Ok, here we go again, the apartment guy is whining about the perils of home ownership while shamelessly pimping his apartments. But hang with me for a moment while we look at the facts.
To put this subject a more palatable way, let’s say instead that your home is the best consumer purchase that you will ever make.
That’s because most consumer purchases become almost immediately worthless after the sale. Certainly, that applies to any service you buy. How about that fancy new outfit you just bought? Wear it once and it becomes a resale reject. The new car? Drive it off the lot and it becomes a rusted relic.
But the home you live in will not only hold its value most of the time, (click here for Cash in on the Coming Real Estate Crash), it may even become more valuable. The question is, will it outperform other investments?
Generally, the answer is no, and it’s easy to see why.
If one invests in stock, you would do so for only one reason: Either you are in anticipation of price appreciation or dividend income or both. In short, your only reason for investing is to make money. You don’t have the Joneses over to admire your new block of stock in the Acme Company. But you might put one up on the Joneses by having them over to admire your fancy new digs.
We have a funny way of thinking about houses. Every year, the National Association of Realtors produces a survey that documents the expected return from the average remodeling project. From room and bathroom additions to kitchen and bath remodels, the Association dutifully reports the expected return on the typical “investment.” Most remodeling projects typically increase the home value by 40-75% of the cost of remodeling. So the Association claims a rate of return of 40-75%, but that sounds more like an immediate loss of 25-60% to me!
The only reason for investing is to make money, but if you ask someone why they bought their house, they’ll tell you something about how pretty it looks. There’s as many reasons for buying a house as there are people. And yes, some of those reasons include, “because it’s good investment.” And some folks have made out well on their home purchases. But studies have shown, a basket of common stock almost always outperforms housing.
Houses have high carrying costs: taxes, utilities, repairs, insurance. And that’s before we get started on those remodeling projects. Here’s an experiment: total up all the costs of owning your house. Then see if you can rent your house for an amount greater than all those costs with sufficient additional profit so as to justify your investment. You don’t have to actually put the for rent sign in the yard. Just get a few rent comparables and do the math.
You’ll rarely find that rents are high enough to even cover costs, let alone provide a profit.
The bottom line? A house can be a wonderful thing. There’s all those memories and you can’t raise a family in your stock portfolio. But as an investment? It stinks.