Saturday, 10 June 2017

Is The Family Home An Investment Asset?


The wine, oil and syrup shelf in our kitchen.


Hi folks

This topics might spark some diverse opinions ....  all good. Bring it on!

Classically, an asset is something that either grows in value (realised at sale) or earns us money.....or both.  Under that measure then, is the family home an asset?  I would argue that it barely is. Consider these factors:

 1. The interest we pay on a mortgage over 25 years is often close to the same amount as the purchase principle. Take that interest cost off any profit/earnings.
 2. How much money have we spent on our homes? Add up every cent we have ever spent on our homes and detract that from the equation too.
 3. If selling to realise a profit, then take stamp duty costs off any profit and also the agents fees and any upgrading/prettying-up we may have done too.
 4. Unless we are going to live in a tent then another house needs to be bought so we have somewhere to live. Take that purchase price off any profits/earnings too.
 5. Then there's the confusion of inflation which decreases the value of the current sale price against the initial purchase price of 25 year ago. If we bought a house in 1991 for $300K then in today's money we actually paid $541K. So many folk sell their home thinking they have made a wonderful profit when it turns out it was only inflation all along and not asset growth.

I would argue that unless we have paid cash for our home, kept it 100% zero maintenance, never upgraded it's kitchen or bathroom etc and sold it ourselves not using an agent and only bought a replacement house for less than the initial purchase price would it have been a financial asset.....a rare occurrence.


Pudding from scratch


Here's what the financials would normally look like:

Purchase price - $300,000
Interest on Mortgage $230,000 (5% over 25 years)
Upgrade of kitchen over 25 years  - $10,000
Upgrade of bathroom over 25 years -  $10,000
Maintenance over 25 years  - $50,000 ($2000 per year for everything)
Stamp duty and agents fees on buying/selling  - $35,000
Inflation adjustment on just the initial purchase price - $241,000.

Total cost to have owned  this house from 1991 to 2017 and then sell it is $876,000.  This figure is what we would have needed in our hand (net) at sale just to break even!!

Now that math was conservative.  It gets worse if we upgraded our kitchen and bathroom twice in that 25 years, redecorated, recarpeted, landscaped, paid a lawn mowing person, re-fenced, paid a premium price in the first place....oh, and I forgot to factor in 25 years worth of house insurance too!

So from a purely financial perspective, is the family home a true investment asset?  A resounding NO.  In fact our family home could well be a financial liability.


Dinner from scratch


Australians are SO obsessed with buying and selling property and I hear so many conversations about it every day - and clearly nobody has done this math on the family home.

Hope that has not done our heads in too much?.......never mind.  This paradigm shift will help create new thoughts, priorities and ideas.



Take care folks and stay nice

Mr HM

15 comments:

  1. I have heard from people who bought houses when the market is down and sold when the prices are sky high. I'm not sure if they have considered interest paid and maintenance cost to calculate the real profit though.
    I don't consider my house as an investment. I wanted a place that I can paint walls, grow a garden, raise chickens (eventually)and have visitors any time I want without the permission of a landlord.
    Renting and owning both have advantages and disadvantages, sometimes these are financial.
    When planning to buy a house, one thing that really jumped out for me is how much interest I have to pay. I don't think many really consider the taxes and insurance either. As long as monthly mortgage payment is less than or equal to monthly rent, they think homeownership is affordable.

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  2. Oh, goodness. Never thought of it like that! There's considerable expense to owning a home and maintaining it. I tend to notice maintenance costs when something breaks or when something needs painting. Having a timber home means something always needs painting! Meg

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  3. Sadly here in UK, our house is there if we need care when we are older or ill, gone are the days when you could get a decent care home at a good price. If one or both of us need full time care our kids won't get an inheritance at all, it will be sold to pay the bills.

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  4. We were really fortunate to have bought this old house back in the 1970s and had it paid off within a couple of years. Unfortunately no renovations have been done since then but they are sorely needed from my point of view. It is worth an awful lot more than it did then and has the added benefit of being on 1/2 acre. However,I would hate to be buying a house these days as they cost the earth.

