Your home a bad investment?

[cute fuzzy bunny]

Congratulations CFB. You are a land speculator. And apparently a good one at that.

Really? Buying single family homes in rebounding, underpriced areas in a fast appreciating region, then fixing it up a little and selling them when the value is matured makes me a speculator?

I'll bet there are some home owners on this board who are also not idiots that have not made out as well as you.

Then why do so many homeowners buy in areas that havent appreciated faster than inflation (or worse) in the last 3-4 decades? Why do people buy condo's and 1 or 2 bedroom homes? Why do people pay $400k for a $150k house on a postage stamp sized lot just because the prices have gone up for 3 years...yet theres no infrastructure to support the price?

Also it seems that the sweat equity is a strategic factor for you.

In one house it was. In the rest, not particularly.

But I claim that I was lucky.

Be my guest.

But I am humble enough to know that it was not foresight but just a good dose of good luck and some inadvertant market timing.

Not so humble here.

Maybe but I don't claim it was an investment strategy.

And you dont have to!

Come on CFB. Be honest with yourself.

I already have. I've demonstrated the ability to make good investment decisions INCLUDING my primary residence as part of that. I dont feel some emotional need to disassociate my most expensive purchase from also being something I can make money on.

But I also dont hold it against anyone who doesnt feel the same way.

 

[JustCurious]

Well I bought my house 15 years ago. I paid 94k for it investing 6k of my own money including closing costs. I bought on a dip, got a good deal because the house was a mess and did put some sweat equity into fixing up the house. My payment as I recall was around $850 a month but there was an efficiency apt in the basement and I had a guy rent it for $450 a month. So I got the two bedrooms and the Kithchen and dining room for $400 per month plus utilities. At the time a 2 bedroom was renting in the area was renting for $900-1200 a month and the guy in the basement was getting a good deal. Prior to buying the house I was renting a room in a house nearby for $500.00 a month plus 1/3 of the utilities.

So for me at the time buying the house was cheaper and much better than renting (no roomates) especially when you consider the tax advantages and contribution to priciple.

Now rents in the area are much higher and a house (I need one now wife and two dogs 60 and 80 lbs) like mine would cost over 2000 a month). While my taxes have increased my mortgage pmt would have actually gone because I refined to a lower 30 fixed but I refied down again to a 15yr and pulled some cash out to buy another property. So let just call that a break even on the sweat equity, maintenance and upgrades and 15 years of rent increases in metro DC.

So how did my 6k investment do?

The house is now worth approximately 500k so it has appreciated 400k. 6k into 400k = 6,600% in 15 years. Remenber while I paid 94k for the house only 6k of it was mine. And that is one of the beauties and dangers of real estate as an investment LEVERAGE!

Now do I think that I was a genious 15 years ago or today no way. I bought a house that I wanted in a place that I wanted that needed some work and I got a good deal. It turns out that later other people figured out that they want to live there too and are willing to pay more for the house and some time fairly soon I am going to let them.

not a bad investment

Bearkley, your post illustrates my point. Undoubtedly your house was a good investment, but you have cited the gains but ignored the expenses. How much have you paid in the last 15 years to keep the house? Taxes, insurance, maintenance, repairs, homeowner's dues, assessments, replacement costs, etc.? You must offset expenses before you can determine your return. You also claim that you only invested 6k, but you had to borrow 94k and repay it with interest, so the 94k is a cost basis, and the interest paid is an expense. How much interest did you pay on that loan in the last 15 years, in addition to the 94k principal?

I suspect the net return on your investment is much lower than you think after you subtract the 94k and the interest and all of your expenses.

 

[mathjak107]

i agree, people forget that by the time they paid their house off depending on their mortgage rate they have paid 2 to 3x the origional cost. we havent even figured in the taxes yet. im not even counting major renovations or repairs that need to be done when you own a home long term.

i love real estate as much as anyone but my portfolio of funds has out performed my home here in new york city over the last 20 years by almost 3x the value assuming starting with equal amounts and paying cash.

realistically i could have paid rent all those years and bought 2 identical homes today.

 

[Orchidflower]

My theory says that owning a house is a liability (not that that wouldn't stop me from owning one as I need some place to store my crapola). Should I make a tidy profit after X number of years, I just consider that gravy. But a house, to me, is strictly a liability.
(I learned that theory from a Finance teacher, by the way, and do not take credit for the original thought.)

 

[free4now]

I doubt that the renter saves or invests the money he is saving by not owning a home so when he moves he has nothing to show for the difference he saved (if he did save) whereas when a home owner sells his house he ends up with a lump sum of money. Whether the home owner did or didn't make a profit on the house he still can end up with a sizable amount of cash.

