Author Topic: Home is not an investment?  (Read 6087 times)

joenorm

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Home is not an investment?
« on: April 16, 2019, 07:52:29 AM »
I've read on here not to think of your home as an investment. I sort of understand this.

But here on the West Coast doesn't everyone, at least in the back of their mind consider their home in this way?

Hard not to when your home has appreciated triple in 5 years. At what point does it make sense to cash out even if yo enjoy the home?

What is so wrong with a home as an investment, anyway? It just seems like good foresight to me, and a little luck of course.



RWD

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Re: Home is not an investment?
« Reply #1 on: April 16, 2019, 08:02:55 AM »

theoverlook

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Re: Home is not an investment?
« Reply #2 on: April 16, 2019, 08:27:46 AM »
To me, the biggest problem with thinking of your home as an investment is the difficulty of utilizing the cash value of the "investment." Are you planning on moving into a cheaper home at some point? If not, you'll never be able to live off the equity in the home.

People also often underestimate the actual carrying costs of a high value home. I have 100% of what I've spent on my house tracked and it's pretty breathtaking. If I was intent on owning my home as an investment, I would be doing pretty badly, and I'm frugal and bought well under market. Houses are expensive, especially in high cost of living areas.

But as has been said over and over, you need a place to live. Just don't count on using the equity in that place to live as a savings account.

ender

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Re: Home is not an investment?
« Reply #3 on: April 16, 2019, 09:15:12 AM »
To me, the biggest problem with thinking of your home as an investment is the difficulty of utilizing the cash value of the "investment." Are you planning on moving into a cheaper home at some point? If not, you'll never be able to live off the equity in the home.

People also often underestimate the actual carrying costs of a high value home. I have 100% of what I've spent on my house tracked and it's pretty breathtaking. If I was intent on owning my home as an investment, I would be doing pretty badly, and I'm frugal and bought well under market. Houses are expensive, especially in high cost of living areas.

But as has been said over and over, you need a place to live. Just don't count on using the equity in that place to live as a savings account.

+1

Investments only matter if you realize the value.

Imagine if you had a 401k but then found out you couldn't use it in retirement until you died. Would you consider a 401k a good investment?


GuitarStv

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Re: Home is not an investment?
« Reply #4 on: April 16, 2019, 09:37:52 AM »
I try not to consider my home as an investment, but since its value has outpaced my actual market investments for quite a while it can be hard not to sometimes.  :P

FINate

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Re: Home is not an investment?
« Reply #5 on: April 16, 2019, 09:40:16 AM »
You have to live somewhere, so it doesn't matter if your home value increases 3x or even 100x. You only come out ahead if you downsize or move to a LCOL area, yet this is a one-off which relies entirely on capital appreciation to work.

The key to RE as an investment is the income it generates. Expecting capital appreciation is nothing more than speculating. May as well buy Bitcoin or gold - like owner occupied RE, these don't generate income and are speculative. Sure, you'll find people around here saying you can buy a rental property in a HCOL area that's negative cash flow because the [predicted] leveraged appreciation more than makes up for it. IMO this is playing with fire, and is part and parcel of the magical thinking about RE that has seeped back into the popular psyche with the long stretch of increasing prices since the last bust.

itchyfeet

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Re: Home is not an investment?
« Reply #6 on: April 16, 2019, 11:52:02 AM »
Hmmm... I agree with everything that has been said above.... but just to be contrarian for the sake of debate...

I purchased an expensive home in an expensive location because it put me within a couple of kms of the high paying jobs. I got rid of my commute and had more time to spend with friends and to do sport and things I enjoyed doing with DW. My expensive home was an ďinvestmentĒ that enabled me to earn a higher salary and to have a better life. The returns were spectacular.

The above is all well and good....... but ..... now as I approach FIRE I want to cash in the money locked in that home, but this is not so easy as it means moving away from friends and cutting off the opportunity to earn a good salary if I ever need to again in the future.

If I donít sell I cant FIRE. Deciding to sell feels like a bigger decision than quitting my job.

Car Jack

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Re: Home is not an investment?
« Reply #7 on: April 16, 2019, 01:57:06 PM »
The reason a home isn't an investment is because you don't get to choose when a downturn hits.  And timing can become everything.  Say you pay a million dollars for a home and some random number of years from now is when you are going to retire, move to Costa Rica and take a job holding a hammock in place.  Ok, so 5 years before this retirement, the real estate market takes a huge nose dive and your house is worth $300k.  As you creep towards that retirement date, you're still paying a mortgage and are under water.  You hit the date and the good news is that the market has been in a strong recovery and now your house value has doubled.  The bad news is that it's $600k and you still owe $685k on it.  So not only is it not a stable investment, you're going to have to pay to leave it.  Of course rents have followed house values, so you can't make anywhere near your mortgage payment by renting it out.

You might think this is crazy, but I've seen it happen twice in the Massachusetts market and had friends buy up without selling their old house because the newer, bigger house was such a bargain.  But for some reason, none of them figured in that their smaller house would be reduced in value as well and most of them sat on the old house, making 2 mortgage payments for 3 years, then finally threw in the towel, used all of their savings and got out of the old house.  And Mass never rose the numbers that CA has.

GuitarStv

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Re: Home is not an investment?
« Reply #8 on: April 16, 2019, 02:28:05 PM »
The reason a home isn't an investment is because you don't get to choose when a downturn hits.  And timing can become everything.  Say you pay a million dollars for a home and some random number of years from now is when you are going to retire, move to Costa Rica and take a job holding a hammock in place.  Ok, so 5 years before this retirement, the real estate market takes a huge nose dive and your house is worth $300k.  As you creep towards that retirement date, you're still paying a mortgage and are under water.  You hit the date and the good news is that the market has been in a strong recovery and now your house value has doubled.  The bad news is that it's $600k and you still owe $685k on it.  So not only is it not a stable investment, you're going to have to pay to leave it.  Of course rents have followed house values, so you can't make anywhere near your mortgage payment by renting it out.

You might think this is crazy, but I've seen it happen twice in the Massachusetts market and had friends buy up without selling their old house because the newer, bigger house was such a bargain.  But for some reason, none of them figured in that their smaller house would be reduced in value as well and most of them sat on the old house, making 2 mortgage payments for 3 years, then finally threw in the towel, used all of their savings and got out of the old house.  And Mass never rose the numbers that CA has.

Do I get to choose when a downturn hits for my stocks?  If so, someone forgot to send me the memo.

Timing can be everything when you're selling equity as well.  The only real difference in your example is that many people borrow to buy a home while few borrow to buy stock.

:P


Telecaster

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Re: Home is not an investment?
« Reply #9 on: April 16, 2019, 02:41:05 PM »
I've read on here not to think of your home as an investment. I sort of understand this.

But here on the West Coast doesn't everyone, at least in the back of their mind consider their home in this way?

Hard not to when your home has appreciated triple in 5 years. At what point does it make sense to cash out even if yo enjoy the home?

What is so wrong with a home as an investment, anyway? It just seems like good foresight to me, and a little luck of course.

