[quote]nephorm wrote:
A lot of this comes down to personal investing preferences. You probably shouldn’t think of your primary home as being an investment, simply because a lot of people then avoid doing all the other kinds of investing that they should be doing. I don’t think, in the majority of cases, that owning a home is a losing proposition, unless you’re in a very depressed area or you have a high likelihood of having to move suddenly. My two cents.
I also confess that I get a little annoyed at people who speak of investing as a sure-thing. Whether it be the stock market or real estate, there are always risks. I am not, for example, savvy enough to invest money in the stock market (other than in mutual funds). 9 out of 10 of my investments have lost me money, and it really didn’t matter what kind of research I did before I bought the stocks. On the other hand, I know that if I buy a house for 200K, and I let someone ELSE pay my mortgage (a tenant), even if the house drops slightly in value, I’ll end up making a profit, or at least breaking close to even.
Let’s see an example. I’m going to assume a 200K house, with 10% down, at a fixed interest rate of 7%. My monthly mortgage payment would be approximately $1200 a month, but with mortgage insurance and hazard insurance, let’s guesstimate that my total cost per month is $1400. I can rent the house for $1300 a month, so I am effectively paying $100 a month. Assuming rent remains fixed, that I rent it for the full 30 years, and that I don’t refinance, in 30 years I will have paid 36K for the house in monthly payments, plus 20K down. Total cost: 56K. Let’s assume the house went down in value to 150K, a 50K loss, and that I want/need to sell it at that point. That means I’ll have made 94K off the deal… basically I was getting 4% per year off my investment, even though it was a “loser.” Let’s assume, instead, that the house retains but does not increase its value. In that case, I’ve made 144K… which is 7%, still in a pretty bad scenario. Finally, let’s assume that we gained 50K of value over the 30 years (which is more than reasonable in most markets). In that case, I was getting the equivalent of 10%/year, and made 194K.
Again, I hate when people say that any investment is a sure thing… certainly there are risks involved, and you might lose your shirt. But as a long-term investment, real estate isn’t bad.[/quote]
I think you’re leaving a few things out of your analysis. Cost of renting – including cost of finding a tenant, keeping said tenant happy, tending to legal relationship with said tenant, and, sometimes, suing the tenant should be figured into that equation. If you don’t plan to be on call (and how many of these investors really want to be professional landlords?), there’s the cost to pay someone to manage your property. Then there’s the added insurance cost in terms of liability and whatnot you’ll need for a rental property – you could try to pass that on to the renter, but that will only work in a tight rental market. And there are specific legal rules that apply to landlord/tenant law in terms of how you have to upkeep the property – if it’s yours, you might decide to let something go, but if you’re renting you might not be able to do that.
Unless you are planning to rent to a personal, trusted friend or family member, there’s a lot more too it that that. That’s just the stuff off the top of my head. Personally, I would not want to be a landlord.
That said, I think real estate is a very viable long term investment, depending on the property and the market. Right now, in certain markets, it’s a little scary for my tastes and my undefined timeframe.