How to think about your house from a financial perspective

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barc0040
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Re: How to think about your house from a financial perspective

Post by barc0040 » Wed Jan 31, 2018 12:30 pm

As with all financial decisions, one cannot only look at numbers on paper in isolation, behavior is a very important component. In theory one could make the argument that I should buy the least expensive house that meets my minimum needs, and invest the money I'm saving vs. buying a more expensive home. Sounds great in theory, but I also know myself, and I need and appreciate a forced savings vehicle.

Obviously this can be taken to a bad extreme if you overextend yourself, but when I look at my net worth calculation, it's an awesome double dip. My liability goes down each month when I pay down principal, and my asset value goes up as well. Once again, you could argue how the opportunity cost of this money would grow, but the past has taught me that money would burn a hole in my pocket. Definitely an asset for me.

Honest question here, haven't they done net worth studies and found a vast difference between home owners and renters (in favor of the home owners)?

barreg
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Re: How to think about your house from a financial perspective

Post by barreg » Wed Jan 31, 2018 1:23 pm

I think about my house as a money pit. There's always another expense coming down the road (though if I could just get my wife to stop watching HGTV, that would help).

When we eventually sell, if we make money off it, that would be a bonus, but not something I'm counting on. We've made lots of improvements to date, but they were done primarily for how we wanted the house to be, not necessarily with resale in mind.

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Re: How to think about your house from a financial perspective

Post by Atgard » Wed Jan 31, 2018 1:39 pm

Houses have formed a forced savings plan for probably the majority of Americans, as we know the "average" person doesn't save or invest, has less than $500 in savings for an emergency, etc. So for people like that, being forced to pay towards principal and eventually owning a valuable asset after 30 years was a good thing.

But when you compare to the average Boglehead, who would NOT just take the extra money and spend it on shoes or lattes, and would have invested it in a retirement account instead? Then houses probably do not generally beat a good investment portfolio.

So it's really two different conversations. For many people, a house is the only savings or "investment" they have. But that doesn't really apply to Bogleheads debating between buying a house vs. investing the down payment + principal payments in their 401k.

I also agree it's extra confusing because it combines an investment component (land in a certain location) and a consumption component (a house which is basically a collection of things in various stages of falling apart & needing to be replaced).

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Artsdoctor
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Re: How to think about your house from a financial perspective

Post by Artsdoctor » Wed Jan 31, 2018 1:42 pm

chevca wrote:
Wed Jan 31, 2018 7:20 am
Artsdoctor wrote:
Tue Jan 30, 2018 7:42 pm
I can destroy my car, I can burn my art, and I can drink my wine; those will not be taxable events. However, there is no way for me to dispose of my house while I'm living without paying tax on the capital gain. I can't think of a scenario in which the government taxes you on an expense only.
If you destroy, burn, or drink your house, does that trigger a taxable event? :wink:

What about classic/collector cars and collector art that are likely to appreciate? Do those trigger taxable events for the seller? I don't know, so I ask. But, I don't think you're comparing apples to apples comparing things being destroyed to an appreciating house.
If my house were to burn to the ground and I sold the lot with nothing on it, I would still owe a capital gain, given the high price of real estate in LA.

Certainly there are people who purchase wine with no intent of drinking it. My BIL did this, sold it, and purchased his office building.

I think we're really dancing on the head of a pin here. At the end of the day, the vast majority of people will sell their houses; they may or may not have appreciated in value. We're really arguing about semantics which has very little bearing on how we lead our lives.

Now, I've had the very unfortunate situation where two very close friends have lost houses in Santa Rosa (fire) and Montecito (debris slide). Both of them lived in their houses, enjoyed them, and were factoring in their appreciation in their general financial plan. They both viewed their houses as investments, so perhaps this whole phenomenon comes down to intent. It's somewhat of a moot point.

RRAAYY3
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Re: How to think about your house from a financial perspective

Post by RRAAYY3 » Wed Jan 31, 2018 1:44 pm

in my area, a 500K property needs to appreciate to 600K in 10 years to simply offset property taxes. forget about mortgage rate, utilities, upkeep, furnishing, etc., etc., etc.

