Do you see your personal home as an investment or an expense? I'm on my second duplex that I bought to live in, improve, and then rent. My next home will likely be a single family and in a nicer neighborhood. I'm not sure if it will be a long-term home, but if it's not I'd like to buy at least a 15 year house after that. When you guys buy a house to live in for a long period of time, do you buy as an investment hoping for appreciation or based simply on a budget and find something that meets your location, size, and architecture requirements?
IMHO a house you live in is usually a pure liability.
Its easy to compare a value from 30 years ago to a value today and say "wow, that was a good buy." But when you factor in:
1) The interest you pay on the loan,
2) The insurance you pay for 30 years,
3) 30 years of taxes
4) all the maintenance and updating required to generate that value after 30 years (I've looked at houses that haven't been updated in that length of time, we call those "needs work" and "deferred maintenance")
5) the costs you will incur to sell,
6) Changes in the area (bad or good), changes in house styles, etc.
then its rarely a good investment. In many cases, the first four, added to the price you paid, total up to more than the new value. Then slice 8-10% off when you sell and you're actually in the hole vs. the money you've spent.
OTOH, many folks don't have any real investments. So, if you buy a house and diligently pay it down for 30 years, at least you do have a big asset. If you use it as an ATM, though, and take the cash out, not so much. You're slowly selling the house rather than building up an asset.
If you use your ability to shelter gains, and do "low speed fix and flips" where you buy a junker, live in it and fix it up over the course of two years, and then sell it at a tax-free profit, then it really can be an investment.
And, if, as David Niles says, you pay it off and leave it to the kids, then they have not only a nice asset, but also get it with a stepped up basis, avoiding taxes. Even then, though, if you leave behind a "needs updating, deferred maintenance" property that's mortgaged to the hilt, you've left nothing to the kids.
But in any case, you need a place to live. Even if the net costs is negative, after adding up the true cost, you should compare that to what rent would have cost you. Even if, as an investment its mediocre, it may still be the cheapest way to put a roof over your head.
Key to buying a house you live in is to buy the cheapest thing that fits your needs and is something you can afford.
I bought my current home as an investment, while I have no intentions on moving again ANY time soon, I bought it for the right price and should be worth considerably more for my kids way down the road, hopefully.
IMHO a house you live in is usually a pure liability.
Its easy to compare a value from 30 years ago to a value today and say "wow, that was a good buy." But when you factor in:
1) The interest you pay on the loan,
2) The insurance you pay for 30 years,
3) 30 years of taxes
4) all the maintenance and updating required to generate that value after 30 years (I've looked at houses that haven't been updated in that length of time, we call those "needs work" and "deferred maintenance")
5) the costs you will incur to sell,
6) Changes in the area (bad or good), changes in house styles, etc.
then its rarely a good investment. In many cases, the first four, added to the price you paid, total up to more than the new value. Then slice 8-10% off when you sell and you're actually in the hole vs. the money you've spent.
OTOH, many folks don't have any real investments. So, if you buy a house and diligently pay it down for 30 years, at least you do have a big asset. If you use it as an ATM, though, and take the cash out, not so much. You're slowly selling the house rather than building up an asset.
If you use your ability to shelter gains, and do "low speed fix and flips" where you buy a junker, live in it and fix it up over the course of two years, and then sell it at a tax-free profit, then it really can be an investment.
And, if, as David Niles says, you pay it off and leave it to the kids, then they have not only a nice asset, but also get it with a stepped up basis, avoiding taxes. Even then, though, if you leave behind a "needs updating, deferred maintenance" property that's mortgaged to the hilt, you've left nothing to the kids.
But in any case, you need a place to live. Even if the net costs is negative, after adding up the true cost, you should compare that to what rent would have cost you. Even if, as an investment its mediocre, it may still be the cheapest way to put a roof over your head.
Key to buying a house you live in is to buy the cheapest thing that fits your needs and is something you can afford.
I am convinced my home is a liability. As Jon Holdman routinely states "your home is just an expensive doo-dad." At first I thought this was not necessarily the case but if you sit down and think about it, an investment is something that produces income or value. Of course, by paying down your mortgage you are building value in your home, but you theoretically should account for the fact that living is indeed an expense thus you are basically paying you and your lender rent. Furthermore, there is an expectation that home values appreciate over time which can be nice but most people I interact with buy their home with goggles designed to meet their needs and not meet their investment beliefs/objectives.
One of the best things I did was convert my primary residence to a rental and downsize substantially. Not only am I making money on my former home, but my operating costs went down drastically. I found it's been a lot costlier to fill/use empty space than it has been to limit my existing needed space.
