A Home is a place to live not invest
Motley Fool
The Worst Investment Ever
Friday May 18, 2:05 pm ET
By Robert Aronen
My fellow Fool John Rosevear considers a house to be the best investment ever. I disagree. A house is a place to live, not a road to riches.
Think about it for a minute. What characteristics do Fools look for in a great investment? Positive cash flow, low expense ratios, low transaction fees, and historically proven returns. Using these criteria, the average house falls well short of the all-time best.
Positive cash flow
If you buy a house, how much money goes into your pockets every year? How much goes out? That's right -- a house clearly produces negative cash flow. Mortgage payments, maintenance, and taxes add up to a lot of money heading out and none coming in.
This is not necessarily true for real estate as an asset class. Purchase a parking lot, apartment block, or strip mall, and you very well may find that the rents are higher than the cost of ownership. Real estate that generates positive cash flow can be a great investment. This positive cash flow fuels the dividends from REITs such as Avalon Bay (NYSE: AVB - News) and American Financial Realty (NYSE: AFR - News).
Low costs
The Fool has long advocated seeking investment vehicles with low expense ratios and transaction fees. The expense ratio is the cost of owning an investment as a percentage of its value over the course of a year. Shannon Zimmerman at the Motley Fool Champion Funds service searches for mutual funds with expense ratios of less than 1%.
How does this compare to housing? Costs vary significantly by location, but for urban areas, annual property taxes are typically between 1% and 2% of the current property value. Annual maintenance costs can add another 1% of the property value. If your down payment is less than 20%, you will also usually have to pay private mortgage insurance. Add property insurance, and the annual expense ratio associated with homeownership can easily reach 3% or more.
The big hit, however, arrives when you sell a property. Real estate agents will collect 6% of the selling price, while, lawyers, inspectors, title companies, and banks will collect additional fees. These fees appear as though they will remain stubbornly fixed for years to come. If you flip properties as though you are actively trading stocks, the only folks getting rich will be real estate agents. Meanwhile, transaction fees for stocks and mutual funds have plummeted in recent decades, to the point of falling below $10 per trade at several discount brokers.
Historically proven returns
The Fool has long advocated shares of individual companies as the best road to wealth, because of their inflation-crushing performance over very long periods of time. In The Future for Investors, Jeremy Siegel identifies several companies that have not only beaten inflation but also delivered returns far in excess of the market average for 50 years. It does not take a genius to actually buy companies like Pfizer (NYSE: PFE - News) or Altria (NYSE: MO - News), consistently reinvest the dividends, and build wealth over the decades. Over the 50 years of data compiled, Pfizer and Altria returned 16.0% and 19.8% respectively.
For any time period longer than the past few years, residential housing prices fall far behind these returns. Perhaps the best measure of housing-market appreciation is the S&P National Home Price Index. This index represents the actual appreciation of the same house over time, whereas a portion of overall housing-price increases occurs because new houses are generally much larger than old houses and people frequently spend substantial money upgrading and expanding their houses. Looking at the index, from 1987 to 2006, we see that the overall average appreciation in the U.S. was only 5.6%. Even cities showing huge gains during the final years of the housing bubble -- including San Diego, Las Vegas, and Washington, D.C. -- showed gains slightly above only 7% for the 19-year period. If we adjust these returns for inflation, we end up with real returns on housing in a range of 3%-5%. Subtract our annual expense ratio of 2%, and the return gets pretty thin.
This index is relatively new, and the data ends at the top of the final eight years of the biggest housing boom in U.S. history. Longer-term data paints an even less encouraging picture. Piet Eichholtz studied records on home sales in Amsterdam's premier Herengracht neighborhood from 1628 to 1973 and found an inflation-adjusted return of 0.2%. There were periods of rising prices and periods of falling prices, but not a continuous march upward with spectacular returns.
