00:00 The American Dream: Homeownership as an Investment – 36% of Americans believe a home is the greatest investment you can make
Patrick Collins (00:05)
Well, welcome back everyone. This is episode [eight] of the Greenstream podcast. We’re going to be talking about a topic I’m guessing that impacts most of the people or the listeners on a somewhat regular basis. It’s going to be about purchasing a home, primary residence, second home, third home. We’re excited to get into it. The title of the podcast is the American dream, your greatest investment. So we’re really going to get into the economics of it.
So I’m excited to kind of get started. I’m joined by Marcus Schafer. My name is Pat Collins. Marcus is our Director of Growth, I’m the CEO at Greenspring So I thought I’d start out by talking about a Gallup poll I just read that came out in 2024, where it found that 36 % of all Americans believe real estate is the best investment that you can make.
So obviously we’re going to dig into the numbers. We love data. So we’re going to talk about that, but that was the number one investment across this poll. Number two was stocks at 22 % and gold was a close third at 18%. So we’re going to kind of dive into that, but this isn’t just a recent phenomenon. I want to talk, I’m going to kind of bring up a quote from the ancient Proverbs that was thousands of years ago. It said, he is not a full man.
that does not own a piece of land. We have, and this is not recent, for years and decades and millenniums, we are thinking through estate as an investment. this episode, we’re going to talk about real estate as a primary residence and all the different factors that go into that. And then we’re going to follow that up with a second episode to talk about
more of investment real estate, rental properties, apartment buildings, industrial buildings, things like that as an investment. And how do you think about investing in those things? so why don’t we get started? I’m going to kind of kick us off here with a personal story, and then I’m going to turn it over to Marcus, but I bought my house, our family home 15 years ago in 2010. And I said, as we were getting ready for this podcast, I was really thinking about,
what were the economics of the purchase of this house that I made 15 years ago and has it worked out for me or not? what’s, you know, I never really think about it because it’s our home. It’s just a place that we live in. And I think a lot of people think about their house that way. But I will get into all the numbers, but when I started doing the numbers just back of the envelope in my head, I decided, I looked at how much I paid for the house, all the different we’ve done, some additions and some renovations to the house. And I add all that stuff up and compare it.
03:09 Real Estate Economics1 – most of us look at price return because evaluating real returns after costs is hard
to what the value is today, I’ve come to realize over 15 years, I’ve actually lost money in my house. So does that mean it was a bad investment? Probably not. I think we’ve gotten a lot of enjoyment out of it. And we’re going to kind of talk through the purchase and/ or renting of a home and which one makes more sense. There’s an economic discussion, but there’s a, you know, kind of a quality of life part of that that’s harder to quantify.
I’m going to kind of turn it over to Marcus, get his thoughts on this as a recent home buyer and see what his thoughts are on buying a personal residence.
Marcus Schafer (03:18)
Yeah, well, I think to your point, and you kind of talked about that poll, one of the things that makes real estate so appealing as an investment perspective is because the price you pay, you remember that really, really well. Like my guess is you could go back to, I know exactly what I paid in 2010. Nowadays you can kind of see the value of your house because you can see your neighbor’s houses pretty well. So you can see these prices really well.
But one of the real challenges of investing is that’s not it. You got to really pay attention to the cash flows going in and you have to really pay attention to the opportunity costs, which means, hey, if I didn’t spend this amount of money, what else would I have done with that amount of money? And so it takes this very simple, I’m just going to look at the price I paid, the price it’s worth, and you start adding in all these conflicting…
factors and it actually becomes a much more complicated outcome. And I think one of the other things that makes this really difficult is you have to think in terms of real terms. So what that means is you have to take your return and then adjust it for inflation. And that’s something that’s really, really hard to do, especially over the past few years when inflation is kind of really rocketing up is to really think
I’m always looking at my real, not my nominal meaning returns after inflation. And then I got to really do a good job of trying to approximate all the different costs and also the benefits, right? Because if you’re not paying your insurance, if you’re not paying property taxes, you would still have to pay rent. And those are going to kind of be factored in. And I think there’s just this component of
Hey, real estate is two things. It’s kind of an investment in a sense, because you’re building equity and it’s an asset, a house is an asset, but it’s also a consumption. It’s a good, it’s I’m choosing to live in this place. And sometimes the best investments, well, investing and consuming are two different ends of the spectrum. You asked for my perspective as a homeowner. It’s been very helpful for me just to think about
my house as a consumption good. And namely, when I used to live in Winston-Salem, North Carolina, for the type of house I wanted, it was just impossible to rent. So I didn’t have to do any of the analytics we’re going to talk about because I couldn’t get the level of luxury I wanted in the school districts I wanted. It just wasn’t there. wasn’t even an option if you looked and tried despite only being there for three or four years. So maybe let’s just get into some of those factors about rent first buy decisions.
Patrick Collins (05:55)
Yeah, I think, and maybe even stepping back just a little bit even further, looking at what I think it’s a great comment of, we look at it as consumption vehicle or as an investment? We can look at the data on the actual returns of home prices. So, well this has been public record for a long, time. And there’s actually researchers out there that have taken
you know, the sale of homes and put it into a database. And we actually have data that goes back to 1890 on this. So 135 years of data of home price appreciation or depreciation for that matter. And I think what we find is really interesting. The guy who actually has put this data together is a guy named Robert Shiller. He’s a professor at Yale. And he found that real estate prices have averaged
3.05 % per year since 1890. So a positive return on real estate, at least on the price of the home. Interestingly enough, to your point earlier, inflation over that exact same time period averaged 2.63%. So I think what we found, at least with residential real estate, is that has kind of kept pace, maybe slightly outpaced inflation. So that’s at least something
positive as homeowners, you know, if you’re buying a house, I think that’s probably a reasonable expectation to make to say that my house should kind of keep pace with inflation. Now know there’s all sorts of different areas of the, you know, in the markets of, know, whether you were in California or you were in DC or New York, you might’ve had different experiences over some period of time, but when we just average it all out, that’s what we come out with. So I think it’s a good starting point to understand that.
you probably shouldn’t expect a 10 % return on your home that you purchase.