* and this is underestimating the taxes some.

no way is buying a home a [good] investment - at least not in my area

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Re: How to think about your house from a financial perspective

Post by WhiteMaxima » Wed Jan 31, 2018 1:49 pm

RRAAYY3 wrote:
Wed Jan 31, 2018 1:44 pm
in my area, a 500K property needs to appreciate to 600K in 10 years to simply offset property taxes. forget about mortgage rate, utilities, upkeep, furnishing, etc., etc., etc.

* and this is underestimating the taxes some.

no way is buying a home a [good] investment - at least not in my area
If you rent, your rent to landlord includes his/her property taxes, upkeep etc. And his/her PROFIT. It is a business seriously.

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Re: How to think about your house from a financial perspective

Post by RRAAYY3 » Wed Jan 31, 2018 1:54 pm

WhiteMaxima wrote:
Wed Jan 31, 2018 1:49 pm
RRAAYY3 wrote:
Wed Jan 31, 2018 1:44 pm
in my area, a 500K property needs to appreciate to 600K in 10 years to simply offset property taxes. forget about mortgage rate, utilities, upkeep, furnishing, etc., etc., etc.

* and this is underestimating the taxes some.

no way is buying a home a [good] investment - at least not in my area
If you rent, your rent to landlord includes his/her property taxes, upkeep etc. And his/her PROFIT. It is a business seriously.
Never said renting doesn’t suck ... just don’t think buying a house is worth the social approval / “congratulations” it garners

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Re: How to think about your house from a financial perspective

Post by WhiteMaxima » Wed Jan 31, 2018 1:58 pm

RRAAYY3 wrote:
Wed Jan 31, 2018 1:54 pm
WhiteMaxima wrote:
Wed Jan 31, 2018 1:49 pm
RRAAYY3 wrote:
Wed Jan 31, 2018 1:44 pm
in my area, a 500K property needs to appreciate to 600K in 10 years to simply offset property taxes. forget about mortgage rate, utilities, upkeep, furnishing, etc., etc., etc.

* and this is underestimating the taxes some.

no way is buying a home a [good] investment - at least not in my area
If you rent, your rent to landlord includes his/her property taxes, upkeep etc. And his/her PROFIT. It is a business seriously.
Never said renting doesn’t suck ... just don’t think buying a house is worth the social approval / “congratulations” it garners
Yes. it has social approval. All human activities must have social approvals.

2015
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Re: How to think about your house from a financial perspective

Post by 2015 » Wed Jan 31, 2018 2:03 pm

I'm going to make a killing on this house when I unload it on some trendy air-headed entertainment hipster, that's how I think of it. :moneybag

barc0040
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Re: How to think about your house from a financial perspective

Post by barc0040 » Wed Jan 31, 2018 2:39 pm

I'm 34 years old. I owe $345K on a house valued at $435K. Even if I never invest another dollar in my lifetime, my house appreciation combined with the future value of my 401K/IRA would set me up to have a decent retirement sum. So yes, I do consider my house an investment. I say this as someone who got royally screwed by the housing crisis when I was fresh out of college, and as someone who benefited handsomly from the housing turnaround.

But just because I view it as an investment, does not mean I think of it in the same way as my 401K or roth IRA for instance. I would never tap my home equity, and it's something that I get current enjoyment from.

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Re: How to think about your house from a financial perspective

Post by jlcnuke » Wed Jan 31, 2018 3:39 pm

Regarding #1
In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.

Read more: Investment https://www.investopedia.com/terms/i/in ... z55nQJ2100
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I don't expect my home that I live in to provide me income in the future.

I don't expect my home in the future to be sold at a higher price for a profit. At best, it will be sold at a higher price to facilitate shifting that money to another substantially similar asset.. i.e. to buy another house... thus consuming any profit.

I do expect, however, to pay off my house and continue to live in it for decades after that, thus benefiting from the significantly lower fixed housing expenses for those decades. Even putting $3-5K into the house every 5-7 years for major item replacements (roof, HVAC stuff, etc etc), plus 1-2% in maintenance costs each year, for those decades I'll come out WAY ahead over renting. I'll set aside my $200 for insurance and property taxes each month, and toss another $200/month into the "house may need something fund" and the house will cost me $400/month. Renting, however, would still cost me around $1,200 for an equivalent sized home each month.

