Should you consider your primary residence an investment?
First off, I am not qualified to give financial advice; I am sharing my considered opinion.
I wrote a post in January titled Now is the Perfect Storm for Buying real estate. I received the following comment on that post (skip to where I bolded if you like):
"An opinion from someone who does not make money selling real estate is needed here. This market won't bottom for at least another 12 - 20 years. We are at the precipice of a world wide depression that will make The Great Depression look like a walk in the park. When it does finally bottom it isn't just going to shoot back up... housing prices will most likely stay low for a while. The only real estate broker I trust is actually advising people to "RENT RENT RENT". That is someone who you can trust. Here are links to my website and blog: (I deleted them...I don't need to have this persons spam in my post when it's already in my comments). You should really educate yourself on how bad this real estate collapse is going to be before you start telling people that this is a good time to buy. Please understand that my intentions are not to offend but inform you that you're giving bad advise. After all, a home IS an investment."
The commentator believes the market is not going to bottom for 12-20 years and that the only broker he respects is the one who is saying rent, rent, rent. I'm stupefied that anyone would think it's sound advice for someone who is purchasing a home responsibly, i.e., making sure they can comfortably afford their payments, not using negative amortization, have a secure job (this may be hard to determine), etc., to not do so for 12-20 years. Homeownership, if done responsibly, is one of lifes greatest joys and "The American Dream."
This reminds me of an incident that happened to an acquaintance of mine. She belonged to a group who believed the world was going to end, literally, at some point in the 1950's. She was instructed to sell her belongings, including her home and was further told not to have any children because it would be irresponsible to bring children into the world when it is going to end. Needless to say, the world did not end. She no longer belongs to that group.
Imagine waiting 12-20 years to purchase a home only to find they went back up in price and now you can never afford to buy.
My contention is this, your home is the place you live, it gives you shelter, protection against the elements, a place to safely lay your head at night, somewhere to hang your clothes, watch the Superbowl, etc.
If nothing else, the downturn in the economy has shown that it's only safe to treat your home as an investment in a rising market, and therein lies the risk, you can't time the market.Wikipedia says: An investment is the choice by the individual to risk his savings with the hope of gain. Rather than store the good produced, or its money equivalent, the investor chooses to use that good either to create a durable consumer or producer good, or to lend the original saved good to another in exchange for either interest or a share of the profits.
Investments are by nature, fraught with risk, of course some are mitigated better than others, like a standard savings account in a bank, but even that's not low-risk anymore. Let's face it, you will need shelter no matter what and risking your shelter is not wise in any situation.
Now I want you to know I am the "pot calling the kettle black." My husband and I built a spec home that we are living in and it's not pleasant. What makes it especially distasteful is I knew to, "never consider your primary residence an investment"; "do not put your home at risk," and a few more catch phrases I haven't done, but who knows, there's still time, such as: "do not use your home to fund your lifestyle," and "do not use it to pay off your credit cards and car," (I know plenty of financial advisers disagree with this, but let's face it, the average individual is not a professional financier who is going to get a HELOC and follow the payment plan).
In closing, I personally know the risks involved with using your home as an investment. It was great selling my previous home at the height of the market and raking in the dough, but it isn't fun being stuck with a high mortgage in a declining market. Better to keep your house payment affordable, and invest money that you can afford to put at risk.
I'd love to hear your opinion, but please do not spam my post. Thanks.
Thank you for stopping by. Your comments on this post are welcomed and appreciated.
No one sold more homes in Del Norte County in 2009, 2010 and 2011--*in units sold and volume--than Fran Gatti. Put Fran to work for you!
 |
Brought to you by Fran Gatti at |
*PER DNAOR-MLS
You're scaring me to death. I'm sending this to my spouse. Thanks? or not....Deb
Deb,
Sorry about that. I'd rather think I am using my own experience to put the fear of God assist others.
Thanks,
Absolutely, your home is an investment. I look at mine as a retirement investment, and fully intend to have it paid off before then. I've got to have a roof over my head, and I've bought a property with a mortgage lower than any rent payment. That's a win-win.
Fran, LOL! You subtly did it! Way to go...got any rentals?
PS. Actually, we are taught that our homes are NOT an asset. Rich Dad teaches us that is a liability. It drains our budget with water, electric, phone, cable, garbage pick-up and so forth. You are right on. Deb
Oh, and BTW, if it's paid off...that's a different story.
Of course a home is an investment. Where we get into trouble with "homes" is when we forget they are just actually a house that we live in. We get all sentimental about them and the emotional attachment gets us into trouble.
