Everyone should have a “default” opp cost in mind. For me, it is Berkshire. Which I think can compound at high single digits - say 7-8%.

Most people do not “charge” themselves for down payments on real estate. But they should. At their opportunity cost rate. Can be shocking.

Say someone is putting 20% down on a $1 million property. Or $200K. That isn’t free money. If the opp cost is 7.5%, the “charge” is $15K per year. Add that to your housing cost.

It can really blow up some real estate economics if you do that. Opp cost can never be zero.

Almost NO ONE “charges” themselves an opportunity cost like this. And, in fairness, the cost is delta between the opportunity cost and whatever appreciation the real estate gets. So maybe it isn’t 7.5% but 5%. Still it’s a cost. Most people implicitly charge nothing for capital.

At the very extreme, if someone puts 100% cash into real estate, they face a large “charge”.

Almost everyone who owns real estate free & clear thinks of their cost as property tax and HOA, implicitly saying that their capital is free. It isn’t.

I don’t think that owning real estate free & clear makes much sense at all even though I once did pay off a mortgage for this “peace of mind”. Everything in our tax code argues for using debt for real estate.

Of course, you can always just rent. The expense is very transparent.

And always remember that rents cannot go up endlessly. Everyone knows it is an expense. And rents are going to have some relationship to incomes. If everyone around you has higher income growth you could be priced out of a rental market. Otherwise, it is not likely.

This week, I happened to look at an apartment building I rented in a very long time ago. As far as I can tell, rents have gone up around 2.5% per year in that building over 15+ years which I’m guessing correlates pretty well with median income growth in that market.

No castles in air, just expense. And people pay it out of monthly income, and it is a competitive market.

In contrast, condo prices have been all over the place.

Anyway, I find rent vs. own issue in real estate fascinating because it is driven by massive irrationality. /end