Investing: Never take your primary residency as an Investment

As a result of the article “Investing in Real Estate “a couple of days ago, someone emailed me and requested an opinion on how investing in real estate could be used as a saving plan to fund their retirement. With no intent of responding to them directly, I realized the need to bring another perspective into investing in real estate. If you intend to buy a house to live in, do not view it as an investment. A lot of people seem to think buying a house is equivalent to putting away savings that will fund their retirement; some even call it a forced savings plan. It is for these very reasons a lot of people feel that they can afford to live a certain lifestyle now, like visiting exotic locations, using their so called equity to buy consumer products etc with the knowledge that their house will appreciate. They assume that upon selling the house, the profit will serve as savings. There is nothing wrong with that, after all a lot of us have grown up knowing that owning a house is one of the greatest financial assets we can have. Real estate has made a lot of people wealthy, but on the other end of the spectrum, it has also made a lot of people miserable because of the same reasoning as above. This is not meant to be a rent vs. buy debate, but should be treated as another way of looking at buying a house from an investment (financial standpoint) perspective. I want to look at real estate, from a position in which you own the house, live in there and plan to sell the house to make profit and use whatever equity/profit you have to fund your future lifestyle. I have always argued that our future living standards are more important than our current lifestyle especially at a younger age. The problem is not whether the house will decrease or increase, in most markets as I have argued before, the house will appreciate. When you buy a house,( in which you live), The problem is people do not take into account the extra costs that the house will bring, such as insurance, property taxes, maintenance, bank interest (the cost of financing the house)and of course inflation. Take for example, for simplicity purposes, and this no means a accurate assessment. It’s meant to be an eye opener to the way you should look at things before you make that decision to buy a house. For example, if you bought a house in today’s market for $230,000. A few years down, say you decided to sell it. Assuming the house has appreciated at the average market appreciation rates and you sell it for $280,000. Your profit in this case is $50,000. But did you really make $50,000? Well, if we do a hypothetical analysis using the present rates in the market, here is what the true picture looks to me: If you paid property taxes: $3200 per year for 5 years, that would mean $16000, add insurance for five years $4500.00, maintenance $10,000(although some will argue that you can do it yourself), Interest $32,659.83, your initial down payment say 5%, $11,500 and the closing costs say 4%, $ 9200.00. If you add all this costs together, that should total $83,859.89, without even factoring in inflation. If you subtract the two, you will quickly realize that your profit isn’t what it looks like when you first sell the house. There is no disputing that investing real estate is a safe way of building your net worth, but you should never view your primary residence as an investment. Sometimes the social pressure leads us to commit to life changing decisions, leading us to believe that we have made a safe investment. Your home is a place to live and if you buy the house with that in mind, good for you. My stance on investing in n real estate is if you buy property for rent/lease as an avenue to bring in cash flow, or for future capital appreciation. It makes sense to buy a house if you plan to stay at the same place for a minimum of 5 years and your career and your family situation is unlikely to change anytime soon. My financial advice has always been centered on the notion that you should never carry any consumer debt and it makes perfect sense to buy a house if you have no other debt. My advice is simple, if you carry any student loans or consumer debt, do not buy a house. Not everyone likes to hear this but it’s the smart way to do things. Because your primary residence should not be viewed as an investment