I'm not devoid of emotion over our home -- to the contrary -- we've lived in it for over 20 years and poured our hearts into the old money pit for equally as long, but I would be remiss to not see it as just one element of our investment portfolio. It should be leveraged and made to churn out a ROI just like any other investment.
As for the person who thinks the world is going to hell in a handbasket just because we had 9/11 followed by 7 years of Bush, they need to study what happens when you get a Democrat into the Presidency. Within two years, we will be looking at a complete turnaround, and be headed for the greatest period of prosperity since ... well since Bill Clinton was in office.
We'll never have a great depression again. I personally don't know a single sole who has been laid off from their job. Now that I've said both of these statements, I supposed I'll live to regret those, but all the indications are that we're very close to the bottom and we're at a great time to buy. If Chicken Little is afraid to buy, that only makes it all the much better for RE investors. The longer this slow demand continues, the better the buying cycle gets.
Watch what Warren Buffet is doing, not Chicken Little.
Deb - Thank you.
Tim - So you will be able to comfortably afford your shelter when you retire. That should be the goal for sure. I have someone very close to me who left a tiny mortgage (about 200k) on his home when he retired and has been paying interest only paymnets for 23 years! He never guessed he would live this long and he's still going strong. With the downturn in the economy, that little mortgage has become a major thorn in his side.
My financial goals have shifted a bit with our "new economy." Paying off my home has jumped to the top of the heap as far as priorities go.
Andrew,
Thanks for the great comment. I have several clients who have been pink slipped by the State of California, but hopefully that won't actually equate into getting laid off. I sure like your optimism.
Thank you for taking the time to comment,
Hi Fran- I'm Deb's husband, Scott. If your other writer is correct then the descent will be much more shallow from what we've seen in the last 18-24 months. We've already lost 50% in some areas, so what does he think? Are we going to 0. That would make homes free. Not very likely, so therefore a person who buys a home to keep for awhile will be fine.
Yes, a home is an investment. However, if one sets aside that motivation for owning a home there's still pride of ownership, control over the property (landscaping, decorating, staying or leaving...), the right of quiet possession, stability... Those factors are substantial motivation for home ownership, aside from any return on $$$ invested.
Hi Scott -
Yeah, no kidding. Very good point. I'm seeing buyers that are so happy to see that they can purchase so much home for the current prices, combined with very good interest rates. Home buyers seem to be more cognizant than ever of the importance of being able to comfortably afford their house payment.
Margaret - Thanks for weighing in.
Fran... I will agree with Andrew's first part of his comment, that a home is an investment, just like so many other things. It's when you are realistic about purchasing or refinancing you home. Knowing that you won't be strapped. Sure, anything can happen to anyone of us at any time when it comes to our jobs or income. But the same could happen when you rent. So that person saying that she trusts the realtor that tells people to rent? Ouch and rut row. Such bad advice. If you can buy, you know what you are doing, and you have a professional loan officer an realtor helping you, then do it. Yes, it is the American Dream and gives you ownership and pride, amongst so many other things.
In regards to Andrew's second part of the comment? Why bring politics into this? First off, I disgree, you can't compare to what Bush did, because his biggest mistake is blaming him for sticking around Iraq too long. But we never had a president who had to deal with 9/11 before. And to say that the next two years will be the best, with a Democrat? Not sure what news he has been watching lately, but the president has slipped in polls, even with some Democrats. But that is not what this post was about.
Overall, agreeing with your comment and just ppor advice, which is a pet peeve of mine. Nice job here.
Very thought provoking post. The gut instinct is treat the home that you live in as if it were something that you had to rent and not an investment.
Yet the very nature in which we segment buyers - first time homebuyer, move-up market, and empty nester, suggests that a home is to be considered an investment.
This is one of those questions that will be debated based on each persons professional focus. We certainly expect our homes to be worth at least what we paid for them.
My career has evolved into one of debt management and debt elimination. You would be blown away at the situations that I come across every day. Getting all our debt paid off, including our mortgages should be a priority. There are those that will argue with me and it's not necessarily the best tax move but paying interest for our entire life makes no sense at all.
Jeff - Thank you for your comments. I agree!
Kate - I know I've rerouted my financial focus. I have longevity in my genes and if my dad and grandmother are an indicator, I will live into my 90's. Having my home paid off asap is going to be one of my goals. It was always there in the back of my mind, but now it's in the forefront, right up there with eating three times a day and sleeping.
Yes,
I am agree with you.