We consider a home an expense, but try to make it as much of an investment as possible. Unlike our investment properties, we always considered our home as buying a lifestyle -- schools, recreation, pool, waterfront, etc., how we wanted to live at that stage of our life. We did, however, choose fixer-uppers in nice neighborhoods and took advantage of the capital gains exemption (tax-free profit is so nice!), moving every 5-7 years. Especially as our kids grew up, lifestyle options were more important than investment considerations for our own home. Now that the kids are grown, we've downsized, turning that tax-free profit into more investment property, and moved into something we can turn into another great rental when we buy a permanent retirement home in the next few years.
I think that unless you're going to live in your parents basement, your car, or some other free place, a home is a great investment. You can buy a home with a fifteen year mortgage for about the cost of renting. After fifteen years, all you need to pay are taxes, insurance, and maintenance. For me, it's a no brainer.
Simple to figure: Is it worth more or less than you owe on it?
Equity = Asset
Negative Equity = Liability
Toss the terminology any way you want, but the above is the fact. Monthly expenses is a different animal, but you'd need a place to rent if you didn't pay a mortgage.
If buying your house is a mediocre retirment investment for a non-real estate investor, it would also be a mediocre retirment investment for a real estate investor.
As far as real estate investment strategy goes, your mortgage payment counts against your DTI. Rent does not. So in terms of getting financing, it is a liability in the sense that it is a hendrence.
When reviewing all the options, I'd rather own my own house. I am even willing to pay for a little more than just what I "need". I know Jon always says a house is an expensive doo dad. My opinion is that the portion of the house that costs you above and beyond what you would pay for rent is the expensive doo dad part and the part that you'd have to pay for rent if you did not own is the justified expense.
I don't consider my home an investment or liability. It's just a place to live. We all require food, water and shelter. That means we have to pay to live somewhere. My mortgage is less than what houses are renting for in the area so I figure it was a good buy.
And don't forget inflation!
To keep it simple:
Asset = makes you money.
Liability = costs you money.
Does your personal home make you money or cost you money? I know mine costs me money and it is the biggest liability I have. True for most people I'm sure.
Asset = makes you money.
Liability = costs you money.
Does your personal home make you money or cost you money? I know mine costs me money and it is the biggest liability I have. True for most people I'm sure.
Would you tell me that cash in the bank is a liability because true inflation is more than the earned interest? I would say that inflation is a liability - not the cash. Same thought process with a house that has equity.
If I pay less for my mortgage (PITI) than I would for rent (and I am not talking extravagance here: 450/month mortgage and the house will rent for 750), even including the maintenance, and I owe less than I can sell it for, how is it not an asset? Not only does it save me money from what I would pay to rent it, but I could sell it for a profit or at least break even after fees.
When you rent a house, you just pay for the liability of a property to a landlord as well as some mortage paydown and even some cash flow if the owner bought it right.
If it doesn't make dollars it doesn't make sense... I agree with everything here. To some degree everyone is right. Some more than others, but we all essentially said the same thing. As long as it costs me less than it would have to live elsewhere.
-Steven
Its a forced savings account with a generous dividend yield.
My thinking is exactly in line with Brian Hoyt. Even if my mortgage is the same as my rent I will never get any of my rent back. However, at some point in the future I will or can cash in my house for some of what I've been paying, after taking out all the things Jon mentioned. So as long as the equity I can recover is larger than the difference between rent and my PITI I'm better off.
For instance the apartment I'm moving out of rent is $995, money I'll never see again, the house I've bought mortgage is $1147. The portion going to actual principal is only $250 but 1147-250 = 897. So I'm saving $100 a month, luckily it's a duplex though so I'm saving much more than that.
All of that just to fancy up what Steven said:
We own ours outright, so we only pay property taxes, insurance and maintenance, which roughly halves our cost of having a roof over our head. So we see it as an investment with a return of about half what we'd otherwise pay for shelter.
For me all my houses have been investments. When I first started out I would buy an investment house and live in it for two years while I was fixing it up. Then I would sell or rent it out and move on to the next one. I don't do that anymore since I am now married but even the house we live in now I purchased as an investor would and luckily the house had very little repairs to be made. I also got a free pool, hot tob, deck, patio cover and other upgrades with the house. I am not sure if I could ever let myself pay retail for a house or any other piece of real estate.
Because I'm young (20) and mobile, I will view my first few homes as investments. Buying for a great price, rehabbing, and selling 2-3 years down the road for tax-free profit will be a great way to learn aspects of the business and build sweat equity from the rehab portion while making a sound investment.
But down the road I'd like to build my own dream house to enjoy with my future family...
