WSJ: Why Your Home Is Not the Investment You Think It Is

[kcowan]

Quote:

Originally Posted by chinaco ...Since kitchens and baths cost a fortune to refurb, plus new roofs, etc... It seems like there might be some advantage to doing so. I have not run any hypothetical numbers. But it might be worth a look. We are going to down-size in about 4 years. Our house will be about 15 years old. It will still have curb appeal and be new enough that the kitchen, bathrooms, roof, etc.... are still in good shape. Any thoughts?

I knew some couples who would buy a new house every 5-8 years and get the "pop" that comes from buying pre-construction, pre-planting and personalization on each purchase plus avoid the maintenance issues you mentioned. The only expense they ever had was cleaning and painting.

It can be lucrative IF you can get your heads around the hassle.

[bright eyed]

tryan i think there is a difference between people w/ avg means who "buy" their house (that they live in) and "consider" it part of their overall worth/investment plan - then people who "invest" in real estate...

i also think that even though you might have made a "profit" by buying cheap at some point and getting a good price when you sell - doesn't that mean that overall the market is steep so whatever you buy will also be costly? cash in cash out right? i think that is the clincher part - unless you do the California cash out and move to other states to really see the "profit" from your house...

i'm happy w/ our decision to rent for now - our biggest problem will be not having leverage to "buy" something until we can save/invest/earn enough for a decent down payment. but then again we just might stay here forever!

in my case, renting is way cheaper for us - it's my parents house so we don't pay market rates

buying in our neighborhood - houses are about $600-800k (our parents bought for $200k about 22 years ago)...so our mortgage would be well over $3k per month - we pay half that.

so our case is not the norm...i think houses rent here for about $2500-$3000/month. mostly for the good schools.

have noticed a lot of "for lease" signs recently ...

[wabmester]

Quote:

Originally Posted by kcowan I knew some couples who would buy a new house every 5-8 years and get the "pop" that comes from buying pre-construction, pre-planting and personalization on each purchase plus avoid the maintenance issues you mentioned. The only expense they ever had was cleaning and painting. It can be lucrative IF you can get your heads around the hassle.

I loved this recent housing bubble. Imagine somebody buying three high-end houses at the start of the bubble, getting double-digit appreciation on each one, selling one every two years and then moving into one of the others, and taking the full $500K tax-free cap gains every two years for six years running.

We didn't nail it quite that well, but I still loved the bubble.

[FIRE'd@51]

Quote:

Originally Posted by wab I loved this recent housing bubble. Imagine somebody buying three high-end houses at the start of the bubble, getting double-digit appreciation on each one, selling one every two years and then moving into one of the others, and taking the full $500K tax-free cap gains every two years for six years running.

This is somewhat related to something I have often wondered about. Once one has a 500K unrealized gain on a primary home, should one sell it and make a lateral move just to re-establish the basis?

[wabmester]

Quote:

Originally Posted by FIRE'd@51 Once one has a 500K unrealized gain on a primary home, should one sell it and make a lateral move just to re-establish the basis?

If one has another home that has also appreciated, definitely.

Otherwise, it does make financial sense to take the free gain, but you have to ask yourself if saving the marginal tax expense on the gain over $500K is really worth the pain of moving.

[ERD50]

Quote:

This is somewhat related to something I have often wondered about. Once one has a 500K unrealized gain on a primary home, should one sell it and make a lateral move just to re-establish the basis?

Quote:

Originally Posted by wab If one has another home that has also appreciated, definitely. Otherwise, it does make financial sense to take the free gain, but you have to ask yourself if saving the marginal tax expense on the gain over $500K is really worth the pain of moving.

wab, I guess I'm dense, but I'm not getting the 'smiley' on the first part.

What does 'another home' have to do with it? If I understand it, you don't pay cap gains on the first $500K of gains of a primary residence. As Fire'd@51 put it, it seems that you could avoid cap gains tax completely by selling as your gain approached $500K, and make a sideways move. You could keep taking that $500K exclusion on any number of homes sequentially, correct?

Whether it is worth it or not must be considered of course. A $600K gain would result in $15K taxes; a $500K gain, $0 taxes. I guess you could estimate the expected annual increase in your home and look at the cap gains tax as an annual expense. Say you had a $800K house with $500K gains. Say you anticipate the value increasing 5%/year. $40K/year average increase is 'costing' you $6K/year in cap gains tax.

Considering the cost and hassle (excitement for some?) of moving, does not seem worth it offhand. But, if you were considering moving anyway, and you are approaching the $500K exclusion, it could add a bit of motivation to time your move.

IIRC, I need to adjust my cost basis by the amount I deferred from previous sales (when the rules were that you only pay cap gains on the amount you take *out* of the primary residence - buying 'up' incurred no cap gains tax). I probably won't hit $500K gain until the kids are all moved out. We may decide to downsize then, so there is a chance this will all fall in line for me. Nah, they will change the rules by then!

