June 4, 2013

A personal home is a good investment before costs and a poor investment after costs. How is this?

6 thoughts on “June 4, 2013”

  1. Thomas Graham says:

    Since houses are a big purchase many people need help from a loaner to purchase one. If you could pay for a house straight up, you would have a good investment. If you add in the costs of interest and other fees you will end up paying much more than the cost you initially saw when you bought the house. You can minimize the costs by putting at least 20% down so you don’t have to pay PMI (private mortgage insurance), try hard to get a 15 year loan rather than a 30, and get your credit score high enough to get into a lower rate rate bracket.

  2. Mike Finley says:

    Nice answer, Thomas. Let’s see if I can add to it just a bit. The personal home is a good investment in most cases before costs because of a little thing called leverage. Example: You buy a $200,000 home with 20% down which equates to $40,000. That home goes up 3% in one year which means it is now worth$206,000. You earned $6,000 tax deferred and probably tax free on your initial $40,000 investment. That is a return of 15% ($6,000 divided by $40,000). That is mighty good, but your use of leverage will gradually go down over the years as your equity goes up in the home. Also, there is no guarantee of home appreciation, something thousands of people have learned over the last few years. Tax benefits help also, but primarily for high income people who buy really big homes. Now let’s look at the after costs return.

    That same $200,000 home is going to cost you plenty on a yearly basis that a renter will not pay. You will pay interest on your loan, property taxes, insurance, maintenance, and upgrades to the inside and outside of the home. When you combine these costs, most people will generally pay out between 3% to 6% yearly based on the value of the home. Example: Your yearly costs end up running you $10,000. That equates to 5% of the value of the home. This wipes out your return and then some when you used leverage to buy the home.

    So what is a person to do? You won’t go wrong by following the advice set forth by Thomas. Also, keep your mortgage payment (principle, interest, property taxes, and insurance) at or below 30% of your gross income AND make that the only debt you have. Pay off other debt BEFORE you buy a home. Finally, buy a home you can afford that you see yourself living in for a long time (well beyond 5 years). Homeownership makes sense when you focus on value and living there a long time.

    Homeownership makes no sense when you ignore costs and move often (incurring real estate commissions of 6% or more). Stop looking at a home as an investment, but rather as a place to live. If investing is what you want, focus on no-load index mutual funds at a place like Vanguard.com. Knowledge will set you FREE!!!!

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