Is your primary house an investment?
Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
Is your primary house an investment?
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Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12yIf 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."
115 Replies
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes10y
1. It depends on where you are located, different properties in different areas may or may not be a GOOD investment.
2. For me if there is not positive cash flow, or the potential to change something quickly to make positive cash flow, then I'm not interested in investing.
3. There are many properties that will never be positive cash flow.
4. I don't count on appreciation, its fickle and unpredictable, and you may not get any appreciation. I bought a property once that I anticipated no appreciation, but it was such a cash flow producer that I didn't care. I paid $32,000 and the rent was $950, so it was almost a 3% rule. I told others about this cash flow pocket and some other people also invested there. But they had a hard time comprehending the no appreciation concept, because we are constantly bombarded with how real estate always appreciates. Tell that to people who bought in 2008!
5. If your personal residence is not generating income then to me its not an investment.
6. But if you change the personal residence so that it does generate income, then to me it is an investment. The first personal residence that I owned I had roommates whose rent paid the mortgage. Then after I moved out I rented the entire house for the next 17 years at positive cash flow.(BP Podcast #82) The second personal residence that I bought was a 2 unit that was sometimes rented.
7. @J. Martin is a great resource. I was just out to Oakland with him the end of August.
- Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes10y
@Rick Baggenstoss if you buy it with the approach it's an investment (ex. 2 - 4 unit where you rent out the other sides) then I believe it is. Because you're making money from renters.
If you buy it and cross your fingers for appreciation then it is not an investment.
- Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes10y
@Joe Fairless I'm afraid we disagree here. Is a growth stock an investment? By your definition only stocks that yield dividends are. There are many way to get income from real estate. Recurring income is just one of them -- often the least of them too.
- 10yVictoria S.Pro MemberInvestor · Miami FL / DMV · Member since 2016 · 70 posts · 27 votes
@David Krulac thanks for the rundown. I have read here and there that "cash flow investors are poor investors" - "appreciation is an essential factor" - obviously, it would be great to have both, in a perfect world. Despite the slightly derogatory tone of such comments, there may be some truth to it in the sense of that negative cash flow or zero (counting on appreciation) being a higher risk game, for people who already have the cash flow to wait it out and have nerves of steel.
I myself am a cash flow gal, and therefore, am not very enamored with houses. Psychologically even. I'd be thrilled with the investment type that you just mentioned, not scared away by the lack of appreciation (assuming low maintenance, I always like to include the 'human cost' i.e, me). I have recently concluded that I should stay nearby.
The advantage though of living in and renting, whether it be single family or duplex / fourplex is very attractive fiscally - though less so personally as I did it once, and I like where I am living now and also have a "good deal." Will see.....I will continue to scour the SF Bay area, and somewhat beyond. This is my current challenge / process.
- Architect · Raleigh-Durham, NC · Member since 2016 · 76 posts · 47 votes10y
@Victoria S. this debate seems to be an ongoing narrative between those who are more or less risk averse than others. Cash flow as @Rick Baggenstoss mentioned is simply one avenue to yield profit. There is a delicate balance needed in order to ride both at the same time. Yes, cash flow is what keeps the property afloat as money slowly trickles in, but to simply ignore the fact that appreciation (albeit a speculative game) exists will not provide you with any leverage in order to grow and buy the next buy and hold property...just ask those who bought in 2009, cash flow and appreciation when buying at the bottom of the market. The Bay Area is a bit of an anomaly at this point, so be sure to run the numbers based on your own risk tolerance and your own ability to take a hit based on a speculative play. Good luck!!
- Real Estate Agent · Chicago, IL · Member since 2015 · 238 posts · 101 votes10y
@Rick Baggenstoss I say no. Anytime I see this argument pop up I immediately think of Kyosaki's definition of an asset/ liability from Rich Dad, Poor Dad. An asset puts money in your pocket and a liability takes money out of your pocket. Your primary residence (unless you're house-hacking) is NOT making you money. More importantly, it is costing you money; repairs/ taxes/ etc.
