Is your primary house an investment?
Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
In another thread this debate was started. Is your primary dwelling an investment?
One argument for is that you expect your primary dwelling to appreciate, therefore, it is an investment.
However, an argument against your primary dwelling being an investment is that it often doesn't appreciate enough to compensate for the payments, effort, expenses.
What are your thoughts?
Rick
If you don't treat it like an investment when you purchase it then you are fooling yourself by pretending it is an investment.
If you bought your current house because you and your spouse fell in love with it and thought it would be a great place to raise your family then I seriously doubt you analyzed it as an investment going in. In addition, if you do any improvements or repairs you are not likely to sit down and methodically decide the best return when you pick your appliances for that new kitchen.
Nope, you are more likely to pick what you like, perhaps with upgrades if you can afford them because you want to enjoy your time in the home where you live.
Can it be an investment? Sure, there are lots of people who buy not because they like it as a place to live but because they can live in it while fixing it up and then sell it and move on to the next one.
So, I suspect the reason a debate broke out over this is because at the end of the day, "it depends."
I've seen this debate start up a few times, I'd have to go with no. I see it more as a liability, this goes hand in hand with my ideas on rent vs own. As much as I'd love to own our primary, it makes no sense for where I live, and I would be dedicating funds away from earning money.
When "qualifying" to be an accredited investor your primary dwelling's value is not included in the net worth requirement. I'm not sure too many here would be excited to buy their primary to try out the appreciation game.
Andrew
If you don't treat it like an investment when you purchase it then you are fooling yourself by pretending it is an investment.
If you bought your current house because you and your spouse fell in love with it and thought it would be a great place to raise your family then I seriously doubt you analyzed it as an investment going in. In addition, if you do any improvements or repairs you are not likely to sit down and methodically decide the best return when you pick your appliances for that new kitchen.
Nope, you are more likely to pick what you like, perhaps with upgrades if you can afford them because you want to enjoy your time in the home where you live.
Can it be an investment? Sure, there are lots of people who buy not because they like it as a place to live but because they can live in it while fixing it up and then sell it and move on to the next one.
So, I suspect the reason a debate broke out over this is because at the end of the day, "it depends."
Do you remember Kiosaki's definitions of asset vs. liablilty?
"Asset" is what puts money in your pocket and "liability" is what takes it out.
Yeah, RK is great at coming up with meaningless sayings like that.
"Asset" is what puts money in your pocket and "liability" is what takes it out.
Yeah, RK is great at coming up with meaningless sayings like that.
Why is it meaningless? It makes perfect sense from a cash-flow perspective. A rental property with negative cash-flow is a liability also. It costs you rather than makes money for you.
When you buy it and move in, no it is a liability. Granted the benefit in some areas is that it is a lower liability than renting so it can have a tangible benefit, for me that is not the case here in CA so I rent and invest out of state. When you sell you convert that liability by paying off the underlying debt and realizing any potential gains into an asset (cash).
The one situation I would say it could qualify as an investment (IMO) would be in a MFR that you owner occupy and the other units cover all your expenses. So we're back to the "it depends", however in 99% of cases no it is not an investment.
@Duncan Taylor , @Nick B. , @Andrew O. I read the book too. I can see the argument that your primary dwelling is not a great investment in many cases. However, I think it can be a great investment and therefore shouldn't be thought of in black and white terms.
For example, if I have a high income and tax burden, then a primary dwelling is a great tax shelter. It's also a great way to buy a home for a small percentage down, renovate, then later move to your next primary dwelling, repeat...
Buying a home as Owner Occupant, Fannie First Look, can create some advantages.
My personal experience is that my primary dwelling has been a good investment. It has appreciated handsomely, sheltered my income, and for a few years, was a source of rental income.
I certainly get some utility out of picking my own finishes and fixing things at my leisure. My response times are much faster for tenant issues than for my own.
To me, buying a home is an investment strategy for expense reduction when retired as well. I would not want to be renting when I'm retired.
my 2 cents.
