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Editor’s Note: This is a guest post by Go Banking Rates
By definition, an investment is “the act of laying out money or capital in an enterprise or asset with the expectation of profit.” So by definition, is a home really an investment? With mortgage rates at a historical low and depressed home prices, it really depends on who you ask.
The self-made, multi-millionaire real estate investor who bought in when homes were cheap would answer with an emphatic yes. But times are different now, and many of those same home flippers and amateur investors are declaring bankruptcy while banks are seizing their assets.
In the wake of one of the worst economic catastrophes ever (and caused by overzealous home purchases), people are finally starting to realize that the era of easy money is gone when it comes to housing. While most people still believe a home is a great investment, there are several good reasons why you should reconsider thinking like most people.
Take a look at the major decline that the housing market has suffered from lately. Things are not looking good for millions of homeowners who are now late on their mortgage payments or are already in foreclosure. Try telling them that housing is a good investment.This recent development only shows how volatile housing can be. Unlike stocks or smaller investments, you cannot sell a home quickly if you needed to.
2. Investment Properties Often Lose Money.
It sounds great to own a second home or investment property. You get the title of landlord, get to brag to people that you own property, and you’re finally in charge.Guess again.Many people have no clue how difficult managing a property can be, especially in states that often favor tenants over landlords. You could have periods of vacancy, vandalism from horrible tenants and a host of other regulation issues on your hands.On top of that, maintenance fees and property taxes can cripple you. Have you checked on the price of a new roof or a set of new pipes? It’s definitely not the dream many expect.By the time investment property owners are ready to call it quits, they’ve either lost money or broke even after years of stress.
3. Returns are Minimal.
Using data from the Case Shiller Index of 10 major cities, The Wall Street Journal ran an article showing that home prices produced a real return of just 1.15 percent a year over inflation.
If you bought a home in one of the 10 major cities in 1994, almost the lowest historical trough for home prices, you would still only come out 2.5 percent ahead of inflation. Compared to stocks and inflation proof government bonds, that’s a pretty low return. Factor in other things like maintenance and property taxes and you could have actually lost money.So the next time you’re at a party and someone brings up the abundance of opportunity being presented by the weak housing market, you’ll be able to provide them with some facts.You can definitely come out ahead in housing if you’re buying for the long term (about 10 years), but then, isn’t that more of a home than an investment?
This guest post was written by Go Banking Rates, bringing you the best interest rates on financial services nationwide, as well as informative content and helpful tools. Subscribe to RSS
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