Real estate is something that will always be there. It is the ground we live on or the structure we work and live in. For this reason, it is something of value. The population of the earth isn't decreasing and the prime places to live and work aren't increasing. This seems like an obvious formula for success as an investment. Many people have made fortunes investing in real estate, but the average investor doesn't always have this experience. Why is this and what has recent history taught us about investing in real estate?
Many Americans are homeowners and, as a result, they became aware of the significant increases in home prices of recent years. This seemed to be a ride that many people were taking to easy prosperity. No one wanted to be left behind so more and more people jumped on for the ride. Like any speculative bubble, the residential real estate market has come crashing down and many novice investors have suffered with the crash. Many people are now avoiding real estate of any form and regretting their decision to invest in this market. Is this the best thing to do?
Your home is often your most valuable asset. Not only does it provide a place to live, but it allows for tax breaks and a forced savings plan (through paying down a mortgage and building equity over time). As a result, buying a home within ones means is not a bad decision. The idea of your home as the primary means to build wealth does not always make sense, though. Over the past twenty years (which included the housing bubble) home prices have averaged gains of just 3.6% a year. Stocks, on the other hand, have averaged gains of 8.4% per year (including the recent downtown in the stock market).
I'm not saying there isn't a place for real estate in a diversified investment portfolio. There are professional real estate managers and ways to invest in commercial real estate in a prudent, diversified manner. My experience and history have taught me that a home should be primarily a home and investing in real estate beyond that should be done carefully, prudently and with a long-term, diversified approach, just like the rest of the investment portfolio.
Hi Scott, I was wondering if you could share your thoughts about home mortgages. I recently heard Suze Orman recommend NOT to pay off your mortgage if it isn't the house you plan to live in for the rest of your life. I had never considered this before and was wondering what you think. I'm not sure I understand her reasoning behind recommending this. There are obviously a lot of factors that could influence this--mortgage rate, loan term, amount of equity, etc. Within the next few years Dave and I will probably be moving out of our condo into a house, and our plan up to this point has been to put as much money down on a mortgage as possible to keep our mortgage payment low (obviously leaving some money for short- and long-term savings). But if it's not the house we plan on staying in for the rest of our lives (it probably isn't), is it better to invest that money elsewhere and have a higher mortgage payment? Do you recommended certain ratios aside from the standard 20% down that you always hear?
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