Rick
Yeah, RK is great at coming up with meaningless sayings like that.
Why is it meaningless? It makes perfect sense from a cash-flow perspective. A rental property with negative cash-flow is a liability also. It costs you rather than makes money for you.
It is no more meaningful than saying the clothes on your back are liabilities. Or the food you eat is a liability. Or the toilet paper... well, you get the idea.
He has always been incredibly ignorant about finance and it frustrates the hell out of me when he pushes that ignorance on to others.
For example, if I have a high income and tax burden, then a primary dwelling is a great tax shelter. It's also a great way to buy a home for a small percentage down, renovate, then later move to your next primary dwelling, repeat...
Buying a home as Owner Occupant, Fannie First Look, can create some advantages.
My personal experience is that my primary dwelling has been a good investment. It has appreciated handsomely, sheltered my income, and for a few years, was a source of rental income.
I certainly get some utility out of picking my own finishes and fixing things at my leisure. My response times are much faster for tenant issues than for my own.
To me, buying a home is an investment strategy for expense reduction when retired as well. I would not want to be renting when I'm retired.
my 2 cents.
Rick
You are exactly correct about the tax shelter strategy. And, as I said, it depends because for some they bought it to be an investment. But, for others they bought it because they wanted to live there.
I don't consider any of my homes to be a monetary investment. Now, if you want to get into intangibles, that is a whole different story. The look on my grandkids faces as they frolic on the beach outside my FL home is worth FAR MORE to me than everything I could ever own. But, I bought it because it was in the right place, with the right space and my current wife loved it.
@Nick B. I am sure he is alluding to the fact that he uses a lot of motivational quotes vice providing very much actual useful information. I believe a PR can be an investment if it is purchased for that intent. Many people benefit from PR benefits buying a property they do not plan on staying in forever. Even if you dont, you have to live somewhere and the added costs can be compared to tax advantages, equity buildup, and the fact that it will be paid off one day (or sold).
Tax shelter? Really? Let's do some math here.
Say, your income is $100K, your tax bracket is 28%, and you payed $10K in mortgage interest. That interest is tax-deductible and you ended up getting $2800 back. Great!
But wait! What if you did not pay interest (a rate was 0% or you paid off your house or you rent)? Now you get taxed on that $10K and have to pay $2800 in taxes.
But what is left? In the first example you paid $10K and got $2800 back, in the second example you paid $2800 and still have $7200 left!
So which scenario is better? Pay 28% to the government or 72% to the bank?
Well, you still need to factor in the costs you would incur to live "somewhere" and unless you pay cash for your home, you will pay interest. Even if you pay cash for your home, it can be very advantageous to still structure it so that you are paying interest, getting the deduction at your marginal rates while your descendants receive it as future income. I'm not a lawyer and I'm not giving any estate or tax planning advice here.
I know it goes way beyond the original question but there are many ways to make your residence a true tax shelter while at the same time passing real assets to your descendants and legally avoiding current taxes and future estate taxes yet keeping effective control of the property where it belongs.
I don't really think of my home as an investment but it certainly supports my investments. I have a healthy credit line against my home that requires monthly interest only payments which I could simply draw off the line if I wished. When I am not using the available balance myself I loan it to other investors.
My primary residence is an investment in that I expect return on sale that is significant. We have bought 5 primaries in 4 states each except the last with a decent amount of rehab. from the 28 k shack with the salamander in the spring box to the 400 plus house I think we have done alright on getting a return on investment. Could we have done better with a targeted investment property in some cases maybe but in most no. If you buy a run of the mill house as a primary with no rehab in an okay area and you live there forever no it isn't an investment. If you pick it for potential to get some return after rehab combined with mortgage interest deduction you can get a good investment. In grad school I was paying less in mortgage then my friends paid in rent, stayed for 6 years, sold for significantly more then I put into it so essentially I lived rent free and made a profit. And you always need somewhere to live.
The most useful way I've found to think about it is this: "You are consuming the rental value of your primary residence".
