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3 Reasons Why Your Home Is A Crappy Investment

Is your home an investment or just another place to live?  Many homeowners say that it’s an investment because it helps them sleep at night after sipping the Kool-Aid during the housing boom.   Well, I’m here to get in your face just a bit and tell you that your home is a crappy investment.  Furthermore, it’s an investment that you’ll never truly own as long as not paying property taxes means that your home can be yanked from you and sold on the court house steps.  This further makes the concept of home ownership ie the American Dream, flawed at best.

Buying A Home Is Always A Good Investment

Historically we know this to be true, but since I forgot my crystal ball today, the verdict is out on whether or not this will remain true in the years to come.  It is doubtful as to whether or not real estate will return to the highs of 2005 which saw double digit appreciation each year.  If we do, then it means we’re probably headed for another recession as the market quite simply cannot handle another bubble.  That is the reality moving forward.

Right now, the current market is either at or near the bottom with no upswing in clear sight.  Prices will continue to go down or stay flat for the next 3-5 years, especially with so much uncertainty around how the government will get involved with trying to fix the mess that is the US housing market.

Keep in mind that life happens as we’re waiting for the housing market to rebound.  Many people move for new jobs, to be closer to family or other reasons which warrant the need to vacate the home they bought.  This means they will need to either rent the home at a loss depending on the financials or short sale the home.  There goes waiting out 30 years to realize any significant appreciation or profit during or near retirement.

Exhibit A

Homeowners who boast about making tons of money on their new investment, I submit to you exhibit A.  As always, the discussion only centers around purchase price and the eventual sale price.  As if the current market conditions aren’t enough, the chart above, is a sobering reality.  In that scenario, the home owner will need to net at least $1,073,000 on the sale, an appreciation of over $700,000.  Still think you’ll be minting money with your new “investment”?

An investment has to make, not lose or cost you money when all is said and done.  If you’re truly focused on making money as a homeowner then focus on making your “investment” produce income and not expenses.

You’re Forgetting The Tax Benefits

Am I?  Let’s take a look at that.  Scroll up and take a look at the list of expenses associated with owning a home.  Then based on your tax situation, calculate the actual monetary value of the tax deduction vs the expenses and see whether or not it makes a difference on your tax return.  For most, it does not.  The expenses of owning a home significantly outweighs whatever benefit the deduction provides.

But If I Rent, I’ll Be Throwing Money Away

With a mortgage comes property taxes, HOA fees, home insurance and other mandatory costs which make buying a home a veritable money pit.  Keep in mind that the amortization table I.E. your schedule of mortgage payments makes it so that during the early years, there really is no difference between renting and buying.

It Takes 18.5 Years To Pay More Principal Than Interest With An Amortizing Mortgage

Still think renters are throwing money away?

Furthermore, most people move every 7 years, and if you decide to move within 7 years then you’ve sunken a substantial down payment, closing costs, taxes, maintenance and repair fees, not to mention the huge amount of interest you pay upfront during that time.  Renters can also usually rent for as long as the landlord will allow or needs a renter in the home.  If a renter loses a home, there’s the option to get a cheaper rental until things get better.  When you own a home, even if your financial situation changes, you must continue to pay the mortgage payment as agreed upon during closing.

I already see the naive/newbie/wannabe landlords telling me that whatever the mortgage ends up being on the home, then the renters will just have to pay it in order to cover the mortgage which validates buying a home.  In what world?   Just because your mortgage is $4000, this then doesn’t mean that your rental market can support that amount.  In many markets, the rent is lower than the mortgage and the landlords eat the balance between the rent and the mortgage to make up the difference.  This fact would behoove would be homeowners to carefully select a home with a price and mortgage where the market rents in that area are higher than the mortgage.

For example, if you’re paying $2500 per month on a home for the mortgage then you better hope that the market rent supports at least $2800 to make money on the rental should you ever need to vacate the home.

