Your Home, Asset or Liability

[Seeker]

I agree that your home is a better investment than renting, but it's not as good an investment as people think. Too many people have too much of their income tied up in their homes. Some homes have seen large appreiciation, but most have not, but we keep putting large sums of money into them instead of true investments.

Yes, that's true too. Most people buy too much house for too much money, especially here in California. Unfortunatly because of the rental situation, and the bad loan choices, people lose both ways.

I still see a lot of families that keep borrowing on their homes as well. I understand real needs and borrowing in those cases.... but not for wants; not for a vacation, not for a new car.

When you borrow against your home you add years of interest payments back into the obligation and you add more time to paying off the total debt.

[LivingAlmostLarge]

Except the millionaire mommy would argue that renting is always better. Read her site about why she rents. And how it costs more to own. Very good arguments.

[maat55]

Except the millionaire mommy would argue that renting is always better. Read her site about why she rents. And how it costs more to own. Very good arguments.

It all depends on what your purpose is for your dwelling. If it's just a place to sleep and shower, you can rent and buy less house, using more funds for investing and enjoyment. If it's your main enjoyment, you can invest a little more into it, your luxury money. But in any most cases, it's a liabillity that should be purchased much like a car, by limiting how much of your income you should put into it and how, such as using shorter term notes and allowing more money for better long term investments.

I think too many people think it is a wise investment and they focus too much of their income into it. It can work for some of those in areas of the country where housing inflates rapidly, and they then move to cheaper areas of the country later. But all in all, it should not be your best investment option.IMO.

[disneysteve]

I think too many people think it is a wise investment

I agree with you here. I think many people rationalize and justify their home purchase by saying it is a good investment. Long-term home appreciation runs around 5 or 6% annually. Most people probably don't even break even when you factor in mortgage interest, taxes and inflation, not even counting maintenance costs and other carrying costs.

[Merch]

I think you guys are missing the typical leveraging factor of a house. Let’s say you purchase a house for 200k and put 40k down or 20%. Now the house increases 5% or 10k. You have just made 25% on your money. So, the leveraging factor is very important when figuring rate of return.

Now, as you pay of your property, the year over year rate of return on your cash investment diminishes and approaches the 5%-6% return Steve mentioned (I am just taking these returns at face value.)

As for carry costs, maintenance, taxes and insurance; you would be paying these indirectly if you rented. Or I should say a landlord would attempt to minimize their negative cash flows as much as possible. Maximizing rent to cover the costs of the property as well as a profit.

So, for the same house the rent and mortgage plus escrow should be comparable. The only time I would see the rent being less would be if the landlord held the property for an extended period of time and hence the mortgage payments the landlord was paying would be less. But then I don’t think that would be an apple to apples comparision. I think you would also need to find an example where the underlying finance was the same too. And in that event, I think rents would be greater then home costs because the landlord would not only have the same costs but would also try to make a profit or keep some sort of retained earnings.

And a house is not like a car. A car continues to decrease in value while a house general does not (in the long term).

[Merch]

I also agree that peopl ein general over extend themselves on house purchases. But people do that on auto purchases too.

[disneysteve]

I think you guys are missing the typical leveraging factor of a house. Let’s say you purchase a house for 200k and put 40k down or 20%. Now the house increases 5% or 10k. You have just made 25% on your money. So, the leveraging factor is very important when figuring rate of return.

Very true and that is an important point. However, that leverage really only comes into play if you sell the property. And then, while your home has increased in value by 5%, all the homes around you have probably done the same, so wherever you move is then more expensive than a year earlier unless you downsize or leave the area. We've been in our home for 14 years and have no plans to move. The leverage issue isn't all that relevant to us.

[maat55]

I'm not arguing that homeownership is better than renting. but that, too much home, is a bad investment and long term loans make it worse.

At least with ownership, your cost will, after paying it off, only cost you insurance, taxes and upkeep. One thing to remember is that, in most cases, you never realize your profit unless you downsize dramatically, move to a lower cost state, or take out a reverse mortgage.

[Merch]

Right. And you only experience the profit in stocks or other investments or other assets when you sell them or sometimes refinance them (auto loans). Same with a house, you have paper profits until you refinance or sell.

Steve, I could sell a large tech stock and buy another large tech stock and chances are they would earn about the same percent. Or I could take the profits and purchase a good stock that is in a sector that is about to turn around. Or I could keep the stock and enjoy the dividend payments.

With a house, I could sell it and move into a comparable house. Or I could sell it and move into a neighborhood that's is starting to turn around. Or I could keep the house and when it is paid off live there rent free.

