Sushi Money

When I read columns by people weighing the pros and cons of actions such as buying real estate, I see opportunity and confusion. Anya Kamenetz writes To Buy or Not To Buy in her Generation Debt column, and talks about the real estate market today. It’s an honest appraisal of the fear of buying into a market that is struggling. She reviews the ups and downs, and comes away with some good advice for estimating a down payment and the reality of home ownership costs. But I think many people are confused by the difference between home ownership and owning a real estate investment property. The real estate boom that peaked in 2005 basically taught people that there wasn’t any difference. But there is.

If you’re a potential home buyer today, what is your real fear? That you will lose your shirt over a few years for how much you spent on a home? Okay, fair enough. If that’s true, then I agree- you’ve probably got no business being a homeowner. Buying, and living in, your own home is primarily a lifestyle, family and geographic choice more than an investment choice. Actually I don’t believe it is an investment choice. Its really meant for long-term ownership, and any investment benefits come way down the road as a reward for disciplined mortgage payments and long-term market appreciation. But it’s expensive, and there are no guarantees. From what I’ve read, the long-term return on real esate (30 + years) has typically averaged around 6 %. You can do a lot better in the stock market for that length of time.

So if someone anticpates moving in a few years, then why buy a home in the first place? The risk is that you tie up your money in a piece of property that isn’t going to sell, and may be worth less when you do sell it. Admittedly, many people buy that home and don’t anticipate that they’ll need to move in a few years. People get transferred, divorced, decide to move, etc. But that used to be the exception before we became such a mobile society.

I’ve been there… I bought a home and was suprised to be transferred less than two years later. Did I sell it? Nope. The market was stagnant and I had to sit with that home for a long time. I didn’t want to lose money, so I rented it. For a long time… like 13 years. Some of those years were pretty tough, especially with mortgage rates, maintenance costs, management costs (I was an out-of-town landlord), insurance and taxes. When I finally did sell, it worked out okay- and we used the money from that home to help purchase a primary home where we settled down for good. But I will tell you that there were many long years of renting that house with negative cash flow that were a challenge for me. And we didn’t have the income to purchase another home until much later. When we moved around during that timeframe, we usually rented. That was okay- we had no intention of staying in most of those places. I still carried that other home “on the books” for many years.

But you know what? That home that I was stuck with, that I couldn’t sell, that was such a hassle dealing with for many years also turned out to be a decent investment and tax shelter. The rental income losses offset my income, and all the time I continued to pay down the mortgage year after year. Well three mortgages/refinanced loans later anyway. By the time it sold I figure my annualized gain was about 9-10 %, not including the tax advantages and the equity in the home from paying the mortgage. That’s why I see such a stark difference in home ownership and owning real estate as an investment. It may not have started out that way, but that home was a rental real estate investment, plain and simple. Can the home you live in be a good investment? Absolutely… in some markets people have become wealthy by owning real estate the lived in. But it may take a very long time with few guarantees beyond a nice place to live. It helps if you’ve got a mortgage you can live with as well.

My reasons for owning, and living in, a home come down to making a place for our family to grow. In some ways it’s still a new experience. I really haven’t lived in any one home or location for more than three years for my entire life. Yet now we hope to stay in the same home for 15-20 years or more! Personally that’s a pretty good feeling… I don’t need to pay attention to the real estate market per se. In other words, I don’t spend time thinking or worrying about it becuase it’s not relevant right now. Ask me again in 10-15 years and I’ll probably have a different answer. The same for the stock market, retirement funds and investing… if I’m saving and investing for the long-term, then why worry so much right now? As I approach retirement one day, I’ll be a lot more interested in what the market is doing to my retirement assets.

So instead of fear and confusion, I see a lot of opportunity today for potential home buyers, especially those who know where they want to live, how long they want to be there, and how much they are willing to spend. The real estate market will probably struggle for a couple more years at least, and there will be many buying opportunities along the way. But if you’re set on becoming a homeowner, then find a place you really like at a fair market price, and plan to stay there a long time (5-10 years +). If you’re not planning to live in that home very long, then you proabably are better off renting.

And by the way, that home that became rental property for so many years? It didn’t start increasing in value until after the 8 year mark! If I had sold any time during the first 8 years, at best I would have broken even. For many people, breaking even on a home they live in is just fine… they’ve had the pleasure of living there all that time. But if it’s a rental property? That’s a tough place to be. Make sure it’s what you want to do with your time and money!

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