Then comes the argument that renters can’t paint.  Again, this is not true.  Most of the time all you have to do is ask or bargain with your landlord.  In some cases, the landlord will pay for painting the room in exchange for an extra year on the lease.  Whatever you choose to work out is up to you, however, this isn’t a hard and fast rule.

Well, Paying My Mortgage Is Forced Savings

If you want to save money, open a savings account.  The argument here is that as you pay down your mortgage you build equity which builds “savings” as you pay down your mortgage.  There’s one problem with that assertion.  A “savings account” allows you access at any time and you earn interest on the money in that account.  For the purposes of this discussion, the forced savings theory is just that, an expensive theory called equity.  When you’re ready to access the equity in your home, one can only do so via Home Equity Line Of Credit (HELOC), refinancing or selling the home.  With the exception of selling,  this ends up costing you money, a lot more money in the long run.

And that my friends is why your home is a crappy investment.  To believe otherwise is to soothe yourself to help you sleep at night.  When you wake up, the only difference is that you’ve exchanged your landlord for the bank and once you’re finished with the bank you’re now at the mercy of the state as you must continue to pay property taxes.    Say hi to your Realtor for me.

  • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

    Here’s an article from Daily Finance on the topic:  Stop ‘Dreaming,’ America: Why Rent is a Better Deal than a Mortgage tinyurl.com/86uslyk

    The tide is a turning!

  • http://www.joetaxpayer.com JoeTaxpayer

    Let me offer a different spin with the same conclusion.  Draw a long term graph for inflation. Next, layer on a chart for home prices. Now, over the years, homes have become more affordable, not less. In fact, the median home size is larger now that it’s ever been, increasing over 1% per year for nearly 40 years. When you look at the two curve graph, the long periods where homes trend above inflation create a belief as powerful as any that home prices always exceed inflation and make great investments. But the busts after the booms show period that cancel out all of the above line trend.
    There are cases of course where one can buy at bargain prices, where after the down payment the mortgage is less than rent, and the savings increase faster than the (repair) expenses. That’s a good time to buy, perhaps, but over the long term, those times are rare.

  • http://www.equityreleaseadviceline.co.uk/ jacob

    i have always heard that phrase, “buying a home is a good investment” but as you say its hard to tell with the economy as it is today and the uncertainty of things to come. I was told not to rent as your money isn’t going anywhere but what you had makes so much sense, thanks for sharing

  • http://twitter.com/fmblogs Frugally Minimal

    Having viewed 1 bed apartments / flats here in Melbourne, Australia & worked out the costs, along with being pre-approved for a mortgage, I decided it’s currently not in my best interests to be an owner/occupier or even investment buyer. I’m on a single income with rentals working out a lot cheaper than a mortgage repayment. I save a third of my net income – not something I could afford to do if I purchased in the current inflated property bubble that is Australia.
    So for the time being – renting here makes sense for me & many others. I prefer having a hefty savings account at my finger tips than a mortgage like a noose around my neck!
    I feel sorry for all the young 20 somethings who have leapt on to the property ladder at the height of the bubble…

  • http://www.moneyobedience.com/ ctreit

    Almost 30 of the 400 richest Americans made their money in real estate. These people may have made a different calculations than this one. After all, they are making their money from renters among other sources.

    • Youngjenniferlyn

      They probably were not investing in single-family home markets, but REIs and were probably paying cash, not paying interest.

  • Reecee8

    Many people buy a house with the hope of eventually paying it off one day. But realistically that really never happens. My one friend says she has no desire to pay off her house as she is older now and it just won’t happen. I have a 30 yr mortgage that I just refinance to a 20. I could have saved 120+ dollars if I refi to a 30 at a lower rate of 4% but did a 20 at 3.75% and increased my payment by about 80 dollars. I thought It was a good thing to do but now who knows.

