I never looked at my primary residence as an investment. I wanted a place to live, and I didn't want to rent from someone else, so buying a home fulfilled those needs. And it's probably safe to assume that 30 years from now I could sell it for a profit, but of course I would be right back at the beginning with no place to live so it really is more of an expense than an investment anyway.

Had I sold it at the peak of the bubble, I would have made about $50,000 profit in a little over a year, but even if you want to call that an investment it would have been a speculative one at best.

This makes me feel so good! I get so much at heat at work for living in an apartment. My community is great and property taxes are a killer where I live. Whenever I start to analyze buying a house, the math doesn’t add up to me. Also tax savings is common benefit people tell me as a reason to buy a house but right now I don't need it.

I would never choose to hassle with real estate as an investment...too much trouble in my estimation.

I am working to get out of my upside-down home and move into an apartment/condo. This will allow me to save & pay of all debt very quickly, and I'm only spending 15.8% of my gross income on housing. Others spend much more...don't know how they do it.

I suppose if I had no other debt I would stay put (I may be staying put anyway in this market) and just pay off the house in 7 years while maxing out investments.

We'll see where the Lord leads me!

I used to look at my house as an investment but no longer. Robert Kiyosaki's Cashflow Quadrant was the eye opener

Another aspect of home buying that real estate agents touted during the boom is the leverage people have to use when buying a home. If someone puts $20,000 down on a $100,000 home and the market rises 10%....voila! his home is now worth $110,000 and his investment has made 50%.

Of course, the leverage also magnifies his investments' downside, which wasn't talked about at all.

I wrote a post about the leverage aspect of home investing here: http://investwisdomblog.com/2009/05/06/your-hom...

Unless you plan on downsizing or moving into a tent, never look at the home that you are living in as an investment.

It is an investment. And a pretty good one.

Everyone needs a place to live. Shelter. . You can either rent or own. Both are expenses. Assuming you need a mortgage of some type....

Typically, Rent expenses increases in perpetuity. Exchanged for shelter in perpetuity. And that is about it. simple service

Owning typically fixes the expense for the lifetime of purchase. Also exchanged for shelter. Also has an ASSET component...the structure itself.

Slight benefit of tax deduction, though most don't use it. Still a "perk" for high incomers.

Main benefit of owning a home is fixed level shelter expense and an asset owned completely at the end of the loan. Don't think renters don't pay upkeep, taxes, etc. Landlords don't rent to loose money. Like Ragu.

So as long as the value of the home is positive anything, whether it be the inflation average, just above, or just below, it doesn't matter. The investment return is the "perk" The gravy. The real meat is the fixed payment NOT SUBJECT TO INFLATION. Over 30 years, no inflation, is equal to the average inflation rate compunded over that same 30 years. Get ready now.

This means that your payment is negative (not subject to) inflation and the asset is simply equaling inflation. If inflation averages 4%, that is a total benefit of double - 8% return.

Sometimes it is not just what you pay, but also what you don't pay that is the benefit.

And... I have never understood this argument that long term renting is better. BS. If renting is better than owning, why are ther rentals? Are'nt rentals owned by someone. They must be owners. Obviously they are making aprofit from renting otherwise they would not exist. So if rentals are profitable, and owning is not, the how do you...own...the...rental?

What I meant by: Unless you plan on downsizing or moving into a tent, never look at the home that you are living in as an investment.

Compared to renting it is an investment.

But, it should not be considered as income. Since I do not plan on ever selling no matter how much it is worth, its value means nothing to me.

Troy, great post!

I have never understood this argument that long term renting is better. BS. If renting is better than owning, why are there rentals? Aren't rentals owned by someone. They must be owners. Obviously they are making a profit from renting otherwise they would not exist. So if rentals are profitable, and owning is not, the how do you…own the rental?

You're not distinguishing between investment properties (the rentals owned by someone else) and the home you live in. An owner of an investment property, like an apartment complex, is making money (I would hope) from the investment; the owner who owns nothing but the home in which he lives is spending money to maintain living -- not a good investment.

Flexter.

No distinguishing necessary. Your argument assumes you have choice a or b. Make money or spend money on a property. But you don't have either or. Everyone MUST live somewhere.

The choice is do you rent from yourself (OWN) or rent from someone else (RENT)

By your retort, you infer that landlords that own rental property should then in turn rent their own primary residence and invest the difference (if there is a difference) in the stock market. Run that past a few big landlords and see how long it takes them to stop laughing.