Housing is an expense, and like all expenses it is wise to minimize it.  Buying a home can minimize your housing expenses.  For one, a portion of your mortgage payment builds equity, which you don't get if you are renting.  And your mortgage remains the same, while presumably rents will continue to increase.   Additionally, it is reasonable to assume your house's value will increase at something close to the rate of inflation which isn't great.  However, you only put 20% down (or whatever) but you get the keep the entire increase, so there is a bit of leverage there.   For those reasons, a lot of people wind up with a lot of their net worth in their home.  That's why you hear things like "stop throwing your money away on rent!"  because for many people it turned out to be an investment, even if it wasn't a great one.

The key is you really have to drill down and look at the numbers.   Sometimes it makes sense, not always though.   

theoverlook

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Re: Home is not an investment?
« Reply #10 on: April 16, 2019, 03:17:04 PM »

Do I get to choose when a downturn hits for my stocks?  If so, someone forgot to send me the memo.


No, but you can sell just a portion of your stocks. It's mighty difficult to sell just a portion of a house.

You also presumably have a bond portion of your liquid asset allocation, and can sell that instead when equities are down.

aasdfadsf

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Re: Home is not an investment?
« Reply #11 on: April 16, 2019, 10:32:29 PM »
This seems to be a persistent misunderstanding, but your home is definitely an investment. It generates income. If you live in the home, you realize that income in the form of imputed rent.

It can of course be a bad investment, but that's another story.

As I like to say, if your home isn't an investment, then what are the people who rent houses to you doing? Philanthropy?
« Last Edit: April 17, 2019, 12:33:53 AM by aasdfadsf »

Malkynn

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Re: Home is not an investment?
« Reply #12 on: April 17, 2019, 04:59:52 AM »
Your home is ABSOLUTELY an investment.

There's no question that it's an investment.
However, as per the reasons stated above, it's often not a very good or practical investment.

The point of the statement "your home is not an investment" is to combat the utter bullshit attitude that many people have of spending whatever it takes to get their "dream home", renovating the fuck out of it and justifying it because "it's an investment". Many, many, MANY people lose money on their homes. Many don't even realize it because they just compare purchase price to sale price and think "OMG, we made so much money!!!"

It's a statement to make people examine the *actual* value of their investment.

Look at the numbers closely. Look at the factors, timelines, and risks. Try to understand what *kind* of investment your home is and make the appropriate plans from there.

I have two homes right now and both are investments: my current townhouse because it will absolutely rise in value as the area gentrifies, and my new apartment because it will always be cheap to maintain and I'll probably live there until I'm 90, so it's an opportunity investment that frees up cash flow indefinitely.

GuitarStv

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Re: Home is not an investment?
« Reply #13 on: April 17, 2019, 07:36:35 AM »

Do I get to choose when a downturn hits for my stocks?  If so, someone forgot to send me the memo.


No, but you can sell just a portion of your stocks. It's mighty difficult to sell just a portion of a house.

You also presumably have a bond portion of your liquid asset allocation, and can sell that instead when equities are down.

These examples of yours are kinda confusing.

While it's mighty difficult to sell just a portion of a house, it's mighty difficult to rent out part of your equities . . . or to put some solar panels on your equities and sell power back into the grid to earn money each year.  Each asset has different pluses and minuses.

I hold bonds, equities, and property.  If my house price tanked and I needed money, I could sell bonds too . . . just like if equity price tanked.

joenorm

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Re: Home is not an investment?
« Reply #14 on: April 17, 2019, 07:59:14 AM »
What about responsibly using the equity in ones house to make further responsible investments?

By responsible I mean not leveraged too far. I have recently refinanced my primary residence (cash out) to be able to build another house. Even if the market really takes a worst-case-scenario dump I believe I could get out of it without losing much.

So my home is now a tool for investing. And when I go to sell the gains are tax free.

I completely hear what everyone is saying though. Homes are crazy expensive and take an insane amount of mental and physical energy to upkeep. At least a lot of that upkeep is enjoyable, or at least I have tricked myself into thinking so :-)


FINate

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Re: Home is not an investment?
« Reply #15 on: April 17, 2019, 10:06:51 AM »
With imputed rent be sure you're looking at "profit" after expenses: mortgage, taxes, insurance, maintenance, depreciation, etc. Are you actually coming out ahead owning vs. renting? The NYT Rent vs. Own calculator is a good starting place. There are quite a few places, such as in my city, where renting is cheaper than owning.

The other issue with imputed rent is that in the end it's almost always accounted for as consumption. If you "invest" $100k in a new kitchen this will increase the value of your home and thereby increase the imputed rent, but then all you've done is given yourself a rent increase that's paid for with your increased imputed rent. Whereas $100k invested in something real would've yielded actual income. Consumption masquerading as investment leads people to do all sorts of nutty things. Hey, why not buy that luxury car...look how much I'm saving by not paying on a lease every month!

Again, what really matters is the rent vs. own calculation, and clarity on what you're consuming vs. real investment. Calling your primary residence an investment conflates a lot of things and muddies the picture. If you insist on thinking of your residence as an investment then at least treat it as such and do an honest assessment. I did this once a few years ago and I was stunned: Even though my house had doubled in value, after expenses it wasn't great and I would have been better off renting over the same period. I don't regret owning as there are other intangibles that make it a worthwhile expense, and it was helpful in keeping my living expenses relatively consistent over two boom cycles. But when all the dust had settled, it was consumption not investment.

IMO, it makes more sense to view your primary residence as an inflation hedge, a way to mostly peg cost of living at a given point in time, and as a way to make future expenses more predictable.
« Last Edit: April 17, 2019, 11:22:13 AM by FINate »

afox

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Re: Home is not an investment?
« Reply #16 on: April 17, 2019, 04:33:30 PM »
. If you "invest" $100k in a new kitchen this will increase the value of your home and thereby increase the imputed rent, but then all you've done is given yourself a rent increase that's paid for with your increased imputed rent. Whereas $100k invested in something real would've yielded actual income. Consumption masquerading as investment leads people to do all sorts of nutty things. Hey, why not buy that luxury car...look how much I'm saving by not paying on a lease every month!

a lot of people assume that "investing" 100k in a new kitchen would somehow increase the value of the home by more than 100k. NOT TRUE. According to the data no home improvement projects offer a 100 ROI. Although if you DIY, you'll probably get a ROI, but then maybe you ought to get a part time job as a plumber, carpenter, etc. https://www.zillow.com/mortgage-learning/roi-home-improvement-projects/

The fact of the matter is that only about 20% of the properties value is in the land, and 80% is the building. The building is a consumable item, much like a car. The building deteriorates, goes out of style, become unsafe, inefficient, etc relatively quickly. The problem is that home-owners have a knack for spending lots of money and time improving and maintaining their properties to prevent them from becoming 1990's ford explorers and when they go to sell the property they dont account for any of that, they dont keep records of their expenses, or their time.

