June 20, 2013
A personal home that you own is a poor investment at best; at worst, it is a nightmare. Why? What are your alternatives?
A personal home that you own is a poor investment at best; at worst, it is a nightmare. Why? What are your alternatives?
Buying a home will rob your emergency home (for the down payment). It can be a very stressful especially on your relationship with your significant other and you never know what kind of headaches the house will bring on — the home improvements will always be the buyers responsibility.
A good alternative is renting. Some people aren’t meant to be home owners and renting is a good option especially if you don’t plan on being in an area for more than 5 years.
Well said, Macala. Let’s look at the facts without any help from the real estate industry (they have a conflict of interest so listening to them talk about housing is generally a pretty bad idea). When people talk about a home being a good investment, they tend to ignore the costs with homeownership. That is a mistake. There are A LOT of costs. Let’s take a look.
You buy a home for $200,000 with a $40,000 (20%) down payment. One year later it has appreciated (doesn’t always happen as many people are coming to realize) 3%. You made $6,000 on the home. With the tax deduction (overhyped and not as big a deal as you may think for low to moderate income people) let’s add another $1,000 in earnings. We made $7,000 on that $40,000 investment. Sounds good, right? Now, the costs.
You will pay property taxes (1.5%), insurance (.5%), interest on the loan (4%), maintenance (2%), and home improvements (2%) during that year and for many years to come. That adds up to 10% which on that $200,000 home would be $20,000. Now let’s look at the after costs return. $20,000 – $7,000 = -$13,000. Ouch!
A person may spend slightly more or slightly less per year on their home, but no matter how you evaluate the situation, the after costs return on investment is poor at best (you will likely lose money). One day you may pay off the loan and get rid of the interest, but those other costs will never go away. You will not pay these costs when you rent. It is clear that Macala understands this point quite well. Do you?
What is the point? Buying a home is expensive and most folks are not prepared or knowledgable about this situation. Buy a home when you are ready and financially prepared. This means a strong relationship, you are ready to settle down for a long time, the ability to lay down 20% without depleting your savings, having a high credit score to lower your interest rate, and maybe most importantly, you have a clear understanding that a home is a place to live and raise a family. It is not an investment that will one day make you wealthy. What will? Those boring no-load index mutual funds that invest in stocks and bonds throughout the world. Vanguard.com is the place to go to further your education on that topic. Knowledge is POWER!!!!