Should home ownership be billed as an “investment”? I suppose that depends upon whom you ask. Take for instance Rich Arzaga. As the founder and CEO of Cornerstone Wealth Management, and adjunct professor in personal finance at Berkeley, you would think that Arzaga, like every other finance guru, touts home ownership as being a fantastic way to grow your wealth. If you were to bet that he did, you would lose that bet...
While Arzaga agrees that the 5,000 sq. foot property he purchased in 2005 for $1.8 million, plus $500,000 towards improvements, is a great home for him and his family he would not say that it’s a great investment.
Says Arzaga, "It's the American Dream to own a home, but whoever said that didn't do the analysis on it.”
Drawing a conclusion that is contrary to conventional wisdom, Arzaga, after reviewing 250 properties across the country and examining the finances of nearly 40 client files, determined that “100 percent of the time it was better to rent, than to own.”
Arzaga’s reasoning? The carrying costs, i.e. taxes, insurance, maintenance, repairs, financing, etc. consume finances better spent on investments offering far greater returns. Obviously, when renting a home the landlord takes care of those costs which allows an individual the freedom of putting their money towards investments which have a greater return on investment.
Arzaga states, "I don't have the emotions a lot of people do surrounding real estate. I have steely eyes for how investing in real estate works, and I'd better be a prudent investor for my clients."
Is this a pessimistic view of home ownership? Although other real estate gurus agree with Arzaga partially, they believe home ownership is still worth reaching for.
Jeffrey Rogers, president and COO of Integra Realty Resources maintains that, “To state that owning a home is or isn’t a good investment is too simplistic. It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home. But in a reverse market, it wouldn't be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead."
Jed Kolko, chief economist at Trulia.com takes the long view of home ownership. He says, "Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return. But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."
Senior analyst at Bankrate.com, Greg McBride, states that. "Home ownership is not so much a creator of wealth as a store of wealth. The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn't rebate a dime."
Americans are so intent on owning a home they miss out on other means of growing wealth and obtaining financial security.
"You have to have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children," says McBride. "There's no sense in buying a home if it's going to deplete your emergency or retirement savings."
McBride ran the numbers on a home purchased in 2004, for $200,000 by a buyer in the 27% tax bracket. He calculated that after a 30 year mortgage, $1,200 home insurance per year, purchase costs of $5,500, maintenance costs of $100 per month, and property taxes, after 10 years, the home would have to sell for $395,404 to break even. That’s an increase of nearly $20,000 per year! These calculations support Arzaga’s conclusion: "Homeownership may not be the moneymaker you think it is."
Many homeowners neglect another important financial goal - the emergency fund.
"As far as emergency savings is concerned, six months of a cushion is adequate," notes McBride. "But only 24 percent of people have that kind of cushion, and about 65 percent own homes."
Buying a home then, it would seem, requires more than just saving earnest money and obtaining financing. It takes a good bit of planning and financial discipline to ensure that your ‘investment’ doesn’t drain resources from your budget that could be providing a better return on your investment.
I too think it really depends on whether or not real estate prices are good or not. For example, right now, depending on where you live, could be a great time to buy and provide a great ROI, as soon as the market picks back up.
If ownership is a bad deal, then why is it profitable to be a landlord? If someone is going to stay in the home for five years or more, owning is a better economic deal than renting in most communities. The only places renting is better for the middle class in the long run is where government controls the rents- New York and San Francisco. And then, there are large bribes that have to be paid to secure a rent-controlled apartment.
Otherwise, renting only makes sense for the short-term, or in the beginning or end of life, for the very young and the very old, or for the poor in subsidized rentals.
So money market rates, savings account rates, bonds are all at 1% or less
The Dow has been trading around 12,500 since the crash
So while renting, you can make 0-1% on your money in this economy. Keep doubting, I'll keep buying homes.
Not sure of places like Vegas, but here in San Diego, anything under $500k in a good neighborhood is gone in less than a week.
Once the inventory runs out, where do the prices go?
I believe this article is blinded by traditional ownership of a home. IF you want it as an "investment", then treated it as such. Put the home(s) in an LLC (each home in separate LLC), if you rent it out, even to yourself (remember an LLC and you are two separate identities), any expenses (taxes, insurance, upkeep)can be written off as a business expense.
Further down the road, if you choose to sell, you sell the LLC (business), which requires less paperwork, less expense and a quicker sale.
You are correct in that calculations were based upon the "traditional" method of owning a home. Your solution is very intriguing, however unfortunately not many individuals are aware of this kind of ownership. Thanks for your reply!
Kenneth, you raise valid points about home ownership and investment that are beyond the scope of this particular article. As Anita noted in her response, the ownership strategy you mentioned is not well known to the general public. In future articles we will provide more information on strategies that the typical homeowner may use to treat their personal residence as a true investment.