Real estate is not an investment, it is a liability. Getting rich through real estate is completely based on your ability to distinguish between “good” and “bad.” That, Jesse my friend, is called speculation. But even taken a step further: your home is real estate, real estate is not an investment…you get the picture.
When you buy real estate at the market price, what exactly makes you think you will make a profit at some point? Is it because you think the home will appreciate in value? What makes you think that? The common answer of “because it always appreciates” is the sort of soft logical fallacy a lot of the banker lemmings used to decide to loan money to anyone with a pulse (and some without pulses). What makes you think that with any improvements you make your outcome will be greater than your investment (time + money) put in? Ah, whats the word for that again? Oh yeah, speculation my friend. A mutual fund is an investment, your home is not. And yes, this line of reasoning works…I know you are going to say “but mutual fund increasing over time is based on historical data” but one particular piece of real estate is akin to one particular stock: may or may not increase.
All of that aside, the definition of an investment is something that puts more cash in your pocket than it takes out on a consistent basis. So something that you put money into every month, including interest that goes directly down the drain, is not only not an investment but the antithesis of an investment.
Lets get back to that speculation thing. When you go to sell your house in ten years there are three outcomes: you sell your house for less than you bought/built it for, you sell your house for comparable to what you bought it/built it for, or you sell it for less than you bought it/built it for. When you factor in transaction costs, that means you are throwing away thousands no matter WHAT you sell it for.
Another thing we can’t forget is that you don’t even REALLY get to own your own land/house. Don’t pay your property tax? Now your stuff is the government’s stuff. Even worse news, you can pay your property tax on time for 100 years and the government wants to build a road through the middle of your house? Now your stuff is the government’s stuff (This is called eminent domain).
Well Matt, I know you’re pretty clever for an economics major (just kidding all you eco majors out there) but really, if pessimism was a sport you would be Babe Ruth. Just to set the record straight the definition of investment is actually “the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.”
I understand your line of thinking about appreciation, but lets use some common sense here: when was the last time the average house depreciated over the course of say, 10 years. Your argument may work on flipping real estate but when applied to your HOME it disintegrates faster than a UN resolution in Iran.
The thing is, I can’t remember the last time I lived in my mutual fund. I’m pretty sure I won’t be able to convince my girlfriend that my well diversified portfolio is a great place to come lounge around and I don’t think my friends will like it much either. This alone should be enough to put the argument to rest but lets look a little deeper anyway. Over the course of time you can either be building equity for yourself, or for someone else. So basically you either have some degree of speculation while building equity (buying) or you have a guaranteed negative return (renting). Which one of those two sounds better? Not only that but lets say you have other people living in your home (as I do) that pay you rent. Now they are building you equity too.
Then there is that little tax thing. Ah yes, taxes. Turns out, you can deduct a whole ton of things (you do read my articles, right Matt? 😉 ) if you own a home.
What shall we talk about next? How about capital gains. I love talking about how much I hate capital gains. Every bit we make on our mutual funds we get to pay out a piece in capital gains taxes. Guess what, gains made on your home sale are capital gains free. Thats right, 15% bonus my friend.
Finally lets take a worst case scenario, lets say there is a massive economic collapse. Which is more likely to hold up, your stocks or your land/home? Thought so.
It should be noted both Jesse and Matt own homes and understand there are pros and cons on each side.