I was reading an article in the Wall Street Journal today when something caught my eye. The article is about one’s primary residence, and why it’s a bad idea to consider it a primary investment for retirement. To an extent, I agreed with what the reporter was writing, but not entirely. He correctly points out some basic facts and statistics:

If you bought a house in Los Angeles in 1990, just as the real-estate market turned downward, you would have had to wait a decade for your home’s value to return to what you paid.

If you bought in Rochester, N.Y., in 1980, you would have seen only a mediocre 4% annual growth for the next 25 years.

If you bought in Dallas in 1986, as the oil boom went bust, your home wouldn’t have appreciated at all before 1998.

Fair enough, but these are stats plucked from selected areas that didn’t do so well over a period of time. And while stories of doom are possible just about anywhere in the U.S., especially places like Texas, where dependence on a single industry can REALLY make real estate investing risky, using another example makes the outlook entirely different. For example, let’s say you purchased a rowhome in Baltimore’s Canton neighborhood in 2000 - for about $125,000. Today that same house would be worth about $300,000 - conservatively - even after a price slump in the area. Also, the industry that the Baltimore-Washington corridor relies on for high occupancy rates and overall home purchasing is the U.S. government. So, if the government goes out of business or downsizes (seriously, when was the last time that happened), folks in the area are in trouble. Otherwise, invest at will…

The article goes on to note:

A house can be an inefficient means of investing, and it costs far more to buy and operate than you think. Homeowners can easily end up paying more to live in their houses than the supposed “profit” they make when they sell them.

When most homeowners figure their returns, they don’t do much more than subtract the price they paid from the price they received. Then they come up with a really big return because they paid only a 10% or 20% down payment. So they figure they made a huge “profit.”

But they didn’t. That’s because the costs of owning a home — buying it with a long-term mortgage and then paying taxes on it, insuring it, repairing it, renovating it — sap most of what most homeowners think they make in price appreciation.

OK, but I think the author fails to realize two things. The first is actually irrelevant to his assertion that a primary residence is a poor investment, but I’ll throw it out there anyway. When one buys a primary residence, they don’t actually think of it as an investment in the same manner they would a home purchased solely to rent out or buy and re-sell. It’s where they’ll live and, as such, they’re probably willing to spend a bit more on it. They may have fallen in love with some details of a home and decided to offer full price even though they think the home is slightly overpriced. In short, the home is first a place where they’ll live and secondly an investment. So even while many out there are thinking that their home is a good investment, it’s still primarily the place where they’ll hang their hat.

More relevant, I think, is the fact that everyone must live somewhere. So, paying taxes, insuring, repairing, renovating, etc. are certainly costs, but are they costs associated with the investment? Should they even be factored in? I would argue that they shouldn’t. As I said, you have to live somewhere, so if you want a true profitability report when selling a home, subtract the mortgage payoff and realtor fees from the total selling price. Thereafter, subtract all taxes, insurance, cost of renovations, etc. from total profits. THEN, add back in to profits all tax savings from deducting interest payments, the increase in the selling price resulting from renovations AND the cost of renting a home of equal or lesser value for the same time that you owned the home.

See what I’m driving at? When you live in a home, and then consider its value as an investment, the cost of maintaining it, insuring it, paying taxes, etc. is not TRULY a factor on the home/investment’s “income statement”. Or, if it is, those other factors should also be included - namely the cost of “living” somewhere else. Now, I don’t advise one to consider their home their primary investment, but doom and gloom abounds too readily in today’s “the bubble has burst” world. So take some things you read - even what I’m writing now, if you wish - with a grain of salt.

Tags: primary residence, real estate bust, real estate investing, real estate slump, wall street journal

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