So, I expect it will save me money in the long run, but it's not an investment since I'm not using it to "generate" money directly. Now, some will argue that the "savings" I expect it to generate constitute "effectively" making money, but to that I'd reply that no "reduced expenses" is really a generation of income (cancelling cable doesn't generate income for instance, it just means I'm spending less).

Regarding #2

What's this "game" that is being won? Do I have to play??

Regarding #3

It's almost always dumb to spend money in order to make less money. In most places, there are no home improvements you can make that have positive return on investments (in fact, a 70-80% return on investment is considered pretty darn good). The primary exception to that rule I've heard is only applicable when the improvements result in the house selling much, much faster than it would otherwise (still not a guarantee of a positive return, but can help tip the scales in that direction).

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Pajamas
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Re: How to think about your house from a financial perspective

Post by Pajamas » Wed Jan 31, 2018 3:47 pm

barc0040 wrote:
Wed Jan 31, 2018 2:39 pm
I'm 34 years old. I owe $345K on a house valued at $435K. Even if I never invest another dollar in my lifetime, my house appreciation combined with the future value of my 401K/IRA would set me up to have a decent retirement sum.
Housing markets are local and fluctuate but U.S. housing prices have been nearly flat with only a slight upward trend over the long term after adjusting for inflation. Those dramatic charts that make housing look like a sure path to riches are either short term or not adjusted for inflation or both.

You may be able to extract value from it at retirement by getting lucky with the timing when you sell and either buy a less expensive dwelling or rent (apartment, nursing home, etc.)

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Re: How to think about your house from a financial perspective

Post by 2015 » Wed Jan 31, 2018 9:24 pm

Pajamas wrote:
Wed Jan 31, 2018 3:47 pm
barc0040 wrote:
Wed Jan 31, 2018 2:39 pm
I'm 34 years old. I owe $345K on a house valued at $435K. Even if I never invest another dollar in my lifetime, my house appreciation combined with the future value of my 401K/IRA would set me up to have a decent retirement sum.
Housing markets are local and fluctuate but U.S. housing prices have been nearly flat with only a slight upward trend over the long term after adjusting for inflation. Those dramatic charts that make housing look like a sure path to riches are either short term or not adjusted for inflation or both.

You may be able to extract value from it at retirement by getting lucky with the timing when you sell and either buy a less expensive dwelling or rent (apartment, nursing home, etc.)
^^^
Very much this.

Were I anywhere else other than the molten lava real estate market I'm in I would not be viewing housing from any type of financial perspective. In fact, I only started thinking that way after deciding to get out of here, and subsequently decided to unload my housing sooner than planned. My own situation is highly atypical.

Four books made a huge impact on my thinking regarding my real estate market (and others like it) and the type of people who live and buy here (and those who don't):

Bobos in Paradise
The New Urban Crisis
The Sum of Small Things
White Working Class

harvestbook
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Re: How to think about your house from a financial perspective

Post by harvestbook » Wed Jan 31, 2018 9:41 pm

To me, a paid-off house is simply a low-cost foundation from which to build wealth. I plan to never sell. If I do, I have a whole new set of problems and costs and hassles.
I'm not smart enough to know, and I can't afford to guess.

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Re: How to think about your house from a financial perspective

Post by Yooper16 » Wed Jan 31, 2018 11:13 pm

We think of our house as a money pit and not a part of our wealth. However that is by design with this house and really even the previous ones.

We knew we wanted to retire here and it is not a well off area of even midlle of the road. There have been some recent years where there has not been a new home construction permit issued.

We are remodeling a 118 year old house, with 3 floors and a basement, to make it fit the next 30-40 years of our lives and we also enjoy doing it. We will never get out of this house what we will put in. That is the nature of the economy up here.

We can walk to eateries, bars, hockey arena, college, river front, grocery, kayak launch, hardware, PO, health food store, Dr. Basically most everything.

This may be considered blasphemy, but the older I get the more I realize that while finances are important, money and investment and wealth is ultimately not what makes the world go around. Fully realize that that is my opinion and others can believe differently.

:beer Next time you're in the UP, we'll twist a few.

