How do you deal with FOMO when comparing ETF with real estate investments?

Real Estate
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This has been nagging me for a while:

The typical FIRE Mustachian seems to be following a non-leveraged ETF investement strategy:

200k invested becomes 400k if the market doubles.

The typical Swiss homeowner follows a leveraged real-estate strategy (although few seem to realize it).

They invest 200k down payment to buy a 1 Mio. house. That’s a leverage of 1:5. If the market doubles, they 5x 6x their investment. If the market goes down 20%, they are underwater.

Nobody in CH seems to be worried that the real estate market could ever go down 20%.

Also the subprime crisis seems to indicate that mortgage banks are very reluctant to give you a ‘margin call’ if the housing market crashes, and let you slip deep into the red. As opposed to a stock broker who will automatically liquidate your positions (or request more money).

I have to listen to friends and family telling me how risky the stock market is, while they are being leveraged to the max in their houses, enjoying 5x 6x gains compared to my measly 2x. Even worse, I suffer through market fluctuations while they sleep like a baby, fully trusting that real estate prices will only ever go up. And so far it has been working out great for them, with no signs of slowing down.

The ETF advantages are:

  • liquidity (but being able to sell in a second also exposes me to scam/fraud risk)
  • diversification (a single house is a very concentrated risk)
  • very simple and takes very little time

What other things do you tell yourself to justify your ETF strategies, and to deal with FOMO when comparing yourself with your homeowner friends and family?

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Well you could have invested in Rheinmetall a year ago and you would be up almost 2x too, there are always opportunities with much larger return than simple ETFs in the short term.

I think what most people don’t calculate clearly are the running costs of owning a house/appartment. After 40-50 years you need a new roof, 30-40 years new windows, 20-30 years new paint inside, 40-50 years new paint outside, 15-25 years a new heating solution, 20-30 years a new kitchen, 20-30 years a new bath, 20-30 years new floors etc. etc. and on top of these costs you still need a strategy to pay back the mortgage somewhen. These are the numbers I keep in my head for the real estate that I rent out.

After taking all these costs into account, over a very long timeframe, ETFs actually had a higher net return than real estate. Don’t get skewed by the immense price boost in Switzerland the last few years. It’s like watching the Rheinmetall stock price but only the last five years (whereas before it only moved very slowly).

Also, unless you have rental income, you only ever get money out of the real estate when you sell (what if you give to to your children for free?). ETFs generate income and give you the option to sell anytime in seconds.

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@logitacher Thanks for your input. I agree with everything you wrote. I guess what bothers me is the leverage: Even if the stock and real estate markets had the exact same returns, the person with 5x leverage gains 5x more in the same timeframe.

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  • my ETF strategy takes 4 x 15 Minutes per year while a homeowner has a part time job for gardening, small repairs, removing snow or leaves, organizing companies to fix things, checking mortgage interest rates
  • as I learnt in this forum, the mortgage hast to be reduced to 65% within 15 years
  • Eigenmietwert
  • “the contract I had to sign with the bank says they can throw me out really quick (e.g. if I fail to pay). A person who rents is much better protected” said a house owning friend of mine
  • house owners are not owning. They are renting from the bank

I am not trying to piss home owners off here. I am answering the question of the OP :slightly_smiling_face:

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Mostly, I don’t compare myself to others and that allows myself to feel good about my positions, provided I am still in agreement with the “fundamentals” I have based my investing decisions on. It also works for FOMO regarding bursts in cryptos and random single stocks 1000x at times.

Here are a few of my considerations regarding single asset real estate in Switzerland, coming at it from the angle you seem to take (there are different angles that could be considered, for example, the concentration risk of having a huge par of our investments in a single asset subject to insurable and non-insurable risks):

  1. 5x leveraged real estate needs to be amortized to 3x in 15 years, that is part of how the banks manage their risk. There is more cashflow locked into a highly leveraged real estate asset and the net gains, assuming constant price appreciation (which isn’t what actually happens) diminish as the leverage ratio does.

