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Independent Investor: Why Your Home Is Not a Piggy BankBy Bill Schmick - April 17, 2008
iBerkshires Columnist
 | | Bill Schmick |
Independent Investor: Why Your Home Is Not a Piggy Bank
Now don't get me wrong. I'm not bashing the American nest egg.
A home is a fine thing to own. It provides shelter, solace, comfort and proof that you're "Living the Dream" but as an investment vehicle, it just doesn't make the grade.
We were told "you can't go wrong by buying a home." You buy it, live in it for 20 to 30 years and then sell it at an enormous profit - unless, of course, you happen to be selling right now. Sellers, especially those who have bought recently, are discovering that timing your investment and location are everything when it comes to property.
Real estate booms and busts have been with us since before the Alamo. Take a homebuyer in California in the beginning of the 1990s or in Houston and Dallas during the mid-80s oil bust. You would have waited a decade or more to recover your purchase price. Yet, in Manhattan or San Francisco the recovery time was much shorter. Here in the Berkshires the swings in real estate values have been just as volatile and long-lasting.
But wait, you say, I bought my house 10 years ago for $150,000 and now it's worth $275,000. That's almost a double, right?
Well, yes and no. Most of us fail to recognize how much it cost to live and maintain a home. There is an increasing tax burden, especially property taxes, which we incur as homeowners but that's not all we pay.
There are mortgage payments, insurance premiums, repairs, renovations, outside maintenance and more. Most homeowners don't take the time to figure exactly how much they dump into their homes over the years. When all is said and done, however, we are lucky to break even on the sale of our homes. If you do the numbers on a 30-year mortgage you may well discover you've paid twice the price in interest payments alone.
If you decided to a do a major renovation such as a new kitchen, bathrooms or and addition, you may need a three-fold increase in price to get your money back.
Another myth: "buying is always preferable to renting" doesn't always make sense either. Prices could conceivably continue to decline for a year or more in the housing market and then bump along the bottom for an even longer period.
Renting may be preferable to plunking that $20,000 to $30,000 down on a house now that might decline at least that much in the short term. In the meantime, you could invest that money in the markets (which are up almost 10 percent so far this year) and make a hefty return while you wait.
Renting, according to conventional wisdom, doesn't build equity ownership but neither does your mortgage payments for at least the first 10 years or so. Typically, it takes 20 years before you pay more principal than interest because the bank wants its interest upfront. Granted, the mortgage tax deduction is an advantage. However, the after tax expenditures of the renter are still lower.
So if you already own a home, what can you do? You can start by changing your mind set. Your house is not your retirement fund. It is a place to live and enjoy but there are much better investment vehicles so start diversifying your assets and taking a hard look at what you're spending.
Check mortgage rates and refinance if it makes sense. Otherwise, consider paying more each month than your principal payment. You will save a huge amount in interest and reduce the overall cost of your home.
Renovate only when you have to and try not to borrow to do it. Studies show you may sell your house faster but rarely will you get back what you spent and taking out a loan will double or triple the cost.
Decide what is important to you. If you have children, the school system might be an overriding factor. Normally, the better the schools, the higher the taxes and property prices will be. Empty-nesters might want to research different states and regions where taxes and prices are lower and your retirement dollars will last longer.
If you are a new buyer don't extend yourself. Buy less than you can afford, pay it off quickly and stay put. On average, American homeowners are glorified renters. They move every seven years, hardly denting their principal but paying enormous interest costs. Buy a house with a rental property or a two-family unit. Let your renters pay all or some of the mortgage while you match payments.
Finally, remember that after all is said and done you will be lucky to break even after taxes and expenses on your home. If you buy another house, the cycle starts all over again so enjoy it, love it, be proud of it but don't kid yourself. There are much better places to invest your money.
Bill Schmick is a licensed investment adviser representative and portfolio strategist with Berkshire-based Dion Money Management, managing over $800 million for middle-class Americans from coast to coast. Direct your inquiries to Bill at 1-877-850-7942, Ext. 146, (toll free) or e-mail him at wschmick@dionmm.com. You can also visit www.afewdollarsmore.com for more of Bill's insight. |
In reply to Right's comments, I would agree that owning one's home is a great psychic investment. It provides the owner with a great deal of emotional satisfactuion, esthetic pleasure and through the payment of a mortgage some tax savings.
However, the most your home will provide you in the long run after investments, aintenance, mortgages, taxs, etc. is a hedge against inflation and sometimes not even that.
As for its financial payoff, I'm sure the millions of Americans who face foreclosure right now might disagree with your comments Your warning to "use your head" should apply to all investments whether in the stock market or real estate. The historical numbers on the stock market's return on investment compared to home ownership however do support my contention that your house is certainly not a piggy bank. | | from: Bill Schmick | on: 04-27-2008 |
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In reply to the first comment on my article, investing in several real estate propoerties to either rent or sell is a completely different investment strategy. My article does not address the pros and cons of investing in real estate as a business but I am sure it can be just as profitable as investing in stocks, bonds or any other security given the right property and time horizon.
| | from: Bill Schmick | on: 04-27-2008 |
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| How about some feedback Schmick? Makes one seriously question your advice. | | from: Hey Schmick | on: 04-26-2008 |
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| For me, buying a home was the best investment I ever made. While the article does mention several advantages to home ownership, it unfairly down plays them. And buying multiple homes to rent to others is profitable even if you must make some improvements. This article is really a backhanded way of promoting the purchase of stocks which are a more volatile risky investment. My stock portfolio, which has always been managed by professionals, can not match the growth of my real estate. And don't forget you can loose a great deal if you must sell your stocks at the wrong time. | | from: Also right... | on: 04-19-2008 |
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I disagree. The purchasing and owning of a home is STILL one of the most secure and best investments that one can make. I would highly suggest readers to consider home ownership over placing their money in more volatile investments, i.e.- stocks, funds, etc. It is the American dream and a sound investment - just use your head and you can make the biggest and most lucrative investment of your life in homeownership. Now is also the ideal time to buy.
| | from: Right? | on: 04-17-2008 |
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