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Re: How to think about your house from a financial perspective

Post by Shikoku » Wed Jan 31, 2018 11:51 pm

thangngo wrote:
Tue Jan 30, 2018 12:24 pm
2. A house might rise in value but you won't benefit from it unless you sell.
Is this true? :confused
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aj76er
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Re: How to think about your house from a financial perspective

Post by aj76er » Thu Feb 01, 2018 12:41 am

I think someone may have said this upthread, but there is an "imputed rent" from owning a home. I calculate mine periodically as:

imputed rent = property taxes + HOA Dues + maintenance + opportunity cost

where opportunity cost is the dividend yield of S&P500 x current value of property x 95%

(this assumes home appreciation approx equals S&P500 price appreciation; you should add a further cost factor if your area is different)

For example, here are the numbers for my condo:

1900 + (143*12) + 1000 + (167000 * 0.02 * 0.95) = $7789/year = $649/month

I know that I can rent a similar unit in my bldg for roughly $950/month.

Thus, I'm coming out ahead by owning (by paying lower "imputed rent" than "actual rent"). In addition, I'm trading off better cash flow (as the imputed rent is lumpy) for less liquidity (home is harder to sell than shares of S&P500).

If not owned outright, mortgage interest should be added to the "imputed rent".

Note that in broad strokes, a home is a depreciating asset that requires maintenance and upkeep to maintain it's value; while the land underneath the structure generally appreciates.

Anyway, I like the "imputed rent" calculation because it provides a real (monthly) quantity that I can use to make a rent-vs-buy decision.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: How to think about your house from a financial perspective

Post by grabiner » Thu Feb 01, 2018 10:24 pm

I view a house as serving the same function as an annuity. Your home will provide you with a place to live, at a cost much less than the market value.

If you work with numbers, it can be an annuity which provides a value of the imputed rent. However, it's actually better than that; if rents rise, you can continue to live in the same house without an extra cost (although your property tax might go up a bit).

The net effect is that you can have a more aggressive asset allocation if you own your home, just as you would if you have a pension or annuity. In any of these situations, a 20% drop in your retirement portfolio will not decrease your standard of living by 20%, since the home/pension/annuity provides some of the standard of living.
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Re: How to think about your house from a financial perspective

Post by yukonjack » Fri Feb 02, 2018 9:04 am

Watty wrote:
Tue Jan 30, 2018 12:34 pm
How to think about your house from a financial perspective
I consider my paid off house to be my long term care insurance.

I live in a medium to low cost of living area so the home value is not outrageous but my home equity would be enough to supplement my normal retirement budget to pay any extra long term care costs for many years.

This is not a perfect plan since I am married and we could both still be alive when LTC is needed but there are several ways that the home equity could be accessed if it is ever needed for LTC when we are both still alive.

In the meantime it provides a lot of tax free virtual income (imputed rent) by allowing me to live rent free where I only pay for maintenance and property taxes.
I currently do not have LTC insurance and have often thought about whether I should get it. So for me this is a new and helpful way to view my paid off house.

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Re: How to think about your house from a financial perspective

Post by yukonjack » Fri Feb 02, 2018 9:08 am

grabiner wrote:
Thu Feb 01, 2018 10:24 pm
I view a house as serving the same function as an annuity. Your home will provide you with a place to live, at a cost much less than the market value.

If you work with numbers, it can be an annuity which provides a value of the imputed rent. However, it's actually better than that; if rents rise, you can continue to live in the same house without an extra cost (although your property tax might go up a bit).

The net effect is that you can have a more aggressive asset allocation if you own your home, just as you would if you have a pension or annuity. In any of these situations, a 20% drop in your retirement portfolio will not decrease your standard of living by 20%, since the home/pension/annuity provides some of the standard of living.
The idea of a more aggressive asset allocation for homeowners makes a lot of sense but do very many bogleheads actually do this. I don’t recall reading much about this type of strategy but it is one I plan to take a hard look at.

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Re: How to think about your house from a financial perspective

Post by grabiner » Fri Feb 02, 2018 7:07 pm

yukonjack wrote:
Fri Feb 02, 2018 9:08 am
grabiner wrote:
Thu Feb 01, 2018 10:24 pm
I view a house as serving the same function as an annuity. Your home will provide you with a place to live, at a cost much less than the market value.