  2. Using Backtest Portfolio, at the time, I had determined that unleveraged real estate, in the US and in USD, was roughly equivalent to a 25% cash, 40% bonds and 35% stocks position.
    Levered 5x, that’s roughly a 175% stocks portfolio, so does not nearly bring in 5x the returns.
    Levered 3x, that’s roughly a 100% stocks portfolio. So different risks but similar returns expectations.

  3. We tend to think of our global ETFs as one unlevered position. In actuality, the companies whose stocks are comprised within them are levered too. A 100% stocks ETFs has leverage built into it (that I haven’t taken the time to approximate yet) that benefits from “immunity” during market crashes (if the market crashes 80%, the “unlevered” stocks in our portfolio go down 80%, our whole position doesn’t get liquidated). In actuality, highly levered companies might have a harder time during crashes and some of them go bankrupt. We just don’t look at it that way when we consider our porftolio, in the same way that many people think of their 5x leveraged individual home as a “safe asset”.

  4. Price appreciation is only part of the returns of either stocks or real estate but real estate tends to be more “distribution” oriented, in that by living in your own home, you don’t have to pay rent (so you get a “dividend” of the rent you would pay - the interest you pay - the extra costs of homeownership, which is the calculation most people seeing homeownership in Switzerland as the obvious choice to make usually do (while also not taking into account a real risk of interests going up and underestimating the actual costs of the maintenance that will need to be done on their homes in time)).
    The real estat returns would be more akin to dividend investing than to global market weighted stocks investing. Judging by the discourse online, dividend investors also tend to feel that they are in a safer position than global market cap investors in times of crises. That is a whole topic in itself and there are threads on this board talking about that so I won’t go into it here.

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I own single stocks (a lot of them), real estate but no ETF. Too much garbage in the index…

I use leverage for my stock investments and I have strong money management rules. I hardly use leverage on my real estate, one has a 20% mortgage (probably less with actual prices) and the other one is fully paid. I don’t see real estate primary as investment but as something nice to have. You have to sleep somewhere and the roof keeps the rain away… :slight_smile:

A real estate bust of 20% is extremely likely as nobody, really nobody, thinks that could happen. A bust of 20% in stocks is not only extremely likely but is almost sure.

The problem is not a bust, the problem is to know exactly what to do when it happens. Exactly, I use written rules to not leave room for any interpretation.

If you want to FIRE you must overcome FOMO. I don’t care if other people make tons of money, I feel good for them. There is always a better investment and there is always a worse investment. And nobody constantly picks tops or bottoms. Once you understand that you can get rid of FOMO because it is not good for nothing.

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Real estate is long term investment and most people never really sell unless they are upgrading to a bigger house . So the reality is that money always stay in Real estate

But yes because of leverage , RE tends to be great investment. But I think it really depends where the property is.

You cannot expect all properties to double in 20 years unless it happens to be luxury real estate like Zurich city. RE on average should keep up with wage increases or else there is no one left to afford those apartments:)

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Which also means it’s XM in assets blocked for pure housing consumption (you can’t use to pay for food or healthcare when you’re retired), while your stock is liquid.

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In Switzerland to qualify for a mortgage, the total monthly cost must not exceed 33% of the monthly salary available, calculated with 5% of interest rate. I’m noticing that right now for desirable cities (near a major train station) the home cost is not limited by demand, but by this rule, that means if you sell for too high a price, you diminish stronlgy the potential buyer pool, because of this affordability law.

To me that will couple house prices to salary. That means buying now near the optimum of prices vs buyer availability…you will be able to sell at a profit only if the salaries are increasing a lot. But salaries are not growing as fast.

I don’t have numbers, just an observation . I will try to calculate some numbers though, could be interesting. I guess the optimal selling price is when you can still target the top decile of salary distirbution, so that you have a large enough pool of possible buyers and can liquidate your home fairly quickly.