If that is the case, which it is not, who do they rent from? should they rent from someone else or themselves? If they own rentals, and rentals are profitable, and their primary residence should also be a rental, then why not rent one of their own rentals from themselves. Then they are both the renter and the rentee. According to your logic they are then kicking the systems you know what.

Real Estate is always an investment, becasue there is always an asset. Whether you as the owner decide to make it into a non owner occupied, or an owner occupied, does not change the assets value or rate of return. It does affect the cash flow, but only to the extent that you are tranfering cash outflow from that property to another that must provide you with shelter.

You can't preditc the appreciation return on the asset (home value) although historically it is a bit above inflation, but you can guarantee the fixed cost of the payment, shich is a hedge agains inflation. A mortgage combines your renting and tips bonds theory into one handy dandy investment. In fact, that is essentially what a fixed rate home loan is. and has been for decades.

In the short term, for temporary purposes renting does make sense, but only to the point it offsets the aquisition costs. All property has carring costs, both rentals and owned. All property has taxes, insurance, maintenence, etc. Rent has those costs factored into the monthly rent. As I said before, landlords are not dumb. They factor in all the costs of owning a home into rent,

So the difference between renting and owning is 1)acuisition cost 2)expense stability 3)asset appreciation. That is it. Renting wins in the short term because it takes some time, usually 3-5 years to offset the acquisition costs. After that, Owning wins. Always.

Let's forget about renting for a second. Real estate, on average, appreciates just slightly more than inflation over long periods of time. The stock market, on average if well diversified, appreciates 5 to 8 percentage points higher than inflation over long periods of time. There is a myth that when buying a house to live in, making money is a sure thing and it's a good way to grow your net worth, but thanks to all the real costs of owning a house, your real return is never your sale price minus your purchase price, leaving you much worse off than inflation.

In other words, you would have done better financially by leaving your money in cash! (But at least you had a roof over your head, the real purpose of a home whether rented or owned.)

You don't make much money with real estate at all, if any, unless it creates income, and your residence usually doesn't create income.

Now, about renting. I'm not saying it always makes financial sense to rent rather than buy your primary residence. That depends entirely on your situation. But the chances are the crossover point -- the amount of time you've owned your house before you come out financially ahead of renting a similar residence -- comes much later than you think. Many families do not live in the same house long enough to experience the crossover point. You can play around with the figures yourself at the New York Times' rent vs. buy calculator.

The decision to buy a house (to live in) is based more on family need and preference. Though some financial consideration is necessary as well, viewing your own home as an investment that can compete with investing in stocks or companies is a losing bet. Investment decisions are not made the same way you decide to buy a house; investment decisions are based on anticipated return and potential income generation.

It's quite possible you buy into a hot market at the right time and are able to experience some great returns, but that doesn't happen very often and should not be a given due to real estate's poor track record of appreciation. Just like stocks, timing the real estate market usually results in poorer than average performance.

Both the stock market and real estate are good long term investments (but hardly sure things). Real estate is historically more stable, but does typically yeild less return. However, that absolute return only matters if the asset is not leveraged.

Since most homes are leveraged with a mortgage, the leverage compounded with the tax benefits typically equals the average stock market return, with much less risk over the long term (say 10+ years). Yes, in the last 2 years home prices have fallen, for the first time in 80 years, but so did the "stock market". In fact, the market lost roughly twice as much in the same time period.

And although a primary residence does not create income, it does eliminate inflation on the expense (payment), while allowing inflation (appreciation) on the asset growth. That is a double win, something rent can never compete with.

A primary residence is diversification of assets. An inflation hedge.

Not all investment decisions are based on return or income generation. Some are based on preservation of capital. Or risk avoidance. Or inflation hedges. An investment that rather than providing a direct income stream instead offsets inflation essentially accomplishes the same thing. My payment not going up 4% annually due to inflation effectively replicates a T bond or TIPS that returns 4% annually. And the boring 4% fixed income market, including MBS, is the largest market in the world.

And regarding rental properties, the benefit of rentals is not the income stream. It is the tax deductions (especially the 29 year depreciation schedule) and the appreciation of the home. The monthly positive cash flow is minor if the property is leveraged.

And the average aquisition cost of a home is 3% for real-estate commissions (one side) plus average 2% closing costs. So roughly 5-6% of the purchase price.

If home prices generally average a bit above inflation, say 3-5% appreciation, the payback is roughly 2-3 years. 4 being conservative. So I agree, if you plan on moving within 4 years or so renting is likely less risky and easier. After that, however, the ownership benefits, not including the psycological perks of "it is mine" and stability become exponentially clearer.

