Own or Rent Paradox: Your home is not an investment

[John Fulton]

There is a lot of commentary surrounding the topic of whether to rent or buy (Regarding personal residences). A roof over your head is an expenditure. The rent-or-own paradox is about losing the least amount of money possible under the expenditure header. In my opinion, residential real estate is a better alternative to renting, but don't get it confused: owning a home is not an investment in the traditional sense of the word. If your home was a restaurant or any other business you'd be losing money and would have to close shop. Consider the profit and loss: Mortgage interest, taxes and insurance, updates, upgrades, roofs, HVAC, condenser, etc., on the expense side, and monthly appreciation on the other side just barely keeping up with inflation. Principal payments are not profit, they are merely savings. The only return on investment is the % of additional value the home has accumulated when you go to sell down the road (if the market doesn't go down, or stay stagnant).

And if you use a Realtor to sell your home, don't you dare call your home an investment or an asset. Again, your profits is the difference between what you paid and what you sell it for.  Consider this: It costs $30,000 to sell a $500,000 home. If you're average monthly principal payment was $700, the commission to sell costs 42 straight months (3.5 years) of those equity payments. Make $120k a year to be able to afford that home? That's 5 months of your after tax (30% bracket) salary. Scale it down to make it relevant to you, e.g., $250,000 home, $15,000 commission, $60,000 a year salary.  It's all still the same....These fees are to your profits what a V12 engine is to gasoline. 

If the goal is to be super frugal - when you buy, purchase something below your means where the mortgage debt is 15-20% of your monthly income. Get a 15 year loan and double your mortgage payments to leap frog the amortization schedule, getting the bulk of the payment to go toward principal and not interest.

If your goal is to use real estate as an investment vehicle, purchase apartment buildings or single family homes and rent them out. Hold them long enough to realize half decent appreciation.  Appreciation averages out better in the long term than what it is on an annual basis, so hold for two or three decades, not two to five years. 

In anticipation of some objections surrounding the Realtor bit, below is a peer-reviewed economic study that empirically demonstrates Realtors do not sell the home for more money than FSBOs, nullifying their argument that their marketing efforts of iPhone photography, and picture slide-show "virtual tours" will somehow sell it for more to cover the extra cost of the commission.

https://www.econstor.eu/bitstream/10419/38634/1/57...