Archive for the 'Retirement' Category
Pre-2007, I am not sure this topic would have even been controversial; people not only regularly utilized their home as their “primary investment”, but often, treated it as their personal piggy bank. In hindsight we can all judge others as we secretly lick our own wounds from a vicious downturn no saw coming, but that experience left a visceral taste in many mouths.
Most experts would suggest that your primary residence is not an investment. Why, you ask? First, you purchase a home based on need. Your buy and sell decisions rarely spring from analytical thinking around market timing. Instead, most times, they are rooted in your changing life needs. Second, investment strategy wages a secret war with your personal desires. For example, I want a tricked out man cave equipped with a full wet bar, bathroom and other appropriate amenities. Am I thinking about the return on my investment, or the endless joy my friends and I will have watching football on Sunday, Monday and Thursday? Sure, I will likely increase the value of my home with these upgrades, but the anemic return on investment, if any, would never be worth the money. Said differently, would you make the same upgrades to your rental property; probably not.
If it was that easy, I wouldn’t write the article.
I will start with a question. Is it easier to invest in stock or buy a house? Right now, Berkshire Hathaway Inc. (NYSE: BRK.A) trades at $128,175 per share. Its five year performance has been strikingly similar to the performance of many real estate markets. If you have a job making $50k and $7k in the bank, do you think you will ever in your lifetime own a share of Berkshire Hathaway A outside of a very lucky lotto ticket? The answer is unequivocally no. You don’t qualify for the right to buy on margin and even if you did, where would you get the 50% required to do a margin buy? And how would you live on the prison food when the margin call comes? All important questions to consider…
Now, let’s take that same fellow and put him / her into a working class neighborhood. He sees a for-sale sign and the asking price is $130k. He walks into his local bank branch gets a pre-approval letter and in 30 days, he is the proud owner of a similar $128k asset. Interesting… Are these two assets really that different? Sure, the risk profile is different, but not as different as people would have thought 4 years ago.
The real difference is access. Leaving aside the risk of foreclosure and the costs associated with credit repair, moving, etc., this person has $7,000 at risk and unlimited upside. Additionally, there is no other investment available to them with a lower risk profile or higher upside. This person probably could not even qualify for a real estate investment loan, but interestingly, they can get one chance to basically play with house money.
I would humbly submit that your primary residence is what you make of it. You can treat it like an investment, moving to an up and coming neighborhood every 4 – 7 years, investing in only the Spartan renovations that meet a certain return threshold, or you can treat it like your home, “investing” in renovations that make you smile a little bit every time you walk in the door. The choice is yours, but importantly, it is a choice. If you treat yourself as you would a tenant and you make sound investment decisions, you very well could do well with your primary investment. Given the easy access to financing, it may just be the biggest, safest investment in your portfolio. Or not, its really up to you.Related posts:
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