- Jan 29, 2008
Buying a home as an investment
It’s supposed to be the American Dream.
Instead of throwing away money on rent every month, you can buy your own home, giving you not only a place to live rent free, but a sound financial investment at the same time.
One small problem: the number’s don’t add up.
(Check my numbers: http://www.bankrate.com/brm/mortgage-calculator http://www.dinkytown.net/java/CompoundSavings.html http://www.hsfcuonline.org/cw2.1/calcs/Appreciation/calc_appreciation.asp )
First and foremost, there is the idea that a home is an investment due to appreciation.
The logical flaw in that idea is simple, and doesn’t depend on appreciation or rental rates.
Say you buy a house at a certain price, and the value goes up 500%. What can you do with that "value"?
If you want to live in your house, the best you can do with it is use it as collateral for a loan.
Great... now you can go much deeper in debt all at once than you ever could before.
If you sell the house, now you need to live somewhere else.
If your house just went up 500%, that means every house in your neighborhood just went up 500%.
What ever you made in profit by selling, it will cost you just as much to buy something else of equal quality.
Minus what you lose to agents, banks, and taxes for the transaction.
So in order to ever make use of appreciation, you must either move to a much worse neighborhood, move to a much smaller home, or move to a less desirable location.
So: IF you have kids who will be moving out of the home in 10 years, or you plan to retire somewhere cheaper like Arizona or Florida, only then might a house which you live in be considered an investment.
(Buying a house to rent out to others is another story, since you can sell it anytime)
If you want to stay in your home, you can never cash out, and any appreciation is useless.
But at least you are saving on rent... right?
Instead of throwing away money on rent every month, you can buy your own home, giving you not only a place to live rent free, but a sound financial investment at the same time.
One small problem: the number’s don’t add up.
(Check my numbers: http://www.bankrate.com/brm/mortgage-calculator http://www.dinkytown.net/java/CompoundSavings.html http://www.hsfcuonline.org/cw2.1/calcs/Appreciation/calc_appreciation.asp )
First and foremost, there is the idea that a home is an investment due to appreciation.
The logical flaw in that idea is simple, and doesn’t depend on appreciation or rental rates.
Say you buy a house at a certain price, and the value goes up 500%. What can you do with that "value"?
If you want to live in your house, the best you can do with it is use it as collateral for a loan.
Great... now you can go much deeper in debt all at once than you ever could before.
If you sell the house, now you need to live somewhere else.
If your house just went up 500%, that means every house in your neighborhood just went up 500%.
What ever you made in profit by selling, it will cost you just as much to buy something else of equal quality.
Minus what you lose to agents, banks, and taxes for the transaction.
So in order to ever make use of appreciation, you must either move to a much worse neighborhood, move to a much smaller home, or move to a less desirable location.
So: IF you have kids who will be moving out of the home in 10 years, or you plan to retire somewhere cheaper like Arizona or Florida, only then might a house which you live in be considered an investment.
(Buying a house to rent out to others is another story, since you can sell it anytime)
If you want to stay in your home, you can never cash out, and any appreciation is useless.
But at least you are saving on rent... right?
