First, thanks for the compliment, but no need to add my name to the post title. I am far for the sharpest tool in this shed.
That said, a few quick comments follow, as I have limited time this morning. I will pop back in later.
An ideal "personal home" real estate investment is one that follows the outline you describe above. These scenarios always look good if three factors work in your favor:
1. Assumption of appreciation
3. Rents increase above mortgage/ownership costs
If these three factors work in your favor, you have a great result. They can make up for many negatives, including the ones already posted, which broadly categorize as transaction costs and maintenance costs (which tend to be high in residential real estate).
However, Your real estate assets will be very poor ones if #1 and #2 do not work in your favor. #3 is a factor, but generally only if #1 is happening, so let's consider them the same.
So, someone living in the SF area of Northern California over the last two decades might think increasing rents and home values is a fact of life, however history suggests that this does not always happen for a specific investment period. You are especially at risk for a short time horizon.
So the short answer is this. You describe an 'I win' scenario. 'I win' scenarios do not always occur.
Illustration (perhaps a hasty poor one)
I will describe a few others. Scenario 1: You sink all your assets into your home and the price does not go up. Your costs equal rent costs while living there, or you rented it out at a break even. Assuming your costs roughly match what they would have been under a rental, after paying a broker a commission, maintenance, insurance, etc. Then you have earned nothing on your assets. It is as if you put your money into a savings account earning 0%. Return on assets is 0 - you saved, which is good. Passive income is 0. Scenario 2: you sink all your assets into your home and it drops in value. In this case, leverage suddenly works against you. Say it drops 20% in value and you borrowed 80% at a interest only loan. In this case you still owe the 80%, but have lost your entire 20% deposit. You have lost 100% of your investment due to your 5x leverage! So in this case you blew all your savings on a bad investment. Passive income is -whatever you put into the house divided by year. You added expense to your consumption with nothing to show for it. Both if these scenarios are possible. If in these scenarios you were a renter, who invested extra cash in a CD earning income you would be far ahead of your home owning clone. You might search out the many buy vs rent threads.
A bit more....
Lets look at the factor of appreciation. Why do home values increase? Studies I have read suggest that housing prices are driven by many factors, but that two of the most important ones are the following:
a) construction costs (including land, infrastructure, materials, amenities); and
b) personal income (demand for housing in terms of what someone is willing to pay to live in an area).
Item a is pretty easy to think about. Inflation or scarcity of land/available labor/infrastructure can drive up construction costs, hence you have to pay more to build a new home, hence developers will need to charge more. There are limits to this based on factor b, but if incomes rise then everyone makes money. However, if incomes are not high enough, no one can afford to buy in an area with unlimited cost growth. The opposite can occur. Study Atlanta today for a good example. Literally people who bought cute 4BR homes for 15k have LOST MONEY. Due to high tax assessments, job losses destroying communities, and govt corruption investors are literally abandoning homes to squatters.
So one who grew up in a community with unprecedented income increases, high construction costs and scarce labor/land availability might have the false impression that because houses always go up in their area that prices always behave that way. It is wrong that houses only go up. It is also wrong that ownership costs will always track to a rate that they increase below rental costs (wrong). In some part of downtown Atlanta you can stay in a home for free in some areas, if you promise to keep squatters out. An owner would be happy if you did. These are homes within a few miles of where the Braves play.
By example, and I think this is where you may have formed false impressions, lets compare two markets, Palo Alto, CA and Dallas, Texas. Both areas are wonderful communities to live in. I can say from experience that the feeling you might have living near Stanford is not all that different from living near Southern Methodist University. Quiet suburbs near an excellent university. Both areas have had periods of growth and high appreciation. Anyone who has lived in these areas and held long enough has done fairly well with real estate, at least not lost their shirt.
However, if I had the power to show price charts, you would see that Palo Alto looks like the Japanese stock market before the bubble burst, while Dallas looks a lot more up and down. Also, because Dallas is flat, with good highways, you can build outward almost without constraint. In the 90s I bought a wonderful 5BR home 15 minutes north for $180k. It was ten years old and was built for $270k by the original owner. 5 years later it sold for 220k. We did fine, the original owner lost their shirt. It is now worth about 320k today.
In Palo Alto, Sunnyvale, SF, etc., that same purchase would have been a rocket ship to wealth creation. I remember modest homes in that area in the 70s being quite attainable that are worth millions now. Anyone in that area would think they are a real estate genius, but the factors of scarce resources combined with historically unprecedented high income job creation from high tech, the values have gone through the roof.
So, in conclusion. It seems that for your circumstances you want to live in the area where you are. The lowest perceived cost of 'living ' is to pay your mortgage on a high value home. However, if your goal is really wealth creation, you would live elsewhere for much less, and then rent your home out to someone who could pay you thousands in rent. However, your high income jobs are linked to the need to be in that area, so you consume that economic rent on your assets yourself. Hence you are high income, high expense, large assets, but very low return on passive assets. IF the home continues to increase in value and IF you can sustain your income (these are highly correlated by the way both for upside and downside scenarios) then the factor of leverage will either work for you, against you or be neutral. It all depends.
From a consumption standpoint, realize that living in your home has a high opportunity cost for rent you could be investing or spending, if your cost of living was more in line with average. Also realize that your strategy of placing your net worth in the hands of the local real estate markets is statistically much more risky. Your future is more at the mercy of market real estate forces which no one can fully predict.
. One other way to look at it. Your biggest financial investment is in your career. That produces the most income, as a cost of your labor. Often jobs are linked to industries linked to a community. If your job fails due to weakness in your industry, it is possible housing prices also drop in the same area. That is why index funds are favored. You spread risk over the whole market. In real estate that type of diversity is most often found in a REIT. Concentration risk is what this is sometimes called. So the ski home might be a better investment in terms if that risk, as it's value depends on wealthy people from a larger area.
[edit 2]. It strikes me as handy to explain in very summary terms why the Dallas house was so cheap when bought. In the early 90s the oil and gas markets had some horrible results. Much of the labor income in communities like Denver, Houston, Dallas and Oklahoma City depended on this industry. These markets also had very efficient housing building industries cranking out tons of supply of new homes. As a result of the incomes drying up, and the many houses that needed to be sold (by folks spending close to earnings and by developers) pressures on prices were intense. Few new buyers, many sellers and guess what, the market tanked. Homes suddenly were available 30-50% cheaper. Eventually, the developers slowed down, the local economy diversified, and because of solid fundamentals like infrastructure investments in a world class airport, low taxes and a well educated work force, cities like Dallas recovered. Now a leader in telecommunications, consumer products, etc., plus a recovered energy industry makes Dallas real estate viable. That said, the market may never have scarcity other than in a few elite areas. Dead shopping malls exist side by side with Gucci shops in palatial hip areas to shop. Some cities like OKC still struggle to recover. Use zillow and you will see former homes of oil industry executives for sale at amazingly affordable prices.
Last edited by Pizzasteve510
on Sat Oct 04, 2014 1:51 pm, edited 3 times in total.