Home is where the heart is, but not necessarily your money.
"The value of my home has more than tripled over the past five years, so I'm considering selling it and renting a house or condo to lock in the profit. Then I'd invest most of the proceeds in dividend-paying stocks. I just feel the housing market is going to keep weakening in the near term, and I don't want to lose these gains. My plan for early retirement would be shot if the price of my home fell significantly. What do you think?"
This was a quote from a letter that was in a financial article I was reading recently. And upon reading that, I realized that this was something that I had often considered myself. Currently, the equity of the condo where I live is nearly 1.5x the current value of my 401k. This is amazing, but at the same time a little absurd. If I was strictly concerned about keeping my assets diversified, I'd have to come up with a few thousand to put in my 401k (assuming a 50/50 split) or sell the condo to regain parity in my diversification.
Common sense and historical reality, however, dictate otherwise. When investing, you are trying to get as much return for your initial investment as you can. This is common sense. That is why flipping became so popular during the boom of real estate (which many people call a bubble). People were buying a property and nearly doubling their money in some cases in less than a year. This kind of 100% return was far and away better than anything that the stock market could offer. And although it wasn't a sure thing, it certainly was much less risky than a stock.
Now we are back to a more normal market in terms of real estate though. And over the long haul, real estate generally only seems to go up in value about 2% over inflation each year. That is not much of an increase, really. So, in terms of investing in your home with the idea that you will sell it and make a bundle, its really not that great of an idea. So, this seems to indicate even more that I should get my money out of my house as soon as possible and invest it to get a better return right? Not really.
My grandfather and I often discussed people with big houses who flipped for quick cash. "Sure they can do it, but now where are they going to live?" And he was right. The author of this letter I quoted at the start of this article really needs to look at what average middle class people are living in where he is. If he is living in one of these McMansions (as I so affectionately hear these houses called), it is probably adventageous to consider downsizing and putting the excess capital into something with a more stable to become more diversified.
But, if he is like most people (who are living in average-sized homes) I think that this type of thinking can be dangerous. Obviously, the real estate markets are different everywhere. And there are people that are able to make tons of money by doing flip and buying large, expensive pieces of real estate. However, for me, and most average people, the condo or smaller home is not so much an "investment" or an "asset" as it is a place to live. I expect it will increase in value, provided that I care for it, but it is not where I am putting large amounts of money to invest for my retirement. Rather, getting it paid off is insurance against the ever increasing price of rent.
If I wanted to invest in real estate, I would invest in real estate. I would not get myself a 1 million dollar mcmansion and hope it improves in value. This just seems silly and risky. If the economy goes sour and you need cash to live on, these homes will become a source of cash for some people. In a really bad economy, there could become a glut of such homes (such as many parts of the country are seeing now) and in the end, someone who *really* has money will come and swoop in and steal these houses right out from under people who will lose thousands.
"The value of my home has more than tripled over the past five years, so I'm considering selling it and renting a house or condo to lock in the profit. Then I'd invest most of the proceeds in dividend-paying stocks. I just feel the housing market is going to keep weakening in the near term, and I don't want to lose these gains. My plan for early retirement would be shot if the price of my home fell significantly. What do you think?"
This was a quote from a letter that was in a financial article I was reading recently. And upon reading that, I realized that this was something that I had often considered myself. Currently, the equity of the condo where I live is nearly 1.5x the current value of my 401k. This is amazing, but at the same time a little absurd. If I was strictly concerned about keeping my assets diversified, I'd have to come up with a few thousand to put in my 401k (assuming a 50/50 split) or sell the condo to regain parity in my diversification.
Common sense and historical reality, however, dictate otherwise. When investing, you are trying to get as much return for your initial investment as you can. This is common sense. That is why flipping became so popular during the boom of real estate (which many people call a bubble). People were buying a property and nearly doubling their money in some cases in less than a year. This kind of 100% return was far and away better than anything that the stock market could offer. And although it wasn't a sure thing, it certainly was much less risky than a stock.
Now we are back to a more normal market in terms of real estate though. And over the long haul, real estate generally only seems to go up in value about 2% over inflation each year. That is not much of an increase, really. So, in terms of investing in your home with the idea that you will sell it and make a bundle, its really not that great of an idea. So, this seems to indicate even more that I should get my money out of my house as soon as possible and invest it to get a better return right? Not really.
My grandfather and I often discussed people with big houses who flipped for quick cash. "Sure they can do it, but now where are they going to live?" And he was right. The author of this letter I quoted at the start of this article really needs to look at what average middle class people are living in where he is. If he is living in one of these McMansions (as I so affectionately hear these houses called), it is probably adventageous to consider downsizing and putting the excess capital into something with a more stable to become more diversified.
But, if he is like most people (who are living in average-sized homes) I think that this type of thinking can be dangerous. Obviously, the real estate markets are different everywhere. And there are people that are able to make tons of money by doing flip and buying large, expensive pieces of real estate. However, for me, and most average people, the condo or smaller home is not so much an "investment" or an "asset" as it is a place to live. I expect it will increase in value, provided that I care for it, but it is not where I am putting large amounts of money to invest for my retirement. Rather, getting it paid off is insurance against the ever increasing price of rent.
If I wanted to invest in real estate, I would invest in real estate. I would not get myself a 1 million dollar mcmansion and hope it improves in value. This just seems silly and risky. If the economy goes sour and you need cash to live on, these homes will become a source of cash for some people. In a really bad economy, there could become a glut of such homes (such as many parts of the country are seeing now) and in the end, someone who *really* has money will come and swoop in and steal these houses right out from under people who will lose thousands.
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