Final thoughts
I will agree with John Rosevear on one account -- a house is a great place to live. Fool Mary Dalrymple provides a good discussion of the issues associated with the rent-or-buy decision. Those who think renting is "throwing money away" should consider that mortgage interest, maintenance, taxes, and insurance are also "thrown away." Having a place to live costs money no matter what, and a rational evaluation of your local market should let you know which one is a better value. Before you start plugging overly optimistic numbers into the rent-vs.-buy calculator, just remember that past performance may not be indicative of future returns.
Fool contributor Robert Aronen does not own shares of any of the companies mentioned. He lives in a van, down by the river. He would rather fund his retirement with his stock portfolio, not equity withdrawals from a house. Please feel free to share your comments with him. The Motley Fool has a disclosure policy.
The Worst Investment Ever
Friday May 18, 2:05 pm ET
By Robert Aronen
My fellow Fool John Rosevear considers a house to be the best investment ever. I disagree. A house is a place to live, not a road to riches.
Think about it for a minute. What characteristics do Fools look for in a great investment? Positive cash flow, low expense ratios, low transaction fees, and historically proven returns. Using these criteria, the average house falls well short of the all-time best.
Positive cash flow
If you buy a house, how much money goes into your pockets every year? How much goes out? That's right -- a house clearly produces negative cash flow. Mortgage payments, maintenance, and taxes add up to a lot of money heading out and none coming in.
This is not necessarily true for real estate as an asset class. Purchase a parking lot, apartment block, or strip mall, and you very well may find that the rents are higher than the cost of ownership. Real estate that generates positive cash flow can be a great investment. This positive cash flow fuels the dividends from REITs such as Avalon Bay (NYSE: AVB - News) and American Financial Realty (NYSE: AFR - News).
Low costs
The Fool has long advocated seeking investment vehicles with low expense ratios and transaction fees. The expense ratio is the cost of owning an investment as a percentage of its value over the course of a year. Shannon Zimmerman at the Motley Fool Champion Funds service searches for mutual funds with expense ratios of less than 1%.
How does this compare to housing? Costs vary significantly by location, but for urban areas, annual property taxes are typically between 1% and 2% of the current property value. Annual maintenance costs can add another 1% of the property value. If your down payment is less than 20%, you will also usually have to pay private mortgage insurance. Add property insurance, and the annual expense ratio associated with homeownership can easily reach 3% or more.
The big hit, however, arrives when you sell a property. Real estate agents will collect 6% of the selling price, while, lawyers, inspectors, title companies, and banks will collect additional fees. These fees appear as though they will remain stubbornly fixed for years to come. If you flip properties as though you are actively trading stocks, the only folks getting rich will be real estate agents. Meanwhile, transaction fees for stocks and mutual funds have plummeted in recent decades, to the point of falling below $10 per trade at several discount brokers.
Historically proven returns
The Fool has long advocated shares of individual companies as the best road to wealth, because of their inflation-crushing performance over very long periods of time. In The Future for Investors, Jeremy Siegel identifies several companies that have not only beaten inflation but also delivered returns far in excess of the market average for 50 years. It does not take a genius to actually buy companies like Pfizer (NYSE: PFE - News) or Altria (NYSE: MO - News), consistently reinvest the dividends, and build wealth over the decades. Over the 50 years of data compiled, Pfizer and Altria returned 16.0% and 19.8% respectively.
For any time period longer than the past few years, residential housing prices fall far behind these returns. Perhaps the best measure of housing-market appreciation is the S&P National Home Price Index. This index represents the actual appreciation of the same house over time, whereas a portion of overall housing-price increases occurs because new houses are generally much larger than old houses and people frequently spend substantial money upgrading and expanding their houses. Looking at the index, from 1987 to 2006, we see that the overall average appreciation in the U.S. was only 5.6%. Even cities showing huge gains during the final years of the housing bubble -- including San Diego, Las Vegas, and Washington, D.C. -- showed gains slightly above only 7% for the 19-year period. If we adjust these returns for inflation, we end up with real returns on housing in a range of 3%-5%. Subtract our annual expense ratio of 2%, and the return gets pretty thin.
