mcknight`s idea is right, except for the psychological aspect of renting forever: limited choice of property styles, presence of neighbours and neighbourhood choice to consider, how much do you really want to spend on decorating/renovating someone else`s house, the owner take back the home at any time, etc.

Owning a house is a lifestyle choice, and the intangible benefits are hard to get if you are renting. The additional costs of owning a home are presumably the costs of those intangible benefits.

But I do agree of course; renting is often a far cheaper solution and one that usually leads to excess free cashflow (depending on where you live, i.e. downtown manhattan, neither renting nor buying is affordable for most). What you do with the excess cash determines your outcome. If you invested heavily in equity markets from 2000-2009, you would have wished you had bought that house 15 years ago.

His older site covers this issue here:
http://www.wealthtipsonline.com.au/pwt/pwt5.html

Alternatively, his newer site http://www.propertyinvesting.com covers more on this topic.

Finally, I have my own take that it depends on your circumstances and goals, and what you want to achieve. I have written a post on this at http://www.moorethought.com/2009/03/wealth-pillar-five-make-your-home-asset.html

All the best,
Josh Moore

If I put a dollar in the stock market and 10 years later its worth a $100, that’s an investment as I dont have to make further payments, no maint, no interest paid and so on after my initial $1. Even if someone paid cash for their house, there is still prop taxes, maint, utilities and so that would eat into any profit you would of made. Buy a house you can afford with ease to live in and not to profit, unless you plan on selling and living under a bridge with a suitcase full of money

A home is an expensive lifestyle choice, albeit a functional and utilitarian use of capital.

You could only consider it an investment if you sell it, and either you will no longer be living in it or any other similarly priced house, or you are getting a reverse mortgage.

Otherwise it is the hardest “investment” to monetize, with huge carrying costs. House rich and cash poor sums it up for most.

On the other hand, investment real estate is another ball game.

Judging by the increased volatility in capital markets due to a number of factors, i would however say that although on paper, equity markets do better over 30 years, real estate has the potential to be much less volatile for most areas in canada except for some areas of bc, alberta and toronto.

Stock markets have become dangerous in a sense: proliferation of new players who can manipulate market direction, instant communications and information/rumors, automated trading algorythms.

All this means equity investors will have to be ready to suffer a -20% or more in a given year. If this big losses are near the time when you plan to exit, ouch!

If you told a broker in the sixties that in 40 years, markets could lose 30% over a couple of years, then lose another 40% 4 years later, they would have thought you were crazy.

Real estate can’t be any where near as volatile (except in very selective areas in Canada and I stress Canada where lending standards aren’t insane like the US), so you could argue that capital preservation or risk adjusted return is a far more useful metric when comparing equities to real estate, while the variability of returns should be carefully examined.

> 2) Appreciation – banking on appreciation is speculating not investing

On the same vein, banking on a company to maintain profits, and grow them is also speculative. So would ‘expecting’ equities to increase in value also be speculating and not investing?

Most studies show that real estate will at LEAST keep up with inflation. The same can not be said about any fixed income ‘investment’ such as bonds or CDs. Whether RE is a GOOD investment is specific to each case.

3) Tax – Typical PR setup, where you cant deduct the mortgage interest cost (in Canada) is another reason why it is NOT an investment.

Cash Damming.

4) Mortgage paydown – You have to ask yourself who is paying the debt servicing? If it is you or your family – then it is not an investment.

When buying stocks on margin, it is also me or my family that is paying the debt servicing.

I don’t believe your PR is a very liquid or flexible asset. But it ultimately depends on what you plan to do with it. A place to park money (that grows faster than inflation), which can be sold or passed on at death to generate positive returns sounds like a decent investment in my books.

Otherwise, it’s all a liability.

Again, everyone is going to have a different/personal opinion on this…but for me…I try to focus on acquiring Assets/Investments (that produce +ve CF) and if you continue this over the years – you’ll end up in much better place (financially), as compared to accumulating what people may ‘think’ are Assets/Investments (ie -ve CF).

So, I just wanted to clarify that if you think a typical PR or other -ve CF producing items (ie a business not covering its costs) are assets, you may look back after many years – and wonder why you may have not achieved the financial freedom/ wealth desired.

The cash flow is the earnings that the underlying company generates. When you buy a stock you are buying a stake in the company’s cash flow. That’s what gives it value. In theory, you wouldn’t buy shares of a company that has no chance of making money, now will you?

