If you’re simplifying the calculation by ignoring maintenance costs, or assuming that the maintenance costs of a large commercial landlord are the same as an individual homeowner performing the same maintenance task with a contractor, the calculation will go wildly wrong.
Ben Felix calls this a “Salience Bias” a term from behavioral economics
{{Salience bias is a cognitive shortcut where our brains disproportionately focus on information, items, or events that are highly prominent, emotionally striking, or vivid, while ignoring less noticeable but objectively more important details }}
You’re making a strong argument for the simplified thinking people love, but if you actually do the rent vs.buy arithmetic on an individual property, you may come to a different conclusion.
We often hear from real estate promoters that “Location” is essential. Well, somebody owns all this real estate that is poorly located. Doing a rent vs. buy analysis may yield a surprising result that will save you money.
And I can tell you from 40 years of personal experience, that while in theory, rents and home prices are correlated, it’s not always true when you’re looking at an individual property in a given neighborhood.
If you’re assuming that large commercial landlord isn’t getting a big chunk of that “skim” you so frequently lament in most other markets, your calculation will also go wildly wrong.
The three biggest advantages to owning, rather than renting, are leverage, tax benefits, and protection against rising housing costs. If you leave those out of your rent/buy calculation, you’re going to get the wrong answer.
Leverage works in both directions, if you can realize your financial goals without debt, that’s less risky.
Long-term buy & hold stock investing has better tax treatment than real estate, if you’re doing it right. Or you can just buy BRK and let Buffett & Company do it for you.
The large historical difference in returns between stocks and real estate is the ultimate insurance against rising home prices. Over time you’ll be able to buy or lease a castle, if you think you need one.
Again, you’re showing the salience bias of the conventional wisdom. Doing the arithmetic may yield a difference result.
I’m not sharing walls, floors and ceilings with loud neighbors. I have an attached garage. I have a (small) amount of green space surrounding me. The backyard is a big benefit for young children. Or my grill. It’s more pet friendly having a reasonable back yard.
If you are only looking at the $$$ you are missing the biggest points of home ownership versus renting. It’s not always about the money people!
As we’ve discussed in other threads, you’re showing the bias of your own experience. From what we’ve discussed, you lived much of your live in a market where housing prices were stagnant and your household was of a size where supply of adequate rental housing was plentiful. Doing the arithmetic on what other people experience may yield a different result.
This is how I view it. Actual emergencies are rare, and so are market drops. People are more worried about avoiding market risk than actually being prepared financially for an emergency.
Having a large emergency fund really only makes sense for people just starting out investing, when a market drop and emergency would place them at financial risk. Beyond that, holding large amounts of cash actually increases your risk over any reasonable period of time.
Let’s say 10 years ago you wanted to be prepared for a $50K emergency. You could invest it in the an index fund or keep in cash. Over the last 10 years, the S&P 500 is up over 250%, so had you invested it, that $50K would now be $200K. That is a much safer position than $50K in cash.
Even if the market were to drop 50% tomorrow, you still would be far better prepared for an emergency if you had invested the money.
Sure, the last 10 years have been red hot, but the worst 10 year period for the S&P is -4%. So not that much different than just holding cash. Simply not much risk there.
I think by definition, your fixed income portion IS the equivalent of your emergency fund. That’s because when you’re working, the [main] purpose of an emergency fund is to provide funds in case your earnings from work suddenly ceases. And when you’re retired, the [main] purpose of your fixed income allocation is to provide funds for periods when it is inopportune to sell parts of your equities allocation (the “emergency”).
Exactly. One problem with the idea of an emergency fund is when you have an emergency and spend it. Now what do you do? You don’t have an emergency fund anymore. So you have to sell something and put the money into the e-fund. But not selling something is why you had the e-fund in the first place.
If you take the money out of fixed income, you simply rebalance on your normal schedule.
If my net worth is $200K and I have minimum social security coming in, no pension and 90% coverage by monthly bills (only 10% goes to savings or discretionary spending), my savings, emergency funds, and general investment options are likely to be significantly impaired relative to my ability to absorb big financial impacts.
If my net worth is $20MM… I probably don’t care about impacts - at all. Even if my budget is 10X the person above, my coverage is so low (<25%)… I STILL don’t care.
Wealthiness is not having to squint at the small (money) stuff.
Small (money) stuff is relative.
I have a nice feeling of security owning my own home, something that you can’t put a price on IMHO. All my family rented, often in social housing. I sleep soundly not worrying about having the rent money - invaluable to me having seen my family struggling to make the rent at times. This is the biggest advantage to owning to me.
Holding precious metals gives me the same sort of feeling.