I think for many cities, we are hovering around that threshold hence the future home selling value is linked to salary increase for larger pool of buyers.

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and costs, debt, interest on the debt, taxes, professional fees (engineer/notary/maintenance) which make it extremely unattractive (to me). See here for a detailed list, better written.

It’s a relatively straightforward route to very high leverage, that’s true, but this is baked in because people need shelter and can’t be expected to cough up the full cost at once.

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I think you are comparing investors and regular folks who just want to buy a home, not looking to invest. The big majority of RE buyers want a roof over their head, if they make money on their house once they don’t need any more, that is just a plus.

If you look at the first thread I opened when I joined here, you will see I am the exact opposite of you, I have everything in RE but nothing in the stock market. The way I saw it, I needed a stable home where kids could grow not having to worry about moving, design your own place just like you would love to have it etc. Heck, I’d be happy just to get my money back, everything else is a plus. I didn’t purchase it to make money, but to enjoy it and use it every day. For me this is the biggest difference between RE and stock market, I am about to start investing now and it just feels unreal. I can’t use it, enjoy it, the value goes down on bad news etc.

I wouldn’t feel good to invest in other things while I pay rent to the owner, and I have limited freedom on what I could do with the place. But this I think is more targeted for people with families, if you ask almost every parent why they work so hard, why they have a good car, why they have a good house, why they spend on education etc etc you will receive an answer: “I’m doing it for the kids”. And this is universal among all people, I think

There has been a disconnect between salaries and housing in the last 20-30 years and I personally don’t see it going back, the difference will get bigger and bigger. You have only a fraction of people who have bought near the top, everyone else has huge equity in their places. You have people inheriting and re-entering the market, they will pay even bigger prices given they already have 50% deposit to make.

And that is why a market correction of 20-30-40% will not touch the big majority of owners, most people buy once and keep for decades. It’s like you’ve bought Coca Cola in 1988 and tomorrow the price tumbles 20%. So? You are now up only 2700% instead the 3400%

Covid showed us that people with families can’t live remote, even if you have delivery, shops, fast internet. They need schools, hospitals, activities at walking distance or very, very near.

While a house is a depreciating asset, the land isn’t. If it was cheaper to rent instead of owning, there would be no landlords. You might find better and more rewarding investments, but RE seem the most straightforward, at least for some people.

The 15% needed to be paid off in 15 years from getting the loan are easily offset by not paying rent.

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I did, but OP was talking about RE as an investment. Your point is good, there is a big difference. If I too was looking for shelter I’d not think in terms of investment but as a necessary cost.

Yeah it’s totally awful, I agree.

I am also partly doing it for my kids too, by the time they’re my age their portfolio (they already have a portfolio) will have had 30 years to grow. Also agree that education is the investment with the higher ROI in the universe (along with healthcare), but a house? Good family life, quality time, education, experiences, mutual respect etc etc is what they will remember and be shaped by. And cars, I love fast cars but have a motorcycle because my kids make my slow car into a pigsty and I resent that! Edit: on cars, funnily enough my mids say they love our car, it’s decent, relatively new (2019 KIA Ceed GT), kept well, driven well, but the kids love it because it’s “our car and has taken us to many places”, kids are simple in a good way.

Land I agree with, it’s far better than a house as an investment, but land needs maintenance too, we bought a small piece of land for very cheap, it still needs a crew to go there from time to time and prevent it from becoming a jungle, it’s a legal requirement too (in Greece, for fire hazard, but as it’s Greece people ignore it, our field is clean and the two adjacent ones are jungles, making me feel like a schmuck). So land is more of a speculative asset, unless you plan to develop it (costs a ton!) or rent it (time hassles, taxes).

There’s no right or wrong I think, I know people who’re like me, would live in a cave with a table, bed and laptop, have a Ferrari parked outside, and invest everything, and know people who get tremendous joy out of their houses. I partly envy a really nice cosy place, yet can’t bring myself to fork out the money to make one, especially knowing we won’t be staying in CH forever.