So the bigger and fancier it is, the more it costs to heat, the more you are consuming. As humans, we must consume some 'housing'.
I consider my 'paid off' house the 'fixed income' portion of my portfolio. Its like having a bond that I bought for $250,000 with a coupon that rises with inflation paying enough to rent my 2,500 square foot home. Obviously, there's real estate taxes and maintenance, so maybe its a bond that pays half my rent.
I consider my home improvements to my primary residence 'consumption' as well.
I'd say you're all right.
I do think Kiyosaki's statement of "your home is a liability" is a good way to shake average people out of their complacency of thinking "I'll be OK financially in the future because my house is rising in value." As we know, a LOT of folks have gotten burned by that kind of thinking.
For a more savvy investor it can be a little more complicated.
While I don't claim to be terribly savvy, my first house made me a lot of money, therefore I see it in retrospect as a "good investment". I lived there for there 12 years, during which time the rents in my area went up dramatically (so I was super glad not to be renting) and then sold it, making enough profit to buy a reasonable replacement home for cash, and also pay off a lot of debt from a failed business venture. Now I have no mortgage and a line of credit on my home that I can use for other investments.
I couldn't have predicted all this when I made my initial "investment" in the house; a lot of this scenario played out because of the housing crash. But it was pretty clear to me from the start that (one way or another) I'd end up better off with that house than without it.
Its a liability, as I said in the other thread.
If you add up the total amount of cash you put in vs. what you get back if you sell, its very, very often a bad investment. That is, if you add up all the money you put in in the form of the down payment, purchase closing costs, insurance, taxes, maintenance, improvements, HOA fees, etc., and compare that to the net you would get if you sell, pay commissions and costs on the same and pay off any remaining mortgage you are very often in the hole. That's OK.
People make silly statements like "I bought this for $50K 30 years ago and now its worth $300K, what a great investment!" Indeed, if you had bought an asset for $50K held it for 30 years and it was now worth $300K you would have been making an annual return, compounded, of 6%. Unfortunately had you purchased a house in 1984 you would have been paying a mid teens interest rate. Had you hung on a while, you would have no doubt refinanced. At a guess for an aggregate rate over the 30 years you would have paid about $86,000 in interest. (I used 6%, here's a graph.) Taxes? Maybe $45K (that's an average of $1500 a year, no doubt more weighted toward the later years). Similar for insurance. Kitchen remodel, bath remodel, a new roof (or two), new furnace and AC, new carpets several times, etc. A few grand on closing costs up front, $24K to sell on the back end. OK, and add back the tax benefit for all that interest and taxes you've been paying. If you're breakeven you're doing well.
You need a roof over your head, though. Even if you're negative you may still be better off than renting.
Or, you could be like folks who got suckered into buying a house during the bubble. Many of those folks will never recover their finances to the point they would have been if they had just rented.
Or, you could have been like most people. Case-Shiller data shows that over the long term housing price appreciation just matches inflation. The feds' inflation calculator says $50K in 1983 is equal to $117K in 2013. So, if that house you bought in 1983 for $50K just matched the overall average its now worth $117K. All those costs listed above still apply, so you may be well in the hole. As luck would have it I did buy a house in 1987 for $55K in Rosenberg, TX. Its still there. We drove by about a year ago. Looks even worse and has been turned into an up/down duplex. I seriously doubt its worth $117K.
Now, for many people, the one good thing is that its a force savings plan. If you buy a house, live in it for 30 years and pay it off, you have a roof over your head with minimal future costs. Not zero, but very likely less than any alternative.
That's a two edged sword. I recall reading an article in the Denver Post at the height of the foreclosures about a couple who had lived in their house 30 years. The article was bemoaning the fact they were being kicked out during a foreclosure instead of burning their mortgage. While the article made is sound like this was the fault of evil lenders, the couple freely admitted they had refinanced and HELOCed the property repeatedly. All that money had been spent. So, instead of being a savings plan they turned it into a piggy bank. They had taken what value they gained during the bubble, spent it, and now were unable to repay the money they had borrowed. Its certainly not the house's fault they got into trouble. But owning a house facilitated a path to destruction that wouldn't have been open to a renter.