A lot of hoopla has surrounded buying a home as "the" thing to do to get ahead financially. But as many people have proved in detailed analysis lately, particularly with the eye-opening real estate downturn, buying homes is not only not an investment, but it may not be the wisest financial choice.

Particularly if you plan to move often...

The best thing to do is decide on your own level of flexibility (you may be stuck), and payoff time (how long until buying makes sense). Ultimately, all things in life come down to personal choice. :)

I wanted to weigh in with my thoughts as well. I am twenty-three years old. I purchased my first home out right four years ago. (For those of you doing the math, I was nineteen.) I am not from a wealthy family, I didn't win the lottery, etc. Rather, I chose to buy a home with a lengthy commute (40 minutes from my workplace and in a cheap area) and that needed a healthy amount of work. Both of these things drove the cost of the residence down significantly, as well as the taxes. I worked hard, saved the money to purchase as I was renting and found a starter home. No, it isn't 3,000 square foot. It doesn't have a pool, sun room, "spa bathroom", gourmet kitchen, or any other highly desired features. It is a simple 1,200 square foot, 3 bedroom, 1 bath home. I have spent many hours rehabbing the place. I have only had to hire out twice in my time I have been here. I had to replace my roof the year I purchased the home and then early this spring I had to have a tree removed. As the repairs I have made have been modest in both design and price, I have only had to spend around $10,000 (including the roof).

I fully feel that this was an investment well worth it as I will be able to sell it, not only for more than I purchased it for, but also more than I have put into it. I have lived here for "free" for the last four years, paying only taxes and insurance (and the repairs mentioned above).

I feel so strongly about the value of purchasing homes, I have purchased another home three blocks away from my current residence to renovate as well. I purchased the home last summer. I currently have just a small mortgage balance of around $6500 (yes, six thousand five hundred) remaining on this new home.
I DO NOT feel sorry for those who purchased outside their means and have now found themselves in a position underwater or unable to meet their obligations. Much of our current housing value issues originate from these people. Those who purchased and drove the prices up above the true value of the home and who could not truly afford the home. (And I don't believe for on moment that you "didn't understand the mortgage"-you signed the papers, who cares if you understood or not). However, I do feel for those who have found themselves in that position due to lay-offs or other unforeseeable events.

I apologize if I have stepped on anyone's toes; however, I feel that homeownership, if taken as part of a well balanced, portfolio can be a good investment. It should not be your only investment. And for gods sake it is not a savings account so don't take that equity!

Read my comments from above. In order for a home to be a good investment, it has to put money in your pocket before you die. If you sale your house today, and use 100% of that money to buy another house. That is not money in your pocket. Yes, your net worth might be higher. If you never put that money in your pocket before you are dead; then, all you have done is made a great investment for your heirs

Therefore, I still believe the house you live in is not a investment; it is your home.

I bought a detached home because I like the life style of individual home ownership. If I wanted an investment, I would room with someone for a couple hundred dollars and invest the difference.

Good point! I was actually talking with a colleague the other day and he blurted out that he was living in his retirement fund. The value has gone up quite a bit but the problem is, he has to sell the place and then find somewhere else to live.

Many people are 'paper rich' because of their homes - in the meantime, they still have to pay all the monthly expenses.

Another thing you also have to look at though is the money that was lost in paying rent if you didn't own. Rent is a guaranteed 100% loss. Yes, there are things in home ownership that are 100% loss too, but how much rent does it take to break even? Everyone's situation varies, but it's a piece of the puzzle that has to be considered as well. While I understand the concept that compared to investing in the stock market it might not pay off, that's not the choice. The choice is rent or buy. You must compare those two situations and the opportunity costs lost to decide what makes sense of you.

The choice is to rent and invest the saved difference or buy and invest nothing. Renting and investing in stocks outperforms buying a house by leaps and bounds over long periods of time. But then you have to ask the question of whether you'd actually invest the difference. Buying should be a personal decision, with some finances thrown in, but it's dangerous to speculate on the purchase of the house you plan to live in.

You can't really say that with absolute certainty for all situations. For instance, my P&I mortgage payment isn't much more than my previous rent. Assuming my house maintains value at inflation, the only -100% return I have is on the interest and other expenses related to the purchase and sale. If you were to take the rent payment @ -100% return for perpetuity and invest any difference the rate of return would have to be significant to overcome the portion of my mortgage payment that is keeping pace with inflation.

