Last year, Sundar Pichai earned 226 million dollars, which is 800 times more than the median salary of an Alphabet employee.
You might ask, “How can Sundar Pichai do as much work as 800 people?” – obviously, he doesn’t. There are secret factors at play. I want to talk about these secret factors that influence everyone’s salary, from the biggest CEOs to the humblest custodian.
To really understand what’s going on, you have to understand that people pay you to do one of two things:
Distract them from their problems (AKA, entertainment)
It’s also possible to cheat people out of their money, but I’ll assume that you’re only interested in deception while playing hidden identity games like Werewolf :)
Anyways, think of an ordinary job, like a barber. If you cut one person’s hair, you get $X. If you cut 2 people’s hair, you get $2X. In a job like this, you’re limited by your time.
But not every job is like this. Some jobs are more intertwined with a multiplier–something that lets you produce more in the same amount of time.
There are four multipliers: labor, capital, media, and code. None of them are good or bad, nor better or worse than the others. They are simply tools used to shape the world.
We Need to Go Back
The four multipliers are intertwined with the story of humanity.
Think back to prehistoric times. There are tales of mythical heroes who brought groups of people together to build the first stone-age irrigation systems or defend their homeland. They became kings and queens. These individuals had power and influence because they could direct human labor to create something new. In practice, labor is the ability to have other people do work for you.
With the growth of agriculture, humans could store wealth in grain. Soon, people traded in complex ways, humans developed metal currency, and capital was born. Capital is like a shortcut to more labor.
Centuries later, the first blursed (blessed and cursed) printing press was built. Media like books, newspapers, radio, movies, and television began to proliferate. A single author had the ability to reach millions of people like never before. And with their ability to inform (or misinform), the author could change the way people think and behave.
In the 20th century, technology became the new hottest multiplier. A developer can write a program for a fixed cost. Then, that code can run an infinite number of times and solve an infinite number of problems. It’s genuinely impressive.
Code touches the other multipliers in a unique way. Code helps set delivery schedules (labor), automate stock trading (capital), or allow some guy in his F-150 share his political rants on the Internet (media). And, further automation allows writing even more code.
Back to the Present
So where does that leave us today?
Jobs that are infused with multipliers have the ability to make more money than other jobs.
As a manager, you use the power of labor. You have the ability to direct people to do work and solve problems. In a team, you can accomplish more than any of you could do alone.
As an investor, you use the power of capital. Whether you trade one share of VTSAX or a million, the cost to make a decision is the same. And you get to reap the reward of your sound judgment–or suffer dearly for making a bad trade.
As an influencer, you use the power of media. You can shoot videos and reach millions of people around the world. You might even be able to convince them to do something for you–or for the planet.
And as a software engineer, you use the power of code. You have the power to command machines to solve very difficult problems and change people’s lives–hopefully for the better.
Today, we see the power of code in Silicon Valley. There, people worship ambition for ambition’s sake. The impact of code is created by software companies large and small, from the hottest startup to FAANG.
We can also find media embodied in another area: Los Angeles. There, people desire image–they would rather flaunt their good looks and virtue than live a quiet life. The power of media is flashed across the globe through Hollywood’s TV shows, music, and movies.
On the other side of the country, we see capital manifested in New York City, where people chase money (and not necessarily wealth). The power of capital is extended through the international banks on Wall Street.
Finally, Americans can find the embodiment of labor in Washington, D.C., where people worship the very idea of power. The control of labor is codified through government and law. Remember, labor is getting other people to do work for you, and the government’s job is to tell people what they can and can’t do.
Beyond salary, why does this matter?
In order to change the world, you can’t just use one multiplier. Even the president, who sits at the head of the US government, can’t control everything. The president has to contend with the other multipliers: capital, media, and code.
To truly change society, all four multipliers must be working together.
And to get back to Sundar Pichai and his 226 million dollar compensation package, the four multipliers show a framework for how he earns this much money: a tech CEO touches every multiplier.
The company has a lot of employees who solve problems for customers. The CEO sets the strategy and influences every product line.
The company has a lot of money. The CEO ratifies where to invest and how to spend it.
For social media products like YouTube, recommendation algorithms have the potential to empower or silence voices. The CEO can step in and change YouTube’s strategy if needed. Additionally, the CEO can easily get interviews on major news networks.
And in a tech company, every product and service is intertwined with code. After the upfront investment, the code can continue running and serve millions of customers.
Once again, I’m not saying any of this is good or bad, or how something “should” be done. This article is just about pulling back the curtain and revealing the game that’s being played around us as software engineers.
Because if you want to play, you have to know the rules first.
The four multipliers are based off of ideas I learned from prior work by Van Jones and Naval Ravikant years ago. I say this not to name-drop, but to give credit to the people who indirectly influenced this article.