Marcus Schafer (07:48)
Yeah. And if you kind of look at that data over time, right? And by the way, this data, have longer data than we do really have for the stock market. So it is extremely powerful and useful, but it’s almost like you kind of see that roughly 1 % real return pretty consistent decade by decade. And where it really gets crazy is the 90s, 2000s, 2010s, and where we’re at now, where you start to see these bigger outliers and these bigger
increases in price that you just kind of don’t, you haven’t seen historically. And so this kind of begs the question of, this a new normal or is this really an outlier? And what happens if this doesn’t continue? But when I see a 1 % real return and I hear the way we talk about real estate, we say things like stability and that seems about right.
to me on just a risk adjusted return. If I’m saying I don’t think real estate’s that risky, I should expect a low real return.
08:56 Costs of Homeownership – approximately 5% annualized costs from transaction, maintenance, and property
Patrick Collins (08:56)
I think that’s a great observation. So yeah, I think that’s a good foundation to start looking at now this economics of buying your house. we have a few things that we thought were probably worthwhile that you just should go into the equation and the economics of it. So first is that there are buying and selling costs when you purchase a house. So you have closing costs, you have
all sorts of different fees on the front end when you buy a house, then you have selling costs when you go to sell it. So when you’re thinking about it as an investment, those are two costs that a lot of times people don’t think about. It’s like, you I, get, you’re, you’re absolutely right that 15 years ago, I can tell you to probably to the penny what I paid for my house. I do not know what the buying costs were. I do not know what the commissions were and all the other fees that were associated with transfer taxes and the appraisal and all that kind of stuff. So.
That is a factor. Most of the stuff I’ve seen is 2 to 3 % of the cost of the home value will probably go to buying costs. And it’s like 6 % to 8 % or so when you sell a house. So that’s one factor I think you want to think about when you’re just doing the estimates of, this a really good investment for me? A few other things that kind of go into the equation is just the ongoing costs of maintaining a home.
Um, you know, there’s, you know, there can be years, I don’t know about you, but there can be years where I have very little costs associated with my house from a maintenance or repair standpoint. Uh, but two years ago, I think in the, in the same year I had to replace my, all my windows and my roof. And so when you average it out though, you’re looking at somewhere between most estimates say 1 % to 4 % of the value of your house is going towards, you know, repairs and maintenance. Um, so that could be.
you know, your lawn care and that could be, you know, you just have to have the plumber come out and fix something that went wrong on you, you know, with your, with your toilet or whatever it may be. But, you know, if you own a million dollar house, you’re looking at $10 to $40,000 of expenses per year, just associated with keeping the house, you know, up to date.
Marcus Schafer (11:07)
Yeah. you know, markets are efficient. So the last house we owned, it was a much newer house and we didn’t have anything really go wrong, which I wouldn’t expect on a house that was three years old when we bought it. It was more expensive than all the other houses in the area. it’s kind of prices are a really good job of approximating value. And, you know, I think about that decision you just lined up there around
buying costs, selling costs. There’s been a lot of news around how real estate agents get a commission on the buy side and maybe that’s not the right way to do it. You mentioned we just bought a house and it’s still that way and why is it still that way? That’s probably a whole other conversation, but just because the rule has changed, it still takes a little bit for this to filter in. But you think about that 10%.
fee if you were to buy and sell. And again, if you’re selling, you’re probably buying again. So you have to think about these kind of round trips. And then that really gets into your length of time that you plan on staying somewhere, which is one of these key factors for a lot of these decisions.
Patrick Collins (12:18)
Yeah, great comment there. Obviously the shorter your timeframe, the more that 10 % of costs of buying and selling really does degrade your returns that you would have or appreciation. So last couple of things is taxes. Obviously when we own a home, I think every state has real estate taxes associated with that. And that can range anywhere from a half a percent to over 2 % of the value of the house. I think
When you think about all of these costs, you know, you have taxes, have insurance, you have repairs, you have maintenance. You know, when we add it up, you know, it’s probably a few percent to maybe 5 % or 6 % of the value of the house. So that kind of gives you the idea of like, well, if we have appreciation, it’s probably being kind of counteracted by some of the costs associated with the value of the house. then, and then the third kind of the last thing that it’s probably worth mentioning.
is around the ability to finance a house. Most investments do not allow for 90 to 100 % financing. Nobody says, hey, I could go buy a million dollars of stock and I don’t have to pay anything for it because I’m gonna get a low interest loan to go finance the purchase of these stocks. Real estate, for a number of reasons, again, we probably don’t need to get into all of them, does have some favorable treatment in different areas, whether it be tax or financing.
And again, with financing, think part of that is it’s viewed and has been a fairly stable asset. So it’s easier to finance something that’s very stable. But I think that’s a factor to think about is that the ability to finance is there with real estate that isn’t with other assets.
13:56 The Benefits of Homeownership – leverage, well-being, and an inflation hedge
Marcus Schafer (13:56)
Yeah, it’s one of those few assets that provides leverage for most investors. And now when we start to add up all these costs, you can kind of see how, oh, we’re really only getting a 1 % real return on expectation. Again, risk adjusted, I actually think that’s a fine outcome, especially when you consider all the amazing consumption style benefits from owning a home.
Psychologically, you feel safer, you feel more secure, stability. Oftentimes that’s settling in, kind of establishing roots, right? There are a ton and when you look at the research, we’ve identified a ton of different benefits to owning. It’s just, it’s not clear that we can connect those to investment benefits as much as well-being benefits as maybe a
A fair way to put it.