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Thank you all for your thoughts, every bit helps!

Regarding liquidity: Couldn’t you realize some gains by increasing the mortgage?

I guess in the end it always comes down to this.

I don’t follow here.

Yes, but what counts for comparison is the total expected net return over a long time. And if that is similar, the leveraged investment wins big time.

I’m interested. How do you finance your leverage? Broker margin? What kind of interest rates?

indeed, and keep doing it, too :sweat_smile:

Kind of reminds me of resource sinks in games.

Thanks for the link.

Not helping with my FOMO :joy::cold_face:

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@Mirager thanks again for the link, it’s a good list :slight_smile:

One interesting take near the bottom:

While a house is a terrible investment, I own a house and recommend other people do so as well. Why? Not because the house is a great investment, but because the mortgage is a great way to borrow money due to all the government subsidies. Having a mortgage is a great way to short the US dollar because of the long maturity and low rates you can borrow at. I make sure to constantly take all of the equity out. If there was some way to borrow $400,000 at 3% for 30 years and buy stocks with the money I would much rather do that, but because our society has decided that homes are the “chosen” asset class and distorts the market by redirecting resources into mortgages it makes sense to buy a home. I would never even consider buy a home with my own money, but hey, if the US taxpayer and a bank is dumb enough to loan me several hundred grand a 3% for 30 years and give me a tax deduction sure why the hell not.

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Why would they? Most people here buy to let or buy to live. I am not aware of buy to sell on or flipping is a thing here. You will get the same rent even if the value of your property is 20% down. In the long run the value will come up again.

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Returns and volatiltiy have been “similar” for, say, the last 10 years (I can’t remember what period I checked), in USD, for a 25% 3 months Treasury bills, 40% Intermediate term treasuries and 35% stocks portfolio and for a US real estate indice, divided by their leverage ratio.

It’s very, very, very, very rough but that was just to give me an inkling of how unleveraged real estate behaved in order to compare mortgages vs margin loans.

If I lever up 3 times that allocation (with a USD margin loan, which is the currency used for the comparison), that gives me:

  • -125% USD allocation
  • 120% intermediate term treasuries
  • 105% stocks.

For the sake of simplicity, I have allowed myself to cancel out the cash and bond allocations (the interests on the margin loan or the mortgage will probably be higher than the returns on bonds of a similar duration or the financial industry would use levered up bonds way more). That leaves 105% stocks / -5% USD cash allocation, which is very close to a 100% stocks allocation.

Indeed. Is it similar, though? The Switzerland House Price Index on Trading Economics (Switzerland Residential House Price Index) gives me an evolution from 158.73 to 195.13 Points from Q1 2015 to Q4 2024, which translates roughly into a 2.1% CAGR. I doubt globally diversified stocks have done similarly over that period though, there again, the rent savings (or rent dues), the dividends and the costs should be added to the comparison.

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I use broker margin at IB. I am currently negotiating a new mortgage rate with my bank because the margin rate at IB is actually cheaper than the mortgage rate.

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That is correct. But a drop of 20% will require refinancing the house or it may be sold at garbage price by the bank (usually to bank friends/clients/employees) and you lose money and your home.

I prefer margin loan on stocks because I can micro manage the risk. Try selling a house room by room…

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I never made it that far :wink: Eh, he’s being a bit smug and and very much a smartass, but indeed if I could borrow 400,000 at 3% interest I’d plug it in stocks too :wink:

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No, that will happen only if you have no equity in your property and your bank sees you as a risk or you stop paying.

The person who bought a single house for 500k in 2010 won’t be asked to increase his deposit if houses today drop 20%, his equity is far greater than any sudden market correction can eat the 80% ratio the bank wants.

Banks are not there to rock the boat, they want people to keep on investing in RE as banks are the biggest holders.

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