Friday, June 01, 2007

Real Estate Isn't a Gimme

I'll agree with Ramit at I Will Teach You to Be Rich:

David Crook's article "Why Your Home Is Not the Investment You Think It Is" is the best I've read on the topic.

This is what your neighbors don't know, what David Bach blows past, and what your real estate agent wishes would get buried in the back pages of the 'net, never to be found again.

I document it here for those readers who might have missed it ... and for my own future reference.

(Yes, I'm a homeowner — or, at least, I'm on the 15-year, fixed-rate path to being one. But I have no delusions about the "wealth building" aspects of it.)

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— Posted by Michael @ 12:19 PM








2 Comments:
 

Great Article, I tend to agree with the theory that a home is not an investment. It's especially true for folks who have 70% of their net worth tied up in their home. Sounds like a bad plan to me.

Diversify, Diversify, Diversify. That's what I've always been taught.

I live in a comfortable home, and plan to pay it off early (15 years or less) but there is no way that I would take all of my investments and saving and pay it off with nothing else to show for it. That's way too much risk for me.

 

I've discussed this topic on a variety of PF blogs, so I'll just repeast what I've said before . . . ALL of this depends on your market. I think many of the numbers in his cost chart are exaggerated. Monthly maintenance is high unless it's an average of large repairs and big maintenance porjects . . . but then he accounts another $300k for that. That's far more than most people will spend, even over 30 years. Taxes and insurance that he lists are at least double what they are in my market.

When you live in a favorable market (ie, mortgage payments and rent payments are not horrifically far apart) you can't HELP but make money on a home purchase. You don't even have to try. A paltry 4% appreciation becomes much higher when you factor in leverage, though admittedly that wanes if you stay in the house for the full life of the mortgage.

The market where I live is strong but not on fire . . . I've had this house for almost exactly 2 years and it has appreciated about 17% (8% per year). If I were to sell now, even if I had to give 6% to a realtor (which I won't do), I'd make a substantial gain . . . right at 100% of what I put into the house (down payment plus payments plus taxes, insurance, and maintenance). Essentially, what I paid in I will get back upon sale. My return for this investment is complete lack of rent for 2 years.

My net worth is just over 50% tied up in my house, but I'm young (27) and within a month or two my other assets will overtake it. But still . . . to have gone from 0% in real estate to 50% in real estate in 2 years shows something about the value of my home as an investment.

To get back to my original point . . . your mileage may vary. It costs me a small amount to own a home over what it would cost to rent. The result is an investment with a remarkable growth rate over a short time period. This won't be true in all markets at all times, but it has been true for anyone in my market. There was no bubble here . . . no decline. Just steady growth. Leverage + growth = substantial gain in wealth.

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