I bought this house because of location and acreage, 5 acres in a prime location. As I told my boys, their making plenty of new houses, but arent making any more land. I would say my investment should be worth at least double for my kids in land alone.
In the US policy makers' point of view, buying a home is a much better investment than owning regular financial assets.
Here I would like to consider the following five aspects:
(1) Mortgage interest deduction.
(2) Tax exemption from implicit rental equivalence of income.
(3) Tax exemption from 500 K capital gain exempt from tax.
(4) Carrying cost.
(5) Non-recourse law of certain states.
A FED study points out that (1) and (2) are advantages from tax code. It seems they forget (3) , which is certainly a big plus. The study argues that if one carries other financial assets, which generate money for the owner or money equivalence of benefits to the owner, that money is viewed as taxable income.
I am not sure if I agree with the study on this completely. For example, if I carry stocks, it is true that the dividend is taxable. Nevertheless, the investment interest is also deductible. Thus (1) has been double counted as an advantage. Certainly, (1) and (2) together make owning home more tax friendly than owning stocks.
The carrying cost for home is probably higher than that for other financial assets, as there is a property tax and insurance etc..
Some financial assets such as natural gas also has a high carrying cost though.
In the eyes of IRS, owning home is a kind of investment and therefore the interest is deductible.
Most of investments carry risks, a bad investment can lose you money. Typically, when you use higher leverages, your risk becomes higher. However, this is not quite true in the housing market, as many home owners are protected by the so-called non-recourse law of certain states. For example, if before the crash you were in a non-recourse state and was 100% financed, then your risk was zero. Had the market gone further up, you would have made money. Even for the finance without non-recourse law, only about 0.2% of the debt was recovered as the legal expenses were too high.
Thus (5) is maybe the biggest plus for home investment, but a extremely politically sensitive aspect, which the FED researchers have chosen not to discuss.
In spite of (4), overall a home is a good investment.
We built ours 20 years ago raised 3 kids & both my wife & I have large (deductible) home offices.
You could not replace it today for the original build cost. We never had a mtg.
It's 3500 sq ft BUT when the wife wanted to add a room for the hot tub a 12x15 room became a 3 story 2000 sq ft addition. I did all the work with subs, & no financing.
Our taxes are $11,000 a year but that's less than one deal a year. Utilities are $2000 p.a.
BUT I can 'HIDE OUT" in a number of places now & we can accommodate all the families during the holidays. We also own the home next door & have few close neighbors. We also hold the paper on all of our kids homes that we have built/rehabbed for them.
We have had so many friends downsize only to be disappointed. To me the cost of home ownership can be supplemented with other streams of income.
I've seen this argument before and most of the pure investors tend to fall on the "your house is a liability". However, my argument to that would be what would your cost be to live in the same home if you were renting? Would it be more or less?
If I look at the homes I'm buying today (90k all in) and I were to move in to one as an owner occupant:
Renter:
$1,400 a month rent
No repair expenses
No principal paydown
No tax deductions (property tax or mortg interest)
No appreciation
Your net cost is $1,400 a month as a renter.
Owner:
$950 a month in PITI
Have to pay repairs ($250 a month tops if you're including long term stuff)
NET $1,200 a month
But add back:
Principal paydown ($150 a month)
Tax deductions ($4k for interest, 5k for taxes = 9k total. Which should mean an additional 2,500 in tax return or $200 a month)
Appreciation. Now, maybe none, but historically 3% a year or about 5k per year on a 145k house. Lets say $2,500 a year or $200 a month to be conservative.
TOTAL ADD BACK: $550 a month (150+200+200)
ACTUAL NET AS HOMEOWNER: $650 a month
As a homeowner, you're saving roughly $750 a month.
Even if you take out appreciation completely, you're still only
paying $850 a month as principal paydown and tax deductions come to $350 a month.
So somebody tell me how owning a home is not a great investment? To suggest that just because it isn't making you money, means its not an investment is semantics. The fact is if you don't own, then you're renting. And if you're renting, you're paying about $750 a month more than if you were a homeowner.
What is you return as a renter? $1,400 a month net loss.
As a homeowner? $650 a month net loss.
Neither option is a good investment since they're both losing money. But being a homeowner is a much better investment to me than being a renter. And, for that reason, I say owning your home is a good investment. Clearly a far better return than the alternative.
In my mind a home is always a liability until you turn it into an asset by selling it or using the equity to leverage into an investment via HELOC that will then put money into your pocket. That assumes of course you've arbitraged correctly and the investment return exceeds the interest cost on the HELOC.
I've been reading The Financial Samurai blog lately and he just had a brilliant post that touches on people's mindsets about this topic.
http://www.financialsamurai.com/2013/01/04/the-real-estate-investors-mindset/