You Can't Live in Your 401k. It Gets Drafty.
Even though the point of this blog by J. Philip Faranda, Broker in New York is that real estate is a good investment, it reminded me of some of the potential buyers I have run into lately.
Many people try to treat the purchase of their home like a "get rich quick" scheme. The problem is that even though your home is an investment, it is not like any other investment you may encounter. Like the title says, "You can't live in your 401K".
While it is important to keep resale value in mind when you purchase a home, you shouldn't make your buying decision solely on the anticipated return on investment (unless your real estate purchase is investment property).
Some of the comments in this story prompted me to write one of my own. The jist of the piece is that all real estate appreciation from the past 10 years is nullified by inflation. Now, I don't know if I should go outside, stand in the street and scream
DUH
at the top of my lungs, or just put my face in a pillow, and scream
DUH
at the top of my lungs in the privacy of my living room.
Stories like this bring out the haters, and several commenters lamented at how a $200,000 house actually costs three times that much in total payments (wrapping it up with a lament about the failure of capitalism) and another said that the stock market is a better investment than real estate.
There is a really really large fallacy some people fall into with when they start comparing buying a home with buying a stock, and here it is:
You can't live in your 401k. It gets drafty.
I really don't care if the stock market outperforms real estate or if it doesn't. It is an apple and orange comparison. I don't care how many charts, graphs and algorythms you show me about how much more money you'll have in 30 years if you took the money you would have put into a house and bought Berkshire Hathaway instead, and here's why: Where ya gonna live Einstein.
To take advantage of the so called "better investments" than real estate, you either have to live in a box, or be a HUGE camping enthusiast, because I haven't figured out how to invest my housing money elsewhere and avoid eviction. A dollar can only go one place.
If you pay 2000 per month rent for 30 years, you've laid out $720,000 to someone else and accomplished two things: avoided being homeless and paid the maximum in taxes possible. If you pay a mortgage over 30 years, you've paid tens of thousands less in taxes and you have an asset of considerable value that you own, even if it hasn't appreciated a dime.
So, here is my question for all the bar graph guys who think they'll have more money in 30 years playing the market while avoiding the pox of home ownership: where will you live while you're being an investment genius? In a pile of stock certificates with no plumbing or cable? A box? Your car?
- J. Philip Faranda, Broker-owner, J. Philip Real Estate, LLC. 2010 Vice President, Westchester-Putnam Multiple Listing Service.
- Read my short sale blog here.
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