3 Reasons why my home is a TERRIBLE investment
We fell for the dream of owning a home. Huge mistake.
A huge part of the American dream is owning a house. Why is that? I was fooled by mass opinion: that owning a home means you made it. This perception came from the invention and marketing of the home loan by banking to — shocker — make LOTS of money off unwitting American families. But back to what I wanted to talk about: three reasons why my home is a TERRIBLE investment.
We bought our current house in Beavercreek, Ohio. Why buy? We knew we’d be here for at least four years and thought that this would be a financially smarter choice. Nah, bro. Looking back, I would have done differently.
Turns out, our home is a terrible investment.
An investment is something that makes you money. It’s where you put your money to work making more money. So when you live in a home you own, you aren’t making any money. By default, that isn’t an investment. That is just an excuse I used to tell myself to feel better about buying. Here are three big reasons why our first home (and the typical middle class American home) is a terrible investment.
Reason 1: Most middle class homes make unsuspecting money-losing rentals
What would happen if we couldn’t sell our home when the military moves us a year from now?
Step 1: Turn it into a rental.
Step 2: Profit. Lose money.
[caption id=”” align=”aligncenter” width=”424"]
Renting my house would be like burning money![/caption]
Here is the rough math. We pay just under $1400 to cover the mortgage, insurance, and taxes on our $200,000 home. We could rent this house for about $1680. Great! We could make $480 a month, right?? Not even close — here are the costs I hadn’t considered.
Rental home costs I didn’t consider
- Repairs — things will break. Since I won’t be around, I can’t fix them myself for cheap. I’d have to hire a professional or handyman. This will cost $40–90 an hour plus materials.
- Capital Expenditures (CapEx)- these are the big ticket items that most people don’t even consider: roof, windows, siding, HVAC, etc. every few decades. Not planning for these expenses hurts when they come due!
- Vacancy — when you change renters, you’ll have a month or a few months gap where you’ll pay all the bills yourself. For our house, a month of no renters would cost $1600 or so with utilities. OUCH.
- Turnover — cleaning, painting, replacing fixtures, carpets… a bunch of little things can add up when it comes time to prep the house for a new renter.
- Property Management — in addition to everything above, property management can be hired to do the rest, including: getting renters, leasing, background/credit checks, arranging the rental income, and handling late rent or evictions. But the cost is 8–10% of monthly rent PLUS one month’s rent every time a new tenant moves in.
After costs, my home is actually a loss
So where does that put us in terms of income? Here are rough estimates for my current home.
- Repairs/CapEx: $250 — I could do a more accurate prediction, but 15% is a decent ballpark for CapEx & repairs
- Vacancy/Turnover: $170 — Vacancy isn’t a monthly cost per say, but doing this helps plan out income/loss. I used 10% of rent. This could be higher if the vacancy is higher in a particular area.
- Property Management: $185 — I used 11% of rent. This helps account for the cost of paying the management company when they move a new tenant in.
So now the numbers are: $1680 in rent — $1400 payment — $605 expenses = -$325. A LOSS.
What about self-managing?
In this case, I’d start profiting, but by a VERY low margin: about 80/month. Not a lot of room for error and now I have a J-O-B: I’M the property manager. Is all the potential hassle above worth $80?
So I am self-managing my 8 apartments and I’ll tell you that it actually isn’t that bad if you are local and if real estate interests you. But I understand it is a job that I’m doing to learn how to manage the manager I’m hiring soon.
What about loan pay down?
Even if I count the principle of the mortgage getting paid down every month, over 30 years that is worth $556/month (FYI: you actually pay down far less principle early in the loan and more at the end). So yes, I could TECHNICALLY make a positive $231. But the problem with that is the money isn’t accessible until the home is sold or refinanced.
Low money down makes rent-ability less profitable
If we hadn’t used the 0% VA loan and instead put the more traditional 25% down, then our loan payment would have been about $200 lower. So having some equity in a rental isn’t a bad thing because it can lower your payments and it lowers your risk should there be a market downturn. We used the 0% down loan because we didn’t have the cash a the time and figured it was a great benefit for that reason. Turns out: not so much…
Why the best neighborhoods make the worst rentals
We thought buying in areas with good schools and low crime would help us sell the home easier when we moved. While this logic is generally true, here is why that was stupid of us:
- Taxes are higher — we were paying for the better schools even though we wouldn’t have school age kids during our time here. I’m paying for other kids to go to school… (I’m a dumbass — but I’ll learn one day!).
- Prices are higher — everyone wants to live there, so the exact same house costs more. We didn’t need to be in a “good school area”; we could have had a lower monthly payment instead.
Turns out, we could have had less to pay in taxes and less to pay for our mortgage. These two reasons are why rental numbers usually end up as negative. Rent tends to almost be the same on a similar houses in less expensive nearby neighborhoods.
Reason 2: Equity building is just a checking account by a different name
I used to justify our home purchase partially by convincing myself that I’m building equity, so it must be good! Hell, the costs of repairs and upgrades we’ve felt obligated to do have WELL exceeded the amount of equity we’ve built — especially because we aren’t building much equity at the start of a mortgage.
I’ll have about $20,000 in equity built up when we (attempt to) sell this house in a year. What good is that money? It is no better than forcing myself to put money in a checking account each month that makes no interest. That is NOT what I want to be doing with my money. I want it INVESTED. Yes, this is a necessary evil of buying a home, but that doesn’t mean I have to like it!
If I was renting, instead of spending money on my home, I could do more interesting things with that cash. I would definitely have saved WAY more than $20,000 had I not had to make repairs, replace appliances, and make (unnecessary) upgrades. I think it would be close to double that. Plus I could have made money on that money!
Reason 3: Appreciation is just gambling by another name
If you keep a house for 30 years then yes, you can expect it to appreciate about 3% a year on average over the long run. This sounds pretty good, but actually that is the EXACT same average long term inflation rate. So while your home SHOULD slowly increase in value over time, the value of the dollar decreases at the same time. So you end up with a zero net sum. Basically, holding real estate is a hedge against inflation, which is better than a savings account for sure, but crappier than a passive index fund.
Sure, I’ll probably still pat myself on the back when we sell this house if we sell it for a decent amount more than what we bought it for. But in reality, I’m just kidding myself. I GOT LUCKY. I didn’t really win at all, especially after I account for closing costs — I would have been better off investing in stocks instead.
When I buy real estate for investing, I don’t even factor in appreciation. I want cash flow immediately — otherwise it isn’t an investment.
Appreciation is akin to day trading. Yeah, you can get lucky, but you can also lose your shirt.
How I would have done it differently
Yes, my current home was a terrible investment. I understand that now and can do better in the future. I learn a LOT more from mistakes than successes. So, I’ll reinvest in success to crush it in the future!
If I could do it again, I still would have bought a house. But I’d buy in a less fancy neighborhood, where the taxes are lower and the houses cost 25–35% less for the exact same thing. Then I would have at least had the OPTION to rent it out when we left.
What do you think?
There you have it: the three reasons why my home is a terrible investment. I’m interested in what you think about my first house debacle! Let me know!
Signing off,
Charlie
Originally published at reinvestinsuccess.com on June 12, 2018.