I think what MStar is saying is that a PR is like the company that has no chance of making money. You could buy it but you wouldn’t consider it an investment.

There’s big a big difference between “cash flow” and investment. Your stock example is pretty good. Also, just storing a bar of gold under your mattress might be a good investment (or investment hedge), but will not give you a cash flow.

It’s what you do with your primary residence (asset) makes it a bad or good or even greatest investment. Hard to beat the leverage that the banks give you when purchasing it (possible 20:1). Agree, many financial bloggers who post here understand this power equity. And for others, it is just a roof over their head.

I think what people should consider, in this case, is what they are truly investing in: it’s not the house, it’s the mortgage. Trust anyone of the posters on here when they say there is a TON of cash flow in a mortgage. If you are lucky/rich enough to buy a house outright, that is an investment too.

Some things can be over simplified. An investment can be a personal definition. I would say any non-consumable product is an investment. But that’s just me.

1) Cash flow is king. And a PR costs you money (-ve CF) and not make you money. Even if you recover some of the costs through renting of the basement or one floor – it helps pay down the debt service costs and ownership costs – but is still not considered an investment. The only have, for a CF perspective, is if you are making POSITIVE CF (even $1) – b/c now you are putting $ into your pocket.

2) Appreciation – Yes, there will be cycles in RE, and you may have an upswing. But, banking on appreciation is speculating not investing (CF related). So, again its a nice bonus to have upward appreciation; however, your typical PR is still not an investment.

3) Tax – Typical PR setup, where you cant deduct the mortgage interest cost (in Canada) is another reason why it is NOT an investment. If you are using the SM, then the point is nullified.

4) Mortgage paydown – You have to ask yourself who is paying the debt servicing? If it is you or your family – then it is not an investment. Whereas, in a investment/rental prop – the tenant is fully covering the costs (ie positive CF), so that would another form of investment.

In summation,

1) This is just my viewpoint and how I look at it.
2) I’m not saying owning your PR is a bad thing at all. There is a lot utility and satisfaction that comes along with home ownerhship (but this is an entirely different reason…and what makes you happy does not always have to equal $ or investment).
3) To reiterate, CF is king. That is the bloodline of all investments – whether it is RE, Stocks, or Businesses. As soon as CF weakens or becomes negative, you know there is only so long before the investment goes underwater. I’m not saying that there are other relevant criteria for investment – I ‘m just saying that is a very crucial and one that I use as baseline to evaluate if the transaction I’m getting into involves an asset/investment vs a liability

Just my thoughts – Let me know your thoughts?

Cheers!

In the long long run we have little to no interest of living in Toronto for our retirement years, likely returning near the small town where we grew up and still have friends.

However we don’t track our house as part of a portfolio. Being a home owner didn’t make me run away from REITs. However it did make me buy a few mortgage backed mutual funds, which managed to survive the market meltdown last year.

So far the two houses I bought were places to live, but I did keep in mind I would sell these places one day so I made certain considerations towards my house being an investment. I made sure to buy in a decant area and make sure I live near to services other people would find useful.

The fact I have made money on both places is not surprising given I buy fixer uppers, but for me that’s more of a hobby than trying to make money.

Tim

In a strict definition of the term, the primary home is an investment. I’m not sure about you guys, but I didn’t buy my house hoping to lose values in long term. If not, I wouldn’t have bought it in the first place. I also bought one of the cheaper house in a nicer neighbourhood even though I could’ve bought much bigger and nicer home in a shady area. Why did I do that? I also bought my house knowing full well there won’t not be any capital gains on its potential appreciation value. I’ll take that risk anytime. (btw, I love TFSA). Not like automobiles, if my house gets burnt down (god forbid) I will get a full replacement home from the insurance. Not what I paid years ago. If I thought my personal home will be a depreciating asset, why would I make efforts to prepay, double up payments, and increase the frequency of my mortgage (to pay off in 7yrs). I know this will increase the capacity of my HELOC, thus more can be reinvested. The personal home can have a rental suite for the extra cash flow. The primary home is just another extension of my overall financial portfolio. We all review our investment portfolio and make proper adjustment. And my personal home will be no different. I will upgrade certain places to increase the value of my house. Just like FT, I consider the maintenance/upgrades like MER fees. All part of doing business. The time might come when I HAVE to sell this house regardless of less liquid or not. That’s risk of owning this specific investment. The stock market has inherent risks and so is your principle residence. Both can be bubble driven.