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  5. Whilst an owner occupied home is not considered an investment, it is often the most valuable asset people have if they don't have a lot in superannuation. I don't understand why inflation is considered a ‘cost’ as you wouldn't have that money in your pocket unless you are considering opportunity cost in which case you would have to borrow money for another investment or save money (the later still affected by inflation). Houses do depreciate in value but land generally increases in value. The demand for land is what drives land prices up - hence the crazy house prices in capital cities. When you take out a mortgage (unless there is significant increase in interest rates) your repayments should get ‘easier’ over time as your income will increase (wage inflation and promotion) and most people can pay off a house in well under the term of the loan by paying weekly or fortnightly and by paying a bit extra. The bit extra should increase with wage increases. When you're paying off a mortgage you don't have to pay rent but if you are renting you will keep paying rent after you retire when your income is reduced. The problem is that many people see their home equity as a way of buying a brand new car or financing an overseas holiday so they don't pay off the home sooner. This is why banks love offering redraw facilities - so you redraw your extra payments and keep paying them interest.
    If you do the frugal thing and pay the mortgage out early you can then use the money that was once repayments to top up super or other investments. On the other hand if you rent you can be guaranteed that your rent will go up with inflation.
    When you look at the costs of selling a home it looks pretty scary but in a good market you can sell a house yourself and save thousands - most people just don't want the hassle. Stamp duty is a percentage of purchase price and it varies a lot between states.
    As a home owner you do have to pay rates, insurances and repair costs but you can also add solar panels and rain water tanks to save on utilities. Pensioners also get discounts on rates and you take in a boarder or rent your home out to go travelling.
    I am a home owner now but if I wasn't I would buy an investment property that would suit me to live in when I retired and have a tenant pay most if the mortgage for me. I am in my early fifties so can hopefully work for at least another 10 years. With the exception of stamp duty the expenses are tax deductible. In between tenants you can upgrade kitchens and bathrooms and then claim tax deductions for depreciation. That way when you move in when you're ready to retire/ semi retire it doesn't need major work and the mortgage is either paid off or close to. Even if you still owed a bit on the mortgage you could renegotiate the loan and have repayments much lower than rent.
    As an example if you bought a house for 250k with 20% deposit and borrowed 207k (you can sometimes borrow the stamp duty which in Queensland would be $7,175)
    $205,000 @ 5.5% over 25 years (principle and interest loan)
    Repayments $1272 per month or $318 per week
    Rental income of $280 pw ($1213 per month) - shortfall of $59 per month
    However if you want the mortgage paid off in ten years you would need to pay $561/WEEK - so an extra $281 per WEEK or more to pay off sooner
    Obviously this is a bit simplistic as I haven't included outgoings or tax deductions and it is impossible to predict what the property would be worth in 10 or 15 years but my point is you can avoid having to pay rent in ten years. You can get a mortgage under 5% and tax benefits obviously depend on your income. I used Boq’s online calculator and this rental yield (5.82%) is pretty easy to find in regional areas in South east Queensland. I don't work in banking or real estate and I can't stand property spruikers!

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  6. Is there not profit in the house providing us with a place to live and grow and nuture without the fear of having to move if the landlord decides to sell or for other reasons?

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    Replies
    1. Absolutely....but that is the other side of the coin.

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  7. I can't tell you how much I hate the current obsession with viewing one's house as an 'investment'. I want my house to be a home that nurtures us and enables us to enjoy our hobbies and interests. I want my home to be investing in my happiness not my bank balance

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  8. And, that is why we sold our house and live on the road in our caravan. Our van was bought on the basis that it had everything in it we need to live, is easy to keep clean and has a aliminum frame which of course is not subject to rot. Yes, we will pay site fees until the day we drop off our perch but presently we freedom camp as much as possible. The most we have paid for site fees is $210 per week for power and water or in Cairns when we stayed a few days over Christmas and paid $43 per day.....ouch. There are places where we can stay long term and only pay $160 per week site fee. Last year our site fees averaged out at $107 per week or $5601 for the year.

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  9. When we purchased our two homes in sixteen years, they were deemed our forever homes. The first one would have become our forever home, had we not wished to purchase more land. It was sold, to roll over to our new investment.

    Just as compound interest in a savings account, increases over time - the investment in you home, decreases what you spent, over time too. Consider when your home turns over to the next generation (once you pass away) what you originally spent, is passed on again.

    I'll give you an example. My FIL was a bit of a workaholic. He purchased a large family home, on the outskirts of Brisbane. After he got through the high interest rates of the 80's, he invested in a second home for his 5 kids. The idea was to start the investment rolling, but his maturing kids would rent it to pay the mortgage. Only one child was interested though. So once he passed away, the deed of that home was passed onto them.

    I'm not sure on the history of my BIL (married to my husband's sister) but his parents raised a large family too, in a house, not far from my husband's family home. When they both died, the investment was passed onto their children. My BIL organised to pay his siblings their share, of the market value of the house, and now he raises his kids there. A large renovation happened to that home (done by his parents) which now hosts the combined family Christmas, every second year.