Patrick Collins (14:54)
Yep, I agree. I think we were, as we were talking about some of the benefits of owning a home, I think personally, and I think many would say one of the main benefits is just this sense of community and belonging that when you live in a neighborhood with other homeowners, obviously that can still happen with renters. Renters maybe tend to be a little more transient, homeowners maybe tend to be a little bit more sticky in their homes. And you tend to…
do you see this feeling of belonging in neighborhoods and communities? And I think that is a really hard thing to quantify from a dollar standpoint. What’s that worth? Well, for a lot of people, that’s worth a lot of money, or at least has a tremendous amount of value that they would assign to it. The other thing too, when you own a home that is worth considering if you’re kind of in that mode of should I own or should I rent or whatnot is there is an inflation hedge kind of built-in to some degree when you
buy a home. if I’m renting, I might spend, let’s just say $5,000 a month on rent. Well, when my lease is up next year, there’s a good chance that the landlord’s gonna say, my costs are up, I’m going to increase the rent on you. So I have to realize that as a renter, I’m gonna bear a lot of inflation risk. If inflation keeps going up, my rent’s gonna keep going up. Whereas if I’m a homeowner,
and I take a loan out to buy my house, that loan, just say, assuming I buy a 30 year fixed mortgage, that mortgage cost is not going up every year. It is actually gonna be the same. So I do get some predictability in my cashflow to the extent that my, at least my mortgage stays flat. Obviously there’s some risk in the standpoint of, well, like in my case, the roof needs to be replaced or the windows, or there’s a major damage to the house that’s not covered. So there are some unpredictable events that you have to be mindful of, but
the ongoing monthly expenses tend to be a little bit more predictable year over year with a house than it would be for rent.
Marcus Schafer (16:44)
Yeah, and honestly, I know our policymakers sometimes don’t get a lot of credit, but if you compare a lot of the policies we’ve set up in America compared to outside the US, we do seem to have some really nice structures that enable certain things in the US. We can talk about tax advantages. The big one you mentioned is the financing. Outside the US, it’s very common for interest rates.
They don’t have 30 year fixed. Those aren’t as common. They have more adjustable rate where, every five years, your interest rates going to adjust whether or not you select it. Like you don’t have another option. And if you think about that type of unpredictability in terms of a housing choice, that makes that decision much harder to make because you say, well, hey, if I bought a house in 2020, think about how expensive rates have changed now. All of a sudden you’re
mortgage would jump up in price. So, and I know we’ll kind of talk about some of the different financing options available, but this is maybe a case where I would say that the U.S. is a leader in enabling some of this and just the way that we’ve set up our financial infrastructure to support Americans kind of actually having this capability.
Patrick Collins (18:01)
Yeah, and many people kind of cite home ownership, obviously, as the American dream, but also just as the primary way of building wealth for many Americans is through their home. Now, we might, as investment professionals, say, well, gosh, there was a lot better ways for them to build wealth that had higher returns or whatnot. But for an average person who needs to take the discipline every month of paying their mortgage,
Marcus Schafer (18:10)
Mm-hmm.
Patrick Collins (18:28)
that mortgage cost is coming down, you know that you’re probably over time gonna have price appreciation on your home, even if it’s just keeping up with inflation. But you do that for a long period of time, just through the act of living in your home, all of a sudden, you look back and say, wow, it’s turned into a really, I have a lot of equity in the house now. And I can’t tell you how many clients and other people I’ve known have said, my house has been my best investment. I bought my house in 1972 for $60,000 and it’s now worth $500,000.
And it’s funny, you you hear that and I always kind of, know, maybe the, cynic inside me kind of wants to say, did you have, know, math on that, do you know exactly what your returns were? Cause you also had expenses during that, but still at that point, if you look at it and say, yes, they have, you know, a half a million dollars of equity in something that they probably wouldn’t have if they hadn’t, if they’d been renting that whole time.
Marcus Schafer (19:19)
Yep, and
Having an asset when you go into retirement, that’s worth that much, provides a ton of flexibility. Is there anything else you kind of want to talk about before we kind of maybe go through the life cycle of some of these decisions? Because I think we could dive into different components a little bit more.
19:36 Buying a Home – funding down payments, not so changing transaction costs, and how much house you can afford
Patrick Collins (19:36)
I think we’re in a good spot. I think we talked high level about how we think about buying a home and some of the benefits of it, obviously, and the financial, the history and the data behind home prices. I think it would be really helpful to get into the tactical items of when you are buying a first or a second or a third home, all the decision points that have to come into play.
and maybe some of the tactics that we’ve kind of advised clients on, I think would be helpful. why don’t we start on that, maybe talk about this idea of the down payment. What are your thoughts there on how do you structure a down payment? What are the things that people should be thinking about?
Marcus Schafer (20:14)
Yeah, I think there’s ⁓ this is one of the components of investing and, why do we invest? Well, we’re forgoing something today to have more of something in the future, power of compounding, the eighth wonder of the world. So I could do more in the future. Right? So first thing about down payment, I think about just, why don’t you start investing? You don’t know exactly what you’re going to spend that money on, but you have to start investing.
Here’s where I think it gets really challenging. When you’re very early on in your career, if we think about your first house, there’s a lot of different decision points. And this is why think financial advice should not be a cookie cutter kind of rule of thumb, because you hear a lot of people and they say, hey, the first thing you should do is max out your retirement accounts at the age of 22. But that means you’ll have less to save in your taxable account.
And you might not be able to save for a house. So I think it’s getting the right split for you between taxable after tax. And then a lot of times you’ll also hear these comments around asset allocation, right? Well, you’re going to buy a house. You want to not take that much risk. And I just think that’s something that you really have to have to revisit because if you’re not taking that much risk as you save up to buy a house, I think that’s limiting when you look at the odds of success.