@Jon Holdman as usual, great post, but maybe the better question is whether to rent or own bc I dont think most people want to live w/ their parents or under a bridge. While you have taxes, repairs, and everything you mentioned- even if you were locked into a high interest rate- if it is fixed, the payment remains the same, while rents typically continue to rise. Also, you mentioned the cost of refi, but I would consider that another advantage of paying less. And the ability to borrow on your equity should really be looked at as an advantage. How it is used is a statement of how that person plans their finances regardless. Finally, if you are holding the property, you dont have all of those selling costs and it will be paid off at some point as well, also increasing savings. And even if you do sell that PR, you can avoid being taxed on that money as well.
Too many people think of their personal residence as an investment and for many it is their only investment. I went to a big real estate investment seminar where there were 1,500 people. They asked people there what real estate investment they had. I was surprised that about 1/3 had no real estate, and about 1/3 only had their personal residence.
The American dream of home ownership has been sold as an investment. If we started a thread with the biggest real estate lies, one that I would add would be, "Paying rent is throwing money down the drain." That's a big lie! Is leasing a car money down the drain? When traveling is renting a car at the airport money down the drain? In many cases renting is more economical than buying. That may seem like a tangent, but it really gets to the point that the popular notion is that buying a personal residence is not only an investment, but a darn good investment.
The tax deduction for interest is phased out for high income earners and even for the majority of people who are able to fully use the deduction, how is spending a $1 worth it to save 0.28 cents? If that's a good investment send me your dollars and I'll send you 0.28 cents.
The best argument for your personal residence being an investment is the $250,000/$500,000 tax free capital gains. I've heard that some people have made a living buying a personal residence, fixing it up and then reselling in two years making $500,000 tax free. That sounds like a simple plan though I don't personally know anybody who has been able to pull it off. In most of the 50 states, and particularly in the fly over country, that would be difficult if not impossible. In high priced areas such like CA, HI. Manhatten, CT, Cape Cod, etc., it would be much more doable.
For many people, especially pre-2008, their homes were their biggest asset. But otoh, many financial statements ask that you exclude your personal residence from your net worth.
Yes. It provides me with quality shelter and lifestyle every day. I value that at about what I could rent it for. It provides me a hedge against inflation. It builds equity that I can use for other investments. The land it sits on houses and grows cattle (income and equity), it has a guest house that is now rented at $875/mo. It has another new shop/loft that is almost ready to rent for even more. It appreciates, typically above and beyond inflation, because it is half an hour from a metro area that is growing at well over 100,000 residents per year. It allows me to capture up to $500k tax free gain when I sell. It allows me to obtain cheaper financing than I could get elsewhere. It is an investment.
I think speculating can be a good investment. Like a quality growth stock with no dividend, or a corner lot in the way of growth.
One thing that did hit the nail on the head is for many people it is a forced saving plan (and they would not have saved otherwise). For me I' ve been in and out of homes but the 5 siblings I have that bought homes are still in their first homes. Most would not have put that money away if they rented. But they are attached to their homes, they don't think about them in economic terms, they think of them emotionally. That more then anything makes the homes a liability.... Its not the dollars and sense to run a house because even if rent over time were to equal mortgage and expenses over time (and this differs regionally) the decisions on improvements and exit strategy is not an economic but an emotional one for most people.
Thanks for the posts on this. I think we all agree that a primary home is best viewed thru an investment lens initially and periodically. The house is more likely to be a better investment with this point of view.
I hope people conclude a primary dwelling is not an unconditional liability or automatically a great investment. More analysis and thought is required. More considerations are required as well.
By the way, I'm the best tenant I've ever had ... never missed a rent payment and haven't had a vacancy since my purchase 14 years ago.
As always, I appreciate the good dialogue.
Rick