The Three Worst Reasons to Buy a House
While home ownership can be a great way to build wealth, a recent article on MSN/Money warns that you need to be careful not to jump into the market for the wrong reasons. So here are three myths to watch out for when you’re deciding whether or not to take the plunge…
(1) Real estate is better than the stock market. While the real estate market has been red hot in the past few years, with a national average increase of 50% over the past five years, and prices in some markets doubling during that same timeframe, it’s important to keep in mind that past peformance is no guarantee of future results. Major real estate recessions are a very real possibility, and it can often take a long time to recover. Moreover, real estate appreciation over the past 40 years has only topped inflation by 1%, as compared to 7% for the stock market. Over the long run, the law of averages has a funny habit of evening things out, so look before you leap.
(2) Rent is the equivalent of throwing your money away. Renting is often cheaper than owning, especially in overpriced markets. Also, you’re not really throwing your money away when you write a check to your landlord — you’re exchanging cash for a place to live, and you’re buying flexibility, freedom, and a lack of homeowner headaches.
(3) The tax deduction makes it all worthwhile. While it’s true that your mortgage will get you a tax break, it’s not like you’re going to end up profiting. Deductions such as this are like giving someone a dollar for the privilege of receiving 35 cents (or less) in return. While this helps to offset the cost of ownership, it’s by no means a justification for buying a house. Moreover, the other costs associated with home ownership (e.g., insurance, repairs, maintenenace, etc.) aren’t typically tax deductible. On top of all this, recent legislation seeks to place a cap on the mortgage tax deduction, meaning that the tax benefits of buying a home may shrink substantially.
[Source: MSN/Money]
Filed under: Real Estate, Taxes
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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November 14th, 2005 at 6:18 am
Hi,
Good points. I’d like to comment on the rent aspect. In evaluating a home as an investment you need to subtract what you’d otherwise be paying in rent from the total cost of owning the home. Note, NOT what an equivalent place would rent for, but what you’d actually be paying for the type of place you’d otherwise be renting.
What you get is the actual cost of the investment, which is the amount you’d be spending over that amount that you’d have to spend with no return for a place to live. You then do you analysis on that number to see how this investment stacks up. That is, that amount is your ‘opportunity cost’ money that would otherwise be free to be invested elsewhere.
January 31st, 2006 at 2:07 am
The article has some good points, but it also depends on holding period and what you want out of real estate. If you are buying it as an investment, a holding period of more than ten years will all but guarantee you a positive return. Alternately, if you are buying to sell or move within a short period, you just as safe buying a stock and will have a bit more liquidity in your investment.
Alan James