Patrick Collins (21:36)
Yeah, I think one of the things that I’ve seen with our clients over time, especially I’m thinking more when they’re either trading up homes or they’re more likely buying a second or even third home sometimes, is this concept of the down payment. They may have a lot of cash flow, so they say, know, we’re good to be able to cover the mortgage, but…
how do we come up with a down payment, especially if they have been maybe diligent about savings, they might look and say, I don’t have $100,000, $200,000 of cash sitting around, but I do have investments. Maybe I have been maxing out my retirement plans. So I think that’s an important thing to think about is if you do think that you’re gonna be buying a home over the next two, three, four, five years, there does need to be some planning around how are gonna finance the down payment and not just
Marcus Schafer (22:09)
Yeah.
Patrick Collins (22:24)
oh, we have some money sitting aside in a brokerage account that we’ve invested, but then you have to start thinking about taxes. know, okay, well, I liquidate this one or $200,000, all of a sudden, maybe I have a $30,000 tax bill because I didn’t realize that there’s all these gains associated with it. So there’s some planning that should go into not just, you know, a month or two before you are going to settlement, but years before around how am I structuring things from a cashflow perspective to be able to handle this.
Marcus Schafer (22:52)
Yes, and
its probably true all the time. You go into a house and say, well, it just depends. You say, hey, I think I’m going to buy a house. For us, we had almost given up our search and, hey, we’ll just wait for spring. Boom, found the right house and, hey, you got to close in 20, 22 days. So a lot of this stuff happens quicker than you might recognize. But yeah, I would just say this is where building up a substantial amount in a taxable account.
And then gradually thinking about as it becomes more likely to, for you to purchase, making sure you’re getting the money in a liquid spot while still not putting it maybe in a checking account where it’s going to be earning 0.1%. When right now in 2025, you can get close to risk-free rates at 4%. If you take a little bit more risk, you get 5%. Right. That’s pretty meaningful when we’re talking about.
hundreds of thousands of dollars that might be saved up for a down payment.
Patrick Collins (23:55)
Yeah, it’s great. There’s been some rules that have come out for realtors. I know you’ve kind of been early on here, you obviously have been recently purchased a home. You want to talk a little bit about those? what’s going on in that space and how should investors or clients or just people buying a home, how should they be thinking about interacting and working with a realtor?
Marcus Schafer (24:20)
Yeah, what happened was a lot of real estate, the way it was structured is the seller would pay a percentage to the buyer’s real estate agent. And it was structured in that way because most buyers might not have that much capital to come up with. So if you say,
Hey, you need to pay 3 % on a half a million dollar house. That’s actually a lot of extra cash and capital that you need. So it was kind of structured this way. Now me, I find that wild because in almost no other case, can I ever imagine that the person representing me makes more money the more money I spend, right? Like I think the more, the less money I spend, they should do a little bit better. So it was this weird,
Conflict this got challenged legally and one of the things that’s happening is you can kind of have the option to have your own Setup, and I won’t get into the details, but from my understanding Realtors don’t really like that. So It doesn’t seem to change but I would say that especially for people that are Buying and selling and trying to do that at the same time. I think that gives you much more negotiating power
Patrick Collins (25:22)
Sure, Yeah.
Marcus Schafer (25:34)
to really say, go to a realtor, hey, I’m selling and I’m buying and I don’t want to pay full price on both of those. I want the fact that you’re going to be making twice as much money to be reflected in the price that is paid.
Patrick Collins (25:47)
Yeah, great. So one of things I think we also want to talk about is just how much house should you buy? Are there some rules of thumb? And to your point, I think we’re always really skeptical about rules of thumb because every person is so unique. So I think you have to be careful there. But I will say, I’ll make a few comments about buying a house or like I said, or a second home. I think the first thing you want to look at is
What are your debt payments going to look like as a percentage of your income? And so obviously the house, your home mortgage or mortgages should be a factor in that. But you’d also want to consider your car payments, your credit card debt, your other types of debt service. Because what happens is, as your debt service grows, there’s a few other areas that your income is going to. Taxes is one. You don’t have a ton of control over how much taxes you pay.
Once you have debt, you’re basically going to be beholden to pay that every single month. And what happens is it crowds out one of two areas basically. It crowds out spending or savings. So that means the more house you own, the more debt that you have, it’s going to crowd out your spending, meaning that, gosh, we’re kind of house poor now, as people would say, and we can’t go out to dinners or we can’t do the trips that we wanna do, or you keep doing that stuff.
and you have very little room to save any money for the future. You’re consuming everything in the present. So I think it’s important to think through those factors. Is this going to start to crowd out either my day-to-day lifestyle of spending, which maybe is partly something I really enjoy. I like going out to lunches or dinners or things like that. Do I like that more?
Than having the ability to live in a bigger house, for example. So I think that’s something to think about. And obviously the other side of that is if I buy a really large home and a lot of my income is gonna go towards essentially maintaining that home, how much do I have to save now? And is that going to impact some of my longer-term goals like sending my kids to college or retiring and becoming financially independent?
And again, there is not a right answer for this. That’s why it’s not cookie cutter. I have talked to some clients who say, I am more than willing to forgo financial independence to enjoy my life today. And that’s not a wrong answer. I think when it gets to extremes is where it gets to be really challenging, where it’s every dollar that we have is going to purchase these homes and we have very little left to do anything with. That’s a problem, I would say.
And the other side of it I’ve seen as well, which is people are so focused on savings that they do not really enjoy what they have and they are living in a house or in a situation where it’s so limiting. So I think at the extremes I’ve found that there’d be some problems, but most people need to kind of think through those decisions when they’re thinking about how big of a house to buy. And I have one other comment on that, but anything, any thoughts on that?
