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Bakari
biodieselhau...
Male
Oakland, CA



 
Posted By Bakari

It's a part of the American Dream.
Instead of throwing away money on rent every month, you can buy your own home, giving you not only a place to live rent free, but a sound financial investment at the same time.

One small problem: the number's don't add up.
(Check my numbers: http://www.bankrate.com/brm/mortgage-calculator  http://www.dinkytown.net/java/CompoundSavings.html  http://www.hsfcuonline.org/cw2.1/calcs/Appreciation/calc_appreciation.asp )

First and foremost, there is the idea that a home is an investment due to appreciation.
The logical flaw in that idea is simple, and doesn't depend on appreciation or rental rates.

Say you buy a house at a certain price, and the value goes up 500%.  What can you do with that "value"?

If you want to live in your house, the best you can do with it is use it as collateral for a loan.
Great... now you can go much deeper in debt all at once than you ever could before.

If you sell the house, now you need to live somewhere else.
If your house just went up 500%, that means every house in your neighborhood just went up 500%.
What ever you made in profit by selling, it will cost you just as much to buy something else of equal quality.
Minus what you lose to agents, banks, and taxes for the transaction.

So in order to ever make use of appreciation, you must either move to a much worse neighborhood, move to a much smaller home, or move to a less desirable location.
So: IF you have kids who will be moving out of the home in 10 years, or you plan to retire somewhere cheaper like Arizona or Florida, only then might a house which you live in be considered an investment.
(Buying a house to rent out to others is another story, since you can sell it anytime)

If you want to stay in your home, you can never cash out, and any appreciation is useless.

But at least you are saving on rent... right?

 

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4 Comment(s):
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May 16, 2017 5:52 AM
 
Carlos Chestnut said...
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December 16, 2013 11:29 PM
 
mama bear said...
one more thing. sometimes there are good reasons to borrow. for example to make a real investment (in a rental property, for example, that will eventually pay back what you invested and more.) If you do choose to borrow for this or other reasons, your home equity (aided by appreciation) is not useless; it is extremely useful. Still, be sure not to borrow more on your own home than you can afford to pay back even if the investment flops. Otherwise you may lose your home to foreclosure.
March 25, 2008 10:06 PM
 
mama bear said...
Buying your own home is not, never was, an investment. People who think that are misinformed. Buying a rental property is an investment. Buying a house to fix up and sell is an investment. Buying your own home is a way to own your own home. Instead of paying rent to buy someone else a (an investment) house, you pay a mortgage to own your own home. As long as you pay the mortgage, no one can evict you, and you can decorate any way you wish, make improvements, etc. But you can profit one day if, after living in your house for years and building equity, you choose to move from a more expensive place (like CA) to a less expensive place (most places); then when you sell the house you'll have a lot more than you would have accumulated renting. Even if you never move, one day when the house is paid off you will only have to pay tax & insurance. Whether or not it is better to buy or rent depends on several factors including how long you want to live in one place, how much rents are and how much houses are selling for at that particular time. Owning your own home usually is a financial advantage for someone who plans to settle down in one place for many years, but not always. If rent is real low &/or house prices real high, you may do better to wait for that situation to reverse itself before trying to buy. As to taking out big equity loans, (as with credit cards) one should use common (or not so common) sense and good judgment and remember it's not free money; it's a loan that must be repaid with interest. An even bigger misconception is held by those who think a car is an investment. Most houses do, at least, appreciate, even if you live in it. You also get the benefit of a tax deduction on some of the interest you pay on the mortgage. But cars depreciate. You buy a car (like a house) for your own use. It is not an investment, it is a commodity. (Unless you buy collector cars and fix them up and sell them for more than you bought and put into them.) And don't forget, "health is your greatest wealth." -- mama bear
March 25, 2008 10:02 PM
 
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