This index is relatively new, and the data ends at the top of the final eight years of the biggest housing boom in U.S. history. Longer-term data paints an even less encouraging picture. Piet Eichholtz studied records on home sales in Amsterdam's premier Herengracht neighborhood from 1628 to 1973 and found an inflation-adjusted return of 0.2%. There were periods of rising prices and periods of falling prices, but not a continuous march upward with spectacular returns.
Final thoughts
I will agree with John Rosevear on one account -- a house is a great place to live. Fool Mary Dalrymple provides a good discussion of the issues associated with the rent-or-buy decision. Those who think renting is "throwing money away" should consider that mortgage interest, maintenance, taxes, and insurance are also "thrown away." Having a place to live costs money no matter what, and a rational evaluation of your local market should let you know which one is a better value. Before you start plugging overly optimistic numbers into the rent-vs.-buy calculator, just remember that past performance may not be indicative of future returns.
Fool contributor Robert Aronen does not own shares of any of the companies mentioned. He lives in a van, down by the river. He would rather fund his retirement with his stock portfolio, not equity withdrawals from a house. Please feel free to share your comments with him. The Motley Fool has a disclosure policy.
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A house is the worst investment ever, BS. Boats,Cars and electronic equipment depreciate...a house appreciates. 0 -
Depends where you live & when you bought your house(s).
The one I live in ... I bought 20 years ago for $139,000. I
lived in it for 20 years and today IF I was willing to sell it,
it'd sell for just under $800,000 ... maybe a tad more in
the summer. My mom's house up in West Hills ((Los
Angeles) cost her about $77,000 in 1975 - today I could
sell it for a little over $600,000.
... most houses in Southern California were/are a very good
investment.[8D]0 -
quote:Originally posted by cartod
A house is the worst investment ever, BS. Boats,Cars and electronic equipment depreciate...a house appreciates.
Try reading the article before you reply.
A house only appreciates so long as you continue spending money to keep it maintained.
Property taxes, realtor and bank fees also eat into that appreciation, such that when you finally do sell it, your return over your original investment is miniscule.0 -
being homeless looks like it has some advantages 0 -
well, I bought this house 9yrs ago, and can sell it for a little over 2x what I paid. Sell without an agent, and pay your taxes in escrow with the morgage and deduct the interest from mortgage, pay one extra payment a year at interest not principle and see where you end up.
Rent is non-deductable, so rent is money wasted where buying a house is the same as a savings account. You can live in a house for basicaly free,..or break-even upon the sale, you get your money back. Rent was money thrown away plain and simple. Also, you have little credit compared to a homeowner.
No way to make NOT buying look better, it just can't happen.
JustC (the finance major and licensed investment broker)0 -
So...compared to the only practical alternatives, renting, buying a house is a good alternative, and one could almost say it is an investment.
What gets me is how the government taxes property. If you make improvements, they tax you more. Here you go out of your way to employ a carpenter, help employ those little pimple poppers at the lumber yard, and those in manufacturing, and the government penalizes you by raising your property taxes!
The slum lords who make no improvements to the property, no naming names [:D], gets rewarded with a comparative lower tax by letting his property depreciate. I'm think about this "A Home is a place to live not investment" thing a little more. I'm looking at it from a landlord view. Perhaps, a home is not an investment, but a house is an investment.0 -
Nope - a home is an investment - depending where you are. I know
quite a few folks who have sold them, moved out of California and
bought lots of land, with a house and lake, pond, stream on it. They
pretty much knew that their house was going to appreciate quite a
bit when they bought it and knew they were going to move after
retirement. if that isn't an investment - don't know what is.[8D]0 -
Now I know why they are called Motley FOOLS.
My fiancee bought a rental house in 1990 for $155,000. Kept it for 14 years. Had a slight positive cash flow, a couple hundred a month, throughout that time, counting all expenses such as furnace and roof repair, and taxes and insurance.