- 10yVictoria S.Pro MemberInvestor · Miami FL / DMV · Member since 2016 · 70 posts · 27 votes
@Ryan Hopkins What is your take on this "anomaly" ?
- Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes10y
@Gerardo Dominguez You buy a house $200k which has the same payment, $1000/mo all in (mortgage, interest, taxes, repairs). You sell it after 10 years for $240k.
Financial Benefits are (illustrative):
- $40k appreciation
- $3k per year in tax avoidance (interest write-off)
The income (puts money in your pocket) comes in the 10th year vs. monthly. Still an asset by Kiyosaki's definition. By the way, we're defining Investment not an Asset.
A car is an asset but not an investment. Investment is an asset you expect will provide more benefits than costs.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Rick Baggenstoss one of the major points ( not sure if anyone made it in this thread as its very old)
is especially for West coast and specifically for CA and Seattle and some Portland homeowners.
there properties have increased by 500k or much more.. and the 500k Is the only tax treatment that is truly TAX FREE... as opposed to rentals.. you end up having to play the roll up game.. and refi until you die game. to get your cash out.
So for me personally if your west coast based and or other markets that can see high run ups in value .. the personal residence can be your NUMBER 1 investment. takes a lot of cash flow at 200 a month to get to 500k... if you figure one asset makes you 500k and one asset makes you 200 a month.
- 10yVictoria S.Pro MemberInvestor · Miami FL / DMV · Member since 2016 · 70 posts · 27 votes
@Jay Hinrichs who says rentals don't appreciate at similar rates as personal residence(s)?
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Victoria S. I do.... rentals sell for what the income is.. unless you have big rises in rental income the values are what an investor will pay for a given cash flow.
now we know the bay area saw some great rental appreciation and so did Portland that's for sure.
But many other areas the rents have been flat for years and will remain that way. and again you don't get ANY TAX free treatment unless you owner occ a 2 to 4 unit.
- Architect · Raleigh-Durham, NC · Member since 2016 · 76 posts · 47 votes10y
@Victoria S. I say anomaly knowing full well that we have been in the right place to receive an unfounded amount of equity/appreciation in a very short amount of time. The Bay Area is treading on recession proof...I say this with a massive grain of salt as I do believe we are nearing a small bubble burst! Always buy with multiple exit strategies, but because an increasingly large amount of business headquarters that are integral to our world market are located in the area, if you hold property long enough chances are you will have an opportunity to turn a profit...again massive speculation. If the Bay Area takes a massive hit and businesses start fleeing, you will need to worry about a whole bunch more than simply the housing market. But hopefully you are diversified enough to maintain levelheadedness.
- Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes10y
@Victoria S. this argument has been going on and will go on forever... But I will say that your primary residence CAN BE a tool to energize your real estate investing. This is particularly true in the SF Bay Area. As @Jay Hinrichs has pointed out, the $500k tax free gain you get at the point of sale is HUGE! Most people outside of this market will never see that, but in this market it is a reality. I am not saying it is a guaranteed upward trend. There are definitely drops/corrections. However, over a longer time horizon this is a definite plus. Yes, you will pay into this pot of gold through maintenance costs, etc and there is a heavy reliance on appreciation, but at the end of the day investment is a risk vs reward equation.
I have personally used this method 3 times and the tax free money that flowed into my pockets could never be matched by $200/unit monthly cash flow figures. I would continue to follow this strategy, but I am married with kids now and having a stable home is more important then tax free money.
With that being said, I did recently pull a first position HELOC on my primary residence that allowed me to purchase a 6 plex in Fruitvale. The gross rents on that purchase cover the HELOC, and all of the costs associated with that building. What is left for me to pay on my primary residence are property taxes and maintenance. I plan to re-position the building and get a stand alone mortgage on that building after 1 year of seasoning. At that point the HELOC will be paid down by the new loan pulled on the Fruitvale property, and my HELOC will be reloaded to do another "cash purchase". By using the HELOC I have made my primary residence generate income while retaining my prop 13 status and other tax benefits. Additionally, if I ever decide to move I have already locked in $500k of tax free money. I say "locked" because my property has more then doubled since I purchased it. Sure it could drop below my original purchase price, but the possibility/probability of that, for my specific home/city are extremely low, if not near zero. Again, I think this type of strategy only works in highly appreciating markets, like the Bay Area.