And this doesn't even touch on the tax benefits of home ownership (Interest and Tax deductions, $8000 FTHB tax credit), which also need to be taken into consideration when comparing the rent vs. buy situation. Nor are you considering the fact that rent will go up while my P&I is locked. And of course there is the speculative part of this in that Real Estate tends to perform well during times of hyper inflation, which some are expecting in our future.

Suffice to say, there's a lot that needs to be considered in the rent vs. buy equation, and blanket statements such as "stocks outperform buying a house by leaps and bounds over long periods of time" can not be made. Yes, stocks will outperform buying a house if that was the simple choice, alas, I still need a roof over my head!

Most people have a hard time quantifying the intangibles of living in a home vs rent. Personally, I don't think a condo is a good investment, but a home is better, but still not best. This is one of those times where Kiyosaki might be right. It is buying a liability if you decide to hold it long term.

Sure, if you're a bad saver, buying a place is a good savings vehicle, but like any investment, there is no guaranteed rate of return. In 30 years you'd like to hope you have recovered the cost of the place, but really, all you got out of it was the utility of living there.

Currently I struggle with a condo that is underwater and down 20% from its purchase price and 40% from its peak value. Since I cannot sell it for a profit, I am turning it into a rental, but even that has a cost associated with it and I will have to sell my condo later for at least 10% above its original purchase price to feel that I recouped any cost, despite having lived there for 5 years as my primary residence.

Some people demonize renting, and I can't see why. Even as a homeowner, I can see the benefits of renting. You pay rent and utilities, and your landlord is on the hook if anything breaks. No lawn mowing, either. Many people tout the forced-savings aspect of home ownership, but they neglect the added expenses that come with it. The housing bubble led many to walk away from mortgages, and people lost all equity that they had built up. If they had invested in stocks instead of buying a house, they could have ridden out this dip without having their credit ratings trashed.

Your home should be your home first and foremost.

Whether or not a home will be a good investment will depend on the local market. Seattle is not Detroit and New York City is not Austin Texas. The most important thing about real estate: Location, location, location. Some markets appreciate much better than others. Some markets the rents are much higher and some places the mortgages are much higher. If you look at two equivalent homes one for rent and the other for purchase and the rent is much less than the mortgage then renting might make more sense, but if the rent is close to or lower than the mortgage then I'd buy.

I think this is an important message because it exposes one of the myths I have heard my whole life - that a home is a good investment. If I add up what I paid for my house, what I've spent on maintenance and improvements, and the time I've spent performing maintenance and repairs, it has been a terrible investment. While there have been benefits of home ownership, return on investment has not been one of them for me. Thanks for telling it straight.

There is a lot of good conversation here.

First, these comparisons completely depend on what and when you buy and sell. There plenty of people that have made tons of money investing in Real Estate (even on one house that they lived in for a limited amount of time).

For the average person, owning a home and eventually paying it off provides a great deal of security and lowers their cost of living as they approach and live through retirement. While it may not have made as much as a good stock portfolio at a specific point in time it keeps them warm and dry.....

What a great post!

I love all the negative sentiment towards housing. As a contrarian, this means we're probably close to a bottom. Three years ago people couldn't stop talking about real estate and that it will "go up forever". Now no one wants to buy a house. Always go against the masses.

I agree with going against the masses, but I am afraid we are along way off from the bottom.

We have major problems coming.

Well, we in Malaysia seem to be doing well we have high growth and high inflation. An example of inflation would be the local desert "cendol" bought about a month ago at the price of $1.20 in local currency would now sell for $ 1.80 in local currency. Job growth is also strong as we have 2 jobs for every worker and Malaysia imports in foreign labour to do jobs that local workers do not want to do. Hence our problem in Malaysia is now high inflation and good news, high growth.. We do not understand why the Western Media keeps on saying we are in a Recession. Yes our economy slowed down in March 2009 but after that period our economy is now experiencing high growth and high inflation thanks to China's strong buying of Malaysian goods and services, thank you China ! So please do not say Malaysia is in a Recession when it is not, only the US is in a Recession, the rest of the World is booming thanks to China !

I think where you can really get ahead is if you are able to turn your principal residence into an asset. My wife and I just bought a duplex in Canada. Our mortgage is $1050 a month and the downstairs rent is $950. Not bad, our mortgage is only $100 a month.

Another advantage to renting where you live is the tax savings. Because we rent the downstairs and our house is a "legal duplex" we now will have 50% of house expenses as a tax write off.