If you work with numbers, it can be an annuity which provides a value of the imputed rent. However, it's actually better than that; if rents rise, you can continue to live in the same house without an extra cost (although your property tax might go up a bit).

The net effect is that you can have a more aggressive asset allocation if you own your home, just as you would if you have a pension or annuity. In any of these situations, a 20% drop in your retirement portfolio will not decrease your standard of living by 20%, since the home/pension/annuity provides some of the standard of living.
The idea of a more aggressive asset allocation for homeowners makes a lot of sense but do very many bogleheads actually do this. I don’t recall reading much about this type of strategy but it is one I plan to take a hard look at.
It deals with the ability to take risk, but not with the psychological side. Mathematically, it might make sense to go from 80% stock to 100% stock if you buy a house with cash, or a bond balance equal to your mortgage balance if you buy it with a mortgage. But most investors don't want to have that much stock, and many shouldn't because they are more likely to panic when the market crashes.
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Re: How to think about your house from a financial perspective

Post by dbr » Fri Feb 02, 2018 7:14 pm

Ron Scott wrote:
Tue Jan 30, 2018 12:13 pm
Had a good dinner conversation last night on this and I thought I'd throw out the conclusion for your comments...

1. A house is not an investment.

Of course a house is an investment. It isn't usefully counted in a portfolio of stocks and bonds in the usual way those things are accounted for, but it is an investment. Equally obviously a person can configure a definition of the word investment that excludes owning a house. Such a person has aswered their own question and that is fine.


2. You "win the game" if the real return on the sale of a house (purchase + cap improvements) is positive.

What game is that? I don't think there is any "game" here.


3. Don't decorate or improve the house "for resale value". Suit yourself.

It can be both. People can study up on the subject and find out when and to what degree decorating and improving generates a financial gain. In some cases it does and in a lot of cases it doesn't. How much someone wants to spend to suit themselves is up to them.

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Re: How to think about your house from a financial perspective

Post by cherijoh » Fri Feb 02, 2018 7:43 pm

dm200 wrote:
Tue Jan 30, 2018 12:41 pm
Equity in a home (as best I understand) has a great degree of "asset protection" from various kinds of lawsuits and related matters.
That is highly dependent on your state's "Homestead" laws. Here's a list for all 50 states. North Carolina's law is ludicrous - it protects a maximum of $1000 of property. :annoyed At the other extreme, Florida and Texas have no $$ value but do limit the acreage protected.

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Re: How to think about your house from a financial perspective

Post by cherijoh » Fri Feb 02, 2018 8:13 pm

Jack FFR1846 wrote:
Tue Jan 30, 2018 3:21 pm
It's only a good investment if I sell for a profit and buy something that's less expensive. If my house doubled in value and I bought a house that initially was twice as expensive as mine and it also doubled in value, then I didn't do all that well.
+1

I've been in my current house for 25 years and it is probably worth 2.5X what I paid for it (ignoring real estate transaction costs, maintenance, new appliances, new HVAC system, etc.). But if I sold the house to extract the "profits" from my "investment", I would still need somewhere to live. Since I own what RE agents consider a "starter home", downsizing isn't really an option (unless I want to try a tiny house like on HGTV :wink:). So that would leave me with rent at today's prices with a guarantee of future inflation. So no, I don't consider it an investment. My VG index funds are an investment - as is my 401k plan.

Anecdotally, most of the people I know who talk about what a good investment their home represents want to have their cake and eat it too by purchasing more house than they could justify as just a residence. (No, a dual-income couple with no kids really doesn't NEED a 3500 square foot house! :oops:).

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Re: How to think about your house from a financial perspective

Post by smitcat » Sat Feb 03, 2018 7:56 am

We have moved through 4 primary homes over near 40 years now in relatively the same area. Our home has been a great investment for many reason including appreciation, cost (rent) control , tax write-off and for many years a tool for utilizing inflation through the mortgage. Our current home is about 30X the value of where we started and when we liquidate it the funds will be realized without taxes due.

