Don't Fool Yourself – Your Home Is Not An Investment.
Recently, a respected blogger on the Web misquoted me on their blog in an entry referencing my essay, "You Don't Own Real Estate. Real Estate Owns You." The blogger made a couple of critical errors in quoting me but the errors have, for the most part, now been corrected based on three points I made privately to the blogger by email. Below, I present the text of my email (with some small edits) for all PowerWealth.com readers who have an interest in real estate investing to review and consider.
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First, I never said on my PowerWealth.com site that a "home mortgage is not an investment." What I said was, "…your home is not an investment…" That's a huge difference! I think your confusion arises out of your merging of two separate and distinct financial considerations from the homeowner/borrower perspective:
1. The Asset, which is the real estate property we would call "home"; it is an asset because it has marketable value to you and others in the real estate marketplace;
AND
2. The Liability, that loan or mortgage serving as a lien on the real estate property only because the buyer of the home did not have enough cash on hand to pay for the property outright and had to borrow the money from a bank or mortgage lender to complete the purchase of the real estate property.
From the borrower's perspective, a "home mortgage" could never be viewed as an investment. It is a legal contract obligating the borrower to pay back the money borrowed, plus interest charges and other fees. In effect, the home mortgage slowly drains the borrower of cash through those interest charges and fees paid out over time. Being legally obligated to pay someone else cash over time is a liability. One "invests" in assets, not liabilities. A freedom loving person seeks to rid themselves of a liability – having no meaningful financial obligations such as liabilities is what "financial freedom" means. Consequently, an investment in a liability is a non sequitur.
It is important to note here that only the lender would view the "home mortgage" as an investment because that home mortgage is indeed an asset to the lender – in exchange for lending the money to the borrower, the lender gets the mortgage documents signed by the borrower agreeing to pay the money back plus interest charges and other fees. So, what is a liability to the borrower – the mortgage – is an asset to the lender. If you were writing about lenders, then your implication that a home mortgage is an investment would make more sense. Unfortunately, you were writing about borrowers in your post. So, contrary to what you posted, no, I do not agree with you.
Second, my quoted statement on your site [Editor's note: the quote used from my article was, "To make it your home, you must take cash out of your pocket each month to finance it, insure it, maintain it, fix it, furnish it, and pay property taxes on it. Unlike investment real estate, your home generates no income to offset these out-of-pocket expenses. So, while you likely derive much pleasure from owning your home, you lose money on it every month. Don’t fool yourself – your home is not an investment. It is simply a purchase."] would be true for a home that had no mortgage on it if only we were to delete two words: "finance it." So, the home need not have a mortgage on it to fail my "investment test" – even if the homeowner owns the home free and clear, there are a litany of expenses associated with home ownership that make it difficult to call a home an investment (because the home generates no income itself to offset those expenses). This was the full point of the "Personal Real Estate is Simply a Purchase, Not an Investment" section in my article on PowerWealth.com.
Third, both you and [a financial services professional who made, in my view, an erroneous comment to the blogger's post] appear confused on the notion that the use of "leverage" to buy a home somehow instantly transforms the purchase of a home into an investment. No, it does not. While "leverage" is a sexy term used by professionals in the trade to romanticize real estate investing and make it sound exciting conceptually, it is a red herring. It masks the truth: to use "leverage" is to legally obligate yourself to a lender. In other words, what you are doing when you "lever a deal" is voluntarily take on a liability and the risk of losing your home to the lender due to your failure to pay back that liability according to the lender's terms. The addition of a liability to your home purchase does not – poof! – make your home an investment.
To clarify, when you use "leverage" to buy your home, you are essentially completing two separate and distinct transactions at the same time:
1. purchasing a piece of real estate that will generate no income for you to help you offset all the expense associated with owning said real estate,
AND
2. entering into a legal agreement to borrow money from a lender whereby you agree to repay the money borrowed plus interest charges and fees according to the lender's terms specified in the agreement.
Note that the addition of "leverage" to the deal did nothing to change your home's ability to generate income for you one bit. In fact, by borrowing the money to buy your home, you simply increase your home ownership expenses by adding interest charges and fees. Clearly, "leverage" is sexy in concept only; in the harsh light of reality, it is anything but sexy.
[Blogger], I hope that you and your readers will consider reading again my article, "You Don't Own Real Estate. Real Estate Owns You." at PowerWealth.com to recall and reinforce its key takeaways:
1. to invest in real estate means to own and operate income-producing real estate;
2. to speculate in real estate means to buy real estate at the prevailing market price and hope to sell later at a higher market price;
3. your home is neither an investment nor a speculation – it is simply a purchase of a piece of real estate to enjoy and call "home", not to make money from it;
4. you really don't own real estate if a government can swoop in and take it away from you because that government thinks your real estate stands between it and a just cause – a cause apparently less important than your personal property rights.
Thank you,
Logan Flatt, CFA
PowerWealth.com
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