Is Real Estate ever a BAD investment? If so, when?
"No, it can really not. Look at Detroit, which has lost a million residents over the past few decades. There is plenty of real estate which will not go for anything like it was sold. Other markets are very risky, like Florida, where speculators drive too much of the price for it to be stable. You have to be sure to buy on the downturn. A lot of price drops in real estate are masked because sellers just don't sell, so you don't really know how low the price is if you absolutely had to sell. In general, in most of America, anyway, you can expect Real Estate to keep up with inflation, but not do much better than that. It is the rental income or the leverage (if you buy with a mortgage) that makes most of the returns. In urban markets that are getting an influx of people and industry, however, Real Estate can indeed outpace inflation, but the number of markets that do this are rare. Also, if you look at it strictly as an investment (as opposed to the question of ""Is it worth it to own my own home?"") there are a lot of additional costs that you have to recoup, from property taxes to bills, rental headaches etc. It's an investment like any other, and should be approached with the same due diligence." Real estate is a lousy investment because: Renting a home and buying a home, all else being equal, are pretty similar in costs in the long term (if you can force yourself to invest the would-be down payment). So, buy a home if you want to enjoy the benefits of home ownership. Buy a home if you need to hedge against rising housing prices (e.g. you're on a fixed income and couldn't cope if rent increased a bunch when the economy heated up). Maybe buy a home if you're in a high tax bracket to save yourself from being taxed on your imputed rent, if it works out that way (consult your financial advisor). But don't consider it a really great investment vehicle. Returns are average and the risk profile isn't that attractive. Real estate is always an interesting dynamic.  In most cases prices have always gone up.   Price is mainly a function of demand.  Sometimes demand is artificially inflated over a short term period and can come down quickly due to corrections.  During recessions the housing market will usually slow down.  There are some rare instances where certain areas never recover (see Subprime Mortgage Crisis Savings & Loans Crisis where scores of unwanted properties exist).  Things to consider: I'm surprised to even hear this question with the current state of devaluation of real estate.  One thing I'll add to the other answers is to make sure you are doing a true apples/apples comparison to other investments when considering real estate. You can't just take subtract the purchase price from the sales price to get your ROI.  Real estate has very heavy carry costs that you need to factor into any ROI calculation including: One more point: A house that you live in shouldn't be considered an investment, but rather an expense. You have to be able to liquidate an investment and collect your return. Unless you plan to move back in with your parents, you are always going to need a place to live so you can never really cash out on that investment, except perhaps by downgrading your lifestyle or a reverse mortgage. "All other factors being equal, owning your primary residence is almost always a good investment over the long haul. Why? Because you have to live somewhere, and rentals, especially long-term leases that are important when you have kids in school, etc.,  are generally in the same ballpark as a mortgage in most markets. Giving $1,500 to a landlord gets me 30 days of living somewhere. Giving $1,500 to the bank gets me a place to live and equity in an asset which requires maintenance, but always has intrinsic value.  Detroit is one extreme, Manhattan or Silicon Valley is another real estate extreme... everywhere else is somewhere in the middle. What isn't always a good investment is speculating in highly elastic ""investment property"" like vacation condos as an amateur. It's a cyclical market, but our attention spans are too short to realize that. As most of the other answers to this question indicate, people tend to be down in the dumps and see all of the problems with real estate when the market is not very good. Conversely people only see the upside and are oblivious to problems when the market is high." "As Yishani points out, you always have to do due diligence in buying a house. As I mentioned in this earlier post  I'd highly recommend reading this   book on buying a house associated   with the Wall Street Journal - it   clearly describes the benefits and   challenges of owning a house. One key   takeaway I had was - on average houses   have a ""rate of return"" on par with   treasury bills. Its best to buy a house if you want to live in a house, not as thinking about it as a ""great investment"". And its certainly worth the 4-6 hours it takes to read the book cover to cover." "There's an aspect to real estate that's under-discussed. When you take all factors into account, it just about keeps up with inflation over the long term.  Three factors: Now - when you normalize all of this, calculating the ""hours worked"" needed to pay for the median home, you find a nearly flat line at just over 40 or so hours of pay per month."