Google changed its performance review system, and chaos was everywhere. The new system was called GRAD (Googler Reviews and Development), and after it was announced, there was a boatload of questions. ICs asked their managers, managers asked their directors, directors asked their VPs, VPs asked the CEO, and the CEO deferred to the GRAD team, whose documentation was incomplete. Trying to change course for a company of over 100,000 people is no easy task.
Despite the uncertainty, I looked at the situation, cut through the chaos, and received the highest performance rating at Google and a 14% raise. Only one other engineer and I in my director’s organization received this rating. My secret was this one weird trick (and my manager loved it).
But before I can tell you what I did, we have to go back.
A year ago, when GRAD was announced, I examined the rubric for my role, L5 software engineer. The rubric had attributes relating to contribution, challenge, leadership, and teamwork.
As I planned projects over the next year, I kept this rubric in the back of my mind. How will each of my projects demonstrate each aspect of the rubric? How can I fulfill my responsibilities and go the extra mile?
Some people are scared to talk about performance reviews. Pardon my language, but that’s a load of baloney! Your performance rating should never be a surprise. You should be in the driver’s seat, fully knowing how you’re performing against your manager’s expectations.
So, I formally wrote my expectations and agreed on them with my manager. We reviewed my projects and progress against the expectations periodically. Occasionally, we would look at the rubric together and rate myself against those unbiased, unfeeling sentences.
Then, after our 1:1, I doubled down on the things I was doing well. I found ways to compensate for my weaknesses. I worked on projects that would fill the gaps in my performance evaluation. I put thought into what projects I would work on, not just the work itself.
And at the end of each week, I wrote a few important things down.
Every Friday, I would add my most notable pieces of my work to an internal website known as Snippets (though a regular Google Doc would work just fine). I linked to design docs I wrote, large bugs I closed, and major presentations I gave. I put in costing worksheets I crafted, production incidents I handled, and projects that I launched.
It barely took me 5 minutes a week. And at the end of the year, I used my snippets to easily summarize my work. Nothing fell through the cracks.
But weekly snippets weren’t the one weird trick that gave me the top rating. There was one more thing I had to do.
At Google, there’s a feeling that people don’t get rewarded for doing necessary work that’s difficult to measure, like maintenance or polish. The company has so many products because people want to get promoted, and launching a new app is a quick way to show something shiny to the promo committee.
Sometimes this culture irritates me because I know there are changes that ought to be made to improve the user experience, but I know they won’t move top-line metrics. So those issues sit in the backlog forever, waiting for the next intern or fixit to be hopefully picked up like a forgotten puppy at an animal shelter. GRAD is supposed to fix some of this, but institutional memory will be hard to change.
So, Googlers have to measure everything. If you launch a feature and don’t have any metrics, there’s no point to launching.
Anyways, I intentionally measured my work’s impact wherever I could. I advocated to improve our logging and to automate metric analysis. And when my teammates proposed features, I asked questions like:
What’s the problem we’re trying to solve?
What’s the impact of making this change?
How will you know if you succeeded?
Occasionally, these questions saved us time because we didn’t implement features we didn’t need. One of my teammates in particular really appreciated these questions because it made him think about the big picture.
Now that I had a list of projects and the impact each one made, I was finally ready to open the GRAD website.
The One Weird Trick
Here’s my secret: I wrote my own performance review, and I sent it to my manager and his manager for their feedback ahead of the deadline.
In GRAD, your manager is supposed to write your performance review. I didn’t want to rely on my manager’s memory–there were simply too many things he could miss, or simply not understand. He has many people to manage and I’m just one member of his team.
So, as the deadline for performance reviews approached, I took another look at the L5 SWE rubric. I copied each attribute from the rubric into a blank Google doc. Then, I went line by line, selecting evidence from my weekly snippets that best demonstrated each aspect of the rubric. For instance, if the rubric said, “manages projects spanning multiple quarters,” I would link to a large, complex project that I led that spanned at least two quarters. I repeated this process down the line, adding links to design docs, project proposals, costing worksheets… in all, it took me about an hour.
Once I had my informal self-assessment done, I sent it to my manager and his manager. I asked if there’s any other evidence they would need to bolster my case during performance reviews. My manager basically said “This is helpful, thank you.” (It also helps that I have a good relationship with my manager and my skip-level manager.)
A few weeks later, my efforts paid off. My rating was “Transformative”–the top rating, only assigned to 6% of employees. This translated into a bigger than usual annual bonus and an above-average raise.
After ratings were released, I read what my manager wrote in the official GRAD review. At the very bottom of the report, there was a line that said “After talking with Sheldon, I realize that he deserves a transformative rating due to…” This is evidence that I was originally slotted for a lower rating, but my self-assessment convinced my manager and the committee to accept the highest rating. My skip-level manager also admitted the doc helped push me over the threshold.
