Buying a $500K home is NOT an investment?

[squiffy]

I had a friend who told me about 5 years ago that he wanted to buy a 500K home in Santa Monica. Back then, that seemed like a ton of money to me. And I argued the timing wasn't so good, maybe he should wait. Turned out I was 100% wrong. The timing was great. And he probably made out like a bandit if he did buy.

He told me I want to buy this as a place for my family to live. I am not looking at this as an investment.

But he was partly right and partly wrong.

The decision of whether or not to buy a home, where to buy it, how much to pay, how much to put down, how much to finance, and the timing of when to buy is incredibly complex and involves many variables.

You can choose to say I don't care what I pay or where the home is located. I just want a home now and will pay any price they ask.

And you can certainly buy a home while ignoring the investment aspects of it.

But you do so at your own peril.

The truth is that the purchase of a 500K or 1 million dollar home has an INVESTMENT aspect to it, whether you want to admit it or not.

You can ignore the investment aspect, at your peril, and pretend that there are no investment considerations.

Similarly, you can ignore the fact that jogging through Central Park at 2 a.m. has a danger aspect. You can say, I am jogging purely for my health and my enjoyment, and I am going to ignore the safety aspects of my early morning jog.

But if you get mugged, raped, or killed, you have ignored the safety aspect at your peril. You might jog 100 times at 2 a.m. and never get mugged. But you are ignoring a very real risk of harm based on crime statistics. The fact that you survived doesn't change the reality that you faced a very real danger of being mugged.

Similarly, you can cross the street to get exercise or to visit a doughnut shop to eat for pleasure. And you can say this is purely a pleasure or lifestyle choice. There is no safety aspect to it. I am not going to look both ways before I cross. But if you don't look both ways before you cross, you run a very real risk of getting hit by a car.

The fact that you may fail to look both ways, but are fortunate enough to make it safely across the street without getting hit, doesn't change the fact that there is traffic, there is a risk of getting run over, and that looking both ways before you cross may be a worthwhile safety measure.

Buying a house is not purely an investment. You may do it for pleasure and stability. But there is most assuredly an investment aspect. You can ignore this investment aspect.

But if you buy a $500K or $1 million piece of real estate in America, I think it's pretty silly to say, I am not at all concerned about the investment aspects. Unless you are Bill Gates, it's a good idea to think about the investment aspects of your home purchase decision.

You may say, I am overpaying for this house by 100K. The value may drop over the next 5 years. But I can afford the mortgage, I don't think I will lose my job, and I plan to live in it for 30 years, so in the long run I will be fine.

But it would be a wise thing to at least consider the investment aspects of the purchase.

[ahnuld]

Good post. Something everyone should consider and why I said in the other thread it doesnt matter if you will live in the house or not it is still an investment.

[hawk59]

buying a house forces people to put money into a leveraged asset that tends to appreciate at a modest rate over time. it's the forced investment aspect of it that makes it good for most people. maybe you could do the math and say it's better to rent and put the difference into the stock market, but people wouldn't do that in the real world they would just spend it.

[scotchnrocks]

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maybe you could do the math nd say it's better to rent and put the difference into the stock market, but people wouldn't do that in the real world they would just spend it.

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Very good point. Also worth mentioning is the investment part of owning a home normally doesn't play out until you've stayed there 7+ years.

[FyteOn]

The problem with that analysis is that if you're speaking about your home then as long as there is a home mortgage deduction there is no way it would be more beneficial. And if you're talking about an investment property, yes there are dips and bubbles or whatever the press wants to call them. But over time you're going to see a 6% increase per year on average. What other investment brings that return at such a high rate of leverage? As long as you can cash-flow the property or at least break even it's a great investment - regardless of the price.

[haakee]

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But over time you're going to see a 6% increase per year on average.

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Source, plz.

[FyteOn]

http://www.census.gov/hhes/www/housi...ic/values.html

Go to the bottom where it is unadjusted for inflation because we're talking unadjusted numbers here.

If you don't want to click the link (which breaks it down state by state) then here is the summary for median home price in US:

1940 - 2,938
1950 - 7,354
1960 - 11,900
1970 - 17,000
1980 - 47,200
1990 - 79,100
2000 - 199,600
2006 - 217,900

Of course it's not linear, but neither is the stock market. The market is great, but you can't leverage the market like you can your house or your investment. The interest on your primary residence is fully deductible (with certain rare exceptions, over $1m) and the gain, when sold, is not taxable. So you're borrowing at 80% paying only 2/3 of the true interest rate after deductions and you're not paying any gains when sold. If you can match that in the market then you're a better investor than me.

As for investing, it's about the same. You can leverage at 20% (less if you're willing to be risky) and you can delay your taxes when you realize any gain with a 1031 exchange. You can't touch that in the market where you're dealing with 60 cent dollars, or if it's long term, you're still looking at 80 cent dollars after state tax.

[Thremp]

Fyte,

Thats a horrible way to determine whether home are appreciating.

[FyteOn]

Let's say, for argument's sake and to make the numbers easy, the stock market goes up 7% a year and housing goes up 6% a year - that's a 17% increase. We're not talking about a primary residence because that just blows everything out of the water. We'll hold all investments for 2 years and we won't include state tax for ease. You invest $100k in each. After 10 years your investmetn in the market is $178,730. That's your total after 10 years, holding your investment 2 years, selling and buying something new.

Real estate doing the same thing at 6% which is 17% lower and you after tax total is $167,222.

However in the market it took you the entire $100,000 (the average layman does not buy on margin) to achieve that gain. In the real estate world you made that gain with $20,000 out of pocket.

It's not even close.

[FyteOn]

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Fyte,

Thats a horrible way to determine whether home are appreciating.

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How is that terrible? Historical national median home price. I stated that housing prices increase 6% a year in our country, historically and someone asked me for a source. We're discussing this on a national scale and I gave the census link the state by state median analysis. How else are you going to quantify it? By your anecdotal knowledge of one house in one market? The question was renting and sticking the money in the stock market - not a particular sector or a particular stock. And we're not talking about a particular housing area or neighborhood. I'm not a slouch in this area - I'm a real estate lawyer with a Master's of Law in Real Property development and finance. I know what I'm talking about (most of the time, anyway) and I'm very successful at what I do. This was a topic that I have in-depth knowledge of so I spoke up.