The idea of being a landlord doesn’t appeal to me. That’s not to say real estate can’t be a good investment. It can. Like every other type of investing, it takes time to learn which investments work – be it a multi-unit building, condos, commercial property, land, or stocks, bonds, funds, etc. – so you actually make a decent profit over time.
I bring this up because a recent Gallop poll came out showing real estate, of all things, is seen as the best long term investment…again. I guess it’s easier to get over a housing market crash than a stock market crash.
I can think of a few possible reasons why.
When the housing bubble burst in ’07/’08, nobody got regular price updates on their house, like they did with their retirement account. Monthly statements don’t come in the mail showing you how much your home’s value has changed. Because of this, people didn’t rush out to sell their house to “save whatever money was left”, like they did with stocks. Maybe people rationalize price changes with property better than stocks. Or maybe they tried to sell but they couldn’t find a buyer. Or they knew their house was a home.
I can’t knock real estate investing because the right person can do very well with it. Instead, I thought I’d clear up any confusion that a home is somehow an investment. Though, I think most people understand this.
A home is not real estate, in the sense that it’s an investment. Maybe an investment in a roof over your head for you and your family, but definitely not something that makes you money. Unless you rent out a room to help cover the regular costs.
First the obvious. There’s only two ways to get money out of a home beyond renting a room – take out a loan (borrow against equity in the home) or sell it. Loans have a funny way of needing to be repaid. And selling your home makes you homeless, which sounds like a terrible return on your investment.
Don’t forget the money you have to put into your home. Basic maintenance and upkeep offsets most of the tiny bit of increase in home values, which only keeps up with inflation – according to Robert Shiller.
Then there’s upgrades. Your home’s value is based on how it compares to other newer homes in your area. That 70s shag carpet and puke green tile are not “retro”. It will be the first thing the new home owner replaces and the cost will be reflected in your home’s price.
Or you could shell out the cash to replace it now. Fifteen years from now, whatever you replaced the shag carpet with, will have to be replaced again because that will be outdated. The same goes for countertops, cabinets, appliances, and anything else that isn’t as new as that other house down the block.
In other words, as an investment, your home has the disturbing side effect of always needing to keep up with the Joneses. It’s a never ending battle to maintain value. Those costs are rarely returned when you sell. You have a huge opportunity cost when you always put money into something and the return only keeps up with inflation.
However, as a roof over your head, the regular maintenance and upgrades make your house a safer, more comfortable home for you and your family. Real estate can be a good investment that grows your wealth and provides a solid income stream over time. Your house won’t.
- Are You Hot or Not? For Investors, It’s Hard to Tell – J. Zweig
- Investors Drive Expense Ratios Down – Morningstar
- Terrible Advice I Hope Young People Ignore – M. Housel
- The Danger of Borrowing Money From Your Future Self – Atlantic
- The ETF Decision Is Not All or None – R. Ferri
- The Search for Investment Serenity: The Look Back Test! – Musing on Markets
- The Importance Of Thinking Backwards, And 5 Inverted Questions That Will Flip Your Thinking Upside Down – Old School Value
- Forget Buffett the Investor. Follow Buffett the Manager – Fortune
- The Role of Government Bonds as an Asset Class is Changing – Economist
- Guy Trading at Home Caused the Flash Crash – M. Levine