FAR 027 Announcements: Tuesdays at 2. Free online coaching from the Flipping America guy Contractor Fails Two Renewal Quotes Topics: Is Home Ownership a good investment? The top Ten Real Estate Deals in American History The best time in History to invest in real estate? Jeff Reeves, a columnist for MarketWatch says yes.
- It’s a Healthy Market, not a bubble. Realtor.com has create a “bubble index”
- Prevalence of house flipping
- Price to income ratios
- % of buyers using mortgage financing
- Foreclosures are at the lowest level since 2000.
- Innovation is lowering barriers to entry for investors.
- Online research
- Online funding
- Innovations in lending for investors
- Comparatively, stocks and bonds aren’t looking that promising at the moment
- 10 year treasurys are at 1.6P% annually and investment grade corporates aren’t much better.
Emails: Susan and Jonathan write in from Pittsburgh. “We are newly married, both college graduates with decent incomes and a plan for a family. We are considering buying our first home and want to know what you think about it as an investment.”
- Your home is not, and should not be considered an investment. The appreciation in your home will barely cover inflation historically. If you are considering a 30 year mortgage, you have to look at historical trends not what has happened recently.
- It doesn’t provide income
- It doesn’t grow in value in a significant way.
- Your down-payment applied to an indexed fund is likely to do better over the next 30 years.
- You are not going to dispassionately analyze your home like you should with any real investment.
- It should be on your balance sheet as a consideration in your net worth, but note that it does not count toward the requirement as an accredited investor. It should be viewed more as a consumption item rather than an investment.
- But what about paying down the mortgage and building up equity? It is true that for many, homeownership is a means of creating a type of “savings account” and for many, the lack of liquidity is probably a good thing. You won’t be selling off a piece of your house so you can buy the hot new consumer electronics next year that you really can’t afford. Are you really building equity?
- Consider the other costs of home ownership
- Maintenance and repairs
- Insurance
- Taxes (deductible but must be reckoned)
- Example: I bought a home in 2002 with $200k in equity the day I bought it. Saw my girls through their high school years, raised my son there. Over the years I have paid the following:
- Maintenance and repairs: $46,500
- Insurance: $22,500
- Taxes: $72,000Total: $141,000
- If I were to sell the house today I would net from the sale around that same $200,000 I had the day I bought it.
- What I should have done:
- Flipped that house for cash after I finished repairs
- Calculate the cost of homeownership and over the years invest that $141,000 into other things (along with the original $200k)
- I would have well over $1m additional in my nest egg right now.
- If you want to pay down a mortgage and build up equity, why not also structure it so you can depreciate the property on your taxes and write off all of the maintenance and repair expenses? Yes I’m talking about owning rental property.
- But when I’m old and gray I want to have a paid off house so I won’t have the burden of the house payment on my retirement income.
- There are OTHER many good benefits of buying and owning a home:
- The forced savings is a reality and for better or worse is the primary savings of most Americans.
- You can deduct the interest paid on a mortgage. This is a benefit, but I do not think it rises to the level of a “reason” to buy a home.
- Typically you can enjoy more space than you can in a rental. The direct cost per sf is less.
- Call me old school, but I think kids need to grow up with a yard to play in. - And parents to make them go outside and play.
- You can find a home and space in an area where you want to be and rent. When your needs grow, rather than the challenges of selling and buying, just upgrade the rental.
- Home ownership is undeniably satisfying to the ego and our idea of the American dream, but is not usually the best financial decision. You should never buy as much house as the lender tells you you can afford, and you shouldn’t do it without a 20% down-payment and a genuine strategy for savings and investments that will not be affected by your house payment.