The First Rule of Real Estate Investing
Most Americans have thought of their personal residence as an investment. And, despite the housing crash that resulted from the recent housing bubble, many people still think of their home as an investment. The first rule of real estate investing is: your home is not an investment.
On the other hand, because of the large drop in housing prices the last few years, there are probably many people reading this post who would now agree with me and say, of course, real estate is not an investment. It is the worst investment I have ever made. But the recent housing bust is not the reason I say your home is not an investment. In most of the country, in the 15 years before the recent housing bust, residential property went up in value each year. Whether an asset increases or decreases in value is not what makes it an investment. What makes an asset an investment is the reason you buy the asset. Are you buying the asset for personal use such as a boat or car, or are you buying it to make money on it. Despite what you may think or say when buying a home, you are buying your home for personal use.
Some people might say they bought their home for both personal use and investment reasons. If that is so, they are not deploying their investment dollars efficiently. Your personal assets and your investment assets should always be separate and treated differently. When you spend money on your home, despite how you may rationalize the expense as “increasing the re-sale value,” you are spending the money because you want to make your home more comfortable for you and your family. When you invest money in any true investment, you are doing so for one reason and one reason only; you expect to get a return on your money invested.
More generally, though, an investment should generate income every year as I discussed in my previous post on Equity Income Investing. At a minimum, an investment should require a one-time cash infusion (the investment capital) and should not require you to feed it more cash every year. This is certainly not the case with your personal residence. Not only does your home not generate income, but it robs you of other income because of all the expenses of maintaining your home.
You should consider your home a personal asset, just like your car or in-home stereo system that you enjoy with your family. It should not be something you buy expecting to make money as if it were an investment. This does not mean your home could not be converted into an investment at a later date, but, while you are living in it, your home is not an investment.
In future posts I will discuss direct real estate ownership as an investment and ways to integrate real estate into your retirement plan.
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