Pretty simple: When is Cash Value Life Insurance a good or bad idea? It is never a good idea. How can life insurance possibly work as investment? It can't.  Just as car, home, or health insurance is not an investment.  Note for counter example providers:  intent to commit insurance fraud is not an investment. Why not live your life so in 15 or 20 years you are debt free, have a nice emergency fund built and have a few 100 thousand in investments?  Then you can self-insure.  If you die with a paid off home, no debt, 20K in a money market, and 550,000 in retirement accounts would your spouse and children be taken care of? I know of no generic formula for determining if an investment property is a good investment, besides the trivial formula. Make sure your income is greater than your expenses, and hope the value of the property doesn't drop. Some people will tell you to expect the monthly rent to be a fixed percentage of the purchase price, but that is a goal not a certainty. It is also impossible to estimate the difficulty renting the property, or how long the roof will last. Taxes can't be predicted, as the value of the house increase, so do the property taxes, but you might not be able to increase the rent.  You can't even predict the quality of the tenant. Will they damage the property? Or skip out early? You will need somebody who knows the local market to estimate the local conditions, and help you determine the estimated costs and income based on the actual property involved. "Here's what Suze Orman has to say about it: Good debt is money you borrow to purchase an asset, such as a home you can afford. History shows that home values generally rise in step with the inflation rate, so a mortgage is good debt. Student loans are, too, because they're an investment in the future. Census data pegs the average lifetime earnings of a high school graduate at a million dollars below that of someone with a bachelor's degree. Bad debt is money you borrow to buy a depreciating asset or to finance a ""want"" rather than a ""need."" A car is a depreciating asset; from the day you drive it off the lot, it starts losing value. Credit card balances or a home equity line of credit that's used to pay for indulgences—vacations, shopping, spa days—is bad debt." Real estate is not an investment but pure speculation. Rental income may make it look like an investment but if you ask some experienced investor you would be told to stay away from real estate unless it is for your own use. If you believe otherwise then please read on : Another strong reason not to buy real estate right now is the low interest rates. You should be selling real estate when the interest rates are so low not buying it. You buy real estate when the interest rate cycle peaks like you would see in Russia in months to come with 17% central bank rate right now and if it goes up a little more that is when it is time to start looking for a property in Russia. This thread sums it up nicely. Be very careful about buying property because it has been going up quickly in recent years.  There are some fundamental factors that limit the amount real-estate can appreciate over time.  In a nutshell, the general real-estate market growth is supported by the entry-level property market.  That is, when values are appreciating, people can sell and use the capital gains to buy more valuable property.  This drives up the prices in higher value properties whose owners can use that to purchase more expensive properties and so on and so forth. At some point in a rising market, the entry-level properties start to become hard for entry-level buyers to afford.  The machine of rising prices throughout the market starts grinding to a halt.  This price-level can be calculated by looking at average incomes in an area.  At some percentage of income, people cannot buy into the market without crazy loans and if those become popular, watch out because things can get really ugly.  If you want an example, just look back to the US in 2007-2009 and the nearly apocalyptic financial crisis that ensued. As with most investing, you want to buy low and sell high.  Buying into a hot market is generally not very profitable.  Buying when the market is abnormally low tends to be a more effective strategy. You don't start out buying a shopping mall, you have to work up to it.  You can start with any amount and work up to a larger amount. For me, I saved 30% of my salary(net), investing in stocks for 8 years.  It was tough to live on less, but I had a goal to buy passive income.  I put down this money to buy 3 houses, putting 35% down and maintaining enough cash to make 5 years of payments.  I rented out the houses making a cap of 15%.  The cap is the net payment per year / cost of the property, where the net accounts for taxes and repairs.  I did not spend any of the profits, but I did start saving less salary.  After 5 years of appreciation, mortgage payments and rental profit, I sold one house to get a loan for a convenience store.  Buildings go on the market all the time, it takes 14 years to directly recoup an investment at a 7% cap, which is the average for a commercial property sale.  Many people cash out for this reason, it's slow, but steady growth, though the earnings on property appreciation is a nice bonus.  Owning real estate is a long term game, after a long time of earning, you can reinvest, but it comes with the risk of bad or no tenants. You can start both slower and smaller, just make sure you're picking up assets, not liabilities.  Like investing in cars is generally bad unless you are sure it will appreciate. China is in the middle of a residential housing bubble, and now is probably a horrible time to invest in real estate in China.  Even if China wasn't near the peak of its bubble it would probably still be a bad idea because owning real estate in a foreign country is expensive and risky. There are real currency risks, think what would happen if the yuan declined significantly against the dollar. There is also the risk of the government seizing foreign held investments (not extremely likely but plausible). Another consideration is that it would be next to impossible for you to get a loan to purchase a property US banks wouldn't touch it with a 10 ft pole and I doubt Chinese banks would be very interested in lending to foreigners. "A couple of distinctions. First, if you were to ""invest in real estate"" were you planning to buy a home to live in, or buy a home to rent out to someone else?  Buying a home as a primary residence really isn't ""investing in real estate"" per se.  It's buying a place to live rather than renting one.  Unless you rent a room out or get a multi-family unit, your primary residence won't be income-producing.  It will be income-draining, for the most part.  I speak as a homeowner. Second, if you are buying to rent out to someone else, buying a single home is quite a bit different than buying an REIT.  The home is a lot less liquid, the transaction costs are higher, and all of your eggs are in one basket.  