Rocky
Drug Intervation Hawaii
I think most people forget their home is usually their biggest investment for today and especially tomorrow
Fran,
I do believe your home in many cases is your largest investment. Just think if you rented for 10 years at $2,000/month; that's $24,000 a year and after 10 years you would have paid $240,000 for your landlord's mortgage (of course they would love you for that). In owning you would spend money along the way for improvements and maintenance (mainly for your lifestyle and comfort),you would take a deduction on your income tax for 10 years, have a sense of pride in ownership and oh you could sell it and get your money back. In 10 years the worst case scenario you would get back what you paid for the home. Let me see own or not..what makes sense??
I think you house is an investment, absolutley. It's a good tax write off every year and it builds equity as well. When I'm ready to retire, I will either sell for a good profit or rent. What's not good about that?
Fran, This is a very thought provoking blog and I may be a Pollyanna, (My husband thinks so.) but I'm not ready to throw away the American Dream. If we wind up in a world wide depression then life as we know it will be over and none of this will matter. You and I will both be standing in the soup line hoping there's still some left by the time we reach the front of the line so we can get a little sustanence before returning to our cardboard box. So unless somebody has a crystal ball, I suggest we all get back to work and use the facts and not the hystrionics of the media (and your writer spammer) to make the most informed decisions we can.
No one has a crystal ball. When we went to Hawaii in the summer the tour guide was showing us some very expensive areas and saying how he wished he had bought there many years ago. the same thing happened when we went to San Francisco.
Hey Fran,
I am right there with you. Getting my home / investment paid off asap is one of my goals. When I retire, I want to own my home free and clear.
Your primary residence should be considered and investment. The most important one. Most of a family's wealth is in this one single purchase.
Yes, a home is certainly one's biggest investment. As the other comments have made clear, there is a pride in ownership of something that represents most of what a family works for and saves for.
Our home is many things including a major investment. It's our shelter and a safe haven from the stresses of the outside world.
Hi Fran. Of course your primary residence is an investment. Even if the market does take 12+ years to recover (as that person in your comment mentions)(I don't believe it will be anyway near that long), it is still a good investment to purchase a home. After all, the home will eventually be paid off, meaning that you'll have zero mortgage payments. Renting, as the comment suggests, means you'll be paying rent forever.
It depends I think, on how long you intend to be there...operative word is intend...life can get in the way...in the olden days some folks bought, fixed and updated and moved on and on and while to some degree if you can play "the price is right" with a short sale or foreclosure...that can still be true. There will always be sour apples who predict the end of the world as we know it....you can listen or whistle a happy tune and moooove on !
Fran, a home is the single largest investment most people ever make. At the end of their lives, people's home many times is the bulk of their estate. That said, looking at a home to be a cash cow for its appreciation every year - well we have already seen what happened to that theory. Great post!
Hi Fran, I enjoyed reading your post. I understand very well the problem of using equity in your home to live. As well as my real estate biz, my husband and I are also builders. For the past 16+ yrs we've been building a home, living in it, then selling to move into the next one. Along the way we have had sporadic income as we do all the construction ourselves and each home has been nearly a full time job taking us 1-2 yrs to complete. We built a large home in 2005 which we have lived in for the past 4 yrs. We started another home 1 1/2 yrs ago on the adjoining lot borrowing against the completed home to build it, all the while assuming the big house would sell in time to finish the next one and move in. Well, surprise! The market started declining here in late 2006 and we still haven't been able to finish the new house. I had the first one listed for 10 months with no offers, even reducing the price 4 times. Although we would have liked to sell the larger home by now, the one good thing is that all our debt is tied only to it. We have been trying to finish the new house just to the point of getting final occupancy which should be very soon. Our larger home has a 1 bdrm apt in the basement. We ended up renting out the 2500 sq. ft. main home and living in the apt. ourselves. When we get moved next door we plan to rent the apt. The good news is the combined rent should cover our mortgage, taxes, & hoa fees. Not being able to sell has been a setback and we worry that the value will continue to decline but I know there are many people in worse shape than us.
To me your monthly mortage payment is an expense. I would say that in a normal market with no governmental constraints on building and no shortage of land, most folks who own for 5-15 years will sell and get back an amount (net due to seller at closing) that is about equal to the net present value of their downpayment and maintenance performed. The amount they spent each month is essentially gone (therefore an expense).
Buying more house than you need as an "investment" or more than you can comfortably afford is foolish. 2001-2006 made this convential wisdom appear dumb, but these are true statements. Prompting buyers to spend more is giving them unrealistic expectations. The "investment" could pay off, or it could loose money (unspeakable two years ago).