Marcus Schafer (28:43)
Well, just, also, there’s two ways to think about houses. I’m going to live in the same house. I’m going to buy it when I’m 30 and I’m going to live until I’m 90 in the same house. I guess I take a slightly separate approach, probably because I’ve moved so much. It just seems very natural where a lot of what we’re thinking about is what’s, how nice of a house do we want at what stage of our life?
And that’s like an ongoing decision that we’re making. Well when our kids are young and they’re really excited to be at home with us, we want to have a very nice house because we’re going to be spending a lot of time in our house. And I think as we get older and the kids move out, the game plan now is we don’t need as nice of a house down the road because we’re not going to be spending
too much time. I remember my aunt used to, she lives in Prescott, Arizona. It’s a big, you leave California when you retire and you kind of move to the low cost mountains of Arizona. And there’s the biggest house in their neighborhood. She’s like, it’s bought and sold every two years from people moving, buying five bedrooms, thinking, the grandkids are going to come all the time. No, it’s an eight hour drive. Pretty inconvenient for people to come every week.
or every month or every quarter. So people buy too much house and they don’t stay in it. So I think a lot about that decision too, where it’s, we do spend a lot of time at home right now because we have young kids. And so we just want to make sure that we’re, if the nicest house we ever have, think we’ll have it right now, but who knows.
Patrick Collins (30:28)
Yeah, that’s a great thought. And I think for a lot of people that is a motivator. I’ve seen that for second homes quite a bit where families, it’s not really about the house. It’s about the family and the belonging and the community that that house gives them, which is we’re buying a beach house. We know everybody’s going to come visit us if we have a beach house. And so we have this home that allows the family to come back together. again, that’s hard to put a price on that.
30:53 Concentration in Real Estate – understanding risks of real estate concentration on your personal balance sheet
One last thing I just want to talk about on the home purchase that I think is worth thinking about is I talked about debt to income ratios, just understanding what it is and making sure it doesn’t crowd out other areas. But there’s also another ratio that I like to look at when we’re talking to a client about it, which is what percentage of your total assets are in real estate, residential real estate? And if it’s a really, really large number,
because you own two or three homes and you have some land and you have the one of the problems with that is A) the cost of keeping that up and B) what we went back to before which is a Very fairly small real return you’re gonna get off of that real estate. So it’s just not super optimal when you’re thinking about growing and building your wealth
to have everything or a vast majority of your money in real estate. There is just so many probably better returning options that you would have than having so much in real estate. I usually kind of use that as another ratio to look at their balance sheet and say, let’s take a look at all your assets. What percentage of them are in real estate? And if it’s a lot, if it’s 50, 60, 70, 80 % of your assets or more,
or in real estate, especially as you get older. I think it’s one thing when you’re younger and you haven’t really built up a lot of liquid assets yet, financial assets. Yes, you could buy a house and that’s by far your largest asset, but when you get into your 50s and 60s and the vast majority of your assets are still real estate, it’s challenging. You’re basically probably gonna have to start liquidating at some point for you to at least have a reasonable opportunity to retire.
Marcus Schafer (32:27)
Yeah. And you, you also think about concentration. What we know from the literature is people tend to invest in things that they know really well. And one of those components is geographical knowledge. So when you own multiple properties, you tend to be highly, it’s not like you some, house in Nebraska and you own a townhouse in New York and you’re kind of hedging and diversifying across.
two kind of potentially non perfectly correlated assets. It tends to be, I own three places and they are all concentrated in these areas. And so it might even be more concentration than you think. Just what happens if something bad happens to that area?
33:13 Financing Your Purchase in 2025 – attention to detail in tax-efficiently turning appreciated investments into cash is important
Patrick Collins (33:13)
Yeah, yeah, for sure. The one of the other things I think we want to talk about maybe tell a quick story on is is the actual financing of your house, especially as you get wealthier and you know, you have different options available to you. Does it make sense to borrow a few years ago? I think most people were borrowing to buy their house, you know, they were buying houses and getting mortgages at 3%.
Now when mortgage rates are more than double that, you tend to hear about more and more people buying houses for cash, literally writing a check for the purchase of their home. And so I think that’s a factor. One of those factors is just really kind of measuring what’s the true cost to borrow compared to what maybe what I’m earning on those investments. I have money sitting around in cash that’s earning 4 % and I’m going to pay a buy a house that and forego a mortgage at six and a half. There could be some, you know,
absolute reasons why you would want to do that. But again, there’s some nuances when you start thinking about that. I know you kind of know the story, but maybe you want to tell a little bit about an advisor here that helped somebody navigate through that process of thinking through how am going to put this down payment down on a house or buy the house outright.
Marcus Schafer (34:28)
Yeah, it’s trying to think about those trade-offs and how to also evaluate how accessible is that liquidity, right? Because you might have assets earning a 7 % return, but if you have to realize a lot of taxes to get back, to exit those investments, to get the cash, right? 7 % return, mortgage rates, by the way, are pushed
past 7 % right now. So you kind of look at that and you say, this is more certain. I might as well do this, but you got to recognize a lot of taxes in order to get there. And this is where just the nuance of portfolio management comes into play where you can look at and say, well, let me, I know all of my accounts have gains, but let me go at the very specific lot level. like when a dividend’s paid,
Right. And you automatically reinvest that that’s a different lot that has a cost basis, meaning the price you pay. Some of that stuff might be at losses. And so if you go and you can find a way to tinker with these methodologies and it’s pretty time consuming, but you can figure out, at the very lot level specific, how can I, sell to be most effective? And then you think from a portfolio management perspective, if I am going to sell, let me sell things I would want to sell.
anyways. So let me think about how to most tax efficiently get liquidity from the portfolio. Let me think about the most efficient way to use this as an opportunity to rebalance my portfolio. And if you can kind of manage that and somebody here at Greenspring was able to turn a taxable gain into a taxable loss to offset something that helped them reposition the portfolio even better. So it just goes to show that there’s so many different levels.
that you have to be looking at. And this is, think what’s really, really actually hard about finance and managing assets is there’s kind of always a next level of depth and it’s just continuous. You every single day you’re kind of presented with options and you got to find the one that’s going to help move you towards your end goal in the best way possible.
