So of course nobody who’s reading this has heard me going on and on about the real estate bubble for the last two plus years. And this is certainly an easier time to write this article now that the bubble is starting to deflate and the light of day is bringing some amount of sense back to the market. But, I still figured it would be worth while to write a bit about the difference between buying a house and investing in real estate, and about what you can expect in terms of investment returns from the real estate market.
Buying a house to live in does not qualify as an investment, in fact, I don’t think I’d be going out on that much of a limb to say that buying a primary residence is a liability, especially until you pay off your mortgage. Even when the mortgage is paid off, the idea that a house is some amazing asset doesn’t hold much water. You are always going to need a place to live and so even if you sell your house at some point you’re still going to need to buy a new house to live in. If the market is up at the time, you’ll sell your house for more, but you’ll also have to pay more for the new house, and if the market is down at the time you’ll get a better deal on the new house, but you’ll get less for yours. The only way you’ll be able to take great financial benefit is if you are able to predict which market will have the fastest home value appreciation over a given period of time, move there and buy a house, then later sell and move to an area where home values have not appreciated as fast.
As far as capital appreciation on real estate, recent data dives on the real estate market have come up with the fact that over the course of time, annual gains on real estate amounts to little more than the rate of inflation, meaning that from a long term investment standpoint you’d be better off putting your money into war bonds. Sure the recent market conditions have gotten everyone all hot and bothered, but the real estate market works just like any other financial market and rapid appreciation, like what has taken place over the last few years, cannot continue indefinitely and the market will rebalance itself. In fact, a recent article in Fortune magazine is already predicting that real estate values in some of the hottest markets (
There are certainly benefits of owning your own home, including financial benefits. When you own your own home you obviously do not have to pay rent and some percentage of the mortgage money that you pay every month goes toward your ownership stake in the house. Also, the interest that you pay on the mortgage is tax deductible. Remember, though, that part of this advantage is offset by the fact that when you own instead of rent you are on the hook not only for property taxes but insurance premiums and any maintenance and repairs that the house needs. So when you put aside non-monetary considerations such as the freedom to paint and remodel a home you own, the consideration of owning a home versus renting should boil down to the cost difference between the mortgage you would have to pay along with insurance, taxes and maintenance costs and what you would have to pay to rent an equivalent space.
Where is real estate an investment? Real estate is an investment when it pays you. If you want to go out and buy a house to rent and can charge more to rent the home than what you pay in mortgage, repairs, etc, then you have yourself a nice little investment. Alternatively, if you can find a good market to buy up some land, subdivide it, market it well and bring in more than you paid, well good for you, that’s a nice investment. Of course real estate investment is not the subject of this blog and I am more than happy to leave the details of that to people much more qualified than me.
The point here, then, is that in terms of accumulating wealth and finding investments that are going to give you long term financial freedom, there is no single asset class, yes – including real estate, that has outperformed stocks in the long run. So if you want to live in a place where you can install wall to wall windows in every room, or you want to live in a place where all the ceilings are painted lime green, well go ahead and buy a house because there aren’t many landlords that are going to go for that. But, if you want your money to grow over time, take a sober look at the asset class that is most likely to make you rich.
Technorati tags: realestate, property, land
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2 comments:
Generally, I classify a house for primary residence the same way as you do. It is not an investment in my eyes. However, one nice thing about a house that is your primary residence is that the gains on that house (up to some fairly large amount) are not taxed. Taxes over time will eat into your returns quite a bit, even on stocks. That said, I'm big on stocks, and the vast majority of my wealth lies in my own long-term stock portfolio, and a lesser amount sits in my "fun" trading portfolio.
Good point! Thanks.
Joe
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