Tuesday, October 6, 2009

Home Ownership is Not an Investment: It Costs You Money

With all the blame being hoisted onto the reputations of the mortgage lenders for bringing about the mortgage crisis and housing meltdown I'd like to say this.

My experience is that most people radically underestimate the real cost of home ownership.

It isn't the monthly mortgage payment that throws you for a loop when you own a home. You know what the payments will likely be years, even decades, in advance. Even the worst ARMs have worst case scenarios on paper before you sign.

No, it's the subtle costs of home ownership that really cause the major financial problems average people face.

It's the constantly rising property taxes and other municipal assessments. Always rising, no end ever in sight. Remember what they said about death and taxes? Well, this is taxes.

Maintaining and repairing a home is expensive. Things break, shingles need paint, equipment wears out, the lawn needs reseeding. They call homes "money pits" for a reason. And that's the larger point on home ownership.

A home you live in is not an investment.

A home you rent out and collect money from tenants is an investment.

See the difference?

The old and often repeated Wall Street axiom is true:

"Assets feed you. Liabilities bleed you."

Everything about home ownership cuts your wallet very painfully.

  • Money. (Been to Home Depot lately?)
  • Time. (I'd rather be fishing than fixing the upstairs toilet.)
  • Energy (Do you enjoy household chores after a long day at the office?)

Of course home ownership is wonderful.

But it way damn more expensive than most people think.

To make matters worse, buying a home pretty much wipes people out from a financial standpoint. All their cash and credit are effectively tied up for a while in the equity of their new home. Emergency cash reserves are low. To be blunt, many average people, working stiffs we used to call them, are broke after their real estate closing. Living on ramen noodles and Kraft macaroni and cheese.

And certainly not in a great position to get hit with rising expenses and sharp and painful repair bills.

Of course bad mortgage and even worse homebuying decisions are ruinous too. But not realizing that with the unique blessing of home ownership comes a barrage of crushing financial obligations now and into the future is foolish.

Home ownership is not an investment. It costs you a fortune now and if you are really lucky you may beat inflation in the end. You buy a home financially because you need a place to sleep and live and it's better to own your home, all things and numbers being equal, than rent one at the same price.

Don't expect to get rich by buying your own home.

Think of it this way. If you bought a $100,000 home for cash (no mortgage) and held it for thirty years and then sold it for $1.2 million that sounds great. But it really is just an 8.3% gain over thirty years. Not bad, but that doesn't include all the tax payments, repairs, improvements, assessments, closing costs, and so on. Again, the goal is really just to hold your original investment after inflation.

Expect to get broke, and often. Congratulations on the getting the new deed but it's going to be a bumpy ride.

Robert J. Abalos, Esq.