When you buy a house, your investment basis is not the total value of the property. It is the cash outlay you make to acquire the property: the down payment, plus the delta between your monthly payment and the rent on an identical property (since you've got to live somewhere).
For most people this is a lot less than the total value of the property. Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation. Voila: the power of leverage.
> The value of your degree goes down over time as you gain work experience; its peak value is right after you graduate.
I'm not aware of any evidence that this is true. What we know is that on average, folks with college education earn more over their lifetimes than those without. I've never seen any sort of reporting that degrees depreciate "right off the lot" like cars.
Anecdotally I'll point out that most people list their college education on their resumes for their entire careers. And my employer calls the university to verify a degree on a resume before extending an offer--no matter how long ago it was received.
And that's just the paper; it doesn't even account for the value of the actual education itself to a career.
If your investment basis is your cash outlay you make to acquire the property, then you should only count the value of the house minus the value of the mortgage as an asset on your balance sheet. Chances are, you will count the whole value of the house as an asset on your balance sheet and the mortgage as a liability so your basis in the house is the total value of the property plus the interest you pay over the lifetime of the mortgage - this is greater than the total value of the property. The rent expense on an identical property is offset by commuted rent income due to occupying the property instead of renting it out.
If the interest rate on the mortgage is equal to inflation, then you will realize the same gains on the house as if you put the downpayment in an interest bearing account at that same interest rate. This is before accounting for transaction costs, property taxes, upkeep, etc. If the mortgage rate is lower than inflation then you will have a larger gain and if the mortgage rate is higher than inflation then you will lose money.
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The increase in earnings will be largest when you have 0 years of work experience and smallest when you have 40 years of work experience. In this sense, the value of the degree diminishes over time as the value of your work experience increases.
Alternatively, you can do a discounted cash flow analysis on this increase in lifetime earnings to get the present value of the degree - you could do this while still in school, at graduation or partway through your career. Arguably, if you do this analysis partway through your career, you should include the increases in earnings already realized in which case the value of the degree will likely remain static or drop slightly over time. Regardless, the value of the degree will not go up over time.
The value of the actual education itself to a career is usually lower than the value of a random (as in random access) sample of 4 years of work experience. However, the value of the education & degree to getting the first, second, and perhaps even third job is non-negligible.
The balance sheet entries for a home are the current market value of the property as an asset, and the current payoff value of the mortgage as a liability.
Mortgage interest doesn't go on the balance sheet because it is an expense, not a liability. Other property expenses include property tax, insurance, upkeep and maintenance, repairs, etc.
These expenses do not magically disappear just because a property is a rental. If you are paying rent, you are paying all these expenses, unless your landlord is purposefully losing money on you.
I'm not here to claim that buying a home with a mortgage is the best investment for everyone. That depends on the particulars of each situation. I'm just challenging the notion that buying a home is not an investment.
People buy homes because they expect to get a return, and most do. Same with education. If your analyses comes to the conclusion that that is not possible, then you need to check against the data actually coming out of the economy.
> Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation.
Incorrect. You're also paying interest on the loan, which is usually pretty close to inflation. No matter how you slice it, you're pretty close to breaking even.
Also, you're not getting paid interest on the cash outlay you make the acquire the property, which is another loss.
> Voila: the power of leverage.
Leverage is just a tool you have, that can come back and bite you. If you leverage your investment by 10X, the real increases and decreases in value (adjusted for inflation) are 10X what they would be if you had not leveraged your assets. If you lose 10K of value on a 100k house that you put 20k down on, voila, the power of leverage. You just lost 50% of your investment.
> I'm not aware of any evidence that this is true.
The longer you go in your career, the less people care which school you went to because you have a work history that people can use to more accurately judge your productivity. If you're right out of college, your degree works as a proxy to that.
For most jobs, if you've already worked in the industry for 10 years, the salary you'll receive is roughly the same with and without a college degree, and the difference is even less between "good" and "bad" colleges. The earnings over career is a red herring, where right out of college, you get an initial salary boost.
When you rent, you are also paying interest on a loan--just not your loan. Unless you think that only 100% paid-for properties are rented out, or that property owners rent out their property for less than their own monthly payment.
Yes leverage is just a tool. The point is, a mortgage creates leverage and it's silly to ignore that when thinking about return.
> The longer you go in your career, the less people care which school you went to because you have a work history that people can use to more accurately judge your productivity.
This is speculation by you. Again: note how many resumes keep college on them.
> For most jobs, if you've already worked in the industry for 10 years, the salary you'll receive is roughly the same with and without a college degree, and the difference is even less between "good" and "bad" colleges. The earnings over career is a red herring, where right out of college, you get an initial salary boost.
This is self-contradictory unless you think that salaries for people with degrees grow more slowly than for people without degrees.
> When you rent, you are also paying interest on a loan--just not your loan.
Actually, you're paying somebody who also might be paying interest on a loan. What happens to money after you pay it is immaterial. You're not paying interest on a rent debt you've accumulated.
> The point is, a mortgage creates leverage and it's silly to ignore that when thinking about return.
You're spinning it in terms of pure rewards. When you leverage your money on an investment which can have value go both up and down, you're just magnifying your exposure. Of course, if you can find an investment that's guaranteed to go up, of course you should leverage yourself to the hilt. If that's the case, go buy up some tulip bulb.
> This is speculation by you. Again: note how many resumes keep college on them.
And also by you - if we did an A/B test based on years of experience vs college, we can see whether that matters or not. Everything else is speculation.
> you think that salaries for people with degrees grow more slowly than for people without degrees.
Of course they do. If you start off earning 30k as a high school dropout doing the same job as somebody earning 60k who has a degree, your wage will rise more quickly if you perform at the same level.
> Of course, if you can find an investment that's guaranteed to go up, of course you should leverage yourself to the hilt.
It's worth pointing out that the post I'm replying to stated that housing prices generally track inflation, which is upward. My point is simply that leverage permits a return higher than inflation under those circumstances. I wouldn't claim that housing prices are some sort of "sure thing," and I don't think I did.
> And also by you
Yes, but the difference is I know I'm speculating.
Unless you've got some actual data to bring, I'm not interested in a guessing contest.
> It's worth pointing out that the post I'm replying to stated that housing prices generally track inflation...
Well, my point is that if you leverage yourself in an investment that just tracks inflation, you're running in place. Leverage doesn't do anything in real terms here. The number value in your bank account might go up, but your real purchasing power doesn't.
That was my point, that in this situation leverage doesn't help you, and that fundamentally if you're trying to use leverage in this situation, you're hoping that housing prices rise faster than inflation does.
For most people this is a lot less than the total value of the property. Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation. Voila: the power of leverage.
> The value of your degree goes down over time as you gain work experience; its peak value is right after you graduate.
I'm not aware of any evidence that this is true. What we know is that on average, folks with college education earn more over their lifetimes than those without. I've never seen any sort of reporting that degrees depreciate "right off the lot" like cars.
Anecdotally I'll point out that most people list their college education on their resumes for their entire careers. And my employer calls the university to verify a degree on a resume before extending an offer--no matter how long ago it was received.
And that's just the paper; it doesn't even account for the value of the actual education itself to a career.