In the official review, I was praised for improving reliability, collaborating with other teams, mentoring Nooglers, and directing projects. I was genuinely proud of accomplishing so much with just a core team of myself and two people–I put in a lot of effort into my day-to-day work. But what surprised me most was that my efforts around diversity and inclusion were mentioned positively. I barely did anything except go to a few DEI meetings and announce events at my team’s weekly meeting. I just wanted to learn and to foster a good environment for my team. Part of GRAD includes intentionally recognizing DEI efforts, and that’s one positive change over the old system.
While all this chaos was going on, I was not attached to the outcome. Given the uncertainty around the new review system, no one was sure how ratings would be assigned, not even managers. People were especially unsure about the boundary between each rating. Last year, I got a “Strongly Exceeds Expectations”, the 2nd highest rating. This year, I was doing even more far-reaching work, so I should have maintained or increased my rating. Therefore, the highest GRAD reading was a stretch goal. The 2nd highest might have fit. The 3rd rating would’ve been an insult.
It is, however, better to ask for the highest rating you can reasonably get, and have your manager find evidence why the rating should be lower, than to argue your case upward. I guess a performance review is like a negotiation. A very long, drawn out, convoluted negotiation, but a negotiation nevertheless.
Why I wrote this article
I didn’t write this article to brag. I wanted to demystify the system, show you how to navigate performance reviews, and improve your chances of a positive outcome. And if you really don’t care about performance reviews, that’s fine. You have to see the game being played around you before you can choose to play.
Personally, I’m okay with spending time to gather evidence for a raise. A raise will benefit me for the rest of my life. Besides, this was all done during business hours as part of the review process, so I don’t see it as time wasted. Call me cynical: it’s called a performance review and not a work review for a reason.
On the other hand, some people manage to get great performance ratings seemingly without doing anything extra. And there are lots of other things to focus on in your career or in your life outside performance ratings and your salary.
With last year’s GRAD behind us, it was time to write expectations for the next year. Out of curiosity, I graded myself against the next level SWE rubric, and found that I could be hypothetically slotted into the middle rating at L6. Currently, I’m expanding my responsibilities and influence to get to the next level. I’m not in a rush, but I think I can be promoted within the next two years.
Recently, Microsoft laid off 10,000 employees. Facebook lost 11,000. Not to be outdone, Google reduced its workforce by 12,000. Overall, in the first two months of 2023, over 120,000 tech employees were laid off, including every sector and every size company.
With software engineers losing their jobs left and right and execs throwing around empty words like “rightsizing,” it’s understandable that many people are nervous about being laid off. The interview process is brutal, and the number of openings in the next few months is going to be smaller than usual. You have to search for jobs. Then, send in your resume, pass the phone screen, pass the onsite whiteboard interview, and maybe, you might get an offer. And after all that, you might like the role and the compensation and accept the offer.
Losing your job means losing your income. You might have a family that relies on you. You might be on a work visa. In the US, you might lose your health insurance. If you own a house, you might fall behind in mortgage payments and lose your property.
And once you’ve spent a lot of time working with a group of people, it’s natural to like them, or at least, to tolerate them. You might generally enjoy your team and your work. And in the chaos, it can all be taken away from you at any moment.
You can’t assume to work in the same job in the same industry for your entire life. Maybe that was true if you were born in 1950 or live in a country like Japan, but it’s extremely rare today. Even “safe” jobs aren’t really safe. The larger the organization, the more likely you’ll be hit with unexpected layoffs. Governments and large corporations only give the appearance of stability.
You can complain about the situation. This doesn’t help anyone, so I don’t recommend it.
You can try to change the situation. You can join a union or push for better labor laws in your area. Political change is difficult and will take some time.
And finally, you can recognize the emotion of the moment and let it pass through you. Then, act.
Here are 6 things you can do so you don’t need to worry about layoffs.
1. Have money in the bank
First, keep cash equal to several months of living expenses in your savings account. If you spend $4000 a month, and want 6 months of buffer, keep a balance of $24,000.
I prefer to keep one year of living expenses in my savings account. This is an incredible mental cushion. If I ever lose my job, I have at least one year to take my time to find one that I genuinely like.
If you don’t have this cash lying around yet, that’s OK. Make it easy by setting up an automatic transfer to your savings account every month. Once you’ve created a cushion, you can turn off the transfer. Don’t try to do it every month manually–you’ll forget. It’s not weakness, it’s just human psychology.
2. Demonstrate your value to your manager
The second thing to do is to be a top performer and make sure your manager knows it. This is not a foolproof way to avoid getting laid off, but it will certainly help your chances of retaining your job.
If you’re not a top performer yet, the path to become one is simple:
Figure out what the team needs
Make it happen
(Though, it will take a lot of time and effort.)
Top performers continually demonstrate the value of their work. They drive their 1:1s with their managers. They think about how their work fits in with the larger organization and how they can help the team. They communicate effectively, unblock teammates, and blaze a trail for the people following them.
Also, being a top performer does not mean “staying late and draining your energy”–it means working on the most important tasks in a sustainable manner. With so many unreliable people doing the bare minimum, doing what you say you’ll do will get you positively noticed.