Everyone knows lots of people that have "made a killing" on the sale of their primary residence and that certainly does happen. If you know where and when its going to happen then you are super-human and you're already fabulously rich, otherwise you were lucky. More likely, those people put a ton of time and money into the property and then bragged about the difference in buying price vs vs selling price with no mention of any of the expenses, transaction fees, etc. Because home purchases are heavily leveraged and because of inflation it only takes small gains in appreciation to look like big gains on the surface. If speculation is your thing, there are more convenient ways to do it than with houses. Noone likes to talk about how little they made from a sale of a property, noone likes to track time and expenses and treat their primary residence as a business, I dont blame them.

This doesnt mean home ownership is a bad thing. I own a house because I like to live in a nice house that is owned by me and SOMEDAY it might be cheaper than renting due to inflation. I dont see it as an investment at all, maybe as a very restrictive savings account. Imagine a savings account with enormous annual fees in which you could only take all the money out at once with 8% fees on withdrawal, that;s probably a good way to think about your primary residence equity.

aasdfadsf

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Re: Home is not an investment?
« Reply #17 on: April 18, 2019, 10:15:51 PM »
The other issue with imputed rent is that in the end it's almost always accounted for as consumption. If you "invest" $100k in a new kitchen this will increase the value of your home and thereby increase the imputed rent, but then all you've done is given yourself a rent increase that's paid for with your increased imputed rent.

Putting aside the fact that spending $100k on a kitchen remodel is totally nuts, what you say here is true. When owning your own home, you are both the producer and the consumer. Don't consume more house than you need!

aasdfadsf

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Re: Home is not an investment?
« Reply #18 on: April 18, 2019, 10:54:37 PM »
The fact of the matter is that only about 20% of the properties value is in the land, and 80% is the building.

This will depend entirely on where you live and what kind of building exists. In a growing city in a good location, the land may be almost all of the value. In my neighborhood, people routinely buy older houses just to tear them down and build new ones (mostly duplexes/quads). The land/building ratio for these properties is obviously tilted way in favor of the land. But if you live in a rural area where land sells for a few thousand bucks an acre, almost all the value is in the building.

englishteacheralex

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Re: Home is not an investment?
« Reply #19 on: April 18, 2019, 10:55:35 PM »
Telecaster already said this, but I'll second it. I don't really see my home as an investment. I see it as the most financially optimized way I could figure out to accomplish my need for housing.

I live in Hawaii. Rent is pretty high. So are mortgages. We realized that if we bought a modest condo--the smallest thing we could tolerate with two toddlers--and lived in it for at least five years, we'd probably come out ahead from having rented a similar property for the same amount of time.

3.5 years in, the numbers bear us out. Our condo has appreciated by about $50k. We can afford the mortgage pretty easily. The longer we stay in this condo, the better the numbers look versus having rented the equivalent length of time (as long as home appreciation out here doesn't totally crap the bed for some reason). Our mortgage plus HOA fees cost exactly the same as the rent that I see other units in our building going for. Considering we've spent almost nothing on maintaining/upgrading our place above the HOA fees, I think it was a good decision.

afox

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Re: Home is not an investment?
« Reply #20 on: April 19, 2019, 10:35:55 AM »
Considering we've spent almost nothing on maintaining/upgrading our place above the HOA fees, I think it was a good decision.

This is a common misunderstanding in upkeep/maintenance thinking among home owners. The math works out the same if you put $2,000 year into your place or $20,000 every 10 years. This is also sometimes described by RE investors as the 80/20 rule. Either way you are consuming the property every day even if you dont use it. You could do nothing for 30 years but your property will be worth shit then and there goes your appreciation, although if your goal is to die in the home by all means do nothing unless its critical for function or safety.


afox

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Re: Home is not an investment?
« Reply #21 on: April 19, 2019, 10:49:44 AM »
The fact of the matter is that only about 20% of the properties value is in the land, and 80% is the building.

This will depend entirely on where you live and what kind of building exists. In a growing city in a good location, the land may be almost all of the value. In my neighborhood, people routinely buy older houses just to tear them down and build new ones (mostly duplexes/quads). The land/building ratio for these properties is obviously tilted way in favor of the land. But if you live in a rural area where land sells for a few thousand bucks an acre, almost all the value is in the building.

So, you are saying that people buy a plot of land with a building on it for say 80k and then spend 20k tearing the building down and replacing it with a brand new one? Replace 80k and 20k with any numbers u like. Do you live in a 3rd world country with very cheap labor?  I think the difference in understanding between us is you are considering the ratio of land/value of the tear down property. I am considering the land/value ratio of the finished property. In fact a property with tear down building on it is often CHEAPER than the same property without a building on it at all since there is a lot of expense in tearing down a property and disposing of it, especially if it has asbestos which is extremely common on older buildings in the US. Unless the buyer is going to live in the teardown building I think you should be considering the total and final price building/land ratio of the final property that buyer will live in.

afox

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Re: Home is not an investment?
« Reply #22 on: April 19, 2019, 10:56:16 AM »
Putting aside the fact that spending $100k on a kitchen remodel is totally nuts, what you say here is true. When owning your own home, you are both the producer and the consumer. Don't consume more house than you need!

The problem with human beings is that our needs (and wants) for a home change over time. For younger people that will get married/start a family etc the needs are growing so the home buyer is forced to buy and consume more home than they need to account for their changing needs (a growing family). Given the fact that RE transaction expenses are so high its often a good decision for these people to buy and consume more home than they need (waste) so that they will have fewer RE transactions.  Probably not as good as renting if they wont own very long though. The average length of ownership for a home in the US is only 7 years! This is because needs (especially including location) change over time. 7 years + very high transaction costs = a lot of happy banks and RE agents.
« Last Edit: April 19, 2019, 11:24:32 AM by afox »

FINate

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Re: Home is not an investment?
« Reply #23 on: April 19, 2019, 11:21:34 AM »
Putting aside the fact that spending $100k on a kitchen remodel is totally nuts, what you say here is true. When owning your own home, you are both the producer and the consumer. Don't consume more house than you need!

The problem with human beings is that our needs (and wants) for a home change over time. For younger people that will get marrie/start a family etc the needs are growning so the home buyer is forced to buy and consume more home than they need to account for their changing needs (a growing family). Given the fact that RE transaction expenses are so high its often for these people to buy and consume more home than they need (waste) so that they will have fewer RE transactions. The average length of ownership for a home in the US is only 7 years! This is because needs (especially including location) change over time. 7 years + very high transaction costs = a lot of happy banks and RE agents.

Yep. I'll own my own folly here from my pre-MMM days. We were DINKs and bought a 3/2 even though we didn't have a need for those other bedrooms for ~10 years. Why? Young and gullible, and the conventional wisdom was "buy as much house as you can afford." Total waste of money. What saved our asses was a manufactured housing shortage such that a ton of appreciation came relatively close to making up the difference. Pure dumb luck, would not want to try to reproduce.

