Ben Stein How Not to Ruin Your Life

GJS - Tuesday, February 27, 2007, 12:01PM ET  Report Abuse

• Overall: 4/5

I liked this article very much. Many people assume that you are guaranteed to make more money in real estate than in the stock market, based on what's happened in the recent past. I think it's good to remind people that this isn't always the case. Over long stretches, the stock market's returns are better than the returns in the real estate market. Davidoppy gave a specific example of how you can consider the effective return on real estate much higher than the actual return because of leveraging. He claims that Ben is misleading people, but his example is actually very misleading. He leaves out 2 very important facts: 1)While borrowing $900,000 to buy a $1M property will allow you to realize the gain on $1M rather than just the down payment of $100,000, there is a cost to borrowing $900,000 - nobody is going to lend you that money for free. You have to include this in your analysis. If you're renting the place out, maybe you can cover your costs, but it's misleading to ignore this major piece of the equation. At least where I live, in the suburbs of NY, it's not easy to get back in rent what you'll have to pay out each month. 2)Aside from just the mortgage and tax costs of a home, there are many other major costs. By the way, I first started investing in both real estate and the stock market in 2000. I've made much more money on my home than in the stock market in both absolute terms and as a percentage of initial investment - even when including costs. But you can't let recent history blind you to the longer term returns of these two asset classes. People have been chasing the performance of the real estate market recently just like people were chasing the performance of the stock market leading up to March of 2000. Wise investors have to have a memory of more than 5 - 7 years or their returns will suffer the consequences.

SkanderE - Tuesday, February 27, 2007, 1:32AM ET  Report Abuse

• Overall: 1/5

Argument is horribly flawed. Can't compare Real Estae to stocks like that. Investors buy stocks with 100% cash. When you're buying Real Estate you can have from 10-0% cash invested per house. If stocks go up 10% and your house only 2%, and you put 90% cash down, the return on investment by Real Estate is 20% two times more than stocks, and that is not counting money you'll make from rent.

Yahoo! Finance User - Monday, February 26, 2007, 9:10PM ET  Report Abuse

• Overall: 3/5

Real estates are kind of investments, most people can start with a small amount of money and little knowledge, as they live their lives, their investment grows all by themselves. most people can not do same in the stock marked.

Yahoo! Finance User - Monday, February 26, 2007, 8:24PM ET  Report Abuse

• Overall: 1/5

I love Stein's articles but this is horrible. Of course real estate that you buy and don't rent or produce any income with isn't the best invesment.

aa909 - Monday, February 26, 2007, 6:22PM ET  Report Abuse

• Overall: 1/5

Terrible article. The base case Ben uses here shows the CAGR for the condo to be 4.4% but he doesn't factor in any leverage. Assuming 20% down, the CAGR on the home equity is 10%. This assumes you're living in it, but if you rent it out with a positive cash flow the return is even higher! Ben, you missed the point of your own article and you are misleading people.

Yahoo! Finance User - Monday, February 26, 2007, 5:42PM ET  Report Abuse

• Overall: 1/5

Rent and Leverage If you live in the house, you need to include the "imputed rent" in returns. If you don't live there, then you need to include the rental income received. Very simple and a glaring ommission. In terms of leverage, the calculation of home price appreciate relates to an unlevered asset. Equity returns are levered by the amount of debt on a company's balance sheet (equity returns are also more volatile as a result). An apples to apples comparison would calculate the returns on "home equity" after leverage and including imputed rent. Suffice it to say that Ben's article doesn't even come close.

Greg N - Monday, February 26, 2007, 4:38PM ET  Report Abuse

• Overall: 1/5

Ben, did they really pay you to right this article? There was really no insight here whatsoever from my viewpoint. Usually your articles have more substance and are worth reading, this didn't make the grade at all.

Yahoo! Finance User - Monday, February 26, 2007, 3:51PM ET  Report Abuse

• Overall: 4/5

Ben is a great story teller and this story is exactly the way I see it

__A_YAHOO_USER__ - Monday, February 26, 2007, 2:29PM ET  Report Abuse

• Overall: 1/5

One of Ben's worst.