On the other hand, the prospect of being laid off is demotivating. What’s the point of putting in extra effort if you might lose your job anyway? On one hand, you’ll have a body of evidence and confidence that you can get stuff done. But still, slacking off might be the most logical thing to do in your situation, especially if you think your company is doing poorly or your team will likely be laid off. In that case, maybe pump the brakes at your job and develop your skills instead.
3. Develop your skills
As a software engineer, you already have valuable skills. Programming is going to be in demand for the foreseeable future. You probably already have a specialty, like databases, iOS development, or testing. And there are many domains around programming, like project management and technical writing. There’s always a way to leverage your experience into a new opportunity.
Soft skills are even more important when looking for a new job. You could be an extremely competent person, but if you suck at talking about your achievements in a job interview, you’ll be rejected every time.
Additionally, finding a new job is a whole other set of skills. Think about all the things you could do:
Finally, remember that you can learn new skills. You’ve done it before and you can do it again.
4. Develop your connections
Speaking of finding a new job, many people find jobs through their informal networks–colleagues, friends, and family. If you have extra time, consider activating hustler mode, going to networking events, and providing value to others. LinkedIn can also be a useful tool if you know how to use it properly.
Additionally, consider talking to a mentor. They may have been through multiple rounds of layoffs before. And if you don’t have a mentor, find one. The best software engineers are more than happy to talk to people earlier in their career.
5. Write down your unemployment plan
There’s a lot of things you could do if you get laid off. If you’re worried, your brain will jump from activity to activity, thought to thought, making no meaningful progress and draining your mental energy.
Instead of getting caught in a loop, write down the things you would do if you unexpectedly lost your job. It can be as short or as long as you like. Here’s a very brief example:
Rest for 1 week
Cut back on restaurants
Practice interview questions on leetcode
Read that book about Swift
Ask Alice for a referral
Practice interviewing with Bob
If I can’t get a software job after six months, get a temporary job at the Krusty Krab.
(Heck, you could even make yourself a vacation plan: if you get laid off, take 3 months to backpack across Europe.)
The human mind does not like uncertainty. By writing down your personal unemployment plan, you can trick your subconscious into feeling okay. Plus, a small number of actions will get you the majority of the results. By prioritizing the important stuff, you’ll free up even more mental energy.
6. Imagine what happens if you get laid off
Finally, take a page from Marcus Aurelius and the Stoic philosophers. Imagine what would happen if you lose your job. You might feel scared. You might feel alright.
I feel like I have no need to worry about being laid off. For a few weeks, I’ve been thinking “This could be my last day going into the office.” And I’m OK with that. Every day, I’ve done my duty.
I would still be upset if I unexpectedly lost my job due to factors outside of my control. But I also understand that a person’s value is not a 1-to-1 mapping with their job or their salary. Nothing is guaranteed. I’m going to give myself the best chance I can at crafting a career and a life that I genuinely enjoy, and the rest is up to fate.
There’s a lot of things you could do. Don’t feel like you have to do everything at once. Acknowledge the emotion of the moment, and you know you will get through this.
Allow me to introduce you to… the expanded goblin mode chart.
Back in my day, before normies co-opted the term, goblin mode meant isolating yourself and submitting to your basest desires. Stuff like staying home, eating junk food, and watching Netflix for 10 hours a day.
Here’s an example. During the pandemic, my two roommates and I were having dinner together. With no context, one roommate turns to me and asks:
“Hey… Do you think I have rickets?”
I slowly turn my head towards and reply, “Like a vitamin D deficiency?”
I raise one eyebrow. “Umm, why do you think that?”
“Well,” says my roommate, “my joints hurt.”
“When was the last time you went outside?” I ask.
“Oh…” he shrugs. “Two months ago.”
What!? Me and my other roommate erupted with more and more incredulous questions. Considering that my roommate spent most of his free time watching v-tubers and playing video games, this was only one step away from goblin mode.
In goblin mode, you’re alone in your cave. But what if you’re alone and grinding?
You’re training at the gym, studying for a degree, or starting a new business while isolating yourself from family and friends. You aren’t in goblin mode. You’re in monk mode.
Monk mode can be good place to be, at least temporarily. You’re super focused on growth but neglecting relationships. Sometimes this is a sacrifice that must be made. Sometimes monks take it too far.
A lot of people on social media like to brag about how hard they work while cutting “toxic” people out of their life. They might be in monk mode. But what if they’re also socializing, networking, and building relationships?
When you’re improving yourself and being social, you’re in hustler mode. Think of a stereotypical tech bro. By day, he’s working at his startup and pushing code to prod. At night, he’s at the Rosewood charming venture capitalists and ladies alike.
A lot of “bros” on social media like to toot about being in hustler mode. They humblebrag about the effort they put into their online business while flashing fake pics of their extravagant lifestyle. (In reality, these bros work regular 9-5s and their online business is little more than a pyramid scheme with extra steps.)