-ERD50

[mb]

Quote:

Originally Posted by FIRE'd@51 This is somewhat related to something I have often wondered about. Once one has a 500K unrealized gain on a primary home, should one sell it and make a lateral move just to re-establish the basis?

Quote:

Originally Posted by wab If one has another home that has also appreciated, definitely. Otherwise, it does make financial sense to take the free gain, but you have to ask yourself if saving the marginal tax expense on the gain over $500K is really worth the pain of moving.

We now have about a $500k gain in our house. I wouldn't even bring it up with DW. I know what the answer would be :P

MB

[tryan]

Quote:

tryan i think there is a difference between people w/ avg means who "buy" their house (that they live in) and "consider" it part of their overall worth/investment plan - then people who "invest" in real estate... i also think that even though you might have made a "profit" by buying cheap at some point and getting a good price when you sell - doesn't that mean that overall the market is steep so whatever you buy will also be costly? cash in cash out right? i think that is the clincher part - unless you do the California cash out and move to other states to really see the "profit" from your house...

I am probably in the minority with this believe but here it goes .... volitile markets have long downward turns; housing is not exempt. IMO, we all live thru 5-7 housing "cycles" where huge buying opportunities are presented at the "bottom". And huge selling opportunities are available at the top. The size of the opportuinty depends on the volitility of your market.

Point being, no need to "move to other states" if you're already in a high volitility market. Just position yourself to take advantage of the long term cycle ... and have the persistence and determination to "wait".

[wabmester]

Quote:

Originally Posted by ERD50 wab, I guess I'm dense, but I'm not getting the 'smiley' on the first part. What does 'another home' have to do with it? If I understand it, you don't pay cap gains on the first $500K of gains of a primary residence. As Fire'd@51 put it, it seems that you could avoid cap gains tax completely by selling as your gain approached $500K, and make a sideways move. You could keep taking that $500K exclusion on any number of homes sequentially, correct?

Sorry, that was sort of a self-satisfied smiley. If you already own another house that you'd consider moving into, then it's virtually a no-brainer to take the tax-free gain on the first home and position yourself for another tax-free gain with the gains already embedded in the second home.

I wouldn't recommend it as a strategy, but the current tax code does seem to encourage this serial mover strategy, and you can optimize it by buying two houses per move. Live in one, rent out the other, switch, sell, and repeat.

In reality, the downsides of moving and Realtor(TM) transaction costs offset the tax savings. But maybe in the next boom, cap gains taxes will be higher and the Realtor(TM) monopoly will have tumbled down, and house hopping will be a useful strategy.

[Finance Dave]

Quote:

Originally Posted by CCdaCE Must be the midwesterner in me. I still say if you're droppin' $50-70k into a $50-300k house, you're nuts. But, it's your life, your money, etc. If renovation is something you're doing to sell the place, and that is seen as necessary, then it's a different story. If I have to dump $50k+ into a house to get you to consider buying, now THAT is just a crazy MARKET. Right now, I'm putting $2k into a bathroom. Ahhh, real estate. -CC

I agree...midwest here too. Another point to make about new vs. existing purchases is that some commodities have increased dramatically in price...such as copper (wiring and plumbing if you have copper plumbing). In addition, there are many "up front" costs for new construction...blinds, landscaping, appliances, getting a yard started, privacy fence, etc. Sure, when buying used, sometimes you still have these...it's hit and miss. I know when we moved into our new construction house, we spent a ton on blinds, curtains, landscaping, epoxy coating on garage floor, and all the little "fix up" things to get it looking nice (for instance, that brown wastebasket you had no longer matches the new green decor). Some of these things are for comparing buying new to buying used, and some are for comparing buying anything to staying put.

Dave

[haha]

Quote:

Originally Posted by tryan I am probably in the minority with this believe but here it goes .... volitile markets have long downward turns; housing is not exempt. IMO, we all live thru 5-7 housing "cycles" where huge buying opportunities are presented at the "bottom". And huge selling opportunities are available at the top. The size of the opportuinty depends on the volitility of your market. Point being, no need to "move to other states" if you're already in a high volitility market. Just position yourself to take advantage of the long term cycle ... and have the persistence and determination to "wait".

I think understand what you are saying, and I appreciate your being willing to put forth this market timing idea. If one is talking about a family residence though, I think it might be hard to convince a spouse to follow through on this idea. Especially the selling part- at the top of these markets it always looks like prices will continue to climb forever without a pause, never mind reverse. Also, houses have character, and an already owned house might be perceived as perfect for your family.

I wouldn’t want to be the guy that promoted moving into an apartment for an unknown period- maybe the period while my daughter went from 8th grade to out of the home and into college! And what if one's timing is off? Ouch if you call a premature top!

