Over the past 25+ years of working with clients, we have been asked more times than we can remember what we think of real estate as an investment.<\/p>\n
Our first response it generally to clarify whether our client is referring to commercial or residential property. While both are obviously real estate, they are very different types of investments. Commercial and residential real estate do not share the same risk and expected return characteristics.<\/p>\n
Most of the time, our client has responded that she means residential real estate. We would then ask if she meant residential real estate as a place to live, as an investment, or both. For clients who don\u2019t own their home, the response has almost always been as place to live, or both.<\/p>\n
With the context of her question defined, we\u2019ve given our response, which we\u2019re sharing with you here.<\/p>\n
Owning your own home \u2013 residential real estate \u2013 has been presented by our government as a key part of the American Dream. Young people grow up in America, and migrants come here, with aspirations to own their home. However, over the past few decades, residential real estate in major population centers (and other highly desirable places) has appreciated far more rapidly than wages have risen for most workers. This has made buying a home in these places (the Bay Area and Portland among them) far more challenging for young people and those with modest, middle class incomes than it was for prior generations.<\/p>\n
Sometimes when we\u2019re asked about buying residential real estate, the question is posed by someone who has only rented before, but who clearly has the financial ability to own a home. To us as financial advisors, the question is really about the economics of owning versus renting a home. Early in our careers we never really questioned the financial wisdom of owning a home. We encouraged young clients to save for a down payment, draft a budget for home ownership and prepare to buy a home when the opportunity presented itself.<\/p>\n
But some time ago, we began to look more carefully at the economics of home ownership. The math supporting home ownership was not nearly as compelling as we had assumed. In fact, in some cases, owning a home made no sense financially. For example, if a person was planning to live in a place for only a short time, like:<\/p>\n
the transaction costs for buying and (presumably) selling a home in a short period of time make renting a better strategy.<\/p>\n
There are other reasons why owning a home may not be the best choice. The costs of ownership are significant. The government assesses property taxes based on the home\u2019s value. These taxes can be as large as a mortgage payment. Property insurance is based on the value to repair or replace it, and the risk that it may be damaged or destroyed. Properties age over time, and require regular maintenance and periodic repairs. Those who live in communities governed by a homeowners association (HOA) pay association fees.<\/p>\n