  • http://www.SheddingForTheWedding.us/ Tracey

    You have neglected to take into account the effect that inflation has on paying off your mortgage.  My 600 mortgage payment from 2003 was huge then, and doesn’t feel so bad now in 2012… By the time we get to 2023, that $600 is gonna feel like peanuts because inflation will have driven the price of the houses up.  And if I sell the house, at the inflated price, I do alright.   If the market tanks, and I lose my job, then I get a rental for myself, and I rent my home out to someone who can afford to cover the mortgage, and make me a little money on the side.

    • excess

      Her math is a little sloppy but her reasoning is sound. A quick way to compensate for inflation would be to subtract the expected inflation rate from the interest rate. Annual inflation has historically been about 3.4% so just make the real interest rate 3%. It’s a little trickier than that to calculate the amount of interest you’ll pay in real dollar terms because so much of the interest is front loaded on the loan but it’s a good approximation. All the other numbers will rise roughly with inflation so you can just think of those as real dollar terms (ie todays dollars).

      Congratulations on having the foresight (or luck) to buy a house at the right time. People who bought in 2006 are not as lucky and I doubt they can find renters who will cover their mortgage. It does sometimes make fiscal sense to buy a house. It often times does not. The point she’s making is that most people don’t run the numbers in a realistic way to find out for sure before committing to such a big purchase. If they did the housing crisis wouldn’t have happened.

      • http://www.SheddingForTheWedding.us/ Tracey

        I’d like to contest the government’s published numbers on rate of inflation.  In 1996, my husband ran a small lawnmowing business.  The price of a gallon of gas was about 1.21.   At 3% per year inflation, a gallon of gas in 2012 should be 1.94.   A 7% inflation rate gets us from $1.21 to $1.57.  But that’s just gas. 

        Maybe we shouldn’t call it inflation… instead… lets call it the cost of living… If I look at my phone bill, my electric bill, water and sewer, grocery, gasoline, real-estate taxes, etc… and I put it all together… my math, for receipts from my family… from 1996 to 2012, puts the cost of living increasing at a rate of 10% to 12% per year.  Now, that is what I call inflation… requiring more paper dollars to getting the same goods.  

        Some people like to buy gold because it holds “value” when “price” (the number of paper bills it takes to buy something) changes.  I like my house for the same reason.   Why?  Because I didn’t have to fork over all the money up front to get it (like you have to with gold).   I can use other people’s money to buy it.  Secondly, i have observed that 30 years ago, my parents bought at house for about the same amount as it cost to go to four years of college at that point.   And when we bought our house in 2003, it costs us about the same as it costs to go to four years of college in 2003.   So if I buy my house, and let “inflation” help pay it off.. i come out ahead as the 600 dollar bills which I use to pay the bank, are continually worth less and less… and buy me less other stuff in the market… as time goes on.  

        By the time my kids are ready to go to college, I can refinance the house I’ve paid off… at it’s new “price” point, and be able to pull out enough paper bills to cover the four year cost of college, and again, let the on going increase in wages and prices pay off my mortgage over time.

        so the argument is that I paid twice what the house was worth in interest… actually, if prices increase at a rate of 7% or more per year, and I’ve got a fixed mortgage at 4.8%… I actually got paid 2.2% per year to barrow that money… If I rented, the landlord would have raised rents each year, and instead, I locked in my housing costs for the next 30 years.   I think I did alright.

        • http://www.SheddingForTheWedding.us/ Tracey

          Sorry 7% inflation gets us from $1.21 to $3.57 per gallon 1996-2012.  Did you know that the government gets to change what products are included in the CPI (consumer Price index) which is the list of goods they use to determine how much “inflation” we have?  So if they number looks to high, they drop one item and add another to make the number look better.

        • excess

          Let’s run the numbers in your case. Interest rates were ~5.8% which means for a $600 mortgage you tough out a mortgage for 100k. I’ll assume you  bought a home worth roughly 125k in July and put 25k down on it. So that means as of March 2012 you will have paid 47k in interest and have a remaining balance on 86k. Nationally home prices are down 3.2% from where they were in July 2003 so your home is currently worth 120k. So if you subtract off your remaining mortgage principal and downpayment you’ve ‘saved’ a grand total of 10000 in 10 years by owning a home. The US average property tax rate is 1.28%, so I’ll assume you’ve been paying 1600/year which means you’ve paid ~14k in taxes over the past 9 years. Average maintenance costs are also about 1% so I’ll assume you spent 11k on that. Adding it all up that means you’re down about 15k.