Bingo! I think this factor is incredibly underappreciated. Buying a home is like committing yourself to financial boot camp... most renters don't have the discipline to save the difference between owning and renting, so in the end they are worse off. But owners know they have no choice but to make that mortgage payment every month or they will get foreclosed in a few months. That forced saving is why homeowners tend to be better off. Even with an interest only loan your PITI payment is typically greater than the rent payment for an equivalent house, and you normally get that money back at the end in the form of appreciation. I have seen many people hanging on by a thread financially who end up with good savings through their houses. That would never happen if they rented.

And another factor that I hadn't really appreciated until recently is the "leverage without margin call" aspect. In California if you are foreclosed and there's no equity in your property, you are not personally responsible for the loan debt left over after the sale. I had always thought of mortgage leverage as very risky because of the high leverage ratios involved. But after reading sites like iamfacingforeclosure.com and hearing other's foreclosure stories, I realize that the worst case isn't as bad as I had imagined... the worst case is simply that you overpaid for your housing by owning as opposed to renting, not that you become personally indebted for the amount of housing value drops as you would with stock market leverage.

In the end though, I'm looking forward to getting out of the RE market and into a rental.

 

[kcowan]

But I also dont hold it against anyone who doesnt feel the same way.

Me neither and the purpose of this board is to stimulate dialog about the investment issues surrounding alternatives. And the associated risks, some of which may not be apparent.

BTW good luck with your pending house sale.

 

[cute fuzzy bunny]

Thanks, I'll take spontaneous luck and the kind I seem to be able to make on my own.

Its just a matter of whether I'll make 50k on the property or as much as 80k.

Not bad for a 3 year passive investment of 250k. And I made a shitload of money in the stock market over the last 3 years on the 250k profit I made on my old mcmansion when I downsized. And the value on my newly purchased home is up about 50k since I bought it.

I guess calling it an investment is a pretty bad way of putting it. Can we just call it an ATM machine that gives out thousand dollar bills?

 

[kcowan]

Can we just call it an ATM machine that gives out thousand dollar bills?

That seems to be what most people are doing (although not so much on this board).

 

[cute fuzzy bunny]

Only difference being that i'm rolling the profits into my investment stash and not buying a bunch of [-]toys[/-] depreciating assets with it.

 

[bearkeley]

Bearkley, your post illustrates my point. Undoubtedly your house was a good investment, but you have cited the gains but ignored the expenses. How much have you paid in the last 15 years to keep the house? Taxes, insurance, maintenance, repairs, homeowner's dues, assessments, replacement costs, etc.? You must offset expenses before you can determine your return. You also claim that you only invested 6k, but you had to borrow 94k and repay it with interest, so the 94k is a cost basis, and the interest paid is an expense. How much interest did you pay on that loan in the last 15 years, in addition to the 94k principal?

I suspect the net return on your investment is much lower than you think after you subtract the 94k and the interest and all of your expenses.

I didn't ignore anythink and I think you missed my point. My 900.00 dollar a month payment which includes interest, taxes and principle is WAY !!!!!cheaper than renting the same house for over $2000 a month. I have had no home owner dues or assesments. And while I have done some work on the house that expense has been more than offset than the rent I would have had to pay if I had rented all that time.

I did subtract the 94k (cost basis) from the sale price to determine the gain. I am sorry but you are mistaken the value of an investment when figuring a Return on Investments is the amount of your capital that you put into in. The idea of using other peoples money to increase the return that can be made from an investment is basic business 101. Its called leverage. While you should factor in the carrying cost of the invetment (ie interest, repairs, insurance, taxes ect,. that should be netted against and revenues or benefits recieved from the investment, in the case of your house you get a place to live that should be the value of that is based the cost of renting a similar property or at least one that meets the needs and or wants.

So I stand by my assesment. If you wish I could run the numbers on some rental houses I have recently sold where the tennants got the benefits (a place to live) and payed me way more each moth than my mortages, insurance and repairs to the tune of nearly $400 per month. But I guess you would only count the expenses and not the revenues.

 

[tryan]

In California if you are foreclosed and there's no equity in your property, you are not personally responsible for the loan debt left over after the sale.

Wow!

Not so in many states thou ... know many MA "investors" who needed bankrupcy to shake the lenders from thier trail.

 

[Martha]

IIRC, California is like Minnesota and allows two different types of foreclosures. One is judicial and one is not. If a lender forecloses through the judicial system by starting a lawsuit, a deficiency judgment is allowed. If foreclosure is done the quick, cheap and easy way without the involvement of the courts, no deficiency is allowed.

I have also heard through the creditor lawyer grapevine that in states that have this type of system, because of declining property values the rate of judicial foreclosures is increasing.

 

[Martha]

Really?

Then why do so many homeowners buy in areas that havent appreciated faster than inflation (or worse) in the last 3-4 decades? Why do people buy condo's and 1 or 2 bedroom homes? Why do people pay $400k for a $150k house on a postage stamp sized lot just because the prices have gone up for 3 years...yet theres no infrastructure to support the price?

