Buying a House

It is a truth universally acknowledged, that a Vietnamese man in possession of a good fortune, must be in want of a house.

I apologize for butchering Jane Austen, but it does seem that the Vietnamese have a propensity for buying up houses. At any cost. A Vietnamese person might buy a house and then go ahead and rent out all three bedrooms to 3 different families. Legal, tax, and fire hazard implications aside, I must admire my people for their ingenuity and resourcefulness.

Houses are definitely assets to be had, and there is definitely money to be made if you invest in real estate at the right price. However, I'm going to challenge the conventional wisdom of my people. I'm not convinced that buying up several houses is the easiest and most sure fire way of accumulating wealth. 

Owning one house is reasonable as long as you are relatively settled. The rule of thumb is 5 years for the tax benefits to be worth it. Additionally, you have to be certain that your employment situation is stable and you are set to be working at the same place for the foreseeable future. You gotta pay rent to someone-- if you own a house, you're effectively paying the rent money to yourself. So far, so good.

Property Management Can Balloon into a Full Time Vocation

What of the notion of owning rental properties? If you can handle all the duties of collecting rent, paying for home insurance, property taxes, advertising, finding good tenants, paying taxes on the rental income, doing the landscaping, and occasionally fixing a faucet here and there. If you live relatively close to your rental, then the logistics of handling all these duties are pretty manageable. At best, you're stopping by once every few weeks to do random fixes, landscaping and rent collection. At worst, it can be somewhat of a part time job keeping up with everything. Sometimes you might have to kick out the occasional deadbeat tenant. But still easy peasy. 

But if you have multiple rentals or if your house is a plane flight away, that's when I start to shudder. All the aforementioned factors become exponentially time consuming and now I'd think twice about the investment of time it takes to care for it all.

Assuming you're still working full time, you would have to ask yourself if its worth it. Did you expect rental income to be a passive income stream or has it grown into a second job? Like I said before, there is definitely money to be made in real estate, but it can easily eat away at your precious free time and become a full time job if you're not careful. That might not be what you were hoping for when you first got into investing in real estate. 

Not Exactly a Nest Egg

Even if you're not making any money on the house, the idea is that it will appreciate and you'll be able to sell it at a handy profit. But remember, you're effectively borrowing ~200,000 dollars and paying it back on a mortgage at an interest rate of about ~4% (as of 2015). You also have to take into consideration the ~1-1.5% (depending on where you live) property tax you pay every year in addition ~3% inflation of the US Dollar.  Add that all up and you'll need the home values in your neighborhood to grow at a rate of 6-7% in order to just to break even. (Uncle Sam does give you a few deductions and breaks for owning a home, so that's why the percentages don't add up). 

And then there's this:

http://www.ritholtz.com

So the numbers on the left hand (or on the Y-Axis, because math) represents the average price of a house, adjusted for inflation. Of course the line is pretty squiggly since it does happen to go up and down with the economy. Secondly, it only displays a visible upward trend around 2000, right around the beginning of the housing bubble. We need not talk about how that turned out.

Wikimedia Commons

But if you take out the bubbly section, the general trend is surprisingly flat. The truth of the matter is that people didn't really think about housing as an investment until maybe 25-30 years ago. 

Additionally, if you crunched all the numbers, the average appreciation rate of a house was something like 3.1%/year - just a little better than the average inflation of 3.0%/year.

Where to Stash Your Net Worth

Don't get me wrong, many people have been able to sell their homes after 30 years, downsize, then live off the proceeds (and usually combined with money saved elsewhere) in a very comfortable retirement. Its ridiculously hard to save money, and in the very least, paying off the mortgage and having it all sit on the equity of the house is a way of socking it away and hedging against inflation for 30 years. There are definitely worse places to store your money.

I hear there's a lot of money in mattresses

And if you happened to be fortunate enough to have the cash laying around to buy a house just as the market bottomed out, then you'd be able to make off like a banshee. The problem is that most of us are really bad at timing the market, let alone have the cajones and the spare cash laying around to buy up land and houses when everyone is losing their jobs and panicking on the street.

At any rate, parking your cash into the equity of a house is very prudent thing to do, provided you don't overpay. As previously mentioned, you're essentially paying yourself rent and hanging on to your net worth. And all this while, the house is providing you value with four walls and a place to keep you dry and warm. But investing in housing and expecting returns any higher than the nominal rate of inflation wouldn't be realistic. Unless you plan on working on the side as a property manager. Or renting out all your spare rooms to like 6 Vietnamese families. #TeamVietnam

further reading:
http://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index#Economic_implications
http://www.econ.yale.edu/~shiller/data.htm
http://www.econ.yale.edu/~shiller/data/Fig3-1.xls
http://observationsandnotes.blogspot.com/2011/06/us-housing-prices-since-1900.html
http://www.ritholtz.com/blog/2011/04/case-shiller-100-year-chart-2011-update/