Just the t 2 cents of a CPA not a realtor.
My home is first of all the place my family and I live.
We own it because I believe no matter what happens to our economy you're better off owning a home than renting one.
Second it could be considered an investment. The government makes it financially advantageous to own a home buy allowing you to deduct interest you pay on your mortgage and property taxes.
Fran - There is no place like home, where memories are made and memories are shared. It is also an investment, where we put hundreds and thousands of $ into our home for our benefit and for our future retirement.
Renting should be only done as a short term solution when you know you only stay in one location for only 2-4 years. Or you simply cannot afford to buy.
Fran, you have received some great comments. I also believe that my home is my biggest investment. Our home is our biggest asset, and are moving toward paying the mortgage off. I dislike paying a mortgage, but would hate to rent and see the money ..so to speak...fly out the window.
A persons home is quite possibly there biggest investment. In fact, purchasing a home, for many Americans, is their ONLY investment.
Great post. Very well done. A home is an investment of a different sort. It's measure is not financial as we have used in the last few years. It is an investment in yourself, your family, and your future. That is why location is so important when buying a home. It isn't about the granite countertops - it is about your children's education. It is about a short commute so you can spend more quality time at home or in leisure activity with those you love rather than be stuck in traffic.
I second Jim Crawford's opinion--and if over time your primary residence turns into a gold mine, good for you--you made a wise selection of location and received the grace of good timing.
Fran, when you look at an asset vs. a liability you know assets pay you and you have to pay liabilities. Unless you have a business or enough cash producing assets that pay your mortgage, your house is considered a financial liability. If you have to pay the mortgage, your home is a liability. Your equity is dead unless you are using it.
Your home along with real estate investment properties are investments but they are long term investments. The bottom of the market is irrelevant to an investor because of the mindset of long term investing. Over time the renters pay down the mortgage and when you retire, you liquidate. The renters create equity for you over time.
This 12-20 year comment is just to worry people. When you understand all facets of real estate investing this is a non-issue. Risk is mitigated with the right knowledge.
I hope this sheds some light for you!
Homes are NOT an investment. An investment is an asset that throws off cash, not something you have to feed cash into.
Having said that it is better to own than rent. Even if the value goes down so what as long as you can afford the payments. Eventually it will come back up.
If you buy a new car for $40,000 the second you sign the papewrwork that car is worth $30,000. Do you walk away from it then? No, you use it for the intened purpose and make the payments. Eventually it will be worth more than you owe on it..
Homes are NOT an investment. An investment is an asset that throws off cash, not something you have to feed cash into.
Having said that it is better to own than rent. Even if the value goes down so what as long as you can afford the payments. Eventually it will come back up.
If you buy a new car for $40,000 the second you sign the papewrwork that car is worth $30,000. Do you walk away from it then? No, you use it for the intened purpose and make the payments. Eventually it will be worth more than you owe on it..
Dear Fran,
I can't imagine anyone who can buy, renting at this time. Rates are great! Prices are down!
Renting only feeds the owners pocketbook.
Great Post!
Barbara
Hi Fran,
That commenter seems a bit extreme.
I do think it will be 3-5 years until the housing market bottoms.
I also think that real estate is indeed an investment. If you are spending $1,000 a month on something, it should make good long term financial sense to spend that money.
That being said, I do see why people would prefer to own than rent. If you have a family, you want a sure thing, renting is a roll of the dice.
A primary residence is investment. It's a life investment (as Jim said above) as well as one of the biggest single financial investments most people will ever make.
BTW, for the people (like your commenter) that want to spout out RD,PD bs out a primary home NOT being an investment, you need to reread your books. That's Asset vs. Liability (not investment), though I could successfully argue that a primary home is an asset as well.
There are two paths I see. One leads to a rebound in the economy on a broad scale, and real estate will recover with that broad economic recovery. The other path is much darker. I don't like the level of government spending and control. And if we venture too far down the path of socialism, there very well could be a major structural collapse in the American economy... and that WOULD crash the world.
I like to think that the first option is more likely.
I like to think of my home as an investment and one that I enjoy very much. If I get less for it than I paid and put into it, well I certainly have had quite a few years use out of it. A long term investment yes - a few years and then selling - now days you will probably lose money.
Fran, I worked with two separate clients, just yesterday that both had to vacate where they were renting because the landlord was being foreclosed. I think part of your point is your home is primarily a safe have. A place to come out of the cold and rain.
Good post.
Jay