The Accidental Money Pit:
Do you have a few hundred thousand dollars lying around to sink into a 0% investment?
Real Estate marketing hype is that you sit back and smoke a cigar while your home value goes up, up, up--but the reality often is that you drag yourself home from work to find that you have to bail water out of your basement before black mold takes root.
The repair problem is not limited to the current housing-bubble price crash. Even “normal” maintenance and repairs of 1-2% of home value total $2k-$5 for a $225k median-price home and thousands more for more expensive homes.
Consider these 2 real-life examples:
- A condo buyer in the first year suffered water damage costs (a problem that damaged a neighbor’s unit), re-roofing costs, and fencing costs to add on top of the regular condo fees, mortgages, and taxes (regular condo fees cover frequent, small expenses such as lawn-mowing but large repairs often require extra “assessments”).
- A home buyer suffered a single structural problem that cost $9,000—an entire year’s rent for many people—to add on top of all the normal maintenance, mortgage, and taxes.
No Escape from Housing Consumption (not Investment)
You can see the false assumptions:
- A condo buyer thought that he/she would escape surprise maintenance bills by paying regular condo fees but then finds that he/she must pay the condo fees and then still pay big maintenance bills too.
- A home buyer thought that he/she would escape paying thousands of dollars of consumption housing expenditures that do not build equity but then finds that he/she must pay hundreds of thousands for the house “sticker price,” plus taxes and fees, plus (usually) mortgage interest, and then still pay more thousands in housing consumption to counter depreciation.
Imagine if people used real finance rules to calculate their housing “investment”?
Repair=Input: Repairs Increase Your “Cost Basis.”
Repairs are input costs, similar to a delayed addition to the purchase price. People like to stop counting their costs after “closing day” and pretend that years of additional costs never happened.
Tax rules recognize that repairs lower return on investment (ROI), i.e. eat away your "profits," which is why people keep repair records for tax returns, to prove that they did not make that much money after subtracting expenses.
I suppose that theoretically you could prevent your car from depreciating if you poured enough extra cash into it but those infusions would lower your return on investment (ROI), not increase it.
Houses Are a Depreciating Asset?
Try this: Buy a house and then abandon it completely for 30-50 years (no heat, no lawn-mowing, no re-roofing, no sump pump, no security, no insurance, etc.). Go find it when you are ready to claim/sell your nest egg to retire. Is that a winning investment?
(Anyone can be a Monday-morning quarterback and name past performance of a particular location, like saying, "If you bought Stock X in 1930 . . .," but it is harder to predict which markets will be hot a half-century in the future.)
The long-term US residential real estate nominal appreciation has averaged 3-6% per year but inflation plus regular, boring maintenance/repairs means that your house might return 0% real growth after 30 years—and that is before considering mortgage interest cost.
Next: All costs combined can make homeownership a negative investment and possibly worse than renting: Homeownership Cost Cliches: Housing Myths Part 10