Real estate, no matter what type of building or investment strategy you take, is just a tool to get you to the financial goal you set for yourself. Not every tool is correct for every situation.
What every you do, study the charts that @J. Martin posted before you make any decisions. There are lots of indicators pointing to a correction in 2017/2018.
Good luck to you,
Arlen
- 10yVictoria S.Pro MemberInvestor · Miami FL / DMV · Member since 2016 · 70 posts · 27 votes
@Arlen Chou
@Arlen Chou thanks you for the wise, open words and the detail, as I can see how that could work, particularly with strong equity in the primary. To my knowledge the 500K only applies to married folk. Yes, I know, how could I possibly not be married! :). 250K isn't bad either! I have been attracted to this question because of a friend's experience and I am looking to move forward with some leverage toward my financial goals. You explained the advantages well, given your conditions financial and familial. Yes, I may have to wait for market corrections, and I will spend some time studying the charts. Sitting and waiting to pounce with cash does not seem like such a horrible situation, though I am aware that doing so also costs, and what do people do about that!? Readiness can't also be timed perfectly, unless you are already in the game? Thank you.
- Investor · Bay Area, CA · Member since 2014 · 63 posts · 77 votes10y
Hi @Victoria S.
Just wanted to add a little bit - the $250k is only the tax free portion. Holding for the last 15 years in the Bay Area has yielded more like ~triple valuation, so depending upon starting number, could be a lot, lot more appreciation to access with mortgage or HELOC. Buy/Lend with Heloc, refi to standalone mortgage, rinse repeat. The next 15 years is your guess but IMHO likely to be less as we are peakish now and 15 years ago was a relative dip... could still be dandy.
I view cash flow <--> capital appreciation; risk <--> reward; investment <-->speculation as spectrums not digital values, and any specific property lies somewhere on those spectrums. It is up to the purchaser to accurately estimate the position, make the risk reward decision or be pleasantly surprised or hit with catastrophe :-(
Anecdotally, one can "force" appreciation on single family on primary in the Bay Area: locate nearly the worst house in the nearly the best school district; renovate, add sq foot; add bedrooms, bathroom; add in-law etc etc. This usually does not raise tax basis (land) at anywhere near the same percentage as potential rent/sale value. Scrape and rebuild has also worked over the last few years too.
IMHO multi-family lies lower on the risk scale as higher rent/appreciation ratio ie higher percentage of your return is in your hand (but taxable). And especially wonderful if you can force the initial chunk of $x00k appreciation , refi, rinse repeat: Love the @J. Martin primary 4-plex route, if you want the cash now rather than wait for tax-free appreciation upon death. Clearly @Arlen Chou and @Amit M. SF reposition multis, and Professor extraordinaire: @Account Closed have the best of both worlds cash now/quick reposition then continued high cashflow + Bay Area appreciation. Not everyone has the skill/intelligence to do this :-(
One thing I conservatively consider when aiming for Bay Area appreciation is to envisage the worst case(s) that I want to mitigate (loss of job, withdrawal of HELOC, earthquake, high % vacancy, high % drop in rent) and answer the question, how can I ensure that I do not have to sell low.
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- Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes10y
@Kathryn M. thanks for your kind words, but I am no where near @Amit M. or @Account Closed No hard pitching, just a bunch of people eating pizza, drinking beer and talking REI.
-Arlen
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Kathryn M. with me basically since we tend to move ( or most of us do) about every 7 years that is about my length of stay anywhere.. I have used the tax free 4 times.. One in Milpitas one in Palo Alto one up at Silverado CC in Napa and one in Portland Oregon... it works pretty darn well. and especially starting out I could no way have made that kind of money on rentals no way.
