Housing:
Why buying is not a good long term investment
If you are buying a house as an investment then you might want to reevaluate your choices in what you invest your money in. If you are buying your house so you can live in it and have a place to raise your family then you are making a great decision with your money.
In the investment world a good long term investment is something that you can buy at a fair price and will eventually be worth much more than you bought it for when you sell it. In the investment world a bad long term investment is something you purchase that will eventually be worth around the same or less than as when you bought it. And you generally don't want to have to put any more money into your investment than what you already have when you first purchased it.
The average sale price of a home in March of 2015 according the the U.S. Census Bureau was $343,300. And the average interest rate on a 30 year fixed rate mortgage in march 2015 was 3.77% according to Freddie Mac. Based off of your purchasing price with a down payment of about 20% ($68,000 which is very unrealistic) your loan amount comes out to $275,300. If you paid off in full in 30 years the amount of money you would have paid into your mortage would be $460,108.80.
The final price of $460,108.80 is what it would cost you to own a house in 30 years in a perfect world. However, there are many more expenses to owning a home such as property tax, home owners insurance, and home maintenance. If you based your tax rate off of my home towns of 2.76% (2014), the national average of $952 for home owners insurance, and the national average of home maintenance of 1% of value annually ($3433) it would cost you an extra $131,632.8. So now your house needs to be worth $591741.6 if you decide to sell it in 2045 to break even. You are paying $248,441.60 in order to own your house at the price of $343,300. Paying more than something is worth to own it is by definition a bad investment.
What we have discussed so far goes against what a long term investment should be. As we stated it should be something that you can sell for considerably more than when you first bought it. A house purchased at $343,300 should be worth considerably more than that in 30 years for it to be a good long term investment. However appreciation of .2% annually would give your house a value of $364,506.64 netting a profit of $21,206.64. But that profit would be wiped out by all the interest due on your loan, the property taxes, home owner's insurance, and home maintenance.
On the inverse let's look at what would happen if we took that $68,000 down payment and $1,643.72 monthly payment and invested it into a low cost index traded fund that mimmic'd the SP 500. From 1950-2009 the average annual return was 11% adjusted for inflation it was 7.2%, which is what we will use to find out what our new long term investment would yield over the same 30 year period. The principal amount that would be invested is $659,739.20 however the interest we would accumulate amounts to $1,893,866.82 for a combined value of $2,553,606.02. Even if you got taxed at a rate of 20% you would still come out ahead of your housing investment by a long shot with an after tax profit of $2,042,884.82.
So what does this all mean to you? Well I am for one not telling you to never buy a house. It actually is a good idea to be a home owner but just not if the idea for owning a home is for investment purposes. There are a few things that aren't expressed in dollar signs when you buy and eventually own a home, specifically the pride of having your own piece of land and dwelling where you can have the freedom to do what you like within the confines of laws. It is also usually cheaper if you buy for the long term than rent for the long term, especially since you have an asset at the end of your 30 year mortgage that can be sold or borrowed against.
What I am telling you is to find "the perfect house" which is very cliche but it is quite true. An investment that isn't very good sure better make you happy in the long run otherwise you will be kicking yourself in 30 years. That perfect house also won't mean anything when you retire if you don't have any money to retire on, so make sure that you live within your means when purchasing a house otherwise you are going to have to sell that perfect house in the future because you need money to live off of. But with the right research in the area that you will be living you might be able to break even if you ever do decide to sell your house.
On the inverse let's look at what would happen if we took that $68,000 down payment and $1,643.72 monthly payment and invested it into a low cost index traded fund that mimmic'd the SP 500. From 1950-2009 the average annual return was 11% adjusted for inflation it was 7.2%, which is what we will use to find out what our new long term investment would yield over the same 30 year period. The principal amount that would be invested is $659,739.20 however the interest we would accumulate amounts to $1,893,866.82 for a combined value of $2,553,606.02. Even if you got taxed at a rate of 20% you would still come out ahead of your housing investment by a long shot with an after tax profit of $2,042,884.82.
So what does this all mean to you? Well I am for one not telling you to never buy a house. It actually is a good idea to be a home owner but just not if the idea for owning a home is for investment purposes. There are a few things that aren't expressed in dollar signs when you buy and eventually own a home, specifically the pride of having your own piece of land and dwelling where you can have the freedom to do what you like within the confines of laws. It is also usually cheaper if you buy for the long term than rent for the long term, especially since you have an asset at the end of your 30 year mortgage that can be sold or borrowed against.
What I am telling you is to find "the perfect house" which is very cliche but it is quite true. An investment that isn't very good sure better make you happy in the long run otherwise you will be kicking yourself in 30 years. That perfect house also won't mean anything when you retire if you don't have any money to retire on, so make sure that you live within your means when purchasing a house otherwise you are going to have to sell that perfect house in the future because you need money to live off of. But with the right research in the area that you will be living you might be able to break even if you ever do decide to sell your house.
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