Patrick Collins (36:35)
Yeah, I think it’s a great illustration of how attention to detail to things that most people probably wouldn’t think about could just save thousands and thousands of dollars during this process. And I think a good advisor really helps think through a lot of those really detailed type of orientation type things. So another detail thing that I never even thought about and you mentioned it to me was what to do after you move in.
with now the advent of the web has got so many different tools that people can kind of see exactly what’s inside your house right now when they go to Xero and Redfin and all these other places. So maybe mention a little bit what you did to me, what you mentioned to me about how you kind of protected yourself through that because I thought was really, really, really smart.
37:18 Protecting Your Privacy in Real Estate – real estate is public, so how can you protect your privacy?
Marcus Schafer (37:18)
Yeah, and I think most people, you’re listening to this, you probably want to grow your money, but you don’t want people to know that you’re growing your money. one of the things when you buy a house, Zillow, they got the pictures, right? Real estate agents are marketing this to the people that are selling, right? Obviously you looked at pictures to do it, to feel comfortable to get the two or to buy it. But you can actually go in and claim these houses and then hide the pictures after the fact.
And you could go in and adjust, you know, is it five bedrooms? Maybe I don’t want to display that fact Maybe I want to kind of remove this. And to me, it’s just a way of being, taking something that’s public knowledge of which real estate transactions are public knowledge and just insulating yourself a little bit. Some people also, this might be a little conspiratory, have a theory that
Tax assessors are just going on Redfin, right? I don’t have to drive by the neighborhood anymore. I can just go to Google Street and look at that. And if I could see inside your house, that gives me a little bit more knowledge about the quality of the house. So I don’t know about that, but the idea of somebody looking in at my house when I don’t invite them, that just feels very, very weird to me. I’m just weird that way.
Patrick Collins (38:42)
No, think it’s, now that you’ve mentioned it, I’m gonna go onto these sites and do the same thing with mine, because I honestly didn’t think that was even available. So I thought, think it was a great tip for people. A few other kind of tactical things that we wanted to make sure we touched on. One was just refinancing decisions. What’s the decision on when to refinance, if you’re gonna refinance? I’m sure people buying houses today,
39:08 Refinancing Decisions – you can’t predict changes in future interest rates, so don’t count on it.
at 7 % mortgages are hopeful that rates will fall at some point and they’ll be able to refinance at a lower rate. But maybe talk a little bit about that. is your theory and thought? And it’s funny because I’ve heard people say maybe some people’s greatest assets today are actually their mortgages that they got a few years ago at 2.5 or 3%, whereas obviously today I would look at that as more of a liability to have a mortgage at 7%.
but maybe talk through what are your thoughts around refinancing decisions?
Marcus Schafer (39:40)
Yeah, I think this is just one of the dangers about investing is you’re kind of, well, it’s not a danger. It’s a good thing, too. You’re cautiously optimistic about the future. So what mortgage rates are based off of tends to be based on commonly held risk-free rates, so US bonds. And then there’s some sort of premium above those US bonds. That’s happened.
That premium does change over time. So that could be one factor where, hey, for some reason or another market is demanding less of a premium that could present an opportunity for you to refinance that changes over time. Very kind of, I think, difficult to predict that. And then the other thing that’s changing is kind of the risk-free rate, the yield curve. And this is where I think a lot of people will hear comments like,
well, we think rates will drop. When you look at the research around the ability to predict future changes in interest rates, it’s pretty clear that the best approximation of tomorrow’s interest rate is today’s interest rate. And so you have, it’s actually like, we probably shouldn’t expect yield curves to change in the future. We hope that they do and they do.
But if you go back in time and you say, hey, what’s the average US treasury rate? It’s actually about what it is now. So that tells me that you hope there’s an opportunity, you monitor all the time for an opportunity. And if that opportunity presents itself, you should try and seize that moment right then and there. So that means, constant monitoring.
And then you’re kind of looking at what’s the cost of doing that refinance versus the benefit both in lower monthly payments and then how much as a result of that lower monthly payment, you’re probably paying more in principle and less in interest. You’re kind of doing the calculation. And then as you know, there’s kind of this inverse benefit where,
your interest you pay might have some tax benefits to you depending on your tax rate and if you’re taking the standard deduction or not. So then you kind of also have to flip it and take that into account. So it’s possible. It’s just one of those things that I actually, I think it’s better for me going forwards as a consumption item to say, I’m not sure I should expect this to happen. Now, when it does, I want to be monitoring it so I can jump on it.
But as an expectation, it also helps me make sure that we didn’t buy too much of a house. Because if you buy a house and you’re counting on interest rates to drop, to feel more comfortable financially, I think that’s a good sign that maybe you’re over-reaching.
39:08 Refinancing Decisions – you can’t predict changes in future interest rates, so don’t count on it.
Patrick Collins (42:35)
Yeah, yeah, absolutely. I think that’s a great way to look at it. We had a few other things kind of talk about what, know, this is probably more for the people that already own homes. Does it make sense to remodel? Probably many people have seen the stats of, you remodel a kitchen, you get like 90 % of the value out of it. If you remodel a master bath, it’s maybe a little less.
I’ve seen those, honestly, I think most of my clients that we’ve talked to rarely think about that as a major decision kind of point to say, how much exactly am I going to get out of this if I sell the house? I’m sure it’s part of the equation. But in my mind, this kind of goes back to the consumption versus investment decision. And I think if you’re going to remodel your house, you’re going to make changes to it.
it should be thought of almost entirely as a consumption expense, not as an investment in the house. I’m sure there’s going to be some level of it. It’s not a good investment. Let’s put it that way. If I do the math and say, I’m going to redo my kitchen for $100,000, it’s probably not going to increase the value by that $100,000. And even if it did, that’s still a 0 % return on my investment. It’s not great. I think as long as you think about it the right way, it’s not a bad thing.