Not picking on this post as I am taking it a bit out of context, but it made me think about this question because it partly applies to us. We live in a part of Minnesota where real estate is worth less than Mpls/St. Paul. Pay is also a lot lower so I made less as a lawyer here than I would have made in a large firm in the cities. But there were plenty of good reasons to have a career here. Recreational opportunies. Less driven work environment. Family. To offset less money, our expenses were a lot lower. Also, there isn't the same drive in our community to have material badges of success, like expensive suits, fancy cars and fancy homes. It really was a nice city to work. So despite the drawbacks we made it to FIRE. All would be fine and dandy if we weren't now selling our place and moving to a more expensive area. To have a place in a neighborhood we want (no suburbs, but good recreation and good neighborhood) we have to buy a condo or a very small two bedroom home. Otherwise the cost is too high. It is very hard to make my peace with the fact that our very nice building with income producing units will yield only enough to buy a small home that isn't nearly so pretty.

Gotta go; someone is coming over to look at our building.

 

[Jay_Gatsby]

I thought homes were a good value (not investment) because of the appreciation on their value, taking into account only having to put 20% down. In other words - leverage.

 

[bright eyed]

as a renter it is the leverage part that i feel i'm missing out on. however we also don't want to buy a house in the current market where we live, and have the advantage of parents who do own here - so our rental costs are far below what they would be if we were renting at market rates.

we are also saving more because of the difference (although not enough yet, nor nearly as much as a bleed to death mortgage would, where we would cut out everything but bread and water) but i appreciate the lower level of stress that allows us!

 

[Gumby]

I thought homes were a good value (not investment) because of the appreciation on their value, taking into account only having to put 20% down. In other words - leverage.

Leverage works both ways. What happens when that house declines in value by 20% and circumstances force a sale ? -- you've just lost your entire down payment (not even counting the real estate commission).

 

[mathjak107]

its only leverage until you pay for it. then its paying 2 to 3x the purchase price because of mortgage interest.

 

[cute fuzzy bunny]

The more all y'all discuss why a house isnt an investment, the more it sounds like an investment!

Gains, appreciation, leverage, avoiding to have to sell at below market prices...

Replace the word 'home' with 'equities' or 'bonds' and you've still got very cohesive statements...

 

[Sam]

The more all y'all discuss why a house isnt an investment, the more it sounds like an investment!

Gains, appreciation, leverage, avoiding to have to sell at below market prices...

Replace the word 'home' with 'equities' or 'bonds' and you've still got very cohesive statements...

Not to me. I'm on my 3rd home now. I lost big time on the first home (Mass). Gained a tiny percentage on my second (Houston). Expect to break even on my current.

Granted, I didn't spend an enormous amount of time searching like you did. But I didn't just buy the first one I saw either. I think you have a skill, and probably a little bit of luck on your side. Yes, I know, you don't believe it was luck.

 

[HFWR]

Well, he does have a couple of rabbit's feet...

 

[cute fuzzy bunny]

Four of them.

I believe very strongly in luck. But I believe equally in making some of my own good luck.

When i'm looking at a property thats selling for slightly over new construction costs, values have dropped 30% in the last couple of years and the area looks promising, its a good medium term investment.

When i'm looking at a condo in an area thats massively converting apartments to condo's, and condo prices just shot up 250%...bad investment. Bad, bad, bad.

That having been said, I'd have been smart AND lucky if I bought that really nicely updated, well kept, well maintained house that the owner painted mustard yellow and couldnt get a buyer. Two days with a sprayer and a five gallon can of white paint and that'd have been a really good investment. I mean, that sucker was hideous. We pulled up and I almost told the agent to keep driving.

 

[pedorrero]

Just for grins, I looked up my childhood home on zillow last night. In a close-in suburb of Washington DC (Vienna, VA), this home sold for about $60K in 1972. We lived there until mid-70s. Dad rented it out until about 1982, when it sold in low $100K's. Zillow claims it's worth around $600K. Ten times appreciation, even in 35 years? Six-fold in 25? This is ridiculous, yet is probably a good example of what's happened in many "hot" areas over the decades. And Dad was bitching about the taxes back in the 1970s! (VA has no tax limitations, AFAIK.) Hell, I could probably live well on just what the current owner is paying the County.

 

[wildcat]

CFB -

Will you be my real estate advisor? I'll pay your dog food bill for a month.

 

[cute fuzzy bunny]

You dont wanna do that. Should I show you pictures of Ted plowing through a $50 bag of food?

pedorrero...funny you mention that...I just looked up my old childhood home on zillow a few days ago. My dad sold that piece of crap in 1971 for $11k and its showing $621k. 200 year old junkpile that was moved to the site and dropped on some old tree trunks for pilings...all of which were eaten up by bugs when I was a kid. I remember 2' of standing water in the basement every spring when the rains hit their peaks.

Thats worth over half a million. Sick.

 

[ESRBob]

CFB
Is there a way to see if it is really the same house, or if it had a massive upgrade and just has the same street address? Maybe a new foundation at least? Otherwise it is a really scary story about overvaluation in Calif real estate...