Yahoo! Finance User - Monday, February 26, 2007, 11:54AM ET  Report Abuse

• Overall: 1/5

This is a horrible article and is nothing new from people that don't get it. 1. You can not compare stocks and 401k to real estate. In order to make money off of stocks or 401k you have to put YOUR money in. So who cares if the S&P gives 6, 10 % or whatever. I can easily borrow 1 million dollars to buy rental properties. If it earns less percentage I don't care. I am making 4-10% return on a million dollars that is already in my "401K" ( my 401k is real estate). Therefore I am making a return on 1 million dollars. If you have millions of dollars to put in 401k then you are wasting your money. Just go buy a rental property that cash flows TAX FREE income and never spend your original investment. Telling people to sock away a few hundred dollars a month into 401k is an idiotic idea. Go get a loan to put money into your 401k they will laugh you out of the office. This article misses the entire point. I have heard it a million times. The governement want you to put money in 401k to fund their economy. It is a big waste of time.

Mark - Monday, February 26, 2007, 6:47AM ET  Report Abuse

• Overall: 3/5

Real estate is not the only leverageable investment vehicle. Most of my $375k/yr portfolio income is not in RE. Do your research and you'll find dozens of non-RE investments that are highly leveraged. Later this year, stocks will be more leveragable if you know what you're doing (and know which broker to use).

Yahoo! Finance User - Sunday, February 25, 2007, 9:34AM ET  Report Abuse

• Overall: 3/5

Were done's one start at 57y old with very litte money.

joseph - Wednesday, February 21, 2007, 2:52PM ET  Report Abuse

• Overall: 2/5

Ben is said the market performed twice as well as the real estate he once owned. That is a little misleading. His measurement of stock performance is where the DOW as a whole closes now in comparison to where it closed in 1990. I'm quite sure there are more publicly traded businesses now than there were in 1990. Keeping that and inflation in mind the DOW better be closing much higher than it did in 1990 if anyone is going to make money. A more fair way to compare the two would be…. 1. Compare the value of all the houses in Palm Springs in 1990 to the value of all the houses in Palm Springs now. There are more houses in Palm Springs now just like there are more publicly traded businesses. 2. Only compare the performance of stocks that existed then with how they are performing now. Then do the same thing with real estate. Only comparing houses that were in or before 1990 to themselves now. I’m sure a lot of those businesses aren’t around anymore for one reason or another. Most due to financial difficulty. If the houses aren't around anymore the owner got paid. (Unless he/she was stupid enough to not have house insurance.) Let’s look at the downside of stocks. In 1998 Yahoo was trading at around $200 a share. Now Yahoo is trading at or around $32. By January of 2002 the stock was trading at $4 a share. That’s very volatile and very risky. Stocks can easily lose half their value in weeks, days, or in some extreme cases hours. When you find a house that is worth $200k and four years later it’s only worth $4k send me an email. Stock have the potential to make you a lot of money in a short period of time. Real estate can offer a nice return just not to the extremes. They also don’t have the potential downsides. One last note. The same rule applies for real estate and stocks. Buy low and sell high!!!

CT - Wednesday, February 21, 2007, 2:51PM ET  Report Abuse

• Overall: 4/5

Tell you what, the simple fact that there is any debate about this just confirms that there isn't any reason that you should look at something so totally illiquid like a property as an "investment". The point about using leverage in real estate (ie using only 100k of your money for a $1mm property) is a great point provided that you understand that when times are tough and the market dips by...say...20% that you are not only out your 100k but now need to come up with ANOTHER 100k to rid yourself of the losing and quite illiquid "investment"...with equities if the market goes to ZERO - or down 100% - you are out what you put in, with real estate, if it is down TWENTY PERCENT you are down DOUBLE WHAT YOU PUT IN. Good investment? If you want to invest in real estate, but REITs which are professionally managed and have CRUSHED homes, rental properties, apartments, etc over time...oh, and you get daily pricing and can liquidate your investment in 3 seconds rather than crossing your fingers that you can sell your "investment property". The problem with this debate is that there is no right or wrong answer, and Ben's point about the magnitude of the appreciation is what most individuals miss...nearly everyone has (theoretically) made money on their homes in the last 5-7 years, and for most people "making money" means a good investment...I think that I will stick with 100% liquid investments that I can easily move in and out of if I need to - oh and the fact that over time they will generate a far greater (triple the) rate of return than real estate doesn't hurt either. PS - for all of the "real estate experts" who posted here about how easy it is to "flip" properties...have fun job hunting like you had to do in 2000 after your day trading careers came to a close.

