Americans have been duped into thinking that their home is their #1 investment. Nowhere in recent history was this misconception more clear than during the recent financial crisis. Just prior to the Housing Crisis people were speculating in real estate, they were buying property for the sole purpose of selling it for more than they bought it for. This is not investing, it’s speculating, there is an distinct difference. First, lets remember what an investment is. Benjamin Graham so aptly described the difference this way: “Investment is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market.” A speculator buys an investment ‘vehicle’ such as a share of stock or a piece of real estate not to benefit from the long term wealth or short term cash flow, but because he or she expects the demand for the ‘vehicle’ to rise, thus lifting its price. An investors’ thought process, on the other hand is, ‘what does this vehicle pay me for investing in it’? In other words, this is a vehicle which creates wealth over the long term, cash flow in the short term, and/or both. So, Investing in companies whose stock provides dividend payments would be considered an investment. The same can be said for buying a real estate that can generate cash flow.
That brings us back to the original topic, is your home a good investment? Does it produce cash flow? Not unless you are renting it out. We have been duped into thinking it is a great investment because property values, pre-housing crisis, increased so dramatically. These values, it turns out, were nothing more than a reflection of government manipulation and media hype. Your primary residence is simply your largest expense, not an investment and here is why: You must pay your mortgage and property tax on your home, which means you never really own it anyway. in addition, typically most people pay insurance and ongoing operating costs. In addition, there is absolutely no guarantee you will experience price appreciation over time. The fact that our government is manipulating currency by printing fiat money, means your house value will most likely fail to keep up with the value of inflation.
Don’t get me wrong – real estate can be a fabulous investment vehicle, one that I own and truly believe in. But, it is a great investment because it provides a monthly cash flow after expenses. Unfortunately, many people put their life savings into their homes, and naively thought they were actually investing this money. Sadly, when the real estate bubble burst, they were left with an empty bag; no savings and a mortgage whose value exceeded the price of their home. So ask yourself when investing, does this vehicle produce positive cash flow, is it a store of value? If not, it may not be an investment, just a nice place to store your clothes and furniture. When you invest your money, the idea is that your money keeps working for you, even while you sleep!
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