Tricky Keg Stands

Why Your House is not an Investment

(this was written in 2004, before the bubble burst)

We were out with two other couples... I can't remember where we were or what we were doing, but the topic of investing came up while talking about our homes/lofts. Someone looked at me and said something along the lines of, "Your new house is so great. such a great investment, you'll make tons of money." I blurted out, "Your home... the place you live in should never be an investment or something you count on to make money. To do so is absolutely retarded..."

They all looked at me as if I pulled out a gun, shot thier puppy and molested their cat... They all looked so freaked out I just sat back and said, "Well, maybe you're right. Maybe counting your house as a great investment is a good idea." and then I ShutTheFuckUp

Right, well, i don't have much time to write a whole thing right now, but i'll start it and hopefully add more guts, slowly.

---

Le Corbusier said, "A home is a machine for living in."

Amen, brother... Your house is a machine... for living in. Not making money. It was conceived, designed, built, and purchased so you'd have a place to sit your sorry ass and a place to protect your useless posessions. I'm not saying you shouldn't buy. But after you buy you shouldn't kick back and think, "wow, i am a brilliant investor. I'll make like $50k off this house when I sell it. I'll be rich."

Right, you would be rich if you moved your ass back to your parent's house or into a nice van down by the lake:

But, you won't. You'll buy another house. If it is in the same area, you'll simply turn that $50k right over to the seller of your new house because they probably bought it for $50k less than you're paying.

Unless you're upgrading.. in that case the previous owners probably sold it to you for $80k more than they paid. You might have made $50k on your old house, but you just handed all that cash to them, plus another $30k.

The numbers are arbitrary, but hopefully you get my point.

Something else to think about. You'll continue paying your house payment. The fun part is your 30 year mortgage starts over. What have you gained? Sure, you got a nicer house, but you traded your 20 year mortgage for a brand new 30 year.

Let's turn it around and make your house a real investment. Say you live in your house for 10 years and sell it for a $50k profit. To see that profit, you are going to have to buy a home that costs $50k less. Yay! your investment netted $50k... problem is, you are the proud owner of a shit-hole and all you have to show for it is $5k a year for the 10 years you sat in the old house. $5k a year... yay.

I guess what I am trying to say is the only way to cash in on your "investment" (your home) is to trade it for a shit-hole and lower your standard of living.

If you are tricky, you may be able to time it right to make some money. But, to do this you are going to have to suffer a bit. You could sell your house at a real-estate peak and pocket the cash. You could move into a modest apt until the market busts. Buy a house... hell, buy back the house you sold... rinse, repeat... It would work.. but would anyone do it? I know I wouldn't want to go back to living in a shitty apartment for 7 years after having a nice house.

I know that I do not want to alter my environment just to make a few dollars.

Here's an idea. Buy an apartment building at a real-estate depression. Buy it in addition to your house. rent out the apartments, maintain the building ($), then sell it when the market peaks. Briliant.. eh?

hello, retards, this is what people call an investment... a real estate INVESTMENT... you are investing in real estate. buying your own home and calling it a real-estate investment is... retarded.

"What about building equity? you can borrow against your house once you build some equity." s

Ok, genius. What are you going to use that money for? are you going to buy a new car with it? braces for your kids? great... but you know what? that is money you already have. When you take a home equity loan, you are paying interest on money you already have for something you may or may not need.

I'm not saying a home equity loan isn't a good tool to use in a pinch. It is way better than racking up your credit card debt. But think about this. Getting a loan actually costs more than selling your house and buying whatever you need with the extra cash. You are paying a bank to allow you to maintain your current living conditions while buying something else.. The fun part of that is you have to pay for whatever you bought with "future money" Future money is the cash you earn somewhere down the road. The beauty of that is $5 earned today is not going to buy nearly as much as $5 in 10 years. (WAIT!! no.. now that i think about it that "future money" bit is wrong... I'll rewrite it in a bit)

lunchtime is up... i'm out.

oh yeah, one last thing. My current guess for the "right thing to do" is this. The first house you buy should be the house you think you can live in until you die. You want kids? Make sure you have enough rooms (or room to expand) Is it in a good school district? Is it in a somewhat central location for when you get laid off and get a new job on the other end of town? Is the neighborhood going to be livable for the next 50 years?

If you don't move and you bought a pretty expensive house you will be able to keep up with housing inflation... I say buy the biggest possible because if in 50 years you look back and see homes, on the average rose 250% in value I'd much rather start with a $350k home than a $100k home.

Get the lowest rate you can possibly get, then don't pay it off early. Drive the crappiest car you can stand.

--OR if you are really smart--

Don't buy a house... buy an apartment building and live in one of the apartments. Live in your investment. Drive the crappiest car you can stand.

---

in general, i'd say:

figure out why you are in debt... fix that, first. (budget)

pay off all debts, starting with the smallest one first (realistic goals, kids)

save 10-25% of your earnings.

invest what you save.

drive the crappiest car you can stand only if the crappiest car you can stand is within your budget.

work your ass off.

---

added in June 2008:

(heavily adapted/paraphrased/quoted from 28 Feb 2006 Berkshire Hathaway Chairman Letter by Warren E. Buffett)

The explanation begins with a fundamental truth: With unimportant exceptions, such as foreclosures (in which some of a seller's losses are borne by creditors) the most that a real estate investor, in aggregate, can earn between now and Judgment Day is what the market, in aggregate, earns.

True, by buying and selling clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when prices soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic-- no shower of money from outer space-- that will enable them to extract wealth from their homes beyond that created by the markets themselves.

Indeed, owners must earn less than their markets earn because of "frictional" costs. And that's my point: These costs are now being incurred in amounts that will cause homeowners to earn far less than they historically have.

---