It’s, you know, this is a consumption expense. Is this something that we’re really going to enjoy that we, you know, that we want to do for our family or whatnot. And you just factor that into your budget.
Marcus Schafer (44:01)
Yeah. And that stat right there where remodeling or adding addition isn’t as, tends to be a negative return on investment. To me, that reinforces the fact that housing should not be viewed as an investment because from an intuition perspective, if increasing the, if you expect house prices to do say 5 % a year, it makes sense to me, hey, if I add a bedroom,
to my house, oh, I could get 5 % off of that. And if I don’t, then that gives me some caution around, is this really, should this be viewed as an investment?
44:43 Trading Homes – how to manage the timing mismatch of selling and buying in the most efficient way
Patrick Collins (44:44)
Yeah, yeah. There’s a few other points that we wanna touch on. This next one actually comes up quite a bit as people kind of progress in their wealth building and their age. And what you tend to see is people will trade houses. I’m gonna move from this house to this next house, or I’m gonna buy a second home as they grow their wealth and whatnot. And there’s a question of timing a lot of times of…
I’m selling my home. need the equity in my home to transition to this new home to make it more affordable, but I’m not going to have it because, you know, there’s the timing of it. Isn’t going to match up. I’m not going to close on my, my, my current home before I buy my second home. So I have this window. Maybe it’s a month, maybe it’s three months that I’m not going to have the cash to put down for my, my sale, but I still need to buy this new house. And so.
You know, there’s obviously things that you can think through. Oftentimes you’d need at least something to put down for a down payment in the new house. But a few things that I’d say we’ve helped clients with to consider as you’re kind of going through that. you know, one would be the ability to just to borrow because obviously one thing you could do is just sell your price, sell your stock. Let’s say if you have a stock portfolio, well, I’ll sell my stock portfolio.
I’ll use it to put down money on this new house. And then when I sell my old house, I’ll replenish the stock portfolio. So it makes sense in theory. The problem is, is the transaction costs of doing that, the taxes associated with doing that could be substantial. So if I need $250,000 and I sell my stock, $250,000 of stocks, you know, maybe that costs me $50,000 in taxes just to get liquidity for three months. Not a great deal. So
What we found is a lot of the, you know, the brokerage firms that we work with, with our clients, we’ll do securities based lending where you could borrow off that portfolio, use that to put the down payment down, and then you can pay that loan off once the other house sells. Well, why would you do that? Well, the downside is you pay a little bit of interest, but you’re not actually selling securities. You’re not going to realize the tax. So how do you make that decision? Well, you look at the interest that you would have paid compared to the taxes you would pay.
And whichever is greater is usually the one you want to think through and probably use. So that’s one thing for people to think about if they have this transition. The second thing that I would say we’ve used from time to time, especially when the window is very short, is using assets inside of their IRA. Typically that would be a no-no because you take your money out of your IRA, it’s going to be fully taxable to you. The IRS has a rule, they call it a 60-day rule.
where if you take money out of your IRA, as long as you put it back in within 60 days, it’s not taxable. And so that is a strategy that can be used, especially when you have a short window. I know I’m gonna have these proceeds coming in. I can take the money out of my IRA and replace them very quickly when the house sells. There is, we like to be, we caution to be really, really careful about this because if you do it and for some reason that the closing on your old house is delayed, you don’t get the money in time,
you don’t get the money back in 60 days. It is a taxable event and it’s ordinary income and penalties if you’re under 59 and a half. And so it can be half probably the value of that distribution. So if you took out $250,000 and you don’t get that money back in by day 60, you’re looking at probably taxes and penalties of $125,000. So that is kind of, I look at that as kind of a last resort, but there are creative ways when you have other assets to think through.
How do we do this in the most efficient way? And we typically, the way we do it is we’re gonna look at all the options, and this is how I think investors and people buying houses should look at this. What are all the options available to us? What causes the least amount of cost to the client? And that’s probably the one we wanna look at. And then obviously there’s a risk factor, like I mentioned on the IRA thing that you wanna consider as well.
Marcus Schafer (48:40)
Or, you know, cost, explicit cost, but also stress cost because buying and selling houses is already stressful enough. so I think that’s something to really, really consider as well as, that’s 60 day. That adds a lot of stress. And do you even need more when you’re kind of going through, going through a bunch of this at the, at the same time, but that kind of gets into.
over the course of your life, kind of build up and at the end of the day, a house is an asset and it provides a lot of opportunities to do things with that asset. So Pat, maybe just talk about other ways you can leverage your asset when you need to and what we’ve seen be helpful.
Patrick Collins (49:29)
Yeah, think, gosh, probably, I don’t know exactly. I want to say maybe the last 20ish years or so, there’s been new products that have come out there. We haven’t had a lot of clients explore this, but one of the ways obviously is something called a reverse mortgage, where, we could probably have a whole episode on this, but basically where you can take the equity in your house and take it out either all at once or over time to help.
supplement your lifestyle. And then ultimately when you sell the house or at your passing, that mortgage is satisfied by the sale of the proceeds of the house. So, you know, I think someone that who would be most likely to kind of look at something like that would be someone who doesn’t have a lot of outside assets outside their house would be a consideration. Obviously the other way you can do it is you could just literally borrow off your house. You can take a mortgage off of it to use to help with consumption towards the end of your life. But that’s
That’s one. I think the other part would be, you know, when people age, one of the things that you tend to see is, you know, a potential desire to downsize a bit as they get older and a house that has, you know, a lot of equity and a lot of value in it allows you to potentially downsize, not have a mortgage anymore. Maybe I’m going from a $2 million house to a $500,000 house. And that’s just part of my plan is.
