Comments on: Your Home as an Investment? Let’s Re-think this.

By: Wayde McKelvy

Wayde McKelvy — Sat, 20 Dec 2008 18:21:04 +0000

I agree with Roland that your home is not an investment asset. It’s been my experience that folks who are making it big in real estate are doing so in commercial real estate, not residential real estate.

By: Roland Manarin

Roland Manarin — Mon, 15 Dec 2008 17:32:38 +0000

A home is a financial asset but I would hardly consider it an investment asset.

Aside from the recent real estate bubble and a period of time following WWII, real estate prices have appreciated historically at about the rate of inflation.

By: Lurker Carl

Lurker Carl — Mon, 15 Dec 2008 02:35:29 +0000

Houses have always been shelters, even in the latest real estate boom and current bust. This isn’t the first cycle and it will not be the last. Appreciation on real estate is an illusion unless you deal in cash.

The few homeowners purchasing real estate with cash can reap profit from buying in depressed markets and selling on the appreciation of the next cycle, ONLY if they don’t have to buy another home to live in during that up cycle. But everyone who holds mortgages seldom break even because of the interest owed on their mortgages. The interest payments on the loan can come close to doubling the original cost, few bother to calculate that interest cost when selling. These losses multiply each time a homeowner sells and “trades up” to a more expensive property, they typically return to a new 30 year loan with the majority of their payments dedicated more to interest than principle.

By: Mr. ToughMoneyLove

Mr. ToughMoneyLove — Mon, 15 Dec 2008 02:15:44 +0000

Matt and Vilkri: It seems that the two of you and I are thinking alike on this. I do think that older adults (pre-retirees particularly) need to focus on getting stability in their housing situation, including full ownership.

By: traineeinvestor

traineeinvestor — Mon, 15 Dec 2008 02:15:27 +0000

I can only agree in part.

It is probably unsafe to rely on your home as a means of retirement funding. It’s illiquid (compared to stocks and bonds), for most people it represents a high proprotion of their assets concentrated in a single investment and emotional factors can often distort judgement.

That said, owning your own home can be viewed as an emergency fund. If your other investments run into difficulty, it can be sold, it can be rented out (in whole or in part) and a reverse mortgage can be taken out. Many people also get a lot of peace of mind from owning their own home.

Given how big a slice of most people’s assets is, I would view it as a mistake not to crunch numbers from an investment perspective (including a buy v rent calculation and affordability considerations).

To address a point made by other comentators, I fail to see why residential property which you do not live in cannot be viewed as an asset class which can be considered for investment purposes. It has value which fluctuates, it can generate cash flow and it can be used as collateral for borrowings. This does not mean it is a good investment at all times – bit if the prices fall low enough or the yields are high enough it can be a good investment.

Cheers
traineeinvestor

By: vilkri

vilkri — Mon, 15 Dec 2008 01:59:51 +0000

I agree with you. This whole investment notion of buying real estate has been a misguided development of recent years/decades. Buying your own home should be just that: buying a home in which you live and maybe raise a family. That is what all generations have done before we got all crazy about the investment part of the deal. Let’s hope that this crisis gets us back to this very sensible approach of “home” ownership. Let’s forget about buying a house and let’s buy a home again.

By: FFB

FFB — Mon, 15 Dec 2008 00:17:36 +0000

Thanks for linking back to the Carnival of Personal Finance!