Yahoo! Finance User - Wednesday, February 21, 2007, 12:00PM ET  Report Abuse

• Overall: 5/5

Leverage cuts both ways and most of you who criticize Ben don't take into account the costs of carrying a property until it sells. It works great when you can flip a property in a few months but those days are gone in most areas. Take a simple example: Suppose you buy a piece of land for $175,000 and put down $17,500. You get a 6.5% 30 year mortgage which works out to monthly payments of $995.50 each. A quick one year later you sell for $183,750...that's 5% annual appreciation (a lot more than the historical average...see below). Let's be generous and assume you sell the property yourself so there is no 3% to 5% broker commission to pay. Let's see how much you'll make: Sale Proceeds: $183,750 Less: Mortgage Payoff: $155,740 (after principal payments made) Net: $28,010 Less Original Down of $17,500 Net: $10,510 Less Interest Payments: $10,185 Net: $325 Add Back Tax Savings (assuming 30% bracket) by being able to deduct the interest = $430 Total Gain: $755...a "whopping" 4.3% (I coulda had a CD!) And let's face it, it's far easier to be a no-work/know nothing winner in the market through index mutual funds than it is to win at real estate. Every property you buy you must research the area, make estimates about it's appreciation potential, assess the condition of the property, shop for good mortgage rates etc. etc. But you can buy a good index fund (which represents the whole market) with no thought and just a few clicks of a mouse. Since the mid '70s, compound annual returns on residential real estate have averaged just 1.35% after adjusting for inflation...only slightly better than T-bills The inflation adjusted return for stocks was 5.95% over the same time period. That's comparing the whole real estate market to the whole stock market. Admit it guys...making a profit in real estate is a lot more difficult than you make it sound (except perhaps in the overheated market of last year but that's old history)

meevamarie - Wednesday, February 21, 2007, 11:32AM ET  Report Abuse

• Overall: 5/5

I totally agree that real estate is not a good investment. Yes, you are not paying rent, but you are paying much more mortgage for a house that you would ever pay rent for the same house.(being a Landlord in that scenario is also not a good investment), You are paying at least two times the amount you bought the house for in the 30 years of a mortgage (not many can afford to pay the house off before that time, or EVER) Look at an amortizations schedule (google) and see for yourself. besides, if a couple of your neighbors, in comparable houses to yours are selling lower that value...guess where your value goes? You can wake up in the morning and your house is worth 10,000 less because John Doe "had to get out from under" or was transferred, or divorced, or lost a job, or...get the picture? I'm a mortgage broker, I see it all - every day!

oscart - Wednesday, February 21, 2007, 11:31AM ET  Report Abuse

• Overall: 5/5

Ben has a good point. My personal situation is that my rent is cheap. the stock market returns about 10% over the long run. Housing in chicago during the recent boom years (2000-2005) generally gained 10% on an annualized basis.... So now the stock market is better for me. I figure that my rent = the expenses when i own (interest, even after the tax deduction, plus repairs or monthly dues). The 'appreciation' in the price of the house I am losing by renting is offset by the fact that the return on my money are twice in the stock market now than in housing, assuming housing will appreciate only at 5% for the next 5 years. Having said that, I still think for MOST people, buying their own home with a 30 year mortgage and investing the rest is a good way to spend your disposable income. While many naysayers had some good points, many were not painting a full picture. Patterson97, for example, talks about 'rental income'... I think a lot of us don't want to be landlords. So, yes, while you can make money at being a landlord, there is also a price to pay: your time and effort.