Having said that, though, if you buy one right and do your homework it can set you on the road for a very comfortable retirement." "In economics, there is a notion called the Sunk Cost Fallacy.  In a nutshell, the sunk cost fallacy says that human beings tend to prefer to ""throw good money after bad"" because of a strong loss aversion.  That, coupled with how we frame an issue, makes it very tempting to say, ""if I just add these funds, I'll recoup my loss plus..."" In reality, the best best is to ignore sunk costs.  (I know, far easier said than done, but bear with me a second.)  How much you've invested is really irrelevant.  The only question worth asking is this: ""Would I invest this money in the asset today?"" Put it this way - any money you spend on ""rescuing"" this upside mortgage is an investment that trades ready funds for a little more equity.  Knowing that the mortgage is $100K in excess of the value, why buy that asset?  If you could do a HARP, different story - but as you say, you can't. As such, buying into that investment is not the best use of your funds. You are throwing good money after bad.  Invest your money where it will earn the best rate of return - not where your heart lead you." So your accountant certainly knows much more than I do about Israeli tax law and its interactions with US tax law, which is zero.  I'm going to look at this problem from the investment perspective which I hope to convince you is the most important place to start. Then you can adjust for interactions between the Isreali and US tax codes. Even if the tax breaks are exceptional, it would be hard to recommend buying real estate as an investment in the 7-10 year time frame.  Especially if this real estate is in the US.  Open/Closing fees, mortgage fees, risk of property devaluation, bad-renters, acts of god, insurance costs and tax complications make short to medium term investments in real estate a particularly risky way to invest.  Buying a local apartment and renting is somewhat more reasonable as you don't have to worry about the currency conversion and you can do a lot more research in your local environment and keep a closer eye on the property, it is  still this a pretty concentrated risk. Saving and investing using tax-advantaged accounts is generally considered a great way to build toward a down payment in the medium term.  A mixture of mostly local bonds with some local and foreign stocks and more and more cash as it gets close to purchase time is generally what is recommended when saving for a home.  This mixture is relatively safe and will tend to grow steadily without the concentrated risk of a real estate investment.  PFIC rules are complicated and certainly worth taking some time to understand, but owning real estate especially in a foreign country seems much more complicated and certainly riskier. There may be some rule that makes investing in REITs much better than normal stocks in these particular accounts though I would be surprised if that were the case.  It is generally not true for people under just he US tax code. So while option (1) may not be the absolute best from a tax perspective it would certainly be my guess as the most likely to succeed. Of course, I know nothing about real estate or owning a home. I would love to hear people's thoughts on why this would or would not be a good idea. Are there any costs I am neglecting? I want the house to be primarily an investment. Is there any reason that it would be a poor investment?  I live and work in a college town, but not your college town. You, like many students convinced to buy, are missing a great many costs. There are benefits of course. There's a healthy supply of renters, and you get to live right next to campus. But the stuff next to campus tends to be the oldest, and therefore most repair prone, property around, which is where the 'bad neighborhood' vibe comes from. Futhermore, a lot of the value of your property would be riding on government policy. Defunding unis could involve drastic cuts to their size in the near future, and student loan reform could backfire and become even less available. Even city politics comes into play: when property developers lobby city council to rezone your neighborhood for apartments, you could end up either surrounded with cheaper units or possibly eminent domain'd. I've seen both happen in my college town. If you refuse to sell you could find yourself facing an oddly high number of rental inspections, for example. So on to the general advice: Firstly, real estate in general doesn't reliably increase in value, at best it tends to track inflation. Most of the 'flipping' and such you saw over the past decade was a prolonged bubble, which is slowly and reliably tanking.   Beyond that, property taxes, insurance, PMI and repairs need to be factored in, as well as income tax from your renters. And, if you leave the home and continue to rent it out, it's not a owner-occupied property anymore, which is part of the agreement you sign and determines your interest rate. There's also risks. If one of your buddies loses their job, wrecks their car, or loses financial aid, you may find yourself having to eat the loss or evict a good friend. Or if they injure themselves (just for an example: alcohol poisoning), it could land on your homeowners insurance. Or maybe the plumbing breaks and you're out an expensive repair. Finally, there are significant costs to transacting in real estate. You can expect to pay like 5-6 percent of the price of the home to the agents, and various fees to inspections. It will be exceedingly difficult to recoup the cost of that transaction before you graduate. You'll also be anchored into managing this asset when you could be pursuing career opportunities elsewhere in the nation. Take a quick look at three houses you would consider buying and see how long they've been on the market. That's months of your life dealing with this house in a bad neighborhood. "If I buy property when the market is in a downtrend the property loses   value, but I would lose money on rent anyway. So, as long I'm viewing   the property as housing expense I would be ok. This is a bit too rough an analysis.  It all depends on the numbers you plug in.  