If you’re really developing your skills, hustler mode can be a good place to be. But for most people, it’s unsustainable. Your energy drains day by day, week by week. Soon, your calendar is double booked and you’re running on caffeine and pure spite.
So you pull back. You keep partying while shoving your career into the back seat. You’re staying out late, eating and drinking terribly, waking up at 3pm next to a group of friendly chinchillas in Hayward, and not knowing how you got there. You’ve reached Bacchus mode.
This is a time when you have fun while being social. You have neither cleaned your apartment nor declined an invitation in weeks. You’re having a good time, but your body and your career pays the price.
People in Bacchus mode generally don’t reply to messages. They’re always busy but never doing anything important. They arrive 2 hours late to every engagement, if at all.
After enough time in Bacchus mode, you tire of the constant partying and retreat back into your cave. You just want to be alone for a little while, maybe eat some potato chips, maybe play some video games. You’ve returned to goblin mode.
“I just need a day to relax,” you tell yourself. “Maybe tomorrow, too.”
Everyone’s parents keep asking them “So, when are you buying a house?” It may be an innocent question, but the effect is to make you feel bad about not owning real estate.
It’s the framework they grew up in. Get married, buy a house in the suburbs, have kids, and retire at age 65. Preferably, in that order.
We have to be honest: times have changed. It’s not realistic for young people, even well-paid software engineers, to follow the same timeline as our parents. In their day, a single breadwinner could afford a decently-sized house. Today, under-construction, shortsighted zoning laws, and inflation have joined forces to block the average American from affording a house at age 25. It’s simple math.
Some people feel bad about falling behind in the rat race. Our brains have subconsciously absorbed the message “You must buy a house and fill it with stuff you don’t need”. All successful people own real estate–everyone from gyrating TikTok influencers to Warren Buffett. And if you don’t own a two story house and a fancy car, you’re a loser.
Interestingly, most people don’t think about why they want to own real estate. They just blindly follow the scripts that society gives them. Yet, if you want to be better than the average person, you have to do something different.
I want to make a case:
Sometimes renting is a better financial decision than buying, and vice versa
You can consciously decide to rent
You should feel good about your decision, on your own timeline
I want to move away from the idea that real estate is the end-all be-all of your finances and your life. I think there are legitimately good reasons to buy a house or a condo (more on that below). But young people don’t need to rush towards real estate like Sonic speeding towards the end of the Green Hill Zone.
Besides, if given the choice, I’d rather be a millionaire renter than a poor homeowner.
Pros and Cons
Before dropping a million dollars on a house, I want to look at all the angles. I want to do a true apples to apples comparison. In this article, we’ll focus on the difference between renting and buying, not “Apartment vs Single-family house”. If you really want to avoid upstairs neighbors and have a backyard for your dog, you can rent a standalone house.
I’ll also assume that you’re taking out a home loan (aka, a mortgage). In January 2023, the median home price in the US is $428,700. Prices are higher in tech hubs like San Francisco, Seattle, NYC, and Austin. You probably don’t have that much cash lying around unless you’ve been consciously saving for years or you’re willing and able to sell your company stock. So, be prepared to take on some debt.
With that out of the way, let’s get started.
First, let’s list the advantages of owning real estate:
You can customize your space.
You don’t have to deal with a landlord.
You get a sense of permanence in your physical space.
And the disadvantages of buying:
There are a lot phantom costs to owning a home. (Some advisers recommend adding 50% to the sticker price to find the actual cost.)
If you take out a loan, you’re paying a bank extra money every month in the form of interest payments.
You have to pay property tax.
You have to pay mortgage insurance.
You have to deal with an HOA.
You’re responsible for maintenance, in both time and money. (Surprise maintenance is a major headache.)
Buying or selling a house takes months, and requires you to pay a hetfy fee to a realtor.
If you buy at the peak of the housing market, you end up over-paying for years.
If you fail to make mortgage payments, the bank could repossess your house, taking all the hard-earned money you put into it. (As a software engineer, this is unlikely.)
Let’s look at the advantages of renting:
There are fewer hidden costs–easier to understand.
Does not require a mortgage.
It’s easier to move in or move out at the end of the lease. This is good for short-term stays (e.g. if you only plan to live in an area for a year).
When the lease is up, you can negotiate rent downward or move to a cheaper place (I’ve done both of these, even in hot markets)
Someone else deals with maintenance issues, in both time and money.
Financial mistakes are smaller and easier to correct.
And the disadvantages of renting:
You can’t renovate your space.
You have to deal with a landlord or a leasing office.
You might have to leave at the end of your lease.
If you fail to make rent payments, you could be evicted. (This sucks, but at least losses are limited. And as a software engineer, this is extremely unlikely.)
You might read this list and say, “Wait, but what about <really important thing that society says>?” Let’s take a step back and look at these invisible scripts with a curious, objective attitude, like an alien from Mars visiting Earth for the first time.