James L - Wednesday, February 21, 2007, 11:23AM ET  Report Abuse

• Overall: 3/5

Get real people. The tax break is not that big of a deal. The standard tax deduction is $10,000 if you don't itemize. So you are only gaining in tax relief for everything you itemize past that. Doesn't make since to me to pay 15,000 in taxes and interest, only to get back $1250 of it ( 15000-10000=5000 tax break claimed over standard deduction times 25% is $1250). Ben Stein's point is that the stock market has consistently won. As for the housing market, talk to those people in losing markets. Not everyone lives in a booming market like San Fran, New York, etc. The key I believe (and the point Ben was making) is that you need to invest both in a house and the stock market. Don't buy so much house that you don't have money left over to invest with. A house only earn's income when you sell it. If you buy a house for 250,000 (6 % interest, 30 yr fixed loan) after 20 years you will have paid 244,739 in interest alone and still owe 135,000 on the principle (this is per a mortgage calculater on Smartmoney). Not to mention the taxes you paid out (that you only get back about 25% depending on your tax bracket.) What Ben was saying was the payoff for a house (YES, YOU WILL PROBABLY MAKE MONEY ON THE INVESTMENT) is not as big of a pay off over an extended timeframe if you invest in the market (and that doesn't mean buying says of just a few stocks). There are several tools to help the average Joe diversify his portfolio for a good return.

Irene - Wednesday, February 21, 2007, 10:53AM ET  Report Abuse

• Overall: 2/5

not taken into consideration of the investment is the amount saved not paying rent.....

Karen - Wednesday, February 21, 2007, 9:50AM ET  Report Abuse

• Overall: 5/5

THANK YOU, SO MUCH for this info!

paul_l_obrien - Wednesday, February 21, 2007, 9:45AM ET  Report Abuse

• Overall: 1/5

pattersons97'a comment is right on a Ben's article very misleading. Real Estate is the investment in your credit. I can't affod the home I live in but I can afford to get a huge loan. That loan goes into an expensive house for which I merely need to gain 4% a year to significantly outperform the money I could make off the much smaller sum I can afford to invest. After the tax breaks and appreciation in the home, its a far better deal. That said, sure, if the home is in a poor market, or losing value, I could be in trouble but even then, with the tax breaks, the risk is less than the same fall in the stock market and won't be hard to swallow because after living in the home for a few years, I've already paid into the home whatever might be lost (unless we have a catastrophe); meaning, when I move, if there is a loss on the home, its already paid out so I net out even and don't absorb the pain all at once.

Yahoo! Finance User - Wednesday, February 21, 2007, 9:33AM ET  Report Abuse

• Overall: 4/5

The previous commentor is a brainwashed clone that reads "Rich Dad" and Carlton Sheets--and buys into it all! Read books written by people who didn't make all their money selling books, please. Kiyosaki became a best selling author because he struck a deal with Avon to distribute his books. Avon's bulk purchase boosted his sales and put him on the best seller's list. That's why he got to Oprah and the other shows. His "Rich dad" is a fictional character, and he won't devulge any personal financial info--even though his entire reputation is built on his being wealthy. You got SCAMMED.

Dave - Wednesday, February 21, 2007, 9:06AM ET  Report Abuse

• Overall: 2/5

What people are missing here is that Ben is referring to an "investment". While buying in a home and living in it may not be the best investment - Ben is correct here - the real opportunity in real estate is to leverage yourself by putting 10% (and in some cases much less) down and borrowing the rest. When you include tax deductions, depreciation and rental income, Real Estate will win over stocks EVERY TIME! This is not rocket science. Ben is acting as if real estate you live in should outperform the stock market but the real story is if you treat real estate vs stock market as an "investment" then I will take real estate every time. Others that have commented said that Ben was speaking to average Joe but the fact is that average Joe is not investing in the stock market and if he was, he is losing his behind! 90% of the stock market is made up of the richest 1% of the population. The average Joe with a little study can have much better success in real estate. Rent it out or flip it and see a much better ROI and an overall safer investment. Ben, your advice is a hard pill to swallow and I can only hope that those who read this who are thinking of investing in either source would do their homework. Real Estate has been and will continue to be the best investment - granted you do your homework as anyone would do if investing in the stock market - for many years to come.