Sold it two years ago for $535,000. I will let the geniuses at the Motley Fool figure out the annual profit but it is better than the stock market, which as I recall crashed in 1999 or 2000, it was called the Dot Bomb bust.
She bought another investment house a year after she bought that one and did nearly as well with it.0 -
bs....
bought my 1st home for 129 and sold it for 275.
bought another for 150 and its at 2.5 mil right now.
bs...
my parents bought theres for 20,000. its at 1.5 mil now up in ct..
if homes are are a bad investment, explain developers scrambling to sprawl out and create 1500 home tracks? what? theyre doing IT just for fun? NOT.0 -
quote:Originally posted by Captplaid
So...compared to the only practical alternatives, renting, buying a house is a good alternative, and one could almost say it is an investment.
What gets me is how the government taxes property. If you make improvements, they tax you more. Here you go out of your way to employ a carpenter, help employ those little pimple poppers at the lumber yard, and those in manufacturing, and the government penalizes you by raising your property taxes!
The slum lords who make no improvements to the property, no naming names [:D], gets rewarded with a comparative lower tax by letting his property depreciate. I'm think about this "A Home is a place to live not investment" thing a little more. I'm looking at it from a landlord view. Perhaps, a home is not an investment, but a house is an investment.
You see the light. Rental property can be depreciated. All upkeep expenditures to keep the property " rented " are also depreciation. Time you add up all of those along with anything else that is rent related.. bingo.. you made no money. [;)][:D][:D][:o)][:o)]0 -
The Motley fool is exactly that. Bought my house 5 years ago at a VA auction for 154K. I have about 70K cash invested minus 30K for the ajoining 10 acres. House last year appraised at 340K, not counting the 10 acres. Probably add 100K if counted. You do the math. 0 -
A mortgage is cheaper than rent.
After the loan is up yer done payin. Renters just keep paying....just keep paying.
Let Bob rent. He can pay off my loans which give me assets-capital gain....not him.
The key is to not pay too much for a home. $180,000 for a double wide mobile home on half an acre.......thaz a no win situation unless it's a meth lab.0 -
quote:thaz a no win situation unless it's a meth lab.
LOL ~~~ A+ +1
[:D][:D][:D]
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Bought my house for 99k, I have 8 years left on 15yr mortgage. Houses in the neighborhood of equal size with less property and no garage(same size as house) are going for 330k to 350k. You can not rent a 2 bedroom apartment around here for what I pay in mortgage payments.
I'm happy with my investment[:)]0 -
A home is a forced savings account, if you take care of it.
Renting a home is like leasing a car, you may pay less to begin with but the only person that wins is the landlord.0 -
I'm with Cartod.
A house is one of the best investments made.
I bought my first house in 1989 and sold it 12 years later and cleared 120,000.00
Thats a profit of 10,000 per year and I never put anything close to 10,000 into it over the whole time I was there.
I then bought a house and land for 350,000 and 5 years later I have had offers for 800,000.
I guess I should have just been renting all these years.0 -
quote:Originally posted by cartod
A house is the worst investment ever, BS. Boats,Cars and electronic equipment depreciate...a house appreciates.
I disagree...
Taxes Insurance Upkeep and a wife inside that wants the best house on the block eats up the profit and takes away capital that could be better invested somewhere else.
Although you guys that drive 30+ miles to work everyday could likely pay for a house by moving a 1/4 mile for work like I did....Gas savings damn near pays for the place////\\\ 4 buck gas could big bucks....0 -
What you guys don't understand is Motley Fool isn't talking about buying a house 10 or 15 years ago and selling it today. The past decade has seen an unnatural housing bubble that is now slowing down. Motley Fool is talking about buying a house NOW. If you were to pay the exorbitant prices for a house NOW, it is extremely unlikely you will make any susbstantial profit off of it. Housing values have peaked in most areas; people simply don't have the money to pay these outrageous housing prices anymore. You can keep appraising your house ever higher and higher, but if you never sell the house then that appraisal means jack. 0 -
Location, location, location. 0 -
My cousin lives on Treasure Island. On the water.