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Re: How to think about your house from a financial perspective

Post by rec7 » Sat Feb 03, 2018 8:36 am

This was written in the last boom. I think like him. https://www.wsj.com/articles/SB111852419690557157
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Re: How to think about your house from a financial perspective

Post by Toons » Sat Feb 03, 2018 8:38 am

For Us?
House=Shelter







:wink:
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Re: How to think about your house from a financial perspective

Post by basspond » Sat Feb 03, 2018 8:39 am

We would be still paying on our mortgage if we didn't refinance. Has been paid off for almost 10 years. House is less the 5% of our total net worth so it is just an after thought. To us it is a home, not an instrument.

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Re: How to think about your house from a financial perspective

Post by oldcomputerguy » Sat Feb 03, 2018 8:44 am

Depends on your purpose in buying a house. My wife and I bought our current house twenty years ago with the idea of keeping it and living in it, not with the idea of one day selling it. As we get older, we likely will indeed have to sell it (or else our executor will), but that's secondary to its primary purpose, which is to keep the rain and cold out.
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Re: How to think about your house from a financial perspective

Post by runner540 » Sat Feb 03, 2018 9:12 am

smitcat wrote:
Sat Feb 03, 2018 7:56 am
We have moved through 4 primary homes over near 40 years now in relatively the same area. Our home has been a great investment for many reason including appreciation, cost (rent) control , tax write-off and for many years a tool for utilizing inflation through the mortgage. Our current home is about 30X the value of where we started and when we liquidate it the funds will be realized without taxes due.
Smitcat, since you call it a "great investment", can you please clairfy if the 30x return is real or nominal, and if it is before or after all transaction and carrying costs (maintenance, insurance, property taxes, interest, etc)? I certainly understand you benefited from not paying rent, but I'm not sure it's a home run.

As a benchmark, the S&P 500 returned 90x (nominal) with dividends reinvested over the last 40 years, and the carrying costs and transaction costs are much lower. https://dqydj.com/sp-500-return-calculator/

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Re: How to think about your house from a financial perspective

Post by vested1 » Sat Feb 03, 2018 9:32 am

I used to think of our home as an investment, which was very convenient until 2008, when the resale value dropped by about 60% in our HCOL area. Now, ten years later the resale value is still 30% less than before the housing debacle, while investments have more than doubled during that time, far surpassing what was lost on paper during the recession.

I believe that a house can be an investment if the intent is to flip it for a profit, but a home cannot be. We have 400k of equity, but it is unrealized until the home is sold, which may never happen until my wife and I are dead. In that respect, it is an investment for our children, but merely an expense for us.

While it's fun to add it to the tally sheet for net worth, it is theoretical until the time it is liquidated. I suppose we'll have to live somewhere if we ever sell our home, so in a way, our abode will continue to be an expense forever. Paying less of an expense (insurance, taxes, maintenance) without a mortgage doesn't change the category on the balance sheet.

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Re: How to think about your house from a financial perspective

Post by smitcat » Sat Feb 03, 2018 9:42 am

runner540 wrote:
Sat Feb 03, 2018 9:12 am
smitcat wrote:
Sat Feb 03, 2018 7:56 am
We have moved through 4 primary homes over near 40 years now in relatively the same area. Our home has been a great investment for many reason including appreciation, cost (rent) control , tax write-off and for many years a tool for utilizing inflation through the mortgage. Our current home is about 30X the value of where we started and when we liquidate it the funds will be realized without taxes due.
Smitcat, since you call it a "great investment", can you please clairfy if the 30x return is real or nominal, and if it is before or after all transaction and carrying costs (maintenance, insurance, property taxes, interest, etc)? I certainly understand you benefited from not paying rent, but I'm not sure it's a home run.

As a benchmark, the S&P 500 returned 90x (nominal) with dividends reinvested over the last 40 years, and the carrying costs and transaction costs are much lower. https://dqydj.com/sp-500-return-calculator/

30X is just based upon the purchase and sales prices - we had two family homes and live in a higher rent rate area. Making sure we were in a very good school district as well, along with paying back mortgages with relatively low rates while living thru time perios of very high inflation.
Not too mention that the 90X rates of the S&P would require you to have the funds up front (not leveraged) and the tax costs.

dbr
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Re: How to think about your house from a financial perspective

Post by dbr » Sat Feb 03, 2018 9:51 am

These things are not either/or. A house can be investment and also provide shelter, etc. and also have costs. The fact that if you didn't own the house you might have to pay rent is true but doesn't change the house having an investment property. Whether or not the return is guaranteed to be positive or is expected to be positive also does not change the fact unless you want it to by choosing a definition that does that for you.