Before we move on, I want point out that I did not say that buying or renting is always cheaper. That depends on a lot of factors like where you live, how long you expect to stay, etc.
In both cases, the price you pay will increase over time. With real estate, it’s property taxes based on your property value (except in California). With renting, it’s the base rent price keeping up with or exceeding inflation.
In hot markets, real estate prices have skyrocketed like Dogecoin in 2021, making both renting and buying more expensive in the long-term. In some areas, real estate prices have fallen from their peaks.
Because the bottom line is highly dependent on location and time, total price cannot be placed in the pro-buying or pro-renting camp.
With that out of the way, let’s examine some common phrases society tosses around when discussing real estate.
Things Society Says
“You’re paying someone else’s mortgage!”
The National Association of Realtors has carefully crafted this piece of propaganda and hammered it into the national consciousness. It’s designed to make you angry.
When you go to a restaurant, do you feel bad for paying the restaurant’s mortgage? Of course not! You’re spending money to receive a delicious meal.
When you rent a house or apartment, you’re spending money to have a place to live. It’s like paying for any other good or service.
“Real estate is the best investment.”
Your residence is a liability, not an asset. Every year, you’re paying money into it and get no money out of it. That is the definition of a liability! It boggles my mind when people think they’re making money by paying loans and taxes. It makes less sense than the plot of The Last Jedi.
You could speculate that an individual property will increase faster than the stock market as a whole. And you could win. But for every story of someone making a killing trading real estate, there’s someone who lost big and doesn’t talk about their loss. Speculation is gambling, not investment.
If 99% of your net worth is in your house or condo, your portfolio is very, very fragile. You deserve to lose money for deliberately putting yourself in a precarious position. A better way to invest in real estate is to buy shares in a real estate investment trust (REIT), which is much more diversified and safer than buying a single property. You can buy REIT shares as easily as stocks. In fact, reputable companies like Vanguard offer REIT funds for ultimate diversification.
And when you peel the onion, you realize real estate has consistently underperformed stocks by an insane margin.
Between 1983 and 2022, the median price of a single family house in the US increased from $62,408 to $356,866. If you had invested $100,000 back then in a typical house or hypothetical REIT with no mortgage, that house (or REIT) would now be worth $571,828 before accounting for maintenance costs. Not bad, right?
What if you had invested in a collection of stocks that represent the US economy? If you put $100,000 into the S&P500 between 1983 and 2022 and reinvested the dividends, you would have $7,794,615. You would have earned over 7 million dollars more and you would never have to worry about maintenance. You would be a literal multimillionaire!
“Well, my grandma bought her house for $100k and now it’s worth $900k, so she made $800k.”
Your grandmother did not make $800,000. There are so many phantom costs surrounding homeownership.
First, she had to take out a mortgage. She probably paid $180k over the course of the loan. Next, she had to maintain the house. Let’s say that’s a 1% cost every year. There’s also property taxes, mortgage insurance, HOA fees, and other random costs. Inflation eats into real gains. And when she sold her house, she had to pay a percentage of the price to a realtor.
Wait, does Grandma still live in that house? She does? I’m sorry to inform you she hasn’t actually made any money!
Do you think that you are going to sell the house you lived in for 40 years? If you actually downsize and buy a cheaper property, nice! But for most people, it is psychologically difficult to go from living in a 4500 SF house to a 1280 SF condo.
So if you don’t sell your house, you don’t make a profit. And if you sell your house, then immediately turn around and buy another one for the same price, you haven’t made any money. Blindly funneling money into real estate is not a retirement strategy.
Let me reiterate: if your goal is to make money, stocks have consistently outperformed real estate. And speculating that your primary residence will grow faster than the economy as a whole is more like buying a lottery ticket than investing.
Tying up huge portions of one's wealth in a single plot of land creates an incentive to preserve the land's value. In the US, groups of landowners band together in organizations that lobby municipal governments. These NIMBY groups block laws that inconvenience landowners but are good for the community as a whole. For example, wealthy suburban neighborhood organizations fear public transit, affordable housing, and three-story buildings because that would bring the "poors" in, which decreases their property values.
At the same time, young people and first-time home buyers *want* low property values. The government tries to help by creating well-intentioned but incredibly complex systems. The result is that young people buy too early and pay more money to the banks over their lifetimes, and when the banks fail, the burden falls to other taxpayers.
Housing can either be affordable or an investment. These are mutually exclusive goals. When the government pursues both at the same time, young people and taxpayers lose.
“Real estate never goes down.”
Pardon my French, but that’s a load of baloney. This graph from DQYDJ visualizes the trend well. Look at the 2008 financial crisis. Look at the slump in 2022. And regardless of the national market, individual properties can lose their attractiveness based on local laws outside your control. Real estate is not a safer investments than stocks or bonds.
And please get it straight: your home is a place to live, not an investment.