Ha

[al_bundy]

i wouldn't sell and rent just because i think prices are high, but i don't see anything wrong with waiting a few years to buy if you think prices are going lower. it can be the difference always struggling to pay that mortgage check, or buying in a downturn at lower prices and 10 years down the road having a ton of free cash flow. it's also independence. buying at the peak may mean being upside down on your mortgage for years.

there are a lot of people that bought at the peak around 1989 in good NYC suburbs and were upside down until a few years ago. then there are people like my inlaws that bought in 1994, saw their property values triple and can retire if they moved to a low cost state and live on the close to $1 million in cash they will have left.

[ESRBob]

Quote:

Originally Posted by HaHa I wouldn’t want to be the guy that promoted moving into an apartment for an unknown period- maybe the period while my daughter went from 8th grade to out of the home and into college! And what if one's timing is off? Ouch if you call a premature top! Ha

I had a few friends who rented through the 2000-2005 period in our town, always assuming things would tank. I think home prices probably went up a good 50% during the period instead, which must have made for some tense conversations around the dinner tables in the apartments... Now there is softening and of course a chance to buy, but only at 2004 or 2005 prices.

I was glad we sat tight -- I would have been one of those apartment dwellers if I'd been forced to make a decision based on all my market cycle instincts. 'Course it's never over til its over... who knows where things will head next.

[bright eyed]

Quote:

Originally Posted by HaHa I think understand what you are saying, and I appreciate your being willing to put forth this market timing idea. If one is talking about a family residence though, I think it might be hard to convince a spouse to follow through on this idea. Especially the selling part- at the top of these markets it always looks like prices will continue to climb forever without a pause, never mind reverse. Also, houses have character, and an already owned house might be perceived as perfect for your family. I wouldn’t want to be the guy that promoted moving into an apartment for an unknown period- maybe the period while my daughter went from 8th grade to out of the home and into college! And what if one's timing is off? Ouch if you call a premature top! Ha

i agree, it is different if it is the primary residence and if you have kids etc...you wouldn't sell the house while jr. has to finish school - to "see the profit" you'd have to move to another town or downsize right? because even though you sell at $1mill a comparable house in your neighborhood would be $1mill - hence the CA cash out - people are buying $400k houses in Tex and Arizona for their $700k cali mcmansions...there you see the profit...

[tryan]

Quote:

If one is talking about a family residence though, I think it might be hard to convince a spouse to follow through on this idea.

Neglected to say, market timing with the primary residence is a loosers game; there's a quality of life issue.

Had a close friend sell his house and put the 6 of them into an apartment while they looked for something to buy ... 2 years later the parents were bordering on depression as the market continued to move UP and their housing $$$ was buying less and less.

[kcowan]

Quote:

Originally Posted by tryan Neglected to say, market timing with the primary residence is a loosers game; there's a quality of life issue.

This is not true for first-time buyers. Market timing can make all the difference for them. I suspect it is also not true for last-time sellers. IOW choose to downsize when the market peaks.

In between, it would require a special attitude among the family that IMHO does not exist in most households. But there are a few that have made it work. For many it is their single largest asset.

[rw86347]

I have always argued that a house is not an investment. If you want a realestate investment buy a rental. Most poeple pay interest, taxes, utilities, and decorating on a home. For a rental I pay non of these expences, my renters pay it. I keep my house cheap and maintance free. Buy a small, well insulated brick home. Put the rest of the money into a real investment.

A house should be good at keeping you warm in the winter and dry in the rain. I will let yuppies buy the BMWs, large houses, and fancy clothing.

[Cut-Throat]

Quote:

Originally Posted by rw86347 I have always argued that a house is not an investment. If you want a realestate investment buy a rental.

This 'Investing in Real Estate' idea may make a lot of money for some folks, but understand when you buy a building or raw land and develop it for Lots, this is not passive investing it's a JOB. Do not compare the returns with passive investing. Compare the returns with a salary of a land developer, real estate salesman or a landlord.

Passive investing is putting your money in an index fund.

[rw86347]

Quote:

Originally Posted by Cut-Throat This 'Investing in Real Estate' idea may make a lot of money for some folks, but understand when you buy a building or raw land and develop it for Lots, this is not passive investing it's a JOB. Do not compare the returns with passive investing. Compare the returns with a salary of a land developer, real estate salesman or a landlord. Passive investing is putting your money in an index fund.

I point wasn't to suggest real estate investing rather to compare a real investment to a non-real investment.

My last house went up $50K in 2 years. After calculating, heating, interest, curtains, grass and repairs, I figured my house was as good of an investment as a gunny sack. Now had it been any other type of investment it would have been a sweet return.

[haha]

Quote:

Originally Posted by rw86347 Buy a small, well insulated brick home.

Where can these be found? When I have looked, small brick homes are old, and tend to have substandard insulation. I agree that it would be a good idea, but isn't it hard to find?

Ha