As investments go, the home you live in is likely a bad one.
“From a rate of return standpoint, your primary residence tends to only appreciate a little bit faster than the rate of inflation,” says Greg McBride, chief financial analyst for Bankrate.com. Translation: The home you bought for $400,000 in 2010 that is now worth $500,000? Inflation alone would put it at about $480,000. During that same period, the stock market, as measured by the S&P 500, slightly more than doubled.
Yes, yes, there’s leverage in real estate. We’ll get to that below. But, no, homes don’t lead the pack in investment results.
Yet we fawn over real estate because it’s visible. We can see it and brag about it and host in it and inherit it and, most importantly, gooseneck at others’ homes, with the supposed values conveniently posted on the Internet. This is not the same as stashing money smartly.
This is not what people want to hear about their biggest asset. But there are so many downsides to residential real estate that I’m having difficulty choosing which to expound upon here. And I say this as someone who owns two properties.
First, consider risk. As investments go, residential real estate is dicey. It locks up your money, leaving you at the whims of the market or banks when you want to actually access your cash. And as contractors will tell you, you don’t know what you own until you tear into the walls. Just ask my friend who recently spent $80,000 to repair incessant flooding in a 10-year-old house.
Justin Pierce, a Virginia real estate investor and agent, points out that homes are rather complicated structures. “All the trades are involved, and then on the transaction side, it’s real estate agents, attorneys, accountants, a home inspector.” These people are essential, and they cost money and your time. Annual upkeep typically costs around 1% of the home value (no bond or stock requires an annual deposit) — and much more if you like landscaping or cleanliness or hot tubs.
And your attempts to add value to the property will likely just drain your wallet. The expense of a new kitchen or bathroom is rarely recouped in the sale price.
What about all those people on TV who seem to be flush with cash from real estate deals? They’re spending someone else’s money. Primary homes are typically profitable in a few scenarios: If someone else (a renter, your parents, etc.) is paying off the mortgage; or if the property is generating a cash flow (Airbnb, roommates, seasonal rental, TV/film set leasing); or, as too many of us assume will happen, if the home’s market value appreciates substantially.
In the latter scenario, a mortgage can make wealth seem to magically spring forth. A $200,000 home with a $40,000 down payment (here’s the leverage) that rises in value by 20% over three years means you’ve doubled your initial investment to $80,000, right? But over that time, you’ve also paid $25,000 in mortgage costs (including tax deductions), plus selling fees and taxes that will typically cost 8-10% of the home value — meaning that after inflation, you’ve actually lost money (but had a place to live).
“And it’s a disaster when asset prices go down,” McBride says. By any measure, this is not a winning investment.
The sweet spot, then, is to purchase the minimum that you need, and invest other money elsewhere. By our math, skipping an extra bedroom can earn you $500,000 over time: www.rate.com/research/news/richer-retirement.
“It’s really dangerous to go looking for a home primarily as an investment,” Pierce says. “That can encourage people to overpay and get in trouble in the long run, or buy something that doesn’t really fit their family’s needs. And then they end up having to move, which creates more cost.”
Another cost! Moving is expensive. My recent move cost $1,400, plus new places inevitably need some immediate work, which in my case was a $5,000 interior paint job. (The walls were tapioca yellow. The whole place. Yes.) Plus I spent a pile on essential furniture, and let’s be real: Did I work much in the weeks surrounding the move? No. I was too busy applying room labels that turned out to be nonremovable on expensive furniture. The total move cost easily topped $10,000.
A useful rule of thumb: You can likely afford a home that is 3.5 times your annual income(s) with 20% down, and less than that if you pay significant expenses such as tuition or debt payments, says certified financial planner Dana Levit, owner of Paragon Financial Advisors. “That essentially leaves you with enough money to live on.” This equation can be challenging in expensive neighborhoods.
Just remember: No one gets filthy rich on a house or two. Lots of people have grown immensely wealthy through seed investing or stock trading (careful) or starting a business — and then they buy real estate when they have money to burn.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