The whole "it's an investment" thing is interesting. Calling something an "investment" is meaningless. What really matters is whether or not it's a good investment. IMO this has become a way for people to throw logic out the window to justify whatever they want. College is an "investment" so go 100k into debt for a Music Theory degree (real story from a few years ago, can't find it now). Or yes, even a 100k kitchen remodel.

afox

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Re: Home is not an investment?
« Reply #24 on: April 19, 2019, 11:34:52 AM »
My partial solution to this was to buy a duplex. Bought right around the time we married with plans of starting a family, as (if) our needs grow we will get rid of the downstairs tenants and move into that part of the house. But its still incredibly wasteful since the house is still bigger than we need and we will have two kitchens and more bathrooms than we need. Kitchens and bathrooms are more costly to build and maintain/update then other parts of the house.

Another thing we havent mentioned is that these "home improvement projects"  like the 100k kitchen arent leveraged and are paid for with cash so they have real opportunity cost. Frugal home buyers planning to buy a fixer upper really need to evaluate the difference between a finished home purchased with a mortgage vs. a cheaper home that needs work with the work paid for with cash. Almost always this is cash that could be used to invest via tax deferred accts lowering your taxable income.  So you're losing the investment income + tax savings of not investing in retirement accts. + additional tax savings from buying a more expensive house that did not need the work and itemizing.

There is a lot to consider!




joenorm

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Re: Home is not an investment?
« Reply #25 on: April 19, 2019, 06:32:51 PM »
OP here. Thanks for the responses.

This site has been extremely illuminating since joining.

It is really interesting dispelling some of the myths that are so deeply engrained around here, and the homeownership thing is a big one.

People will kill to own, thinking the value will only go up, and pour countless hours and dollars into the house along the way and never really keep track of what they spend. I am guilty of this, although I enjoy the creative outlet of home projects so it seems Ok.

Still nobody has touched on my post from earlier about using equity to make further sound investments. This is the way I still see a primary residence as a useful tool.

aasdfadsf

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Re: Home is not an investment?
« Reply #26 on: April 19, 2019, 09:45:49 PM »
The fact of the matter is that only about 20% of the properties value is in the land, and 80% is the building.

This will depend entirely on where you live and what kind of building exists. In a growing city in a good location, the land may be almost all of the value. In my neighborhood, people routinely buy older houses just to tear them down and build new ones (mostly duplexes/quads). The land/building ratio for these properties is obviously tilted way in favor of the land. But if you live in a rural area where land sells for a few thousand bucks an acre, almost all the value is in the building.

So, you are saying that people buy a plot of land with a building on it for say 80k and then spend 20k tearing the building down and replacing it with a brand new one?

No, they buy a $800k property and spend perhaps $250k to tear it down and build a new one, resulting in a property that's maybe worth $1.2M by the time they're done.

Quote
Do you live in a 3rd world country with very cheap labor?

Not exactly.

aasdfadsf

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Re: Home is not an investment?
« Reply #27 on: April 19, 2019, 10:23:43 PM »
The average length of ownership for a home in the US is only 7 years! This is because needs (especially including location) change over time. 7 years + very high transaction costs = a lot of happy banks and RE agents.

Over a 7-year time horizon, even if you're paying the full 6% commission when selling (you can do much better these days), that's a 0.86% hit per year. Yeah it's a cost, but if you were smart when buying, you should have at least 6% imputed rent and 3% capital gain per year, minus maybe 2-3% costs, so worst case you're still getting over a 5% ROI.

Of course, the caveat that you may not have been smart always applies.

(And just to preempt the predictable complaint about the mortgage payments, they're not relevant in this scenario since we're talking about returns on the full value of the property. If you leveraged for a rate lower than 5%, then your ROI is even higher. Just imagine we're talking about an all-cash purchase if you want to keep things simple.)

afox

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Re: Home is not an investment?
« Reply #28 on: April 19, 2019, 10:47:31 PM »
The average length of ownership for a home in the US is only 7 years! This is because needs (especially including location) change over time. 7 years + very high transaction costs = a lot of happy banks and RE agents.

Over a 7-year time horizon, even if you're paying the full 6% commission when selling (you can do much better these days), that's a 0.86% hit per year. Yeah it's a cost, but if you were smart when buying, you should have at least 6% imputed rent and 3% capital gain per year, minus maybe 2-3% costs, so worst case you're still getting over a 5% ROI.

Of course, the caveat that you may not have been smart always applies.


(And just to preempt the predictable complaint about the mortgage payments, they're not relevant in this scenario since we're talking about returns on the full value of the property. If you leveraged for a rate lower than 5%, then your ROI is even higher. Just imagine we're talking about an all-cash purchase if you want to keep things simple.)

what about your expenses?  surely there must be other expenses from owning a house for 7 years than just the transaction costs to sell it?  And Ive never sold via a realtor but I think the selling costs go beyond realtor commissions. 0.83% is not chump change. I would never buy an investment with expense ratios anywhere near that high, its not necessary. I own a house but I dont consider it an investment, its a place to live with equity, the lower my housing expense the more money to invest in tax free/tax deferred investments. Also, if leverage is your thing there are lots of leveraged investment options with lower fees than your 0.83% per year with leverage too. Here is a leveraged S&P index fund with 0.90% expense ratio: https://www.proshares.com/funds/spxu.html

spartana

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Re: Home is not an investment?
« Reply #29 on: April 19, 2019, 11:12:37 PM »
The fact of the matter is that only about 20% of the properties value is in the land, and 80% is the building.

This will depend entirely on where you live and what kind of building exists. In a growing city in a good location, the land may be almost all of the value. In my neighborhood, people routinely buy older houses just to tear them down and build new ones (mostly duplexes/quads). The land/building ratio for these properties is obviously tilted way in favor of the land. But if you live in a rural area where land sells for a few thousand bucks an acre, almost all the value is in the building.

So, you are saying that people buy a plot of land with a building on it for say 80k and then spend 20k tearing the building down and replacing it with a brand new one?

No, they buy a $800k property and spend perhaps $250k to tear it down and build a new one, resulting in a property that's maybe worth $1.2M by the time they're done.

Yes this. Around my former area its very common to see a beautifully redone home on a large lot be bought out for hundreds of thousands, razed and a mcmansions (or two) worth millions built on the entire lot. Reason? Cause ya know that no one can live in that "tiny" but highly.upgraded house so you just gotta knock it down for 2 - 4000 sf behemouths.   

This is an example. This was once a charming smaller upgraded house. Notice "regular" house next door. Often there are 2 houses like this on a lot where only one smaller house used to be.

As to the OP. No I wouldn't consider my house as investment even.though it grew in value over the years I owned. It also dropped in value by more than half during the Great Recession - as did my investments. Unlike most everyone I knew at that time who used their rising equality to fund their lifestyle or make investments, when everything crashed I didn't find myself in an underwater house and no way to pay for it if I lost my job and lost a big part of my investments like they did.
« Last Edit: April 19, 2019, 11:38:29 PM by spartana »

ilsy

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Re: Home is not an investment?
« Reply #30 on: April 19, 2019, 11:28:53 PM »
Still nobody has touched on my post from earlier about using equity to make further sound investments. This is the way I still see a primary residence as a useful tool.
I'm really surprised that no-one had touched the definition that "Rich dad poor dad"'s author,  Robert Kyiosaki, gave in his book, that primary residence house is not an asset (read investment), but a liability. Assets put money in your pocket,  a liability - takes money out of your pocket. So, unless you rent your house and get back not only all your mortgage payments (that includes taxes and insurance), but also cover your maintenance and vacancies, it cannot be called an investment. It's a liability.

