Someone buying a $1.5m condo only has to put up $300k for the mortgage, so it's not correct to say that the alternative is to just put $1.5m into the stock market: the buyer often doesn't have that much.

Also, it's more precise to use the S&P dividend yield (2%) or 10-year Treasury yield (2.4%) to gauge how much someone with $1.5m could spend in rent, assuming they put all their interest into rent. They'd be renting something at more like $3k/month.

Now take the fact that home prices are, at the higher end, about 25x the yearly rent of the same place. So this person with $1.5m is essentially renting a place worth $900k, whereas the buyer (who perhaps only has $500k) is living in a nicer place that cost $1.5m. And that's not considering the fact that rents could rise further.

There are taxes and maintenance to consider, the risk of putting a lot of money into a volatile asset, and being tied to one place. Financial leverage in general is risky. But it's not a clear-cut decision like most people try to make it.

That Treasury is vastly safer than a condo, which fluctuate significantly more than a standalone structure and often has dramatic increase in fees over time. Further renters can move to a new building every few years for minimal costs.

4% return above inflation and taxes is a bit optimistic long-term, but otherwise this is correct. However where you stand depends on where you sit. Many other factor have to be "priced in" and the prices are dependent on what's important to you.

Eg, factor in equity (after 15-30 years of mortgage you own a condo), valuation (in 15-30 years that condo will be worth more than 1.5M), risk (...unless that condo sinks into the mud!), finance (you can borrow 1.5M to buy a condo but you can't borrow 1.5M to invest and rent), and flexibility (you can move out of a rental more easily then selling a condo).

Many financial planners assume 4% or even 5% annual returns above inflation. Heck, I forget which state it was, but I remember reading about some boneheaded assumption of 8% annually written into the laws for its pension fund.

I agree that 4% is optimistic.

Can you clarify on why you think 4% is optimistic, but then say 4-5% appears to be a reasonable 30 year expectation?

I guess with these things I always think of past performance not being a guarantee of future performance, but on the flip side I'd like to be able to live off my investments when I retire, so making some sort of informed assumptions is probably better than not.

The expected return of a year is not independent of the year before. Rudimentary models that many financial advisors use don't account for that. Even the more sophisticated folks don't account for it enough as I think is appropriate. They think they've observed dozens of years and the evidence says it's nearly impossible for the market to go down (as a whole) over a ten-year period. I think they've observed only a handful of decades and therefore should have very low certainty.

I'm still heavily invested in the stock market. I just think you should be very cautious in your assumption of how much money you need to live comfortably on interest/dividends in perpetuity.

Why is that do you think? If you pay them a fee and they aren't pushing investment products you'd think they'd be more realistic...

Historically, 4 or 5% appears to be a reasonable expectation over a 30-year timeframe after 1940 if you consider each year as an independent random variable and expect that the future will look mostly like the past.

These things are quite rare.

Moreover, you could feasibly buy insurance for such things which would be the financially appropriate way to think about it in terms of risk.

Tack on the cost of insurance to the cost of ownership to make the calculation.

Owning in SF has been smarter than renting for the last 20 years in almost all cases.

All the surpluses in the Valley have gone into real-estate.

In fact - given the failure rate of startups ... if you had $10 M in 1990, the best investment you could possibly make would be simply to buy real-estate, assuming you don't have access to the top tier VC funds as an LP.

By buying real estate - you're basically 'investing in tech' indirectly, across the board. And there's considerably less risk.

> you could pay ~$5k/mo in rent forever and just leave when problems arise.

We saw our apartment kept raising our rent, and yet the housing market in the area was still recovering from the crash so we decided to buy.

> but if you taken that $1.5m (they go for much more[0]) and put it into index funds instead,

Granted most people don't have $1.5 probably. Going to the bank and asking for $1.5 to invest in the stock market might not work as well as going and asking for a home loan.

Also there interest paid on the home mortgage is tax deductible. That's another incentive.

Given that simply getting a $1.5 loan from a bank to do whatever investment doesn't work, most people think in terms of "what do I pay per month and what do I get for it". In some markets what people pay per month on a mortgage and a large house is less than what they'd pay in rent in a smaller apartment . And also rent could go up at any time. A fixed rate mortgage will stay the same.

People who buy $1.5m condos in cash usually don't care that much about rate of return. Or are you implying borrowing $1.5m at mortgage rates and investing that? Not happening.

More along these lines, these condos are veblen goods not "the only place you can afford" type residences. If you have $1.5M in cash laying about to invest, you're probably not going to be happy in place that rents for $5K a month.

Do a lot of people have 1.5M$ in liquidity assets? This sounds like a good plan, but it requires you to already be at least somewhat well-off.

Don't buy new, don't buy off the plan, don't buy in new high-rises especially.