          If instead you’d taken the 25k down payment and invested in an indexed mutual fund it’d be worth about 37k for a net gain of about 12k. So by my estimates your net worth is about 27k less today than it would be if you’d just rented a place for $600/month. Still think it’s worth it?

  • guest

    Landlords absolutely build all the costs into their calculations when they buy properties. They also look at prevailing rents for those properties. It is a business calculation and they are going to get a return on their investment.

    Sure, the market can change and they can be underwater, but rental properties will come on the market and the new buyer will pay what the current prevailing rent will support.

    So if you are comparing buying a house with renting, the market will come into balance.

    I think your long term maintenance costs and upgrade costs are too high in your home ownership analysis. You certainly won’t get those kind of maintenance and upgrades from your landlord.

  • Email

    Any reason why in Exhibit A the price of the house is counted twice?  First you list the price, then you break it down into principal and down payment.  You then sum them into the total $1mil.

    • User

       It’s not actually counted twice.  Add up the columns and you’ll see it’s not there.  It’s just laid out poorly.

  • Anonymous

    Not sure why you think landlords don’t factor in the cost of those “home-owning expenses” you have there into the monthly rent they charge tenants. They don’t provide those for free.

    Sure it’s risky investment if you don’t live in the house but most of us live in the properties we own.

    • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

       That’s often the retort given by naive landlords who don’t have experience in multiple markets.

      The reality is that the market determines what rent you can charge and what ultimately renters will pay.  Sure in some cases, the rent covers the mortgage, but in many others it does not and the landlord eats the balance owed to the bank.

      In my area just because the mortgage may be $4000 on a home, this then doesn’t mean that the rent will be $4000.  It means the rent is between $2800-$3500 depending on the home itself.

      So yes, in those cases they are provided for FREE because they landlord eats that cost.

      • Anonymous

        Do SOME landlords do that because they have no choice in bad areas, fine. Do most? Absolutely not if they have a half a brain.

        • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

          The reality is that given the boom which fueled the recession, many landlords have high mortgages which they cannot refi because they are underwater.  Thus they are stuck with a mortgage payment that no renter will cover.

          As a result we have strong rental markets where they are many units open as rentals but the rent does not cover ALL expenses.

          Half a brain or not, the market dictates the rent and not the glorified dream that renters cover all expenses. 

          • Anonymous

            Fair point given the current market but what buyer sees a home as a short term investment? Is this recession or mortgage crisis going to last forever? If you’re buying a home as investment and trying to get ROI within five years than all your points make sense. But what about for someone thinking a minimum of 10-15 years down the road?

            • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

              Wait….I forgot my crystal ball, let’s use yours and you tell me what it’ll look like years from now with so many regulations around housing up in the air.

              Its a gamble to think that 10-15 years down the road we will be able to recoup the last 5 years of losses and then overcome that with market appreciation.

              • Anonymous

                5 years of losses? If I buy a home today or last year? Wow, guess the US economy is just going to disintegrate. 

                • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

                  Yes, since 20007 home prices have dropped in some cases by 50-60%.

        • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

           http://articles.sun-sentinel.com/2011-12-02/business/fl-reluctant-landlords-20111202_1_reluctant-landlords-underwater-homeowners-short-sale

          “Finding good tenants hasn’t been an issue. Still, he’s $200 in the red
          each month, and he also has to cover any maintenance costs. In October,
          he spent $350 to replace the washing machine.”

          http://ptmoney.com/renting-out-your-home/
          “Breaking Even
          The most common reason to rent out a home is to
          make enough money to cover the monthly mortgage payment. Most landlords
          in the current real estate environment do not hope to make a profit
          from their rent, but simply make enough to pay the bills and stay
          solvent.”