    A second renovation was done by my BIL, which was meant to house his MIL. But she decided to stay in the family home with her son, and one of the sisters moved in the new reno, instead. So in the example above, two sets of parents, invested in 3 homes in the Brisbane region. That investment, ended up providing housing for the 2 original families, and then a next generation family - as well as, 3 siblings from the original parents. This is while inflation was climbing, which was causing the cost of living to escalate.

    So those 3 original investments and 2 renovations, went an incredibly long way - and still have a ways to go! If you're buying houses only to sell them, perhaps it's not so cost effective. But when you plan for permanence (as much as you're able to) then any investment into a home, has the potential to save money, for generations.

    I don't believe we would recoup our costs, after living here 10 years, if we sold - but it has saved us money, which isn't accounted for in the original investment either. We have the land to grow resources, we would be dependent on purchasing, on a smaller block. In our lifetimes, the trailer-loads of stuff we would normally purchase from a nursery, is now growing on our land.

    So I guess it depends, what you do with that home, how much it ends up saving you. Rather than the purchase of it, being a general loss. It could be, but it doesn't have to be, if permanence is factored into the equation.

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    Replies
    1. Buying and holding generationally is certainly the old fashioned way to wealth - but it is rare these days. Your story above is unique and truly piqued my interest. Yet another comment of yours that I will have to reflect on and ponder some more.

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  10. Again, it's not always about the math. Buying your own home can bring security and stability. The peace of mind that if something needs fixing, it will be fixed. peace of mind that you can stay in that home as long as you want, and not be "moved on" when the owner decided to sell, renovate or move back in. You also haven't taken the calculations past the 25 years once the mortgage has been paid off and you are reaching a point when you are considering retirement. Rent is forever, a mortgage has an end

    If you're buying a family home, then that's what it is...if you're thinking of it only as an investment then that's what it is, and you do different financial calculations.

    One of the things I hate more than anything though is when people try to have the best of both worlds and don't give a damn about the consequences. They use their backyards as a way to make money. They build another dwelling in the backyard and sell it, thinking that will be the end of their financial problems. Then realise they didn't make as much money as they thought, hate living in such close proximity to their neighbour who's right there in their backyard...and decide to sell up and move on. leaving their neighbourhood/street to deal with the consequences.

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  11. Sorry, me again. I meant to add...I've done both rent and buy and I came to the conclusion pretty early on that it's a fair bet there is a mortgage being paid off either way. You just have to decide if it's going to be yours or someone elses

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  12. I get what your saying totally, and both agree and disagree.

    But I also live in South Australia where there are many areas where house prices are very affordable.

    I think it depends on the reasons you are buying your home as to weather it is an investment that brings you financial gain. We have been careful to renovate for profit - We keep it simple and have made decent money off it. We also have a FIL who is a builder, and Grant is increadably handy. Its about buying a good home thats a bit ugly, thats been on the market for a while so its cheap, which we then use the profit as a deposit on the next house. To the point we bought this current place in cash. We are far from professionals but we are doing just fine and it is worth the effort. (We have cruched all the numbers taking in all costs, clearly or we wouldnt go to the effort.....)Though hopefully this current place will be the last and the next will be a keeper on our farm.

    I think there are some people that over invest in their homes, renovating them beyond what their value is....You always need to know what your home is realistically worth and keep any works with that in mind...

    I also think for some people the investment is an investment in emotional/social security. To know you are in charge of your home and cant be suddenly evicted, (assuming your paying to mortagage..) that you can work on it as you like, not having to deal with painful rental inspections, being able to have pets and so forth. The knowledege that is something goes wrong, you can sell your home and access the funds. It is a form of forced savings in a way - paying off a mortage. There are advantages to renting, sure. But it requires strong discapline to save the money and perhaps invest it another way, or let it grow in the bank. In todays consumerist society, more people then ever are living from pay check to pay check. Would many people ACTUALLY save the money? Some would, which would make this a good option for them, but others wouldn't.

    My grandparents had a little weatherboard place just a street or two back from the coast in Dee Why, NSW on a good size block. They sold it for a few hundred thousond when they moved to a retirement village. Just a few years later afer they passed, it was sold again for a few million when Sydney beach properties sky rocketed.....so it can be an amazing investment. ;)

    xx

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  13. You think too much Mr HM...;)...it hurts my head LOL!

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