Is it more work? Yes! But it all depends on how you look at it. Because we are willing to put in the extra work, we are getting a house almost for no mortgage cost.
Brandon

I agree that in this case, your house is an investment. You have more cash in your pocket each month to spend due to your investment. Plus, you are seeing the investment return in your pocket before you die.

Generally I would agree with you, but I would also argue that we should go back to housing basics and look at our house as a "home". As such it has also been a source of wealth for previous generations who have done just that. Our parents owned a home and not an ATM into whose value you can tap if you need cash. The did not do refinancings and cash out mortgages. They paid the mortgage off dutifully and, thus, accumulated some wealth.

So what did they do with this extra wealth? When they sold the house, did they use it to pay nursing home bills? Did they cash it out and go on wild vacations and rent a place their last ten years or so? Or were their house an investment to accumulate wealth for you when they die?

@flexo - care to lay odds on "Renting and investing in stocks outperforms buying a house by leaps and bounds over long periods of time"?

There are some good points in that article. Unfortunately, the author has both sensationalized it and not provided a very thorough analysis. That being said - counting on the appreciation of your home's market value to create wealth is extremely suspect. In my opnion you when considering whether to purchase a home (or stay in a home for that matter) you really should be doing a analysis that is focused on imputed rent, utility and risk. Renting v. owning is a very complex analysis (NYT has one of the best rent v. buy calculators, but you still need to tweak the analysis a bit).

And PLEASE if you are considering a rent and invest the difference strategy carefully consider the asset allocation of your alternative investment (e.g. you're trying to hedge perpetual rental payments with stocks and the risk of ruin is . . .)

Both sides of the argument has been overly sensationalized. I think the biggest sensationalist around is Kiyosaki.

hello i have some ?... is it a good Idea to Buy a house rite now in new york queens??? with the economic situation we in ppls say taking advantage of it by buying a house now that it cost less would be good idea if you have a good credit.. ??? if anyone out there knows please help…
~~~god bless~~~

The amount of closed minds commenting on this article is mind-blowing. Has the concept of Individual Situations completely disappeared? Everyone has gone through their own battles in life, and each have come out with a different opinion on how they want to live. In our situation, we bought a house a few years ago because of the unforgettable and often unavoidable idea that when you're married and starting a family, you have to own a home to be worth anything. Currently, our financial situation has changed (after some pregnancy complications I can only work part-time now), and we can no longer afford our house. We pay mortgage, one car payment, and numerous other bills each month, and that's it. No savings. No "treats" like going out to eat or catching a movie on the weekends. We work and live for our house. And we don't like it one bit. So we've decided to start taking steps to downsizing our life. We're selling our house and moving into an apartment.
I completley understand the argument that renting is not profitable from a general point of view. But at the same time, I beg to differ. Because it's not always about money, it's about living. Right now we are trapped by our house. We're paying mortgage, utilities, insurance, and upkeep each month, and have no other means to do anything else with our life. We can't even afford for one of us to take come college courses in hopes of bettering our future. By renting, we cut out most of our utilities bills (as gas and water are included in rent in this city) and lower the rest, we don't pay for insurance, and the rent is cheaper (by far) than the mortgage. This will allow us to save money, treat ourselves to dinner and/or a movie every once in a while, and may even allow us to attend college and provided a better career future for ourselves.
The American Dream of homeownership is an empty one. For us, anyways. But we were foolish enough to follow that dream, so we're working hard on our own to win back our life. Renting is the way to go for us. And we're sticking to it.

I am inclined to favor the renting option. We own a home which is for sale and valued at about $400,000, moderately expensive by Alabama standards. We have no mortgage and have chosen not to carry homeowners insurance as we are prepared to assume the risk rather than pay an insurance company for doing it. We do not itemize deductions on our tax returns .Of course we pay property taxes and maintenance. The home has not appreciated since we built it six years ago. If we can successfully sell the house, we can invest the net proceeds, which I estimate will be approximately $350,000, in a tax exempt mutual fund and expect a 4.5% tax free annual total return of $15,750 annually, or $1300 a month. We can rent a house, nice but smaller and on a zero lot line, for that amount here and avoid the expense of property taxes, maintenance and, of course, home ownership. We are empty nesters and can essentially put a roof over our heads for nothing. Our principal remains intact and we avoid the encumbrance of home ownership and dealing with real estate agents. Unless we have overlooked something the advantages of renting, at least for us, trumps owning. I agree with Carisa, home ownership has proven to be an empty dream.