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Your analysis is flawed. When evaluating the return on home ownership, two additional factors need to be included. First, interest and taxes on your home are partially subsidized by the government through income tax deductibility. This can be quite substantial depending on your tax bracket. So you need to add back the net tax impact of ownership.

Second, you need to include the cost of any alternative to home ownership - such as rent. In the Portland area, where rents for even a small apartment average $1200 to $1500, the benefit of home ownership in retaining the value of your hard earned dollars is great. So again, you must add in the value of the costs of alternate living arrangements in arriving at the true value of ownership.

These two factors more than offset the costs of financing and maintaining a home when determining the overall benefit of your home investment.

Your Home IS a Great Investment and you sir are an idiot.

Did you actually really read the entry? The analysis took into consideration the AFTER tax cost of the mortgage interest and real estate taxes, assuming the person was in the 33% marginal tax bracket. Let me guide you with the exact wording:

Since real estate taxes and mortgage interest are tax deductible, I assumed the after-tax cost for someone in the 33% marginal tax bracket.

And as you said, the decision to rent or own a home is a cost decision, not an investment decision. And yes, there are situations where the person is better off economically renting than owning.

Nice try, but I believe the pot is calling the kettle black.

Super article Jeff! I've been looking at homes for the past 6 months, attempting to find at least a financial equilibrium so I'm not overtending myself with a mortgage, but factoring in long term financial gain. Your article provided some much needed insight on the matter. Thank you.

Better than renting.

The comments your reader posted were rude and uncalled for. First there is always a little truth to every lie.A house should always be considered a home for your family first. While it is true you can yield substantial gains on the sale, holding time can have a tremendous effect. As a investment a house is a illiquid investment and extremely expensive to sell RE comm.5-7% of selling price while the owners equity may only be 20-30% (you do the math)the cost of selling your home is right up there with brain surgery. Remember very few people hold a property for 30 years and with all the fancy financing these days you can lose a lot of money in real estate or destroy your credit rating for years to come whiteness the current sub-prime loan situation. Please remember first last and always residential housing (1-4 units) is a place to raise a family or reduce your housing expense in exchange for manageing a multi-unit Bldg.

Nope - just calling the kettle Boque - since you don't have a clue. So what if you can read the WSJ? You're still one of those financial planners who rip people off by making them think they can't take care of things on their own.

You know Ken, you really aren’t creating any persuasive argument when all you can resort to is name calling.

as a CFA and real estate investor at the institutional level and personal level for some 20 plus years, I agree the analysis is accurate. It would be interesting to see the numbers when the transaction costs (broker fees, and closing costs on financing and annual repairs) are included. I suspect that would bring the investment yield closer to the one percent range.

Interesting article. I think this train of thought could lead into a compelling arguement for buying a home with a 15 year mortgage. I'd be curious to see the effect on the overall return % if the home were paid off in a shorter time period. Even if you could shave just a few years off the mortgage and save some interest expenses, I'd bet it would greatly improve the numbers.

I've stood back and listened in astonishment as the multitude of Mass-Holes interspersed with a few really delusional New Yorkers say how much their house is worth. Native Mainers like myself can only wonder at the utter stupidity of it all... But then again, we know better as we've seen this played out before. And the best part of it? The imported scum has slowed to a trickle.

Boque - your sales pitch is exactly that. It's a canned statement they teach you in CFA school. But it is inaccurate. It's only purpose is to convince people that they need your services.

By the way, you also have to add in the value of the tax you DON'T have to pay on the capital gain if you hold the property more than a couple years. What other income goes untaxed like that?

So the Fed subsidizes your annual taxes and interest AND they allow your investment to earn value without taxing you on it! Try that with dividends, interest or widgets.

So instead of a non-deductible rent, you have a non-taxed income. How hard is it to see the full VALUE of investing in a home (primary residence). "Pretty sweet huh?"

Right Ken. Nothing like committing a lifetime of earnings for a depreciating asset that eats into your paycheck every week.