I’m going to be debt free. I’m also going to put some money away inside of, my savings accounts, my investment accounts, whatever that looks like. so I think that’s one thing to consider. A lot of our clients also use that as a mechanism to fund long-term care expenses that could come up. So a lot of these continuing care communities, you know, they have really large down payments to get into these facilities. So it could be assisted living or independent living, or even skilled nursing care.
but they might have two, three, four, $500,000 deposits required to get in. And so a lot of times people will think about selling their homes or when they sell their home to use that as proceeds because the reality is is that if I’m moving to a assisted living facility, I no longer need my house. It’s just gonna be sitting there. It’s probably a good asset to use. So you see that happen quite a bit as well as kind of more as people age.
It’s just a strategy to kind of move into one of those facilities.
Marcus Schafer (51:49)
Yeah, it is one of the, think the benefits of owning a house is it kind of forces saving. And although the real return might be really low, you’re forcing and gradually building up this asset. And then the key is, at some point in time, you might have to leverage that asset. And it’s really, really hard to switch from an accumulation mindset to all of sudden, hey, I have to start whittling down.
52:11 Leveraging Home Equity in Retirement – reverse mortgages, downsizing, and funding long term care
on the things that I’ve built, but that’s a natural point. You might have to whittle down on the things that you’ve built over time. And then maybe the last consideration is kind of building off that, building off that theme, but what are some estate planning considerations for houses as they tend to be one of the big pieces of somebody’s estate, one of the big assets.
Patrick Collins (52:42)
Yeah, there’s probably a few things to think through here. One is just the titling of the house, who should own it basically to make things efficient from a state planning standpoint. So typically we see joint owners on a house if it’s a husband and wife. You tend to see the spouses own the house jointly. if a husband passed away, wife just automatically is now the new owner in the house. So I think that’s fairly typical.
Every once in a you’ll start to hear, we get questions from the children of our adult children of clients and they’re asking, I put myself on the deed? That’s typically not a strategy we recommend for a number of reasons, but there’s risks associated that when you own a house and it’s not really yours, there’s also gifting considerations. It’s really considered a gift when somebody puts your name on a house, even if it has a joint owner.
So that’s something that you really want to talk to your tax and estate planning advisors on. The last thing I would say, and this is one that we tend to see a lot, is clients that have properties in multiple states. So I own a home in the state of Maryland where we’re at, and I also have a second home in South Carolina or in Florida or out west somewhere. And one of the considerations to think about from an estate standpoint is,
When I own property in multiple state jurisdictions and I pass away, my heirs are going to have to go through probate, meaning that’s the process of validating the will, making sure the assets kind of get to the right person, but that’s done at the state level. So I now have to go to probate in Maryland. I have to go to probate in South Carolina. That means I’m most likely I’m hiring an attorney in Maryland, hiring an attorney in South Carolina. If it’s even more states, we have clients that might have three or four states that they own property in.
it gets really unwieldy for the beneficiaries. So how do you get around that? Typically, most attorneys will recommend a living trust or revocable trust is something you’ll hear. And so instead of Pat Collins owning the asset, it’s the revocable trust of Pat Collins owning the asset. And basically that trust will dictate what happens to it when I pass. And that avoids probate in each of the states because the trust basically
Marcus Schafer (54:43)
Mm-hmm.
Patrick Collins (54:54)
owns the asset versus me individually. And so it doesn’t go through that probate process. So I would encourage you if you have multiple properties or you’re going to get ready to buy your second property, it’s probably a good time to revisit your estate plan and talk to an attorney about potentially drafting a trust to have that that the trust in the asset.
55:28 Estate Planning Considerations for Homeowners – avoiding probate and premature gifting
Marcus Schafer (55:13)
Yeah, and again, house is a very personal decision and that oftentimes means there might be legacy love for the house and multiple kids, hey, we want to think about doing X, Y, and Z with this property. And that’s just a good opportunity to make sure that your wishes are conveyed and everybody’s taken into account. Whether or not they like it or not, at least you have a plan and sometimes.
a plan is better than none.
Patrick Collins (55:42)
Absolutely. So, maybe we can wrap up with a few closing thoughts on this. Again, I think this episode was all around buying and selling your primary residences or second homes, but personal residences. We’re gonna move into more of the investment side of it next. But I guess the thing that I took away from this conversation was that a personal residence really shouldn’t be thought of purely as an investment.
There is a consumption element to it that we talked about several times. And if I start thinking about it as an investment, I probably would never buy it. A diversified mix of stocks is probably gonna outperform my real estate in any 10, 20 year period that you look at. But there’s other benefits I get from real estate. We talked about that, that belonging neighborhood community, the sense of kind
hedging inflation, the predictability of a mortgage. All those things are really positives when you’re thinking about buying a personal residence. So that’s kind what I took away mainly from the conversation.
Marcus Schafer (56:41)
Yeah, you look at the returns going back to the 1800s and that’s 1 % over inflation and maybe it’s changed a little bit more recent, but again, that’s a nice moment to pause. For me, bucketing is one of most effective, mental bucketing. It’s, my house, I’m going to go out there from a family decision. If we don’t want to rent, we’re going to go buy a house, but it’s really that mentality. What are we getting from that?
and I separate the investment consideration, anything we get cherry on top. But if I don’t have these huge expectations, I think that’s probably appropriate given all the lessons from history that we have. So with that, Pat, I’ll see you for talking about real estate in a way that maybe might make a little more sense from an investment perspective.
Patrick Collins (57:34)
Great, great being with you, thanks.
Marcus Schafer (57:36)
All right.
Sources:
1 Gallup poll – https://news.gallup.com/poll/645107/stocks-gold-down-americans-best-investment-ratings.aspx
2 Shiller real estate data – https://papers.ssrn.com/sol3/papers.cfm?abstract_id=291281