He bought his place(4br 2.5ba, 2300sqft) for 169,000 in the mid 90's.
Valued at over 3 Million now.
Our town's selling market SUCKS right now. I would be lucky if I can get 15 grand less than what I paid for my place and we put 20-25k at least in it in materials and labor(our own) for improvements. I was talking with a broker in town and he said the market will even out in another 3-5yrs. Guess I'll be here a while longer.0 -
quote:Originally posted by MosinNagantDisciple
What you guys don't understand is Motley Fool isn't talking about buying a house 10 or 15 years ago and selling it today. The past decade has seen an unnatural housing bubble that is now slowing down. Motley Fool is talking about buying a house NOW. If you were to pay the exorbitant prices for a house NOW, it is extremely unlikely you will make any susbstantial profit off of it. Housing values have peaked in most areas; people simply don't have the money to pay these outrageous housing prices anymore. You can keep appraising your house ever higher and higher, but if you never sell the house then that appraisal means jack.
When I bought my house in the late 80s at 75,000 I was tols we are at the end of a housing bubble and the house would not appreciate and I could lose money on the deal. What ever. I failed to take the Advice and bought anyway because I am not going to buy a house for someone else with my rent money. One thing for sure is you need to live somewhere and I refuse to pay someone elses Motgage.
If that the route some people take...Good for them.0 -
I have never considered the purchase of a home as an investment.
I have bought them because I wanted to live in them.
Whether they appreciated or not, was not a concern.
As it happened, all of them have appreciated significantly.
I like living at my place.
Doug0 -
Buying and owning a house is the best investment out there. Wish I could or would of been able to buy 10 of them. 0 -
quote:Boats,Cars and electronic equipment depreciate...a house appreciates.
I have owned four homes. Took a beating on the first three. Living in number 4. Probably will take a beating on it, too.
Houses are crappy investments in my experience. Had I rented all these years, and put my original down payment of $10G into a good mutual fund in 1984, I would be ready to retire now.
Real estate, BAH! HUMBUG!0 -
quote:Originally posted by zipperzap
... most houses in Southern California were/are a very good
investment.[8D]
Yeah, but then you'd have to live there![xx(][xx(][xx(] Or submit someone else to if you leased it. Okay, maybe you're right, there is a sucker born every minute.0 -
I have a family member who invests in real estate. they make MILLIONS every year. so do alot of people. 0 -
houses are bad investments if you just squat in them. like it was said, if you take care of it, it will take care of you. name me one rent that you can get a bank loan on.
houses are instant money and, it shows lenders that you are RESPONSIBLE people.
and always remember, the map is changing. your home may be an industrial sight some day and corps may pay dearly for it. its the LAND that never goes down and you dont have to do much to LAND to keep it valuable.
if houses arent a good investment, list for me what is so we can tear it apart.
i was always told 5 things never lose value:
gold/diamonds
land/equity
and the price of a soul.0 -
quote:Originally posted by bobski
houses are bad investments if you just squat in them. like it was said, if you take care of it, it will take care of you. name me one rent that you can get a bank loan on.
houses are instant money and, it shows lenders that you are RESPONSIBLE people.
and always remember, the map is changing. your home may be an industrial sight some day and corps may pay dearly for it. its the LAND that never goes down and you dont have to do much to LAND to keep it valuable.
if houses arent a good investment, list for me what is so we can tear it apart.
i was always told 5 things never lose value:gold/diamonds
land/equity
and the price of a soul.
I don't see any Model 12's, 42's, 21's on your list? Firearms aren't good investments?? [:o)][:o)]0 -
my model 12's didnt make 2 mil in 10 years! house did![:D] 0 -
Every house I bought I was takin to the cleaners on. Now my ex-wives made a killin. Don 0
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