About your question. Yes, you could maybe use your equity in the future, provided your income is high enough to qualify for it (I, for example, have $200k in equity in my primary residence, but can't even get $80k out because my income is too low, so I use other ways to invest in my rental properties). But you could also rent instead of owning a house and save the money you don't need to spend on maintanence, insurance, taxes and interest, for your future investments.

aasdfadsf

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Re: Home is not an investment?
« Reply #31 on: April 19, 2019, 11:41:26 PM »
Spartana, you will undoubtedly enjoy this: http://mcmansionhell.com/

In my own neighborhood, we aren't getting McMansions. Most of the tear-downs are of not-charming houses that were built in the 50s or 70s and are weirdly out of place in a neighborhood that is rapidly going upscale. And they're being replaced by duplexes and whatnot that are actually very nice, though no doubt they'll be out of style in 20 years. Basically, because the land is worth way more than the buildings, density is increasing. And I'm fine with that.

spartana

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Re: Home is not an investment?
« Reply #32 on: April 19, 2019, 11:47:29 PM »
Spartana, you will undoubtedly enjoy this: http://mcmansionhell.com/

In my own neighborhood, we aren't getting McMansions. Most of the tear-downs are of not-charming houses that were built in the 50s or 70s and are weirdly out of place in a neighborhood that is rapidly going upscale. And they're being replaced by duplexes and whatnot that are actually very nice, though no doubt they'll be out of style in 20 years. Basically, because the land is worth way more than the buildings, density is increasing. And I'm fine with that.
Yikes scary fun! I'm in coast SoCal and many of the mcmansions (and dual mcmansions on one lot) are in older hoods but they are often squeezed between the small houses and look so weirdly opulent and out of place. Especially since they are built to cover the entire lot.

aasdfadsf

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Re: Home is not an investment?
« Reply #33 on: April 20, 2019, 12:56:16 AM »
what about your expenses?  surely there must be other expenses from owning a house for 7 years than just the transaction costs to sell it?


I tried to account for that in my example. 3% expenses per year gives you 1% for property taxes, 1% for maintenance, and 1% for insurance and misc. Those percentages are actually about twice as high as for the real estate that I own, but I'm trying to be conservative.

Quote
And Ive never sold via a realtor but I think the selling costs go beyond realtor commissions.

What costs did you have in mind, exactly? There are some additional closing costs, but they typically aren't that much, and buyers usually pay them. If the contract requires seller concessions, then that's really just price haggling.

Quote
Also, if leverage is your thing there are lots of leveraged investment options with lower fees than your 0.83% per year with leverage too. Here is a leveraged S&P index fund with 0.90% expense ratio: https://www.proshares.com/funds/spxu.html

I'm not sure how 0.9% is less than 0.83%, but whatevs...

Transaction costs are a big part of real estate. The game is to keep them low. In an efficient market, real estate isn't supposed to be better (or worse) than any other investment minus transaction costs and risk premium. But it's still an investment!

The whole point here isn't that owning your own home is always and everywhere a great idea, because it clearly is not. But it can be a great idea, it just totally depends. The question put forth in the OP was, "is owning your own home an investment", and the answer is clearly yes. Just don't be stupid about it.   

js82

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Re: Home is not an investment?
« Reply #34 on: April 20, 2019, 06:47:51 AM »
I've read on here not to think of your home as an investment. I sort of understand this.

But here on the West Coast doesn't everyone, at least in the back of their mind consider their home in this way?

Hard not to when your home has appreciated triple in 5 years. At what point does it make sense to cash out even if yo enjoy the home?

What is so wrong with a home as an investment, anyway? It just seems like good foresight to me, and a little luck of course.

Expecting any asset to appreciate in value at a rate significantly above GDP growth + inflation over a long time horizon, defies basic logic.

Saying that owning is more efficient than renting in the current, low-interest environment is true, in many areas.  But to just buy more house than you need (assuming you're not renting it out to someone)  because "a home is an investment" is unwise - you're paying mortgage interest, property tax, etc. - and to expect house appreciation, minus mortgage interest, minus property tax, minus the extra utilities, maintenance, etc. you're paying for getting a bigger place to be anything other than a net money sink is to set yourself up for disappointment.

If you're renting it out for an income stream, the discussion changes and the home becomes a money-generating investment.  But for your personal house the "it's an investment" mindset can promote the wrong set of behaviors.

mountain mustache

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Re: Home is not an investment?
« Reply #35 on: April 20, 2019, 07:52:16 AM »
I am a renter, so my perspective is probably not incredibly valuable...but I see this happening with my friends a lot at the moment. We are all young, in our late 20s, early 30s, and a lot of my friends are on the house hunt. I hear it all the time "we want this type of house, but we know that this other type of house is a better investment in the long run".....what?! How do you know that it is a better investment? I always just roll my eyes, because to me a home is just a place to live. It's expensive, but we all need one, whether we rent or buy. Thinking of it as an investment causes people to make choices based on an unpredictable/unrealistic  *hope* that they will make a ton of cash if they sell it later on.

I'm actually hoping to move to a lower cost of living area this Fall, rent for a year and then buy a little house. The area I want to move to has a pretty decent rental market, but the real estate market is really inexpensive. I've talked to some friends about houses I've looked at, and they are all suggesting "at least 3 bedrooms, 2 bathrooms, because that's what families want." But...I'm just one person! My dream is to buy a little 800 square foot house, 1 bed/1bath, with a yard for my garden. There are actually quite a few houses like that in this city! I'm not thinking of it as my future investment, but only as a lovely little cottage I can come home to every night, small enough that I don't get overwhelmed cleaning it, and has everything I need and nothing I don't. If my needs change later on, I guess I can always find a different house...but I can't predict the future, and buying now for imaginary needs later, or imaginary house buyers who may want certain things just makes 0 sense to me.

englishteacheralex

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Re: Home is not an investment?
« Reply #36 on: April 20, 2019, 09:22:42 AM »
I am a renter, so my perspective is probably not incredibly valuable...but I see this happening with my friends a lot at the moment. We are all young, in our late 20s, early 30s, and a lot of my friends are on the house hunt. I hear it all the time "we want this type of house, but we know that this other type of house is a better investment in the long run".....what?! How do you know that it is a better investment? I always just roll my eyes, because to me a home is just a place to live. It's expensive, but we all need one, whether we rent or buy. Thinking of it as an investment causes people to make choices based on an unpredictable/unrealistic  *hope* that they will make a ton of cash if they sell it later on.