A question is how or why does it matter. If you own a house it is what it is and if you don't own a house it isn't.

How I think about the house is this:

1. I am going to own my own home until it is more practical to do otherwise. That was true all along.
2. The home has a value on the real estate market and that value is meaningful.
3. It costs money to maintain the home, taxes, insurance, etc. The expense is in my budget. When there was a mortgage I owed somebody money and paid it off every month. That also affected taxes.
4. If I sell the home I get some money, avoid some expenses, and incur other expenses in their place.
5. I don't try to calculate the return on my home, but I don't calculate the return on anything else I own. If I did calculate returns I would try to figure out a way to do that for the home.

But who does not know all this.

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Top99%
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Re: How to think about your house from a financial perspective

Post by Top99% » Sat Feb 03, 2018 10:11 am

As far as price appreciation goes, I think houses need to be split into 2 "markets": Pay check houses and Portfolio houses.
Prices for the former shouldn't be able to rise substantially faster than pay checks over the long term while the prices for the latter can rise as fast as the equity market. My house is definitely in the "pay check" category so I don't expect long term "real" price gains. But at least my monthly "rent" is now fixed. So, from a financial perspective I look at a house as trading off an inflation hedge for somewhat uncertain upkeep/repair costs.
Adapt or perish

sfchris
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Re: How to think about your house from a financial perspective

Post by sfchris » Sat Feb 03, 2018 9:28 pm

I am a middle aged renter in an extreme cost of living area. For me, the question is inverted: "How do I think of a lack of a house from a financial perspective"?. What if I decide to buy later in an area where a starter shack is more than a million dollars and an ordinary home is close to 2 million?

Many of my colleagues (and a good portion of you) have over a million dollars in their house. When they talk about asset allocations and say that they are "80/20", what they really mean is that 80% of their money that is in stocks+bonds is in stocks. But in actuality, perhaps 50% of their "net worth" is in stocks.

For me, I am 60% stocks. But if I were to take my money that is in bonds and buy a house, I would then have an asset ratio of 90/10, if real estate is not counted. So compared to you all I am actually in a very aggressive stock position if I were to ever buy a house.

It makes reading advice about asset allocation pretty tricky. It also makes long term investing tricky with the idea of buying a couple million dollar house at some point a possibility. For example, if I try to rebalance at that point, it could involve paying a lot of taxes to convert stocks into bonds.

Admiral
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Re: How to think about your house from a financial perspective

Post by Admiral » Sun Feb 04, 2018 8:30 am

One of the things nobody has mentioned is that owning a home (with or without a mortgage) is a form of price and inflation control over what, for most people, is their largest single monthly expense.

A fixed-rate loan--and particularly one at a low rate--becomes cheaper relative to rents year over year for many, many years. This is owing to inflation, but also to the general trend in home and rental pricing, which is upward (not always, yes, that's true. But landlords don't usually lower their rent: In r.e. downturns, more people are looking to rent, which as you might expect does not lower rents.) Cost containment frees up cash for other uses, and also provides stability for life planning and so on.

Whether you call it an investment or not is immaterial. It's a place you live that you own that becomes more affordable relative to other housing options that you do not own.

Jags4186
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Re: How to think about your house from a financial perspective

Post by Jags4186 » Sun Feb 04, 2018 8:50 am

Admiral wrote:
Sun Feb 04, 2018 8:30 am
Whether you call it an investment or not is immaterial. It's a place you live that you own that becomes more affordable relative to other housing options that you do not own.
If you own a $500k house free and clear you still have maintenance, taxes, insurance. Depending where you live a $500k house could carry 12k property taxes or more. Another $1000 a year in insurance and if you go by the 1% rule there’s another $5k in maintenance. This hypothetical house costs you $1500/mo. Taxes, insurance, and maintenance go up every year as well.