  • Jeff

    Girls just wanna have funds – love the title..  You have some good arguments and especially now but if you put 20% minimum down on your house and only take out a 15 year loan at let’s say 28 years old then your home is paid off when you are 43 and that does not take in to consideration you putting more on the principal and paying it off sooner like my 28 year old daughter and her husband.  They have two homes and rent one of them out for $1350 and their mortgage payment is $900.  They will have this home paid off in 5 years.  Both are officers in the Air Force and have learned to live on one income.  I would say it is not out of line to project average rent payments could be $3000-$4000 per month in 15 years.  They will have no mortgage payments but will have property taxes and homeowners insurance but certainly willl not cost more than a rent payment in the future.  The other consideration is if you buy a distressed sale and do a little fixing up you can do pretty well for yourself.  We have friends that own 22 homes in Colorado Springs and have renters in all of them.  If a $300,000 home just goes up 3% you have increased your equity by almost $9,000.  I would say the goal is to own your own home and at the very least have it paid off by the time you retire.  Too many people are getting 30 year loans in their 50′s to keep the payment down.  Crazy!!!  What say you???

    Jeff
    Debt Free Squad

    • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

       You had me up until this point: 
      “I would say it is not out of line to project average rent payments could be $3000-$4000 per month”

      There’s no way to project that much of an increase.  Triple in 15 years?  HA!  I know the rental market and unless where they are right now is pretty undeveloped and then it gets several successful development projects which put the area in high demand, then your crystal ball is as good as mine- broken.

      I agree with you about distressed properties.  Been there, doing that now and that’s about the only way I’d do homeownership moving forward.

      • guest

        1350 to 3000 in 15 years only requires a 5.5% compounded growth rate. To 4000 requires 7.5% Those are not completely outlandish, a 5.5% wouldn’t surprise me at all.

  • http://www.moneyinfant.com/ Money Infant

    The taxes and maintenance costs associated with home ownership are what has kept me as a renter for the past 15 years and will likely keep me a renter for the rest of my life.  And as far as being an investment, HA!  If you look at the long term (1890-2005) housing as an investment has returned just under 1% per year.  Might as well put your money in the bank and at least have easy access to it.

    • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

       Well, I’d probably look at the years that are more relevant to our current lifetime.  As an investment property in certain areas it makes sense given the risk and market projections.  As an owner occupied home, not for me.

  • http://www.earnsavelive.com/ Earn Save Live

    Great post!

    Right now, I’m a landlord (in the U.S.) and a renter (here in Australia). Right now, we get so much more house as renters. If I ran the numbers right, we would need over a quarter of a million for a down payment in order to have our monthly mortgage payments be the same as our current rent.

    I know that home ownership is supposed to be the “be all and end all,” but sometimes, it’s better to rent!  We’re hoping to buy in the coming years, but we’re not rushing into it. After seeing the property bubble burst in the States, we’re leery that the same could happen here.

    • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

       I wish more people would run the numbers before buying.  Here in the States we had a MAJOR home ownership campaign going on and you see where that left us!

  • http://www.earnsavelive.com/ Earn Save Live

    Great post!

    Right now, I’m a landlord (in the U.S.) and a renter (here in Australia). Right now, we get so much more house as renters. If I ran the numbers right, we would need over a quarter of a million for a down payment in order to have our monthly mortgage payments be the same as our current rent.

    I know that home ownership is supposed to be the “be all and end all,” but sometimes, it’s better to rent!  We’re hoping to buy in the coming years, but we’re not rushing into it. After seeing the property bubble burst in the States, we’re leery that the same could happen here.

  • http://randomthoughtsandacronyms.wordpress.com/ Vanessa

    Ack! “Forced savings” is the worse expression that’s floating around out there. You know how else you can “force savings”? By automatic withdrawal.

    Also, that “income tax deduction” BS drives me crazy. I explain to everyone the basic math of a 15% deduction… 15% off is still 85% on

    Good post!

    • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

      Thanks!