I'm actually hoping to move to a lower cost of living area this Fall, rent for a year and then buy a little house. The area I want to move to has a pretty decent rental market, but the real estate market is really inexpensive. I've talked to some friends about houses I've looked at, and they are all suggesting "at least 3 bedrooms, 2 bathrooms, because that's what families want." But...I'm just one person! My dream is to buy a little 800 square foot house, 1 bed/1bath, with a yard for my garden. There are actually quite a few houses like that in this city! I'm not thinking of it as my future investment, but only as a lovely little cottage I can come home to every night, small enough that I don't get overwhelmed cleaning it, and has everything I need and nothing I don't. If my needs change later on, I guess I can always find a different house...but I can't predict the future, and buying now for imaginary needs later, or imaginary house buyers who may want certain things just makes 0 sense to me.

I'm not a real estate expert, but from what I've read, it's not a terrible idea to think about the resale of your house as a factor in the decision to buy it. I definitely think it's not wise to let that factor dictate a home purchase that is egregiously bad for you. I just think that if you're looking for a very small house, in the back of your mind you have to realize that later (and there's pretty much always a later--very rare to stay in the same place until death) it might be harder to sell, and that you should make sure it's priced accordingly.

I've noticed savvy people do this when they buy cars; they consider how the car holds its value as a factor in the decision to buy it.

If I were you I'd absolutely avoid a 3/2 house, and I agree that that would be ridiculous for a single person. But you should definitely consider the ease of later offloading the house you buy. Very scary to have a mortgage on something that's going to take years or an extremely low price to get rid of, should you need to get out of it.


maizeman

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Re: Home is not an investment?
« Reply #37 on: April 20, 2019, 10:06:51 AM »
To me, the biggest problem with thinking of your home as an investment is the difficulty of utilizing the cash value of the "investment." Are you planning on moving into a cheaper home at some point? If not, you'll never be able to live off the equity in the home.

People also often underestimate the actual carrying costs of a high value home. I have 100% of what I've spent on my house tracked and it's pretty breathtaking. If I was intent on owning my home as an investment, I would be doing pretty badly, and I'm frugal and bought well under market. Houses are expensive, especially in high cost of living areas.

But as has been said over and over, you need a place to live. Just don't count on using the equity in that place to live as a savings account.

+1

Investments only matter if you realize the value.

Imagine if you had a 401k but then found out you couldn't use it in retirement until you died. Would you consider a 401k a good investment?

Indeed. As a result of a weird life insurance situation, despite having no dependents, my net worth would at least double if I died tomorrow. I don't count this toward my net worth since there is no way for me to access that money in question while still being alive to spend it.

Dicey

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Re: Home is not an investment?
« Reply #38 on: April 20, 2019, 10:23:02 AM »
I've commented previously on this thread, so it pops up. When that happened today, my first thought was this: I live in a HCOLA. Zillow, which is pretty accurate in my area, thinks my [mortgage-free] house is worth $1.4M. Even if the market dumped 50% and I was forced to sell (not gonna happen), $700k on top of what we already have is more than enough to maintain our lifestyle in a helluva lot of places I'd be happy to live. IMO, that makes this fucker an asset.

Finances_With_Purpose

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Re: Home is not an investment?
« Reply #39 on: April 20, 2019, 10:59:41 AM »
To me, the biggest problem with thinking of your home as an investment is the difficulty of utilizing the cash value of the "investment." Are you planning on moving into a cheaper home at some point? If not, you'll never be able to live off the equity in the home.

People also often underestimate the actual carrying costs of a high value home. I have 100% of what I've spent on my house tracked and it's pretty breathtaking. If I was intent on owning my home as an investment, I would be doing pretty badly, and I'm frugal and bought well under market. Houses are expensive, especially in high cost of living areas.

But as has been said over and over, you need a place to live. Just don't count on using the equity in that place to live as a savings account.

Exactly this.  As your value goes up, so does the carry cost (i.e. cost of continuing to own it). High-value houses have high-cost maintenance. 

Plumbers have to charge more to work in high-price neighborhoods because their cost of living/commute costs more, too.  And so on.  You can expect that appreciation to bring along some higher costs. 

You don't want to consider the appreciation an investment unless you're anticipating a move to a much lower-cost area.  I can't imagine looking at my house as an investment in that way.

Here's another thing to think about: if you consider your house as an investment, then you'd need some way to cash it out eventually (moving).  This implies that you consider the social value you're building up there - with neighbors, church, local community - worthless.  In other words, you're not valuing the social capital you're building up.  Instead, you're focused on the transactional value of your house.  But the social capital has real value in most places.

For all of those reasons, we don't consider our house an investment at all, and that's even though (1) we can expect very significant appreciation (especially thanks to where/when we bought), and (2) we actually may move one day to a much lower-cost area and cash out.  If we do, we do, if we don't, then we're not behind on any investments because that wasn't a consideration; we're not locked in either way. 

spartana

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Re: Home is not an investment?
« Reply #40 on: April 20, 2019, 03:16:56 PM »
^ Again all of that is highly dependent on your location. There are literal falling down shacks in some Calif housing areas that are selling for millions. There are small 2/1 700 sf original homes that haven't had a property tax increase in years (decades) and only need minimal upkeep and repairs that would sell for millions. Those don't cost the original owner any more then a place in a LCOL area.  And often cost them much less. Much less then renting too.

honeyfill

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Re: Home is not an investment?
« Reply #41 on: April 20, 2019, 06:03:08 PM »
^ Again all of that is highly dependent on your location. There are literal falling down shacks in some Calif housing areas that are selling for millions. There are small 2/1 700 sf original homes that haven't had a property tax increase in years (decades) and only need minimal upkeep and repairs that would sell for millions. Those don't cost the original owner any more then a place in a LCOL area.  And often cost them much less. Much less then renting too.

I've seen both ends of the spectrum. My sister bought a small place in Palo Alto in the mid eighties for about 100k. Today it is worth about 2 million.  She has paid it off. I bought a place in Tucson in 2006 for  550k , today it is worth about 450k.  I still owe about 260K.
She will not sell as should would only recoup about 1.5 million after taking her home owners deduction and California and federal capital gains taxes.  I'm not sure I understand her reasoning  because her net worth not counting her house is less than a million. 
However, Since she has made 1.9 million in 35 years on her house while I have lost 100k in 12 years on mine, who am I  to question her reasoning. 
I guess the point is that neither one of us consider our houses as part of our networth. My sister , because she will never sell. Myself, because my home equity is less then 8% of my net worth , so why bother?
I suppose most people are some where between the two extremes, but home equity should only be considered if you are willing to sell.

spartana

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Re: Home is not an investment?
« Reply #42 on: April 20, 2019, 10:29:49 PM »
^ I didn't consider my house part of my net worth either until I actually sold it. To me its just a place to live that costs a certain fixed amount (or at least a somewhat fixed amount) until I didn't live there any longer. I sold for more than I bought and more than it cost all in for everything (taxes, insurance, repairs, costs to buy and sell, etc) So a good deal but it could have easily went the other direction.

