This economy has many of us wondering what the best way is to invest our hard-earned dollar bills. So naturally, this path of exploration will eventually lead us to the question of whether real estate is something that we should be investing in, for the time being, or not.
The answer to this will depend on whom you ask. Just about any old-timer will tell you that real estate is something that will always be there. Even if the value of the dollar is soon outranked by the peso, you’ll have land that you can call your own and live on. Also, land doesn’t just disappear… and you can’t manufacture it. (Well, maybe you can, but you know what I mean.) The law of supply and demand guarantees that eventually your investment will increase in value.
That’s true unless you have some prime beachfront property in Siberia.
The fact is, you can’t just make a blanket statement that, yes, all real estate is a good investment, because the accurate answer is always: it depends.
Conventional wisdom says that buying real estate is a long-term investment that will always pay off and that the real estate bubble burst is merely a speedbump on the road to wealth. But is that always the case?
Sure, once you own a house, you can sleep in it. But even when you own a house outright, there are still HOA, maintenance, insurance, and taxes to account for. Depending on where you live, these expenses may be pretty hefty. By the time you sell your place, you may have already spent most of your profit from the sale. According to some numbers from the Office of Federal Housing Enterprise Oversight, if you bought a $290,000 home in 2007 at the average 2006 rate of 6.41%, by the time you were done paying the mortgage over 30 years, as well as taxes, insurance, maintenance, repairs, improvements, etc., you would have to sell that same house for $1,073,000 just to break even. (That doesn’t even include utilities.) Generally, plan on spending at least three times the amount you paid for your home over the thirty years, plus the taxes, insurance, maintenance, and so on. Still think that real estate is automatically a good investment?
Let’s also remember that most people don’t stick around for 30 years before they sell their house. Plus, your initial entry costs (down payment, mortgage points, closing costs, perhaps some maintenance or remodeling) are substantial. Spread over 30 years, these upfront costs even out. But most people are gone within seven years. One who is renting and invests what would have been the down payment into stocks instead is much more likely to come out ahead with much more.
Even if you do own real estate in a highly demanded area, generally, real estate is not the best investment. It may be good, but it can’t match the return that you can generate by putting your money into certain stocks or especially the forex market. The fact is, with less out of your pocket by renting, you have more available to you to invest. At least then you have a choice of what to do with your money. Why lock it up into a house for thirty years?
Mom always said to not put all your eggs in one basket. If you think about it, isn’t that what you’re doing when buying a house? What type of investment could be made with two, three, four hundred thousand dollars or more over time? Sure, not all of us have that kind of cash lying around, but the ten or twenty percent you normally put down for a down payment toward your home is still quite substantial. Even if you were a conservative trader, following proper money management rules, you could invest in a vast portfolio of stocks from a variety of sectors, thereby spreading the risk out and minimizing the possibility of losing everything. The returns are bound to be far greater than putting your money into bricks and mortar for the next half of your life. Put all that money into a house, and it’s an all-or-nothing approach. If that house is in a bad location or, if that location where the house is located becomes a bad location over the next thirty years (you never know), then consider this to be a thirty-year trade that results in a loss, not a gain. Is that really the best way to make your money work for you?
Granted, in this current economy, if you’re going to buy a house, prices are definitely low. But we don’t even know if we are out of this yet. There are talks of a double bottom (which will mean even lower house prices in the future). The fact is, there is no way to really know.
If you’re considering what to do with any extra income you may have, consider renting, instead of buying, and put your money in a market you can trade actively and with less commitment.