Robert Shiller isn't shy about his opinions on treating housing as an investment. To paraphrase, Shiller thinks it's a stinker.
According to research compiled by Shiller, the average home has increased in value by a scant 0.2% annually since 1890, after adjusting for inflation.
That finding flies in the face of conventional wisdom holding that your home is your single biggest, and best, investment. It seems a home is just a place to hang your hat, rather than the best parking spot for retirement savings.
Shiller drove that point home in a recent conversation with the Fool's own Morgan Housel: "To me, the idea that buying a home is such a great idea is just wrong. They may very well decline for the next 30 years in real terms."
If a home isn't a good investment, what is?
Despite whipsawing returns, stocks have proven a far better place to sock money away -- returning a compounded annual rate of between 6% and 7% over the past hundred years or so.
That brings me to the advice I'm giving my 21-year-old son.
While stock returns have historically outpaced housing price gains, singles and couples committed to buying rather than renting may want to consider another, more money-friendly option: becoming a landlord.
Here are nine reasons why multifamily homes can make a great deal of sense for first-time home-buyers:
- They're often in or near town and city centers, making them ideal for lifestyles that include bar hopping, concerts, and sports.
- They're typically smaller, making them more efficient than single-family homes. That means they'll cost less to furnish, heat, and light.
- They provide income that can offset mortgage costs, property taxes, and maintenance costs.
- Minimum down payments on multifamily homes can be as low as those for single-family homes if you're going to live in them. That means down payments may be as low as 3.5%. However, if you buy a single-family first and then try to buy a multifamily later, you'll need to put at least 20% of the purchase price down instead.
- They give buyers flexibility. The buyer can live in one side, rent out the other, and later move out and rent out both sides for income. Heck, if the purchase is in or near a college town, your children could even live their someday, saving money on college room and board payments.
- Interest on the buyer's mortgage can be tax-deductible once the buyer's income or situation shifts them from taking the standard tax deduction to itemizing deductions. That can reduce your annual tax bill, resulting in a bigger refund check in April.
- The multifamily home can be depreciated over time, providing additional tax-friendly benefits that include reducing taxes on the rental income.
- Home repairs or improvements (think replacing your roof or finishing an attic or basement) can be deductible or depreciated, depending on the situation.
- Money that won't go toward your mortgage can be invested monthly using dollar-cost-averaging into stocks or mutual funds.
Those nine reasons are all compelling for first-time home-buyers to take the leap and become landlords, but the ninth reason may be the most important. Why? Because investing just $1,000 and then adding an additional $100 per month would result in a portfolio worth more than $18,000 in 10 years, assuming a 6% annualized return. If my 21-year-old started today and continued at that $100 clip for the next 40 years to retirement, the balance could be more than $200,000.