If you had a $500,000 portfolio which you pulled 4% from, $20k, and you added in your $18k already there housing expenses, could you rent an equally nice place? You can increase your withdrawal by inflation every year and increase your cash outlay by equivalent of the above scenarios increase every year. That’s the question people need to answer.

Admiral
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Re: How to think about your house from a financial perspective

Post by Admiral » Sun Feb 04, 2018 9:00 am

Jags4186 wrote:
Sun Feb 04, 2018 8:50 am
Admiral wrote:
Sun Feb 04, 2018 8:30 am
Whether you call it an investment or not is immaterial. It's a place you live that you own that becomes more affordable relative to other housing options that you do not own.
If you own a $500k house free and clear you still have maintenance, taxes, insurance. Depending where you live a $500k house could carry 12k property taxes or more. Another $1000 a year in insurance and if you go by the 1% rule there’s another $5k in maintenance. This hypothetical house costs you $1500/mo. Taxes, insurance, and maintenance go up every year as well.

If you had a $500,000 portfolio which you pulled 4% from, $20k, and you added in your $18k already there housing expenses, could you rent an equally nice place? You can increase your withdrawal by inflation every year and increase your cash outlay by equivalent of the above scenarios increase every year. That’s the question people need to answer.
Taxes, insurance, and maintenance go up every year as well.
This is not nearly true in my experience and I have owned homes for 20 years. I have paid 5k per year in maintenance perhaps twice in 20 years.

Your hypothetical is not the reality for pretty much anyone except the 1%. Most people don't have 500k taxable portfolios, and even if they do, they should not be taking 4% of it each year to pay rent.

The common choice is loan vs rent.

Olemiss540
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Re: How to think about your house from a financial perspective

Post by Olemiss540 » Sun Feb 04, 2018 9:22 am

halfnine wrote:
Tue Jan 30, 2018 5:22 pm
A house is an investment that might look something like:

4-5% dividend yield (imputed rent)(after tax yield)
1-2% ER (some of which is pre-tax, some post-tax)
3-4% transaction fee (per transaction)
0% expected real return (tax free to 250/500K)
I like this analogy. Except in IL the property tax rate of 2.5% makes the expense ratio more like 4% after insurance and maintenance.

Shows the 1% dividend yield after expenses to account for why renting is better for short term purchases and buying generally for long term ownership.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

Jags4186
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Re: How to think about your house from a financial perspective

Post by Jags4186 » Sun Feb 04, 2018 9:27 am

Admiral wrote:
Sun Feb 04, 2018 9:00 am
Jags4186 wrote:
Sun Feb 04, 2018 8:50 am
Admiral wrote:
Sun Feb 04, 2018 8:30 am
Whether you call it an investment or not is immaterial. It's a place you live that you own that becomes more affordable relative to other housing options that you do not own.
If you own a $500k house free and clear you still have maintenance, taxes, insurance. Depending where you live a $500k house could carry 12k property taxes or more. Another $1000 a year in insurance and if you go by the 1% rule there’s another $5k in maintenance. This hypothetical house costs you $1500/mo. Taxes, insurance, and maintenance go up every year as well.

If you had a $500,000 portfolio which you pulled 4% from, $20k, and you added in your $18k already there housing expenses, could you rent an equally nice place? You can increase your withdrawal by inflation every year and increase your cash outlay by equivalent of the above scenarios increase every year. That’s the question people need to answer.
Taxes, insurance, and maintenance go up every year as well.
This is not nearly true in my experience and I have owned homes for 20 years. I have paid 5k per year in maintenance perhaps twice in 20 years.

Your hypothetical is not the reality for pretty much anyone except the 1%. Most people don't have 500k taxable portfolios, and even if they do, they should not be taking 4% of it each year to pay rent.

The common choice is loan vs rent.
Maybe not $5k in water heaters and plumbers, but many people pay for lawn care, gutter cleanings, snow removal, exterminator etc. Also, you spend more on things for a house you own than one you rent. Nicer finishings, upgrades that don’t really increase the value of the home.

As for $500k portfolio it doesn’t matter if you have it or not. If you take a 30 year $500k loan at 4% you’d have an additional $2387 a month in outlay.

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