In One Up on Wall Street, Peter Lynch recommends housing as the best first investment:
Because of leverage, if you buy a $100,000 house for 20 percent down and the value of the house increases by five percent a year, you are making a 25 percent return on your down payment, and the interest on the loan is tax-deductible. Do that well in the stock market and eventually you’d be worth more than Boone Pickens.
As a bonus you get a federal tax deduction on the local real estate tax on the house, plus the house is a perfect hedge against inflation and a great place to hide out during a recession, not to mention the roof over your head. Then at the end, if you decide to cash in your house, you can roll the proceeds into a fancier house to avoid paying taxes on your profit.
The customary progression in houses is as follows: You buy a small house (a starter house), then a medium-sized house, then a larger house that eventually you don’t need. After the children have moved away, then you sell the big house and revert to a smaller house, making a sizable profit in the transition. This windfall isn’t taxed, because the government in its compassion “gives you a once-in-a-lifetime house windfall exemption. That never happens in stocks, which are taxed as frequently and as heavily as possible.
Because of the deductions, this works for individuals, not professional investors, of course.
How does this strategy perform compared to 401k, index funds, and other low-risk passive instruments available to individuals? What are cumulative returns over 20-30 years?