Buffalo Chip

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Re: Home is not an investment?
« Reply #43 on: April 21, 2019, 02:44:44 AM »
If your personal home is an investment, itís a darn lousy one in my view. Absent house hacks, what owning your own home allows you to do is limit your rent. And in exchange you pay a heck of a lot for maintenance, repairs, and upgrades while keeping a significant part of your capital tied up.

Further, the RE market of late has been taking on a lot of the aroma of 2003-2006. That didnít end well.

Seadog

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Re: Home is not an investment?
« Reply #44 on: April 21, 2019, 06:59:50 AM »
I'm really surprised that no-one had touched the definition that "Rich dad poor dad"'s author,  Robert Kyiosaki, gave in his book, that primary residence house is not an asset (read investment), but a liability. Assets put money in your pocket,  a liability - takes money out of your pocket. So, unless you rent your house and get back not only all your mortgage payments (that includes taxes and insurance), but also cover your maintenance and vacancies, it cannot be called an investment. It's a liability.

I absolutely hate that quote, enough to almost wholly discount the book and him as an author because of it, despite there being some otherwise sound advice there. Why? Because it wholly ignores the value of utility derived (ie imputed foregone rent). What's his suggestion then? Set up a corp, buy a home, have the corp rent to yourself, forego tax free cap gains, pay higher rent than carrying costs(with after tax money) so that the corp makes a profit, lose out on tax advantages, and have to pay higher overall fees due to increased costs for accountants and taxes?

People are piss poor at even accounting for investments, let alone evaluating them. So many people simply look at price paid vs price sold of a home, and call that their return.

The true calculation is something along the lines of down payment + tax/insurance/(forever) + periodic, varying interest paid + periodic principle paid - deferred (tax free) rent - final selling price - "pride of ownership" value, all adjusted for the time value of money, for varying terms, at varying interest rates.

Damn near all of those things are either unknown, or best guesses, or unquantifiable (pride of ownership). This makes a true investment calculation a rough guess at best.

There are $5m homes in Vancouver now renting for less than 0.1%/month. If it were a stock it would have a negative P/E, a Price/Sales of over 100, and negative growth. It *only* makes sense as a speculative investment which was the case for the last 15 years, but quickly not being the case as we see double digit YoY declines in the high end of the market. The vast majority of people are morons with money, and aspire to (or already) own homes. Because of that you see far greater swings in fundamental valuation metrics in homes on both the bull and bear side of the cycle, albeit on a longer time line since people are stubborn and have it in their head that homes only ever go up. So often in these cases (another Buffet quote) people will readily ignore the obvious until their diaper is so full it's overflowing from the sides. 

Contrast that with other places where even if the 1% rule isn't in force, you're at least in the grey in between area where even if renting may be a few dollars cheaper, you can rationalize it away from a security/pride of ownership perspective.  My feeling of the 1% rule is that it's a buffet style "margin of safety". Those few properties that meet it are largely "can't lose" ones where even if a few big things go wrong, you can still get by. Contrast with Vancouver/Toronto where in terms of an ongoing investment, prices are at the point where everything has already gone wrong, and the only hope of salvation is continued appreciation well above inflation and income growth rates. Not impossible, but it's the investing equivalent of drawing to an inside straight flush.

ilsy

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Re: Home is not an investment?
« Reply #45 on: April 22, 2019, 07:26:22 AM »
I'm really surprised that no-one had touched the definition that "Rich dad poor dad"'s author,  Robert Kyiosaki, gave in his book, that primary residence house is not an asset (read investment), but a liability. Assets put money in your pocket,  a liability - takes money out of your pocket. So, unless you rent your house and get back not only all your mortgage payments (that includes taxes and insurance), but also cover your maintenance and vacancies, it cannot be called an investment. It's a liability.

I absolutely hate that quote, enough to almost wholly discount the book and him as an author because of it, despite there being some otherwise sound advice there. Why? Because it wholly ignores the value of utility derived (ie imputed foregone rent). What's his suggestion then? Set up a corp, buy a home, have the corp rent to yourself, forego tax free cap gains, pay higher rent than carrying costs(with after tax money) so that the corp makes a profit, lose out on tax advantages, and have to pay higher overall fees due to increased costs for accountants and taxes?

I'm a bit confused by your response. One one hand you seem not to like the definition, but on the other hand you seem to come to a conclusion that primary residence is  not an asset. Beside the definition of asset and liability, I am not sure why would anyone use this book as a guide on investing, at most it's an inspirational piece and any reference on "how to" should be disregarded primarily because all real estate is local. Every state has it's laws regarding corporation, LLC and such, and in some places it might not work. Second, that was something the author suggested long time ago, current tax laws has changed (I think his advice might be illegal now), no book can keep up their advises with tax laws, by the time a book is written and published, it's irrelevant. 

The true calculation is something along the lines of down payment + tax/insurance/(forever) + periodic, varying interest paid + periodic principle paid - deferred (tax free) rent - final selling price - "pride of ownership" value, all adjusted for the time value of money, for varying terms, at varying interest rates.

Damn near all of those things are either unknown, or best guesses, or unquantifiable (pride of ownership). This makes a true investment calculation a rough guess at best.
Well, that's why it's better to call it a liability, not an asset. You may not be able to predict your calculations, but you can definitely calculate whatever happened in the previous tax year and see if your primary residence is an asset (puts money in your pocket or pulls out of your pocket).

I don't understand why people include selling price in the consideration of the investment, that seems to me the opposite of investing, when you sell. In a stock market you make money while you invest, once you have sold (realized) your investment, it's no longer an investment. So, if you are in an up market and the prices are x3 times whatever you originally paid, great, but if you sell right now, to reinvest that money in another house, you would need to pay x3 more. So, the true investment, is when you make profits and reinvest them, you don't sell your investment. So, you shouldn't consider appreciation in your investment calculations. But you should consider maintenance, like a new roof every 10 years, or water heater every 10-15 years to keep your property at the same resell value. 

ilsy

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Re: Home is not an investment?
« Reply #46 on: April 22, 2019, 08:29:36 AM »
I've read on here not to think of your home as an investment. I sort of understand this.

But here on the West Coast doesn't everyone, at least in the back of their mind consider their home in this way?

Hard not to when your home has appreciated triple in 5 years. At what point does it make sense to cash out even if yo enjoy the home?

What is so wrong with a home as an investment, anyway? It just seems like good foresight to me, and a little luck of course.

Housing is an expense, and like all expenses it is wise to minimize it.  Buying a home can minimize your housing expenses.  For one, a portion of your mortgage payment builds equity, which you don't get if you are renting. And your mortgage remains the same, while presumably rents will continue to increase.   Additionally, it is reasonable to assume your house's value will increase at something close to the rate of inflation which isn't great.  However, you only put 20% down (or whatever) but you get the keep the entire increase, so there is a bit of leverage there.   For those reasons, a lot of people wind up with a lot of their net worth in their home.  That's why you hear things like "stop throwing your money away on rent!"  because for many people it turned out to be an investment, even if it wasn't a great one.