Weak-minded, economically illiterate real estate creeps never fail to say something stupid.

Here is a point to ponder, stocks and bonds represents the value of a business and going concern. As we all know business come and go and can lose value regardless how long there are in business. Business can file bankruptcy and completely lose all there value and cease to exists. However Real Estate will always exist and never disappear, it may lose some its value for a short period of time but historic data shows that it will regain its value with time. Too bad the dot.com’s of the early 2000's could not do the same thing, I would have an extra $10,000.00 in my pocket. Lets face it I will never ever see that $10,000.00 but my real estate still exists and has always recovered in value!

Sincerely Bob

Mr. Boque:
Thanks for your kind words about my article. I enjoyed reading your readers' emails as well. (We should compare!)
The article, which is still available for free at WSJ's realestatejournal.com, grew out of the first chapter of my book ("The WSJ Complete Real-Estate Investing Guidebook") called "Your Home Is Not an Investment Property." The response to that initial chapter was so terrific, that we're now preparing a new book on home-owning that (I hope) will be out next year.
Thanks again for your comments.
Best,
David Crook
Editor
The Wall Street Journal Sunday
david.crook@wsj.com

Mr. Baizley,

Enjoy paying exploding property taxes, insurance and maintenance on that "investment".

Dennis

Are you kidding, the taxes, insurance and maintenance on a real estate investment is a bargain when compared to what a going concern/stock and bond is paying in taxes, insurance and maintenance. The company behind that stock or bond is going to pay directly or indirectly the same or more in real estate taxes not to mention the related payroll taxes, matching FICA, equipment and auto taxes.

When it come to insurance, that stock or bond entity will pay as much as 25 times more for the same insurance when compared to the real estate investment, and here again look at all the additional required insurance for a company: errors and omission, auto and equipment just to mention a few.

When it comes to maintenance it seems like that my office spends more in maintaining the photo copiers in my office in a year when compared to the maintenance on the real estate .

So yes I do enjoy paying the taxes, insurance and maintenance on my real estate investments because it is a bargain compared to what is pay by my stock and bonds for the same items. This is why so many business owners/CEO’s make substantial investment in real estate, they also know the related expenses with real estate are a bargain as well.

Investing in its true definition is the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use of money in the hope of making more money. How can home ownership fit this description? Especially when in most cases, you end up making very little in return over time? And I'm sorry that you lost $10K on dot.com stocks Mr. Baizley. But you were speculating, not investing. And there is a difference between the two.

Every once in a while I come across these issues where people feel things are “absolute truths” where they are only half truths; and the home ownership is a great investment mantra is one of those. And I like to stick my neck out and make a stand against conventional wisdom. And hey, I own a home. I don’t look at it as an investment; I look it as my place to live.

I suggest checking out the article that inspired me to write this. It can be found at http://www.realestatejournal.com/buysell/tactics/20070313-crook.html?refresh=on

Hmmmm... let's see...

I've paid approximately $150 in tansaction fees on a $200k stock portfolio. Yet, transaction fees on your real estate" investments are upwards of 10% of the purchase price. So you're out $20,000 upfront on a $200k real estate "investment".

I haven't paid a penny in property taxes, school taxes, insurance on my portfolio and it doesn't need a new roof and boiler. How much $$$ will your real estate "investment" eat up in those costs this year?

I'm beginning to this Baizley is another real estate crook attempting to sell more of is overpriced, depreciating "investments".

A house, a place called "home" where there are memories, a place your children feel comfortable/secure, a place where you entertain with the ones you love....the day your newborn child comes home to.....the day that same child goes off to college. Memories that are never forgotten whether you live in that home for one year or 50+ years. A house, this place you call "home"..... PRICELESS.

I thought this article was very informative and interesting....opinions are opinions....that's what makes the world go round.