“You can deduct mortgage interest from your income taxes.”
People love saying this because it makes them feel smart.
Deducting mortgage interest from your income taxes is like paying a dollar to save 27¢. You should not be excited about paying interest to the big banks! To save money, the easiest thing to do is to not have a mortgage at all.
How about a simple, alternative model: imagine renting a house costs $2500/mo, and buying a similar dwelling would cost $4000/mo. You could rent, then save or invest the difference. That’s a net gain of $1500 every month. It’s so simple and I love it.
If you don’t care about tax law, you can skip to the next section.
I want to prove that the mortgage interest deduction is not a magic bullet to make real estate instantly affordable. For starters:
The deduction only applies to interest, not principal.
The deduction reduces taxable income, not the amount you pay in taxes. So, you’re effectively saving at most 35% of the interest payments.
It only applies if you itemize deductions.
It only applies for mortgages up to $750,000.
For people who currently take the standard deduction, the mortgage interest tax deduction might be saving debtors even less money than they think. To find the real savings, you have to compare how much you take home using an itemized deduction with a mortgage versus the standard deduction when renting.
Let’s do that right now. We’ll take the best-case scenario for taking out a mortgage: the first year. Each year after that, the interest portion of the mortgage payment goes down, which makes the deduction less effective over time.
Buying (Best Case)
Renting (Equal Cost)
First Year Principal
First Year Interest
Federal Income Tax
Income After Expenses
Notes for nerds:
The mortgage is a 30-year fixed rate loan at 5% interest.
I used Bankrate to calculate amortization Note that the first year is when you get the best tax deduction, and it gradually decreases each year as you pay off the interest.
The “Buying” column uses itemized deductions. The “Renting” column uses the standard deduction for a single filer.
I left out other deductions (e.g. retirement contributions) for simplicity.
The cost to rent is equal to the first year principal and interest for simplicity. (In reality, you can probably find a similar dwelling for a cheaper monthly price.)
Factors like inflation, property taxes, and rent increases are left out for simplicity.
Summary: In the best case scenario, you would save $7924 in the first year, or $660 per month, by taking out a mortgage instead of renting. Sounds good, right?
But over time, the deduction’s effectiveness decreases. By year 20, principal payments have greatly overtaken interest payments. When you run the numbers again, the mortgage is only up $2,044 per year, or $170 per month.
The table also doesn’t include mortgage insurance, property tax, or home maintenance.
And if you adjust the calculations with a lower rent payment than the monthly mortgage payment, renting wins every time. The following chart shows the best mortgage interest deduction you can get versus simply renting other, normal properties, keeping all other variables the same.
Mortgage (Best Case)
Renting (Even Cheaper)
Income After Expenses
In the best year for a mortgage, renting is up $362, or $30 per month. If you run the numbers again with a $24000 renting expense (equivalent to a $2000/mo apartment), renting wins by $12,362, or $1,030 per month. And every year gets better for the renter, since the mortgage interested deduction gets smaller over time.
Takeaway: Mortgage interest deductions do not automatically earn you a boatload of money. The deduction only matters if the difference between a mortgage payment and renting is small. It is much easier to save money by renting a cheaper place to live.
And now, back to our regularly scheduled program.
“You can rent out the property to someone else or use AirBnB.”
My dude, where are you going to live?
Being an AirBnB host is a part time job. And if you’re renting out the property to long-term renters, you get to deal with finding tenants, handling repairs, and all the other tedious parts about owning real estate. Sure, you might make money, but by this point, your time is spent running a small business. There is no free lunch.
If you genuinely want to become a landlord or AirBnB host, great! Just don’t conflate it with the goal of “having a place to live”.
“My realtor said now is a good time to buy.”
Realtors are not on your side! A realtor’s sole job is to sell you property so they can take the commission on the transaction. They tend to paint a picture of a glittering future. Few sit down and really talk about what you want and how much it really costs in the long term.
Here’s a hidden secret about the real estate industry: the total cost of a property doesn’t fluctuate very much based on interest rates.
When they exclaim “Prices are low!”, interest rates are high.
When they shout “Interest rates are low!”, the base price is high.
Kind of ironic, huh?
A good realtor won’t push you to make a decision. They won’t recommend you to take a huge financial risk without a rigorous analysis.
“I want a backyard (or another hard-to-find feature).”
Please don’t compare renting an apartment to owning a house. The comparison should be:
Renting an apartment vs owning a condo
Renting a house vs owning a house
Before jumping into the biggest financial decision of your life, check if you can rent a house with a backyard (or whatever thing you want) in your area. The point is to test it out in a low stakes environment before committing. Do you really want to mow the lawn, or do you like the idea of having a lawn? In either case, you’ll learn something.
How would my life improve?
Before we can answer the original question, you have to ask yourself one more important question:
“How would my life improve if I owned my apartment/house/yurt instead of renting it?”