Samantha B - Wednesday, February 21, 2007, 5:58AM ET  Report Abuse

• Overall: 5/5

I will admit that I am chicken little when it comes to the idea of leverage--whether it is buying stock on margin or real estate on margin. It is all too scary for me, that is why I'll never become the tycoon that so many commenters on this column are. But I'll also never be a pauper and those that try to time the real estate markets by buying more real estate than they can afford with leverage....well they run a risk. A very big risk. And in my line of work (law) I've seen some high flers humbled this past year and a half. The interest payments to the banks continue whether or not you have renters and whether or not you have buyers. There are few investments that are risk free and the higher the return, the more leveraged you are, well, the downside is the more risk you have assumed.

david - Wednesday, February 21, 2007, 2:52AM ET  Report Abuse

• Overall: 4/5

To all the 'real estate seminar-ites' who are leaving comments about "leverage".. Ben is writing an article about buying your OWN home and living in it long term vs. long term stock ownership. And he makes a very good point about overdevelopment in places like Vegas and Phx. I have a secret your real estate seminar didn't teach you... A lot of people loose their savings and waste their time in real estate, just like any other investment.

chrystal - Wednesday, February 21, 2007, 1:06AM ET  Report Abuse

• Overall: 1/5

Your comparison of the stock market vs. real estate long-term/short-term returns clearly does not take into account any leverage or tax factors. With a little educuation, some hutspa, and a diligent eye on your portfolio, even the most novice investor can become VERY wealthy in real estate in 5 years with NO tax implications! But I think you really need to LOVE real estate investing! I'm a licensed CPA, real estate agent and loan agent and have been able to build a fabulous asset base in a relatively short amount of time without having to be glued to my computer tracking the latest indices or market trends! I simply change up my investment portfolio/strategy as the market conditions change, and if my timing is off, I know I've always got a piece of dirt out there I can count on to pull me through. I did however enjoy your article and think you are a talented if a little uninformed writer on the topic. Please keep writing! Just do a little more homework on the bigger picture when it comes to investment comparisons! LOL

BillyB - Wednesday, February 21, 2007, 12:35AM ET  Report Abuse

• Overall: 5/5

They are not making any more land, but there is plenty out there! and for that matter, there is way too much space out there right now due to over exuberance in the real estate market. This will correct itself with the asset and space markets in the next few years, but it will take a while. Compound this with the baby boomers like Ben dying off and there will be a lot of Real estate on the market in the future, and not enough people to fill the space. just my .02, nice article Ben.

Yahoo! Finance User - Wednesday, February 21, 2007, 12:22AM ET  Report Abuse

• Overall: 5/5

Bravo to Ben for making his comparison between real estate investment and stocks investments. However, stock investment is a gamble, hoping for the big break, which you can lose most or all. While real estate is more viable, which has short and long time GAIN advantages.

Brent - Tuesday, February 20, 2007, 11:17PM ET  Report Abuse

• Overall: 3/5

Ben, I understand your article, but you're forgetting another key component of investment properties. Rent. I purchase homes, both to be able to sell them at a higher value later, but also because the investment pretty much pays for itself. If you can rent it for enough money, it pays for itself, and you get much more for your investment that you previosuly stated.

JackK - Tuesday, February 20, 2007, 10:33PM ET  Report Abuse

• Overall: 2/5

The view of the increase in the value of a house and comparing it to the stock market is simplistic. If you look value to value then yes, the market has out performed real estate. However, when you factor into the equation the leverage of a mortgage, real estate far outperforms the stock market, with much less risk than buying stock on margin. The key to accumulating wealth is to accumulate assets. Real estate is a very good method to do this with a low risk to reward ratio.