What do you suppose the worst investment you could ever make would be? Vintage comic books? Old beer can collections? Belgium tulip bulbs? None of those sound particularly promising, but the worst investment you’re ever likely to make is the home you own and live in.
That may sound a little self-serving coming from the guy making his living as a landlord. Let me try another approach that might be a little more palatable: The home you live in is the best consumer purchase you’ll ever make. But it’s still a lousy investment.
Most consumer purchases lose all or nearly all their value immediately. Think a bag of groceries or dinner out. In order for a consumer purchase to retain any value, the item needs to be nonperishable and there must be a robust secondary market for the used item. Used cars are a good example, but used cars still lose value over time. That your house stands to increase in value over time sets it apart as the champion among consumer purchases.
Beware that home price appreciation is not guaranteed. A more complete discussion on that topic can be found in my book, Cash In On the Coming Real Estate Crash, published in January 2006, about 30 months before real estate markets crashed. But I’ll concede that home prices do a good job of keeping pace with inflation most of the time. I’ll further concede that you need a place to live and a single-family home can be a tremendous source of pride, physical security and comfort.
But it’s still a lousy investment.
Owning stocks is a good investment. What’s better than owning 100 shares of Microsoft? Owning 1000 shares of Microsoft. In other words, for actual good investments, a little is good, more is always better.
So if a 2000 square foot home is a good investment, a 20,000 square foot home must be a much better investment. But obviously, for most people, even if they could afford a 20,000 square foot home, that wouldn’t be a good investment. It would be a budget buster of mortgage interest, upkeep, insurance and property taxes.
The purchase of a home lights the fuse on further financial disaster. A new house needs new furniture doesn’t it? And wouldn’t the living room just come alive with all new window treatments? One of the reasons a robust real estate market ordinarily helps the nation recover from recession is the resulting cascade of consumer purchases associated with home acquisition.
The National Association of Realtors is only too happy to report on the economic feasibility of various home improvements like a kitchen remodel or bathroom update. Kitchen remodels typically feature a recovery rate of 67% and bathroom upgrades fetch 71% recovery in 2022. What exactly does a 67% recovery mean? It means an immediate 33% loss! Enjoy your new kitchen, you certainly paid for it.
Want to turn your home into a good investment? Find someone with a home about the same value as yours and sell him your home, buy his and rent from each other. Now you’re eligible for depreciation benefits and you’re no longer a homeowner, you’re a landlord. I’ve been a landlord since I was 23. Being a landlord is the first, last and best chance for average folks like you and me to become financially independent. I love real estate and being a landlord. If you love your home, I’m happy for you. Just don’t buy into the illusion that it’s a good investment.
Here’s a litmus test for whether your home is a good investment: Can you rent your home to a third party and cover the costs of mortgage payments, insurance, taxes and repairs? The chances are if you can answer yes to this question, it’s because your mortgage balance is very low relative to your home’s value. If you’re getting the equivalent of a two thousand dollars cash flow on a home equity position of $300,000 that’s a lousy rate of return on your equity. Typically, a small, modest house has the best chance of being rented out at a positive cash flow as described above. Suburban behemoths are a money pit.
Come back next time to hear when your home can be a great investment.