When I asked myself this question, I couldn’t find a good answer. In my situation, buying would cost about $50,0000 per year more than renting. Furthermore, owning a house meant I would spend my weekends doing home maintenance instead of traveling, going to concerts, and playing board games with my friends. I wanted to do a lot of other things in life. My budget could afford a house, or everything else. I chose everything else.
I also didn’t like the idea of being a chained to a mortgage for the next 30 years. I have no interest in being a modern debt-slave, forced to keep working to make mortgage payments or lose your entire investment.
One of my friends bought an old house 27 miles outside the city center. Closer properties were too expensive. He’s a single man with no kids, so most of the rooms in his house are empty. My friend always complains that it takes too long to take the train downtown, it’s hard to meet up with friends, and there’s nothing to do in his quiet suburban town. And then he complains about the headaches caused by AirBnB guests, cleaning, home repairs, and contractors.
I get the sense that my friend a little bit dissatisfied with his purchase. I think he would have more fun if he lived closer to his friends and the other exciting parts of the city. If he’s intentionally making this tradeoff–great! But I have to wonder if he and other people in our generation have been misled into wanting something we don’t really need yet.
When is it the right time to buy?
So that brings us back to the question: When is it the right time to buy?
The right time to buy is when you are ready. It sounds cliché, I know. But the opposite would be “rush in and buy a property without understanding all the benefits, costs, and responsibilities.”
Personally, I think buying real estate makes sense when:
You’ve done a rigorous analysis of your financial situation and understand the hidden costs of owning real estate.
Buying will not take money away from your retirement contributions.
You’re confident that you’ll stay in that property for at least 10 years.
You have one year’s living expenses in cash (so you don’t fall behind in mortgage payments).
You acknowledge that your property is a place to live, not an investment or a get rich quick scheme.
You’re OK with doing home maintenance and yard work.
You’re making this decision based on your own initiative, not because you feel pressured by family, friends, or a realtor.
And most importantly: you like the space and the neighborhood you’re going to live in.
From a purely mathematical standpoint, you could run the numbers and answer the financial question today. There are a number of good calculators on the Internet, such as this one from the New York Times. Try plugging in some different values and seeing what happens.
You might find that buying a certain property is cheaper than renting in the long term, even after accounting for all the phantom costs. And that’s great! And in other places and times, you might find renting for 20 years is a better deal. And that’s OK, too!
The point of buying real estate is to have a place to live. You should like where you live. You should be able to say, “I understand that living here will cost X dollars per month after all the random costs, and my plan to pay for it is so solid I will never lose sleep over it.”
Maybe you value flexibility and explore a different country every three months, so you consciously choose to rent. Renting is also great if you don’t want to do all the maintenance yourself. When something breaks my apartment, I put in a maintenance request with my leasing office, and it’s fixed the next day. I love that! No taking time out of my busy schedule for an unexpected trip to Home Depot.
Or, maybe you have a dream of buying a historic Victorian house in your hometown. You consciously decide to save up to buy one, even if though it’s the option that decreases your overall net worth. And that’s okay! Sometimes buying a property is an emotional decision, and as long as you run the numbers and are realistic about your situation, go for it. You’re the captain of your own ship.
I’m not categorically opposed to buying real estate. I’m opposed to young people blinding following the messages that society gives us and then having our savings swindled away by realtors and big banks.
Critics might say, “This guy is just salty he can’t afford a house. LOL!” I can afford a house. I consciously choose to rent.
In this stage of my life, I don’t want to be chained to particular place or be forced to repeatedly make mortgage payments. I have the flexibility to quit my job and move anywhere in the world without fearing whether a bank will repossess my property.
One of personal finance rules is “Never take advice from someone with less money than you.” Lots of people love to talk–but are they in an enviable situation?
What to say when people pressure you to buy
Let’s keep an eye on practicality. People are going to pressure you to buy property. Your parents in particular will judge you for not owning real estate.
If someone asks you “Why don’t you own a house yet?” you can say “I ran the numbers and it doesn’t make financial sense for me right now.”
Let’s break that down.
“I ran the numbers” — You took the initiative and performed a rigorous analysis of practical considerations like the price of the property, phantom costs, and your ability to pay.
“and it doesn’t make financial sense for me” — You intentionally and independently chose your priorities in life right now, whether it’s your career, travel, dating, or something else. Buying real estate is not your financial priority.
“right now” — You acknowledge that things change, and you’re open to buying real estate in the future.
Some people will be shocked to hear this. They are in the cult of real estate. As soon as you suggest that buying property is not the greatest thing ever, they will launch into a monologue with all the propaganda phrases fed to them by the National Association of Realtors and chatter excitedly about mortgage interest rates. The best thing you can do is smile, nod, and change the subject. You don’t need to explain yourself to them.
At the end of the day, buying a house or condo should be something you want to do, not something you feel obligated to do. It’s possible that I’ll buy a property one day, but I’m not in a rush.