I agree totally if you classify a home as an investment then you must classify the investment as mediocre. However, it's much easier to get capital to invest in "real" estate then stocks & bonds. The return may be smaller but the total sum of the return for most individuals is greater. Try a REIT or one of the homebuilders if you want real estate exposure. Maybe wait a couple 1/4's though lol.

It amazes me how many people are clueless as to the total costs associated with home ownership and the true appreciation rate for residential real estate. I think Robert J. Shiller pegged it at something like 1% above the CPI which is substantially below equities in the long run. Unfortunately, our houses/condos are investments if only because they are so costly and there are real price fluctuations which leads me to paraphrase Benjamin Graham's best advice, it's fun to buy dollars for 40 cents. Those days are coming for residential property in many chi chi neighborhoods. Hallelujah!

Benefits of home ownership:
1. Mortgage interest and taxes are income tax deductable.
2. Principle paid is money back in your pocket.
2. If you hold for more than 7 years history tells us you will make good money on the transaction. I did on both of my previous homes.
3. You are the master of your domain and no landlord can tell you what to do. Build, remodel, or renovate, no permission except a building permit required.
4. Equity can be used to get a home equity loan with interest that is also tax deductable.
5. In my case, Portland, Maine, the rent I would have to pay to live in my home is is about 50-100% more than I pay for mortgage, taxes, insurance, and maintenance combined, because of the shortage of rental stock. And by rental stock I mean real rental property that is built with federal building codes, reinforced concrete construction for noise insulation, two parking spaces, security, and a renewable lease.

Benefits of renting (assuming you have found a rental property as described in item 5):
1. I can't think of any. I'll let you know if I do.

Lets see.. The benefit of buying real estate at the top of the cycle? I don't see any.

The downside of buying at the top of the cyle?

1)The "asset" depreciates for many years. How long will it take for this lunatic run up to correct? Many years, so why would any one consider such a silly risk?
2)Your tax assessments are based on a value that was just fantasy. Why overpay on taxes?

3) The mortgage interest deduction is laughable. It's best understood as "I pay 1 dollar to save 10 cents". Foolish

Be prepared to lose ALOT of money buying real estate today and for many years to come. The barking minority who deny this are the fraudulent realtors.

I'd like to preface this comment by stating that I am 24 years old, unemployed, and living in my parents loft. I know very little about mortgages and how the housing market works, but I find this article to be a little... silly?

For a moment, lets compare 'investing' in a home to investing in a financial instrument of equivalent perceived risk. We'll call this instrument a bond. If you had to borrow money to purchase this bond, and after taxes etc., the net gain on the bond was only a few fractions of a percent, would you then label the bond as a poor investment? It might not achieve great returns, and it might not even be worth the risk for you as an investor, but your personal financial situation (having to borrow the money) would not make the entire asset class a poor investment. It was just a poor choice for you.

Now imagine that this bond was necessary for your survival. Buying the bond on borrowed money and only getting a return of a few percent seems like a far superior option to that of paying coupons (or rent). Mr. Boque realizes this, and stated it clearly in his comments above.

But how does real estate look when we treat it as we treat our other investments? What happens when we are able to pay for it in cash? All of a sudden it begins to behave as an investment again. This indicates to me that real estate is an investment. We hold it, expecting it to increase in value, and were disappointed when it doesn't. What effects its 'investment' status, according to Mr. Boque's definition, is not some outstanding characteristic of real estate itself, but the fact we must borrow so much money to obtain it. Just like buying stock on margin and then going bust, we see people who really couldn’t afford their homes having to relinquish them at the slightest dip in the housing market. It’s a poor use of leverage.

With that being said, is it a good investment? Obviously we live in a free market where sellers and banks are competing against people who rent property. Saying that ‘always renting’ or ‘always buying’ seems silly to me. It’s relative to the other options you have available at the time (including other investment opportunities). It’s a major financial decision, and you have to take all factors into account. But the majority of people won’t do this. The majority of people will react on some form of gut instinct or opinion formed years ago. These people will also post and argue about these pre-conceived notions on blogs such as this.

Does this make any sense?