- Investor · Jacksonville, FL · Member since 2016 · 13 posts · 1 vote10y
Definitely a liability (gotta live somewhere) but if you do house hacking by renting out spare bedrooms, you can actually lower your bills every month - which is what we are currently doing.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes10y
My primary residences have brought me many hundreds of thousands of dollars in return from forced and market appreciation over the years, and that is icing on the cake in addition to giving me and my family a nice place to live. I don't care what Kiosaki says, they were all great investments for me, both personally and financially.
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes10y
It's an honor to have my name next to @Arlen Chou and @Amit M. I'm a little fish in the San Jose pond compared to these gentlemen.
To me, your house can be both an investment and a home. For those who bought into Robert Kiyosaki's idea that a house is a liability, I have news for you. Unless you live under a bridge, you either have to pay rent, or pay a mortgage to the bank. Owning a house in a high appreciating market like the Bay Area has proven to be an asset rather than a liability. The first house I bought in 1996 is now worth $500k+ more than what I paid for it. The second house I bought in 1999 is now worth $600k+ more than what I paid. The third house I bought in 2003 is now worth $500k+ compared to when I bought. A whole bunch of properties I bought between 2009 to 2013 are now worth $250k-$350k more than what I paid. All in all, the rate of appreciation has been between $2k-$10k/month/property depending on the timing of the purchase. How long does it take for an investor who collects $200/mo positive cash flow/property to get to $250k-$500k?
If you can do force appreciation in your market, you can gain hundreds of thousands of dollars in a very short amount of time. Can you do that in an afar market that you have no clue about? You have local advantage at home here. Use it to your advantage. The grass is not greener on the other side. The best market is the market you know best. Stop being lazy and take the path of least resistance. I'm willing to bet you will pay dearly for it.
Originally posted by @Rick Baggenstoss:
@Gerardo Dominguez You buy a house $200k which has the same payment, $1000/mo all in (mortgage, interest, taxes, repairs). You sell it after 10 years for $240k.
Financial Benefits are (illustrative):
- $40k appreciation
- $3k per year in tax avoidance (interest write-off)
The income (puts money in your pocket) comes in the 10th year vs. monthly. Still an asset by Kiyosaki's definition. By the way, we're defining Investment not an Asset.
A car is an asset but not an investment. Investment is an asset you expect will provide more benefits than costs.
Rick,
This is the point I was trying to make. You did not make any money here. What you are forgetting is the cost during those 10 years. Let's assume for the sake of argument you got 100% financing, 3.5% interest over 30 years (which is lower than you would probably get), and taxes/insurance were $100/month (this may even be low). But using those numbers puts you right at your $1,000 you said (give or take a couple of bucks). So let's use that for the sake of my example.
Over those 10 years, you will have paid $12k in taxes and insurance, and $62k in interest (I rounded down). Your tax avoidance is too high though. Even at 30% tax rate it's less than $2k/year. Even throwing in property tax write off, you are looking at best case $2.25k/year in tax avoidance. So that's $25k.
Without factoring in *ANY* repairs or anything other than taxes/insurance/interest, you have spent $74k on this house over the 10 years and "earned" $65k in appreciation and tax write-off. Again, I'm sure there are easily $10k-$20k of repairs (if you did no major renovations of any kind) along the way but I'm not even counting that. Even not counting that, you still have a negative $11k, so you essentially lost $1,100/year. Sure you got a nice check when you sold the house, but your only getting a portion of the money back you put in over the years.
To further illustrate, you are assuming appreciation. If you bought your house 10 years ago today, more than likely, you have negative appreciation. Many people who bought in 2006/2007, are still underwater, much less have any appreciation. For the purposes of our example here we really are using best case (positive appreciation, write-offs, and no expenses) and you still lost $11k.
And before people start throwing examples out of how they bought at $200k and sold 5 years later at $400k, those types of deals are the 1% or 2% exception to the rule. I'm dealing with 80-90% of situations here. It's a general question of whether or not your primary house is an investment (or asset). Of course there are exceptions where people make a lot of money, but the example we have above is the BEST CASE normal situation and you still lose money.
