Quote Originally Posted by Jeffski
Disagree. Real estate is almost always a good investment.
OK, let's look at numbers:

You buy a house for $200k today and you have your eyes on a house that is $300k today. You put down 10% ($20k) on the current house. You locked in a 6% interest for 30 years in the remaining 90%. Your mortgage will be $1080/month.

Then the housing in the area goes crazy and everything appreciates 25%. So the house you live in now worth $250k and the house you wanted to live in now costs $375k. So you sell your house after 5 years od living in it. You would owe $168k and you could sell for $250k. You'd pay 6% for realtor fees ($15k) and another 3% for closing costs ($7.5k). So you would have a net profit of $59.5k ($250k-($15k+$7.5k+$186k)). So now you have $59.5k as a down payment on your new dream house that costs $375k. You tripled your down payment from $20k to close to $60.k in 5 years for an actual gain of $39.5k and it had an opportunity cost of $75k since that is how much your dream house appreciated too.

So now you put the $60k down on your $375k house and you end up financing $315k for a monthly payment of $1880 (assuming that interest staed 6% in the past 5 years). Had you bought the house 5 years earlier for $300k with the $20k down payment you'd had to finance only $280k. Your monthly payment would have been $1680 ($200 less than on the new finance) you would have 25 more years to go (instead of the 30 you would if you bought it 5 years later) and you'd owe $260k on a $375k house.

Now go and tell me that buying the $200k starter home in the first pace was a good investment!

Granted I didn't include the $600/month extra you would have had to pay for the past 5 years, so that's another $36k that we'd have to subtract from the equation making the scenario where you buy the $300k house right away less profitable than the math above makes it look like. Or we could just include it in the other scenario as an additional $36k down payment towards the $375k home making your total down payment $96k ($60k profit of sale + $36k savings from lower monthly payments) so you'd end up financing (gasp!) $279k for 30 years. That is the same as the original $280k had you bought the $300k house 5 years earlier.

However, what are the odds that someone who can't afford $1680/month for a house today would have $1880/month for a house 5 years down the road?

Again, a house is NOT an investment! It's a place to live with all its associated cost and benefits.