FICO to incorporate buy-now-pay-later loans into credit scores

A mortgage doesn’t make money, but it (can) enable spending less money. If you buy a place such that interest, maintenance, insurance, taxes and the opportunity cost of not being able to easily relocate are less than rent, then you have saved the difference.

It’s also a way to force saving, which is psychologically useful (and thus valuable).

If you buy a house for 500k on a 5% mortgage over 25 years when you are 25, and you plan to live until you are 85, you will live there for 60 years.

It will cost you 35k a year for 25 years, or 875k a year

After 25 years you have no more expenses.

If instead you rent it for 20k a year, increasing with 2% inflation each year, by year 25 you're paying 33k a year in rent, and by year 60 you're paying 66k a year.

Over 60 years you pay 2.4m in rent, or 900k in mortgage (you could also then sell that house for 1.6m with a 2% annual inflation).

You'd have to invest the savings and get way higher than inflation returns to break even.

Of course there's maintenance costs of the house too, but that's with rent far cheaper than the mortgage. In reality rent tends to be a similar amount as a mortgage (in the UK it tends to be higher - as people won't rent places out if they aren't covering their mortgage - at the very least the interest part of it). You'll likely find house prices appreciating more than inflation too - just like stock prices do. Rent tends to track income.

Now you could argue that you'll get more by investing in high return growth stocks. And you might be right. In the 80s there was a whole "endownment" mortgage craze where you paid the interest on the mortgage, and then the rest rather than paying down the mortgage capital, instead was invested.

This was a massive scandal as many investments didn't have enough to cover the mortgage amount upon maturity. With a mortgage you know that no matter what happens with inflation, growth, returns, stock crashes etc, you will own one house after X years.

> You'd have to invest the savings and get way higher than inflation returns to break even.

You say that like it's a difficult thing to do.

S&P500 is up 710% since 1996. Gold is up 92% since 2012.

Personally, the rent control is the best part of a mortgage and even though renting is typically better, I'm fine paying a premium for that. That said, good luck getting somebody to loan you 900k so you can play the stock market; it's much easier to get that for a house though.

>After 25 years you have no more expenses.

After 25-50yr (depending a lot on macroeconomic factors and your specific municipality) property taxes will likely be comparable to your mortgage payment.

No more expenses... Right!

No property tax. No homeowner's insurance. No maintenance. Just living on easy street.

> Gold is up 92% since 2012.

And housing is up 125% since 2012, so the sucker who bought gold instead of a house has lost out.

We can all be rich in hindsight.

(There's also other benefits to owning - like being able to have pets, not being able to be evicted, etc)

But the biggest tell that housing is valuable is that nobody is spending $500k on housing to rent it out if they could make more money pumping $500k into the stock market.

It seems unlikely you'd be able to rent somewhere for less than the cost of

* maintenence

* taxes

* return on capital

Because otherwise your landlord is subsidising you, and why would they do that?

You should look into how many homes are being purchased primarily for AirBNB/VRBO type income streams...

Rental prices are connected to costs, but not tightly.

If I'm a landlord and my costs are $X, but I can find renters for $2X, I'm probably going to charge closer to $2X.

If my costs are $X, but I can only charge $0.9X, I'll most likely rent it for that, because losing $0.1X is better than losing $X; unless I own a lot of units and it makes more sense to push the 'average rent' up, even if it means more vacancies. If the market conditions are like that for a while, I'll probably try to sell, but I'll take the loss for a while.

Additionally, if local market conditions include something like California Prop 13, a landlord that has been holding property since before I was born most likely has a much lower property tax bill than if I purchase a similar property. In that case, renting could supply them with a nice return and me with a nice discount.

Property taxes tend to go up with inflation though, so while the numbers given are wrong, the point still stands.

If you put around 200-300k into IBKR (not affiliated) you can get portfolio margin which will give you just shy of $2,000,000 in buying power. Access to leverage isn’t really an issue, but forced liquidation definitely is. The bank will not liquidate your mortgage if you end up underwater.

Yeah forced liquidation is a big problem for a long-term loan.

IIUC, Musk et al take loans at 25% of their share's value to avoid this ever coming up.

Also the average house price is 500k in the US so a 20% downpayment (which not everybody does) is still less than 200k.

> people won't rent places out if they aren't covering their mortgage

btw this is usually false, and mostly irrational.

1. Realize that every landlord has a different capitalization structure. Many likely bought decades ago and thus only owe a fraction of what the current market selling price is. Additionally we also have had a long period of ultra low interest rates so their interest rate is different than what new entrants are paying. Because their capital cost is lower they can actually offer for far less than the (Interest+Taxes+Insurance+Maintenance) costs that a home owner would have to bear.

2. The rational move of a landlord is to price competitively based on what the market can bear, even possibly losing a little money per month in cashflow (but less bad than the appreciation rate and cost of disposal/selling/defaulting).