By treating it as an investment, I make every efforts to make the money work for me. If you feel that it is just a depreciating asset, then be a renter. Have your 30yr mortgage. No need to maintain or improve your home. Location is not important. No need to figure out what HELOC is. If renting, perhaps try to afford that same home 10yrs from now.

@Jason Unger: I don’t believe bubbles are caused by people who purely treating homes as an investment vehicle. More likely due to the miss use of leverage and GREED. Agree, houses are worth what others are willing to pay for.
@Bakers@MansVsDebt: Yes, home might be more of long term investment grade.
@Thicken My Wallet: Only difference between long term vs short term is the “term”. The house might be less liquid, but still more likely to sell quicker if priced correctly. We are all greedy and all think our houses are worth way more. I try not to limit my investment options.
@Scott: Agree with your comments.
@Peter: I’m sure it can be retirement savings for many baby boomers. Especially to those who bought in Vancouver for under $200k and now worth $1.5 million
@Traciatim: Agree, the combination of overall portfolio matters.
@Housak: Agree, the investment can be different thing to many because we all try to make our own definition. We create it to fit our own needs. :)
@The baker’s Son: The investment has a “potential” to have favourable future returns. If you lose your job, then you are losing on your cash flow. Losing a job doesn’t equate to how much cash flow your home loses. You are not comparing apples to apples. ROI of your principle residence is the difference between what you paid for and what your sold for. And compare that to the cost of rent during that same period.
@Astin: Congrats! Must be nice to be mortgage free.
@CanadianFinance: Yes, just another piece of puzzle.
@209: I beg to differ. If you treat as an investment, you will make proper use of home equity. Also get ones with secondary suite if you have to. Like any other investments, you do have choices.
@Archanfel: Well said.
@John: The leaky condo caused much fiasco here in west coast. However, it created much opportunity for many. I know a half dozen people (risk takers) who purchased those condos for $70k-$120k years back. Despite these recent housing price drop, still rarity to find condos under $200k in my area.
@jesse: The argument could be said about those who bought stocks at the peak of 1929 or 2008.
@Sarlock: Again, you are using your own definition of “investment”. Is GIC at 3% any less of an investment than a stock market that just lost 60%? I find the word “illiquid” used to loosely on houses. Perhaps, more hassle to sell primary homes (arrange for showing, packing, moving, etc), but right prices will almost always bring in buyers (except in Detroit where can’t sell homes even for $500). It’s our greed to maximize gains makes the house asset illiquid. Despite the slow realty market, 2 out of 4 houses in my neighbourhood still sold theirs within 24hrs. Why? Price was right.

Phew.. my apologizes for submitting a long winded comment.

As DAvid points out, if you view a GIC as an investment – then something beating inflation MUST be an investment.

Parking your money somewhere that beats inflation – sounds good enough for me.

Buy your primary residence as a place to live and enjoy being your own landlord… but beware viewing it as an investment, those days are done for a very long time. We’ve had a generational feeding frenzy on homes (largely driven by the Baby Boomers) and it is coming to an abrupt halt and the hangover could last a decade or two. Don’t get caught waiting for another big price appreciation for your “investment”… one isn’t coming.

Don’t forget that houses are very illiquid too. Often when you most want/need the money out of your investment, you are waiting a very painfully long time to find a buyer (like these days).

There have been periods of history in which real estate has been an absolutely horrible investment, most notably those who bought in the ’20s. We now may be in one of those times. Leverage will decidedly act against those holding assets falling in price.

Often people will say it’s the best investment you’ll ever make. The only problem with that comment is it often comes from someone who has never made any other investment.

Long term it’s not often you see people lose money on their house. Just don’t ask anyone that bought a leaky condo out west how good of an investment a home can be.

Technically, it’s a(n):
1. expense mitigation (you have to live somewhere)
2. depreciating asset (the building),
3. potentially appreciating asset (the land)
4. asset with overhead costs (taxes, insurance, utilities)
5. assumed risk (market interest rates, location-based tethering)
6. tax shelter (in the US)

@Houska mentions this very real risk which is definitely coming to term in the US. It’s been a risk in “mill towns” everywhere, but Detroit is fast becoming a “mill town”.

In the technical sense of the term, it’s definitely an investment as it has the “opportunity for appreciation”.

But it’s so much more than that, it pretty much needs its own “pile”. If I had to package a personal residence as a security, it would be a very complex security. Most common vehicles for investment simply don’t carry the financial and emotional complexity of home ownership.

Home ownership is really its own category, which is why everyone has a different take.