You work hard for your money. Don’t make mistakes that equate to throwing your money away. If you’re going to make a mistake, let it be over a dress or a pair of shoes that in the light of a new day, you really shouldn’t have bought.
Getting rid of a house you shouldn’t have purchased is so much harder.
Don’t misunderstand. Home ownership comes with some great tax breaks and a forced savings plan called a mortgage. And you have to live somewhere. Just don’t make the mistake of believing it’s a great investment.
Any regular readers of this blog are probably thinking this is a familiar refrain trumpeted shamelessly by the apartment guy. So don’t take it from me. Listen to Jonathan Clements, a regular contributor to the Wall Street Journal Sunday.
“Historically, the financial return on a home is fairly meager. Think of it as a place to live, not as an investment.”
Mr. Clements cites transactions costs and home price appreciation averaging just 3.7% annually for the last 30 years as a problem to home ownership making a passing grade as an investment. Often, in short-term ownership, some or all of the appreciation is lost to transaction costs. You can even wind up with a loss.
I would add to this observation by noting that the 3.7% is just an average. There have been good times when it was more, but also bad times when it was less and home prices were falling. For more about that, read my book Cash In On the Coming Real Estate Crash.
Here are three lessons quoted directly from Mr. Clements:
- 1. Over the long run, you are unlikely to make much from home-price appreciation, especially once you figure in costs.
2. Real estate is a horribly expensive asset to buy, and especially to sell.
3. The big gain from owning a home is getting to live there.
Here are two more paraphrased directives from Mr. Clements:
- 1. If you’re going to buy a home, plan on being there at least five years.
2. If you’re going to remodel your home, go ahead and enjoy the improvements. Just don’t think of them as an investment.
Don’t make the mistake of believing home ownership is a great investment. You might be better off financially renting a beautiful, and affordable, Shorewood apartment.