> Because otherwise your landlord is subsidising you, and why would they do that?

Because they may have capitalized decades ago and the market only bears a certain price. They're not subsidizing you because their cashflow needs are actually lower than new entrants.

> But the biggest tell that housing is valuable is that nobody is spending $500k on housing to rent it out if they could make more money pumping $500k into the stock market.

Of course they are. I do. I do so knowing full well that my expected returns are going to be nowhere near my brokerage account invested in public equities. The past decade has followed that expectation.

I and many others do it as a form of diversification. It’s risk aversion in the end. Most people with capital don’t want to be putting all their eggs into one basket, so for wealth preservation and diversified income streams it’s a good option even knowing up front you are expected to lose money via opportunity cost.

That ignores other benefits of housing being a privileged investment category by the current government and monetary/tax policy. If you seek cheap leverage this is probably one of your few options as a “two bit” player in the market at that $500k level.

> It will cost you 35k a year

> If instead you rent it for 20k a year

Some good numbers, but what is missing is the result of investing $35k-$20k=$15k per year. Let's say you earn a %7 real return on $15k/year invested for 60-25=35 years.

Writing a little program:

    import core.stdc.stdio;
    void main() {
        double d = 0;
        foreach (i; 0..35)
            d = (d+15000)*1.07;
        printf("d: $%f\n", d);
    }

Yields $2,218,701

I would think twice about buying real estate as an investment.

Personally, I own my home because I want to use it as I see fit, but I recognize that as an investment it's a lousy one.

> and mostly irrational

I'd say it is quite rational. Real estate represents value, and value should be earning at all times. Owning it free and clear does not change that one iota. Rents are based on the value of the property, not the mortgage on it.

somehow, I never learned to use a spreadsheet

You can use a rent vs buy calculator to do the math for your situation: https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...

The parent is minimizing a bunch of coats of owning: maintenance, property tax, included utilities, HOAs, and most importantly opportunity cost.

https://www.npr.org/sections/money/2010/11/05/131105373/the-... I still remember an old Planet Money podcast they did covering a Rent or Buy calculator, It didn't allow for the possibility that the value of a house might fall over time. If you put a negative appreciation rate it would spit out an error. Which in the immediate aftermath of 2007 meant the tool was unable to capture reality.

False, rents are based on what the market will bear. The value of the property is stickier than rents.

Plus one can be "losing money" on cashflow but earning money in equity, so one can rent for less than the mortgage while the value of the asset is rising even faster than the monthly loss. Of course this only happens based on speculation and having free cash to "lose" monthly.

> rents are based on what the market will bear

And that is the value of the property. I.e. the value of property is what income it will generate.

When those two values diverge, then "arbitrage" steps in which converges them again.

25 years ago, I sold my previous house. It recently sold for 4x what I sold it for, a 300% ROI. Was selling it a financial mistake?

Consider that I didn't pay property taxes, insurance, maintenance, and squatter eviction costs for the last 25 years.

Consider that the S&P500 went up 561%.

Buying a house is not a good wealth builder strategy.

Can’t argue with the math but one thing about a mortgage is it takes no effort. Just pay the bill and time does the rest. With stock investment there’s an emotional attachment to every major swing, should you buy or should you sell is never far from your thoughts. Using a home as an investment may not make the most return but it’s easy as long as you can pay the bill.

Real estate prices swing around, wax and wane, just like the stock market does. It's just that there is no real estate price ticker.

Investing in the S&P 500 is even less effort. The last time I bought a house, I had to carefully read and sign about 50 pages of legal papers. Buying stocks is just pushing a button.

Huh? I invest tens of thousands a year into stocks and have never once thought should I buy or sell. I just auto buy weekly, it couldn't be easier and I never think about it at all. They even have funds that automatically re-balance as you approach retirement.

Also you are acting like the housing market can't also crash.

But owning a house has other costs that owning gold doesn't.

Are you factoring in property taxes, maintenance costs, utility costs, insurance, etc?

In places like the Bay Area, property values pretty much never go down in price, and the YoY relative increase is on par with that of index funds. Combine that with rental income, and you can very likely beat an index fund. Mortgages offer much more leverage than margin loans, which helps offset the upfront capital cost.

For decades, property values kept going up in Detroit until they didn't.

not just Detroit…

The value of real estate in Detroit was tied to the auto industry. When it fell, so did real estate prices. The Bay Area's value does come in large part from the tech industry, but it's also a very important port of entry for trans-Pacific immigration and commerce, and that's a lot less likely to change IMO.

But that's beside the point. Substitute Bay Area with Seattle, Los Angeles, Manhattan, or some other area of your choice. Or, better yet, diversify your portfolio by buying real estate in multiple cities. The same options that are available in the stock investment to tune your risk profile are available in real estate investment as well.

I would use the long-run return on housing: the same as inflation.