Your Home Is Not an Investment - Really!
Some enterprising real estate salesman decided to adopt the line that a "house is an investment".
A house can be an investment - that is, if you buy it to rent out; or to renovate and sell; or to flip the property.
But a house that you buy to live in is mainly a household expense item - no different than the decision to buy a car, or a new suit, or groceries! It is also the most expensive item in your budget so before you make a decision on buying a home, you need to look carefully at the numbers.
Here are some historical statistics.
From 1980 through 2010, the average annual increase in the Federal Housing Finance Agency House Price Index was 3.
7%; while the average annual increase in the US Consumer Price Index was 3.
3%.
So housing appreciated a little more than the rate of inflation.
The NYSE Index increased by about twice that amount.
There are other factors to consider, but note that as an investment, there are alternatives to real estate that perform better as investments; and real estate values over time tend to even out at a relatively low rate of increase.
Think about this the next time you feel that you need to buy a property right now or you contemplate a bidding war for a house! This is a very simplistic overview of the data.
To fully understand the financial implications of a buy decision, you need to take into account local variations in the housing data for appreciation rates as well as other factors such as rents, interest payments, closing costs, seller's fees and tax benefits.
But when you do take these factors into consideration, you may find that the financial benefits of home ownership are marginal; and the costs need to be examined closely before you make a commitment.
Prospective homeowners often cite as the reason for the buy decision the security inherent in real estate ownership.
If something happens - I lose my job, for instance - I can always sell the property.
But a property is not a very liquid asset and in the short term, property values tend to fluctuate significantly.
When the economy goes bad for you, there's a good chance that it's going bad for many people.
You will be trying to sell your property in a market flooded with sellers.
You may sell your property at a loss, if at all.
If you buy a $1 million property and assuming a normal market, you probably need to hold the property for at least 5 years to break even.
There are closing costs to buy the property and brokers fees when you sell it and they total roughly 10% of the purchase price.
And there are other costs that need to be considered.
Appreciation will ultimately cover the costs to buy and sell, but it will take some time.
So when you decide to buy, think 5 year minimum - and the longer past that the better.
As I said, the decision to buy is more of an emotional one than a practical decision - and most of us do it.
But you need to be smart about it.
Here are some things to consider.
· Most lending institutions will insist on at least 20% down.
Don't fall for the easy 5% government backed mortgages.
You may put off buying for a few years by saving for a proper down payment, but you will be on steadier financial footing.
· Have at least 5% of the purchase price in reserve.
Problems happen even if you've had an inspection.
You want to avoid putting costly repairs on your credit card.
· Your mortgage company will have an appraisal done on your property.
If there is a significant difference between the selling price and the appraised value, the mortgage company will turn down your application.
You have options, but if the report looks right and the seller won't reduce the price, you should walk away.
· Know your prospective neighborhood.
You may find a house on a block that is less expensive than surrounding houses.
You may be a real estate genius and found that hidden gem...
but probably not.
There's usually a good reason for the price discrepancy and you need to find out why.
· Above all you should work with an agent who you trust.
You are a real estate amateur.
A good agent is invaluable in helping you find the right property at the right price.
It's their job! The decision to buy (vs.
rent) is often a poor financial decision.
But owning a home gives you a great deal of satisfaction and a sense of belonging to a community that you don't get if you rent.
There is a fair price for every property.
There's an affordable home for every family.
A house can be an albatross if you overpay or over extend yourself.
Make sure that the purchase makes sense from a practical financial perspective, no different than if you were buying a new car or a new suit.
A home is, after all, an expense and not an investment.
Let's be smart about it.
Michael Nolan - Managing Director, Nupark Financial Solutions mike.
nolan@nuparkfinancial.
com / 917-817-8478
A house can be an investment - that is, if you buy it to rent out; or to renovate and sell; or to flip the property.
But a house that you buy to live in is mainly a household expense item - no different than the decision to buy a car, or a new suit, or groceries! It is also the most expensive item in your budget so before you make a decision on buying a home, you need to look carefully at the numbers.
Here are some historical statistics.
From 1980 through 2010, the average annual increase in the Federal Housing Finance Agency House Price Index was 3.
7%; while the average annual increase in the US Consumer Price Index was 3.
3%.
So housing appreciated a little more than the rate of inflation.
The NYSE Index increased by about twice that amount.
There are other factors to consider, but note that as an investment, there are alternatives to real estate that perform better as investments; and real estate values over time tend to even out at a relatively low rate of increase.
Think about this the next time you feel that you need to buy a property right now or you contemplate a bidding war for a house! This is a very simplistic overview of the data.
To fully understand the financial implications of a buy decision, you need to take into account local variations in the housing data for appreciation rates as well as other factors such as rents, interest payments, closing costs, seller's fees and tax benefits.
But when you do take these factors into consideration, you may find that the financial benefits of home ownership are marginal; and the costs need to be examined closely before you make a commitment.
Prospective homeowners often cite as the reason for the buy decision the security inherent in real estate ownership.
If something happens - I lose my job, for instance - I can always sell the property.
But a property is not a very liquid asset and in the short term, property values tend to fluctuate significantly.
When the economy goes bad for you, there's a good chance that it's going bad for many people.
You will be trying to sell your property in a market flooded with sellers.
You may sell your property at a loss, if at all.
If you buy a $1 million property and assuming a normal market, you probably need to hold the property for at least 5 years to break even.
There are closing costs to buy the property and brokers fees when you sell it and they total roughly 10% of the purchase price.
And there are other costs that need to be considered.
Appreciation will ultimately cover the costs to buy and sell, but it will take some time.
So when you decide to buy, think 5 year minimum - and the longer past that the better.
As I said, the decision to buy is more of an emotional one than a practical decision - and most of us do it.
But you need to be smart about it.
Here are some things to consider.
· Most lending institutions will insist on at least 20% down.
Don't fall for the easy 5% government backed mortgages.
You may put off buying for a few years by saving for a proper down payment, but you will be on steadier financial footing.
· Have at least 5% of the purchase price in reserve.
Problems happen even if you've had an inspection.
You want to avoid putting costly repairs on your credit card.
· Your mortgage company will have an appraisal done on your property.
If there is a significant difference between the selling price and the appraised value, the mortgage company will turn down your application.
You have options, but if the report looks right and the seller won't reduce the price, you should walk away.
· Know your prospective neighborhood.
You may find a house on a block that is less expensive than surrounding houses.
You may be a real estate genius and found that hidden gem...
but probably not.
There's usually a good reason for the price discrepancy and you need to find out why.
· Above all you should work with an agent who you trust.
You are a real estate amateur.
A good agent is invaluable in helping you find the right property at the right price.
It's their job! The decision to buy (vs.
rent) is often a poor financial decision.
But owning a home gives you a great deal of satisfaction and a sense of belonging to a community that you don't get if you rent.
There is a fair price for every property.
There's an affordable home for every family.
A house can be an albatross if you overpay or over extend yourself.
Make sure that the purchase makes sense from a practical financial perspective, no different than if you were buying a new car or a new suit.
A home is, after all, an expense and not an investment.
Let's be smart about it.
Michael Nolan - Managing Director, Nupark Financial Solutions mike.
nolan@nuparkfinancial.
com / 917-817-8478
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