The key is you really have to drill down and look at the numbers.   Sometimes it makes sense, not always though.
Your mortgage remains the same ONLY if you buy in a very low cost area. The true mortgage payment that includes escrow (taxes and insurance) will go up every year, as property taxes rise and so the insurance. Since I bought my primary residence in high end neighborhood, I had switched my insurance provider 3 times and have a $7.5k deductible on my roof, to keep my mortgage close to same (still higher than the first year), plus I despute my property taxes on an annual basis now, and they still creep up.
My rentals (in low income neighborhoods) barely had any increase in insurance and taxes (something like $20/year/property). I didn't even adjust my rent, their one time late fee covers my taxes and insurance increase.

Telecaster

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Re: Home is not an investment?
« Reply #47 on: April 22, 2019, 10:54:53 AM »
Housing is an expense, and like all expenses it is wise to minimize it.  Buying a home can minimize your housing expenses.  For one, a portion of your mortgage payment builds equity, which you don't get if you are renting. And your mortgage remains the same, while presumably rents will continue to increase.   Additionally, it is reasonable to assume your house's value will increase at something close to the rate of inflation which isn't great.  However, you only put 20% down (or whatever) but you get the keep the entire increase, so there is a bit of leverage there.   For those reasons, a lot of people wind up with a lot of their net worth in their home.  That's why you hear things like "stop throwing your money away on rent!"  because for many people it turned out to be an investment, even if it wasn't a great one.

The key is you really have to drill down and look at the numbers.   Sometimes it makes sense, not always though.
Your mortgage remains the same ONLY if you buy in a very low cost area. The true mortgage payment that includes escrow (taxes and insurance) will go up every year, as property taxes rise and so the insurance. Since I bought my primary residence in high end neighborhood, I had switched my insurance provider 3 times and have a $7.5k deductible on my roof, to keep my mortgage close to same (still higher than the first year), plus I despute my property taxes on an annual basis now, and they still creep up.
My rentals (in low income neighborhoods) barely had any increase in insurance and taxes (something like $20/year/property). I didn't even adjust my rent, their one time late fee covers my taxes and insurance increase.

Nope.  Taxes and insurance are an expense, but they are not the mortgage.   Taxes and insurance will rise with inflation, as will other expenses like utilities and maintenance, but the mortgage is fixed  (assumed a fixed rate, of course).   

If you look at housing as an expense, then it is important to consider the effects of inflation.   Assuming 3.0% inflation (a bit less than the historical average), in 15 years your mortgage will be reduced by about 40%.   That's a non-trivial amount.  That doesn't suggest your housing costs will be reduced by 40%, but for most people the mortgage is the single biggest housing expense they have.  And therefore it is appropriate to include inflation in the rent vs. buy calculation.   

ilsy

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Re: Home is not an investment?
« Reply #48 on: April 22, 2019, 12:57:24 PM »
Housing is an expense, and like all expenses it is wise to minimize it.  Buying a home can minimize your housing expenses.  For one, a portion of your mortgage payment builds equity, which you don't get if you are renting. And your mortgage remains the same, while presumably rents will continue to increase.   Additionally, it is reasonable to assume your house's value will increase at something close to the rate of inflation which isn't great.  However, you only put 20% down (or whatever) but you get the keep the entire increase, so there is a bit of leverage there.   For those reasons, a lot of people wind up with a lot of their net worth in their home.  That's why you hear things like "stop throwing your money away on rent!"  because for many people it turned out to be an investment, even if it wasn't a great one.

The key is you really have to drill down and look at the numbers.   Sometimes it makes sense, not always though.
Your mortgage remains the same ONLY if you buy in a very low cost area. The true mortgage payment that includes escrow (taxes and insurance) will go up every year, as property taxes rise and so the insurance. Since I bought my primary residence in high end neighborhood, I had switched my insurance provider 3 times and have a $7.5k deductible on my roof, to keep my mortgage close to same (still higher than the first year), plus I dispute my property taxes on an annual basis now, and they still creep up.
My rentals (in low income neighborhoods) barely had any increase in insurance and taxes (something like $20/year/property). I didn't even adjust my rent, their one time late fee covers my taxes and insurance increase.

Nope.  Taxes and insurance are an expense, but they are not the mortgage.   Taxes and insurance will rise with inflation, as will other expenses like utilities and maintenance, but the mortgage is fixed  (assumed a fixed rate, of course).

I don't get your point. It's just semantics, usually monthly mortgage payments include escrow, if don't want to call it mortgage payments, it's up to you, call it an escrow. The point was, your monthly payments as a home owner (I will omit the word "mortgage") increases. So, if you compare a tenant who's rent increases every year and so the monthly payments, homeowners monthly payments for their primary residence also increase (tenants don't pay property taxes and home insurance, it's included in their rent payment). That was my point.

Plus, I would like to find an area where taxes and insurance rise as much as utilities. In my city that only happens in very low income areas where my rentals are. Otherwise taxes and insurance rise well higher than an inflation rate (go with 5-10% annually, sometimes more). Insurance also rises if your area was hit with a hail storm or other hazard, even if you didn't file a claim. My insurance also increased its rates from $1.2k to $2.4k after I got divorced (apparently, I became a high risk for them to insure); plus, you would be surprised to learn that if you open more than 2 CCs after having old CC for >5 years, they suddenly become panicky and increase your home insurance.

If you look at housing as an expense, then it is important to consider the effects of inflation.   Assuming 3.0% inflation (a bit less than the historical average), in 15 years your mortgage will be reduced by about 40%.   That's a non-trivial amount.  That doesn't suggest your housing costs will be reduced by 40%, but for most people the mortgage is the single biggest housing expense they have.  And therefore it is appropriate to include inflation in the rent vs. buy calculation.
Still missing your point. Are you talking about a 30 year mortgage in this case? Because people who have a 15 year mortgage (like me) shouldn't have any mortgage payments in 15 years. And after 15 or 30 years my roof would need to be replaced, as well as water heater, furnace and AC, not to mention other items becoming outdated, like sprinkler system, driveway, windows, gutters, downspouts, garage door motor, back porch, bathrooms, kitchens. Should I go on?

And then you try to sell your "investment" after 30 years of not being updated and maintained, and you might get your purchase price, if you are lucky, and if no major damage was done with leaking roof and broken gutters.

caleb

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Re: Home is not an investment?
« Reply #49 on: April 22, 2019, 01:42:14 PM »
If your personal home is an investment, itís a darn lousy one in my view. Absent house hacks, what owning your own home allows you to do is limit your rent.

Another way to put it is that the costs of buying are insurance against rising rents.  Of course, taxes and insurance will likely go up, but probably not at the pace of local wages.

Anyone who is convinced that a particular house will appreciate should spend a little time in cities like Cleveland, Detroit, Syracuse, or Albany.  Not all that many years ago, these were the places to be.  Now 200k will buy you a mansion.

Not only does the housing market go up and down, tastes for different locations have changed in the past, and there's no reason to think they won't change again in the future.  Do you really want to put a big "investment" bet on one particular chunk of ground out of all the places in the world?  Do you also think blackjack has good odds?