Wednesday, May 27, 2009

Your Home Is A Bad Investment

Many people believe their home is a good investment. Using Robert Kiyosaki's definition of an investment as "something that puts money into your pocket," it's obvious it is not. Now the Wall Street Journal is reporting that, even by the conventional definition of investment, your home still may not be a good investment.

Using housing pricing data for the last twenty years in ten major cities, housing prices produced a real return of between 1.15% and 2.2% annually, after inflation. When you figure in maintenance costs, you could actually be losing money.

The article really only looks at property appreciation to determine the value of the investment. There is no mention of the income tax deduction for mortgage interest, which is usually quite substantial for most homeowners and probably would boost the return figure a couple of percentage points. Still, the gist of the article is correct - your primary residence is not an investment.

I subscribe to the "putting money in your pocket" definition of an investment. And while your personal residence may not be a good investment, that doesn't mean real estate isn't. As long as a property has positive cash flow, it's a decent investment. How good of an investment, of course, depends on how good the cash flow is. Then, of course, there are the other factors, such as depreciation, the ability to defer taxes through 1031 exchanges, etc.

While I am glad the WSJ article points out that people's primary residences are not generally good investments, I'm afraid some readers might come away from the article thinking all real estate is a bad investment.

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