Let's say you live in the Boston area, and you buy a house during a downtrend at $550k.  Two years later, you need to sell it, and the best you can get is $480k.  You are down $70k and you are also out two years' of property taxes, maintenance, insurance, mortgage interest maybe, etc.  Say that's another $10k a year, so you are down $70k + $20k = $90k.  It's probably more than that, but let's go with it... In those same two years, you could have been living in a fairly nice apartment for $2,000/mo.  In that scenario, you are out $2k * 24 months = $48k--and that's it.  It's a difference of $90k - $48k = $42k in two years.  That's sizable. If I wanted to sell and upgrade to a larger property, the larger   property would also be cheaper in the downtrend. Yes, the general rule is:  if you have to spend your money on a purchase, it's best to buy when things are low, so you maximize your value.   However, if the market is in an uptrend, selling the property would   gain me more than what I paid, but larger houses would also have   increased in price. But it may not scale.  When you jump to a much larger (more expensive) house, you can think of it as buying 1.5 houses.  That extra 0.5 of a house is a new purchase, and if you buy when prices are high (relative to other economic indicators, like salaries and rents), you are not doing as well as when you buy when they are low.   Do both of these scenarios negate the pro/cons of buying in either   market? I don't think so.  I think, in general, buying ""more house"" (either going from an apartment to a house or from a small house to a bigger house) when housing is cheaper is favorable.  Houses are goods like anything else, and when supply is high (after overproduction of them) and demand is low (during bad economic times), deals can be found relative to other times when the opposite applies, or during housing bubbles.   The other point is, as with any trend, you only know the future of the trend...after it passes.  You don't know if you are buying at anything close to the bottom of a trend, though you can certainly see it is lower than it once was.   In terms of practical matters, if you are going to buy when it's up, you hope you sell when it's up, too. This graph of historical inflation-adjusted housing prices is helpful to that point:  let me just say that if I bought in the latest boom, I sure hope I sold during that boom, too!" Properties do in fact devaluate every year for several reasons. One of the reasons is that an old property is not the state of the art and cannot therefore compete with the newest properties, e.g. energy efficiency may be outdated. Second reason is that the property becomes older and thus it is more likely that it requires expensive repairs. I have read somewhere that the real value depreciation of properties if left practically unmaintained (i.e. only the repairs that have to absolutely be performed are made) is about 2% per year, but do not remember the source right now. However, Properties (or more accurately, the tenants) do pay you rent, and it is possible in some cases that rent more than pays for the possible depreciation in value. For example, you could ask whether car leasing is a poor business because cars depreciate in value. Obviously it is not, as the leasing payments more than make for the value depreciation. However, I would not recommend properties as an investment if you have only small sums of money. The reasons are manyfold: So, as a summary: for large investors property investments may be a good idea because large investors have the ability to diversify. However, large investors often use debt leverage so it is a very good question why they don't simply invest in stocks with no debt leverage. For small investors, property investments do not often make sense. If you nevertheless do property investments, remember the diversification, also in time. So, purchase different kinds of properties and purchase them in different times. Putting a million USD to properties at one point of time is very risky, because property prices can rise or fall as time goes on. Your house is not an asset, it is a liability. Assets feed you. Liabilites eat you. Robert Kiyosaki From a cash flow perspective your primary residence (ie your house) is an investment but it is not an asset. If you add up all the income your primary residence generates and subtract all the expenses it incurs, you will see why investment gurus claim this. Perform the same calculations for a rental property and you're more likely to find it has a positive cash flow. If it has a negative cash flow, it's not an asset either; it's a liability. A rental property with a negative cash flow is still an investment, but cash flow gurus will tell you it's a bad investment. While it is possible that your house may increase in value and you may be able to sell it for more than you paid, will you be able to sell it for more than all of the expenses incurred while living there? If so, you have an asset.  Some people will purchase a home in need of repair, live in it and upgrade it, sell it for profit exceeding all expenses, and repeat. These people are flipping houses and generating capital gains based on their own hard work. In this instance a person's primary residence can be an asset. How much of an asset is calculated when the renovated house is sold. Your question may have another clue. You are bullish regarding the real estate market. Is that for your city, your state, your nation or for the whole world?  Unless you can identify particular properties or neighborhoods that are expected to be better than the average return for your expected bull market in real estate, you will be taking a huge risk. It would be the same as believing that stocks are about to enter a bull market, but then wanting to put 50% of your wealth on one stock. The YTD for the DOW is ~+7%, yet 13 of the 30 have not reached the average increase including 4 that are down more than 7%. Being bullish about the real estate segment still gives you plenty of opportunities to invest. You can invest directly in the REIT or you can invest in the companies that will grow because of the bullish conditions.  If your opinion changes in a few years it is hard to short a single property.