"Real Estate is Always a Good Investment"

Blake asks:
"People have often touted Real Estate as the most secure and steady of all investments. Conventional wisdom has been to buy a principal residence, and then buy revenue property if you can. What are your thoughts about revenue property given the current economic landscape?"



Thanks for your question Blake.
I will answer your question, but today I will address some prevailing ideas about real estate ownership.


Conventional wisdom (and real estate agents) tend to say that "real estate is always a good investment".


Now, I am not one to contradict conventional wisdom or realtors, but it is not often that you find very many things in life that are ALWAYS anything.


If you ask me if there is money to be made in property, then the answer is, of course, yes.
If you look at a real estate portfolio and a portfolio containing stock and compare them in the areas of risk adjusted returns (meaning returns after risk levels are considered), then yes, the real estate portfolio is usually a better bet.
If you ask me what my personal holdings are in, the answer is mostly real estate.



However, the idea that it is ALWAYS a good investment is problematic for several reasons.
First, it implies that buying ANY property at ANY price is a good idea. (which people who bought houses at the peak of the bubble and are now "under water" learned was not the case)
Second, it does not take several important factors that should become very important to a potential buyer, such as location, market conditions, risk, carrying costs, and condition of the property.
Third, (and this is a big one), people often have an emotional attachment to homes, and therefor make emotionally based buying decisions, which rarely lead to profit.

So, yes, real estate CAN be a great investment, but it is not ALWAYS a good investment.


Let's say you are currently renting, and your parents are bugging you to "stop paying your landlord's mortgage" and buy a house.


What should you do?
Or, to put it a different way, which is better, renting or owning?



Well, its true, no one wants to be paying someone else's mortgage, but it should not be assumed that it is a good idea for you to buy a house at this point.



If you want to financially benefit from owning a house, you could do so in two primary ways:

• By saving money each month (by paying less as an owner than you would as a renter)
  
• By selling the house for more than you bought it for.
  

Now, first time homebuyers often get it wrong in both of these areas.

First, they look at the monthly mortgage payment and if it is less than rent, they become homeowners.

The problem here is that they often ignore other costs such as home insurance, property taxes, and (this one can be huge) maintenance that will add to the carrying costs, but not really add to the value of their investment.

Second, people tend to buy properties with the idea that they will buy a house for one price and sell it for twice as much a few years later.

Unless we have another housing bubble around the corner, it is likely that house prices will drop, stay stagnant or creep up slowly for the foreseeable future.

Now, let's say that you find the house of your dreams, and when you consider mortgage payments, insurance, taxes and maintenance, you would still pay less as an owner than you are currently paying in rent.

Should you buy it?

There is one more thing for you to consider that should affect your decision, and that is that you don't know what the future holds.

As of today, you are probably employed.

As of today, interest rates are at all time lows.

These two factors can make home ownership easy today, but they could both could change very quickly.

If your financial situation changes significantly, you could potentially leave your rental house and move to a different one, but if you have mortgage payments, you are stuck.

If interest rates go up (and they will. I will write more about that some day soon), you may find it impossible to afford the mortgage payments you can afford today.

So, to sum it all up....

Buying a house can be a good decision for some people in some situations under certain market conditions.

I am sorry.... I know that statement doesn't roll off of the tongue as well as “real estate is always a good investment” does, but its true.

So, I am not trying to scare you away from home ownership.

I just want to make sure that you know what you are getting yourself into before you take the terrifying plunge into the world of real estate ownership.