[disneysteve]

Merch, I'm not disagreeing. Everything you said is true. I just think leverage is more significant when dealing with investment properties than when dealing with your primary residence. Personally, I'm not all that concerned about the value of my home. If it goes up, down or sideways, we have a place to live at what we consider a reasonable cost. If the value skyrockets, we aren't selling. If the value plummets, we aren't selling (unless the neighborhood becomes unsafe). It wasn't purchased as an investment.

[Merch]

Steve,

I agree with you. Generally, the underlying reasons for purchase a house is less similar to other investments. A house purchase has a lot of emotion in it. It is part of who you are. A home, if you will.

[maat55]

Right. And you only experience the profit in stocks or other investments or other assets when you sell them or sometimes refinance them (auto loans). Same with a house, you have paper profits until you refinance or sell.

Steve, I could sell a large tech stock and buy another large tech stock and chances are they would earn about the same percent. Or I could take the profits and purchase a good stock that is in a sector that is about to turn around. Or I could keep the stock and enjoy the dividend payments.

With a house, I could sell it and move into a comparable house. Or I could sell it and move into a neighborhood that's is starting to turn around. Or I could keep the house and when it is paid off live there rent free.

The purpose of buying stocks and other non home investments is to earn money to spend for whatever. How many people buy a house so they can earn money to buy whatever with it and is that a good idea. Home ownership is nothing more than self landlording.

[Scanner]

Well, I will say this. . .our house the last 10 years has probably gained about 100% in equity (started with a $130,000 house, now own a $360,000 house with a $123,000 mortgage).

The Blue Chips has netted my wife's Roth IRA a big fat 3% return. Yes, I'm fuming about that - its just not the 90's. We barely have the money we have contributed. . .maybe a little more. Oh, yeah, I know. . .be patient. Dell, Disney, and Coke will rescue the day.

I have to say in all fairness, our house has outperformed the S&P 500/Blue Chips and why most of our net worth has ended up there.

No offense guys but I do think you all do place a little too much faith in domestic stock/Blue Chips.

Thank God for our house. . .or we'd be a lot worse off.

This is why I refuse to pencil it off.

[Merch]

Maat55,

The first home I purchased was a condo in an up and coming area in Brookline. The reason I purchased it was solely as an investment. Now I happened to roll all the profits into my next house purchase.

When I profit and trade stocks, I usually rotate my money into other stocks that have higher return potentials.

And I do believe that people look at a house as an investment 2 times during their lives (if not more). 1) If they are looking at a starter house and plan on using it to get into a larger house in the future 2) in retirement when people are looking to downsize and fund their lifestyles.

In the last 5 years, people have been taking equity out of there house in the form of loans. But I do agree that people buy too much house and usually do not think about the entire financing angle.

But I do look at my house as a long term investment. After I retire in another 35-40 years, I will probably sell it and down size and use the rest of the proceeds for retirement. Like any investment, I do expect the value to grow and I do plan to realize that gain. I also look at it as an asset that I could sell or borrow against if I ever needed to.

I am just trying to make the point that you can look at a house as an investment or asset like any other investment. The major difference is that a lot more emotions and feelings are caught up in a house.

[Scanner]

I want to give you more specifics of my situation and why I am digging my heels in on "valueing my home."

In 1997. . .we put $50,000 on a $130,000 home (pay attention to the "leveraging concept").

In 2008. . .being upwardly mobile and moving to a bigger house, we currently have a $360,000 home with a $123,000 mortgage.

So. . .we went from a $80,000 Net Worth on our Real Estate to $237,000 within 11 years. So effectively, that's about a 150% return.

Now. . .we started our Roth IRA's nearly the same time. . .I confess I am not sure of my exact contributions but I am aware of my wife's contributions somewhat.

We have put approximately $20,000 in retirement savings (I know. . .some years we did nothing) into a Blue Chip fund for her. . .today, it sits at about $25,000 in worth).

Woop.

Dee.

Doo.

Yah.

Go mutual funds.

We got no leverage with our mutual fund and a pee-poor return IMO.

Not to mention by contribuing to retirement savings and directing cash elsewhere, we lose leverage when we contribute to IRA's. I am not saying we shouldn't have done it but fair is fair. . .the home has won the race the last 10 years.

My International and Silver have done better but it still doesn't match what our home has done for us.

Yes, I realize all the pitfalls of owning a home and I am not casually dismissing them. And maybe all of this opinion that a house isn't an asset is based off of Pundits from the 1990's who said Domestic American Stock could never go wrong. . .8% per year forever and ever and ever.

But I guess I see a home as an integral part of wealth accumulation and I'll dig my heels in on the subject as you can see.