When I first learned about real estate, I noticed that Real estate brokers and family members would always refer to their home as a “great investment”. So I would think to myself, wow if this is such a great investment, how come my family and other adults have no money. I always thought an investment gives you money. I asked my uncle, who was a real estate broker to explain housing real estate to me. He said “listen, buying a house is great, but don’t confuse that with an investment. Most do not realize they make no money at all by buying their first home”.
This made no sense to me, you spend $200,000 on a house and it goes up in value to $260,000, you sell it and make $60,000 right? I came to learn that you make NOTHING, NADA, ZERO, ZIP… you may even LOSE money. You’ve heard it from friends and family before, “I just sold my house and made $100,000″, followed by a slight chuckle of achievement. These people have so much enthusiasm and are so excited that they made no money. I felt bad because I was in the same boat, my math and finance skills were under-developed.
Real Estate has been considered one of the most secure investments in the past. With the recent recession in 2008/2009 it’s time to look for deals as prices bottom out over the next 24 months to come. Real Estate can give you returns between 5% and 25% annually, depending on size of down payment, location and investment strategy (ie. buy low-sell high, renting or even partial rentals where you live in it while you rent out the basement).
Remember, the house in which you live is NOT a real estate investment, it’s an expense or a break-even situation. Here is an example that will prove the above statement. Observe a house bought and then sold after 10 years:
- House price $250,000 - Down payment $50,000 = Mortgage $200,000.
House Value after 10 years $335,979.09 (appreciation of 3% annually)
So lets start subtracting the expenses,
$335,979.09
- $145,000 (mortgage left)
- $27,500 (Property Tax over 10 years)
- $78,000 (Interest over 10 years)
- $50,000 (Furniture and Maintenance over 10 years)
= $37,479
So when you sell you will actually receive $37,479. But wait, you put in a $50,000 down payment, so you actually lost $12,521 … This math is real and easy.
So next time someone tells you they plan to buy house to live in is such a great investment (especially your first house), tell them why it’s not. If you approach home buying from an investors perspective, you can make the numbers work in your favor and truly convert real estate into a source of wealth.
We’ll post more tips and news on real estate investing in the near future.
- MastermindGrowth.com
No related posts.
Hi, while I agree with some of the logic in this article I disagree with others. It is true that many people fail to consider the interest and property tax as expenses in their investment when purchasing a home. But it is also important to consider that even if you don’t purchase a home you do have to live somewhere and this will cost money as well. I believe a more true scenario would strip furniture out of this equation as it is likely a cost that will be incurred whether purcahsing a home or renting. The remaining expenses must then be compared to the expenses that would have been incurred in a comparable rental property.
I believe that this will provide a more accurate assesment of the cost of purcahsing a home.