the terms of repayment and the mortgage offers the property for collateral. The bank cannot go back and ask for additional collateral on the loan, unless it is in the loan papers. And it never is, because mortgages are written on standard FNMA contracts.

If so, then buying a house now is a very bad investment. One should wait for the minima of the real estate price curve, which might occur several years from now.

Brilliant - I'll just whip out my handy dandy crystal ball and voila.

No need for a crystall ball, just invest in the stock market for now, and monitor the avg real estate prices in the area(s) of your interest. As the first derivative turns positive, take from stock market and buy RE.

You wont get a clear cut answer because it isnt a clear cut question. It will depend on all sorts of things, including the capabilities and skills of the investor. Some people arent cut out to be landlords. So it wouldnt matter how good a deal a piece of property is, they still shouldnt do it.
And no, your question in paragraph 2 is wrong. You do not put down 100k on the house and pay 100k to the principle. You take out a smaller loan and start off with more equity.

You've got to be kidding me. What kind of period do you use - daily avg price? Weekly? Monthly? And how do you know the first derivative won't change back to positive the minute you put your money in real estate?

Nope, I kid you not You use daily avg price. You don't know if it's gonna reverse direction, but at least if it does once, that's a sign that the decline is slowing down.

If you want, you can set a threshold to trigger you decision (i.e. if the derivative goes above the threshold).

Sorry but that strikes me as a very poor investment strategy, even ignoring transaction costs.