Your house is not an investment (assuming you are just buying it to live in it and not doing anything mentioned in this thread like BRRRR, flipping, or renting a part of it out, etc) and it is not an asset. And I'm not talking accounting terms. Yes, your house is the asset and the mortgage is the liability on your balance sheet, but that's not the type of asset we're referring to here.
So I'm hoping that example goes to show just what most people are referring to when they say your primary house is not an investment. Also look up the term "house poor" on google to dive deeper into what we're talking about.
- Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes10y
I think you're arguing that your personal residence can be a bad investment or that on average, it's a bad investment. Ok. That's not my argument.
My argument is it is an investment that when you buy it, you intend to benefit from it (more than not doing it). Most people would say the primary benefit is enjoyment and many others would say money.
The really dangerous part is, if you don't view your house as a potential investment, will you get as much benefit? Without the goal of making a good investment decision, will it be a good investment? Probably not, right?
So, the problem may very well be that many people have decided to buy an asset for $200k with $40k down and 1/3 of their income and expect nothing in return. YIKES! That's pretty stupid investing.
- Fremont, CA · Member since 2015 · 289 posts · 63 votes10y
lot of smart people have given there thought here is my 2 cents
I tend to believe that income is real and appreciation is imaginary. But primary home is first about your happiness and growing family together. Also I am not a big fan of house hacking. If you pull aside that money and put in the investment home (might be for appreciation or rental income) you will make more money. Having said that one should buy primary home where it make sense. But think about it as rent saving and family happiness. It might not be best investment.
PS I upgraded my primary home late last year.
- 10yVictoria S.Pro MemberInvestor · Miami FL / DMV · Member since 2016 · 70 posts · 27 votes
@Kathryn M.Thank you for your 2 cents. I think it is best to view the debate risk / reward, appreciation / cash flow on a spectrum. And yes, be very very conservative. It just seems smart to pay attention to both. I have really focused on the cash flow side, having bought a 4plex in a C neighborhood (not without appreciation, but less). In 2009 it was pretty ugly, but I weathered it an remained occupied with good tenants (when people were saying it was impossible, and it would have been with PM) @Account Closed mentioned get the money first so that you can make the deal when you find it - thank you - that is exactly what I am up to :). Do you mean cash only? or leveraged funds? What to do with leveraged funds that are sitting around costing (low) interest rates? As a jeweler - I am used to the shine object stare and impulse, so I am careful but not experienced! Thanks for the invite to SJ! I plan to come! Going to come early to @Johnson H. meet up to avoid traffic - if anyone can meet up earlier than the scheduled time, let me know!!! (I can tell you all about mixed-use properties! :))
reading this thread is kinda funny....it's like there are two separate conversions going on here ;) But to clarify, if you buy well in premier blue chip markets like costal CA, Hawaii, Manhattan, Seattle, etc., of course your primary is an investment. And you can use the gain by borrowing against it (for additional investments) or you could sell it and move to a cheaper location for retirement. I know loads of long term middle class owners in SF and Silicon Valley that sold their debt free 30+ year old "junker" for north of $1mil, and are now laughing all the way to the bank as retirees in AZ, FL, Mexico, etc. Well played :)
Also, dismissing appreciation as pure speculation is willful ignorance. Of course markets have cycles, but it doesn't take a rocket scientist to conclude that buying in highly desirable and growth markets will lead to more appreciation than no growth, low jobs, open land everywhere type markets. Just because you can "analyze" an immediate profit of $100 a door, doesn't mean you will get that profit 6 months, 1 or 2 years from now. One water heater going out kills your profit for 9 months. A new subdivision with newer units will lower your rents, and you'll need to deal with Lowe end, high maintenance tenants to keep your building occupied. Of course there are experienced investors that know how to work in these types of markets and make money. But my point is that profit is not a given. Frankly I think that a well timed purchase of a primary (or first investment 2-4) in blue chip markets is a much easier way to make an initial financial gain. And, you get to live in it :)
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