Wednesday, May 27, 2009

Your Home Is A Bad Investment

Many people believe their home is a good investment. Using Robert Kiyosaki's definition of an investment as "something that puts money into your pocket," it's obvious it is not. Now the Wall Street Journal is reporting that, even by the conventional definition of investment, your home still may not be a good investment.

Using housing pricing data for the last twenty years in ten major cities, housing prices produced a real return of between 1.15% and 2.2% annually, after inflation. When you figure in maintenance costs, you could actually be losing money.

The article really only looks at property appreciation to determine the value of the investment. There is no mention of the income tax deduction for mortgage interest, which is usually quite substantial for most homeowners and probably would boost the return figure a couple of percentage points. Still, the gist of the article is correct - your primary residence is not an investment.

I subscribe to the "putting money in your pocket" definition of an investment. And while your personal residence may not be a good investment, that doesn't mean real estate isn't. As long as a property has positive cash flow, it's a decent investment. How good of an investment, of course, depends on how good the cash flow is. Then, of course, there are the other factors, such as depreciation, the ability to defer taxes through 1031 exchanges, etc.

While I am glad the WSJ article points out that people's primary residences are not generally good investments, I'm afraid some readers might come away from the article thinking all real estate is a bad investment.


kwerner said...

I too subscribe to Kiyosaki's definition of how an asset should put money in your pocket. However, I disagree with the WSJ article's questioning that your home is not a good investment.

I bought my home in 2005 and during the last 4 years, I've built up about $40,000 in equity.

My mortgage payment (PITI) during this period has been about $800 a month. So, when you divide the $40,000 of equity I've gained into the number of months I've lived in my home (48) it equals $833. Meaning that I've gained $33 a month in equity ON TOP OF my mortgage payment each month I've lived here.

If I had chosen to rent a similar home over the last 4 years, I'd probably have paid nearly $1000 a month towards rent and have spent a total of $48,000 over the last 4 years with NO equity build up.

That's why I have a problem with the WSJ article doubting that your home is a good investment. After all, if you didn't own your home, you'd probably just be renting (and building up NO equity) - which is really just throwing your money away.

Clifford said...

Every now and then, some major newspaper article prints out that homes are bad investments. Last article was from the NYTimes.

These clowns always forget two points: (1) the tax deductions and/or depreciation (2) the power of leverage.

I expected more from the WSJ because they seem more business savvy. But I guess in the end, they're still a newspaper.

Matthew Jung said...

I agree, the primary residence is not a good investment. I guess this is especially true for me since I paid off my mortgage years ago and do not have the ability to deduct the interest.

S said...

I agree it's not a good investment WHILE it is your PRIMARY RESIDENCE. But if done correctly, it CAN be a good investment in the long run. I know a few couples who do nothing else but buy a distressed property, live in it for 2-3 years, fix it up while living in it, and take all the personal residence deductions. They then sell it for a big profit - tax free - rinse and repeat.

bilgefisherman said...

I'm not sure I agree. I picked up my home for 87k last year. I put around 7k worth of work into it. My holding costs mortgage, water, power, security, trash etc will be around 11k. Figure 7% closing costs will total 113k into the house. I can sell it in this market for 125k. Basically I have been paid 12k plus my tax reductions just for living here. Its not a homerun, but it beats the alternative.

Shaun said...

You've only run half the numbers. When you sell you will have closing costs again. Using your 7% figure, that's 8.75K. Plus if you use an agent to sell, that's likely to be another 6% or 7.5K. So after you sell at 125K, you'll be getting 108.75K back in escrow. That is less than your purchase price, giving this investment a negative return.

adrin said...

Hey Shaun.. if you think that home is a bad investment I totally disagree with this article. Your home means a lot of things to you, most of them good. Your home gives comfort and protection to you and your family, and it could well embody all your material hopes and dreams.

Boise real estate

Shaun said...

Adrin - again, you miss the point. An investment is something that puts money into your pocket. And yes, a home does give you comfort and protection. But that does not make it an investment. Food provides you with the means to survive, but it is not an investment either.

Matt said...

Moneywise primary residence is certainly not a good investment, in fact it is a cost. But thats a cost that no body can do away with.


wachovia online banking said...

I believe investing money in real estate is never a loss. May be prices of home we bought get lower but at least it provides us our own property.
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