August 24, 2013

Buying a home to live in can be a wonderful experience psychologically, but it is almost always a poor investment. Why?

4 thoughts on “August 24, 2013”

  1. Aaron Howard says:

    A home is typically more of a luxury than an investment. A home has a lot of expenses associated with it. Initial cash downpayment has opportunity cost, financing a home can often cost as much as the property. Large fees are awarded to realestate agents. Large maintenance expense, roof, HVAC, plumping remodels. Insurance, taxes utilities, etc. Many people will outgrow their first home and feel discontent with the space and value they have. When you buy a house it’s a blind purchase as to what condition the property is in. It’s a risk. Other risks include how the surrounding neighborhood appreciates or depreciates.

  2. Mike Finley says:

    Great answer, Aaron. Let’s recap. A home can provide many wonderful memories, but it can also provide a person many nightmares as well. Buy a home when you are ready financially and that means have 20% or more for the down payment so you can avoid PMI. Also, enough money set aside before moving in so when the inevitable expenses pop up, you will not have to go into debt to pay for them. Hit on the Buying a home tab on my website for more information. Let’s look at some numbers.

    Costs incurred with a home AFTER you move in. You will pay interest on the loan (4 to 5% in the current environment). You will pay property taxes (1% to 2% based on location and value of the home). You will pay insurance (roughly .5% of the value of the home). You will pay for yearly maintenance which includes fixing what breaks (1% or more of the value of the home). You will also pay for any upgrades that you find desirable (1% or more based on the value of the home). This could easily take you to 8% or more in yearly costs. Even if your home appreciates in value 5% (3% is closer to the norm in most locations), you have lost 3% on a yearly basis and that is probably a best case scenario. You could actually see costs of 10% or more and appreciation at 0%. The tax deductions (interest on the loan and property taxes)? They benefit the high income folks who buy big homes much more so than the average Joe or Jane. You could probably add 1% a year to your appreciation, which still provides you a loss on the property. Yikes!

    What is the point of this discussion? Buy a home so your family has a safe and secure place to live. Buy one you can afford. Do not buy a home for the investment aspect of the deal. Banks and real estate agents are the ones who make money on homeownership, not you. If investing is your goal, stick with no-load index mutual funds at a place like Vanguard.com. If you would like to learn more on this subject, go here: http://www.cbsnews.com/8301-505123_162-57369547/history-says-home-real-estate-is-a-bad-investment/

  3. Adrony says:

    It’s a sad news that you decided to susepnd your blog. I am surprised that you faced so many pressure on writing this blog, just because different investment strategies.It’s not bad thing, though, since Warren buffet has been scold on his investment strategies in last TNT bubble. Now he still be the 2nd riches people in the world.good luck!

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