Do you Live in a Dead Real Estate “Investment”? Reduce your Financial Crypt Quotient!


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Common Belief:  My primary residence is a real estate investment.

You want a great return on all your investments, right?  In this post you’ll learn that a homeowner consumes shelter and does not own a real estate investment.

What does it cost to buy a house?

Loan Closing Costs: The closing costs to buy a house vary depending on the mortgage company and state of residence.  According to, the 2010 average closing costs were $3,741 on a $200,000 mortgage. In other words, a $250,000 home purchased with a 20% down payment would have about 1.5% in closing costs, not including taxes and other prepaid expenses.  Acquisition costs can include legal, title, appraisal, inspection, discount points, and lender fees.

Other Closing Costs: Other costs not included in the average listed above can include decorating, appliances, moving, storage, breakage and theft.  Let’s add another 1.5% for these costs.

Intangible Closing Costs: Intangible costs include the stress of moving to a new home, trading leisure time for work, impaired friendships and physical injuries from lifting boxes.

Total estimated costs to buy a house: 3% of the purchase price

Annual Cost of Ownership:

Home Maintenance: The average annual maintenance cost can be 1-3% of the house value or more.

Other out of Pocket Costs: Includes property taxes, insurance, homeowner’s association fees, water, gas and electric, garbage, and telecommunications and other costs.  Total annual cost of ownership can exceed 3-6% of the house value.

What About Mortgage Interest? At this point we’ll follow sound investment analysis by ignoring the cost of borrowed money to buy the house.  In an earlier post I explained the correct way to evaluate an investment is on an unleveraged basis, or before debt.

Other Intangible Ownership Costs: Can include foregone leisure time to do yard work, routine maintenance and repairs.

Total annual cost of ownership: 3%-6% of the house’s value; lets call it 4.5% average cost per year

Exit Costs:  the cost of selling the house may include a broker commission of 3-6% or more, staging costs to prepare the house for sale, moving and storage costs, along with more of the intangible costs listed above when you bought the house.

Total exit costs:  4%- 7% of the house’s value; let’s call it 5.5% average exit cost

Uncommon Sense:  The historical average house price appreciation has been about 5% per year over the last 19+ years according to the Federal Housing Finance Agency. The “investment” return is offset by:

  1. If we divide the total purchase costs over seven years the average buyer owns a home, “return on investment” decreases about 0.4% per year for the buy-in costs.
  2. The annual costs to operate your house can be 4.5% or more per year, which is a drag on the “return on investment.”
  3. The exit costs at sale can be 5.5% or more.  Again, if we divide the total exit costs over the 7 years the average buyer owns a home, we can apply about 0.8% per year to the exit costs.

So what is the real “investment” return for a primary residence?

The average unleveraged annual return on your real estate “investment” is somewhere in the -0.8% area.  If you take into account a 2.5% average rate of inflation the real return falls to -3.3%.  No rational person would pay cash for an investment with such an abysmal rate of return.  Borrowing money to fund the purchase would compound the problem through negative leverage, i.e. the interest rate on the loan is far greater than the return on investment that in our example is already negative.

A better way to view your primary residence is to consider it consumption of shelter, not an investment in real estate.  Many people gorged on residential real estate because the credit market was willing to lend the money.  It’s like having two dinners because a restaurant owner loaned the money for a second meal.  The indigestion from consuming too much house can lead to financial diarrhea from too much debt.

Are you consuming the right amount, type and quality of shelter for your station in life?

About Michael Shelton

Your Business Coach Facilitating Delegation and Work Group Engagement Michael Shelton has over twenty-five years of business and military accomplishments, including extensive experience with one of the largest, publicly traded real estate investment trusts (REIT). He is a qualified business coach with assignments in cross-functional work group management, strategic planning, unit leadership, joint venture acquisitions, executive education, mentoring, training and merger integration. Michael has accumulated best practices for building committed work groups from more than $4 billion of capital markets transactions and commercial property development. He served as a commissioned officer and helicopter pilot in the U.S. Army, and earned his MBA from The University of Arizona. Michael has served as a major conference panelist and is the author of Cash Flow Rich, Winning Ways to Evaluate and Finance Real Estate. Today, he helps business owners get more work group engagement as President and CEO of Shelton Business Services, LLC in Scottsdale, Arizona. Disclaimer: I don't offer investment, legal or tax advice. Talk to your broker, accountant or lawyer for investment, tax and legal help. I might own stock in the companies I mention on-line. My posts, tweets and other on-line activity are my personal thoughts and don't represent my employer or company.
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13 Responses to Do you Live in a Dead Real Estate “Investment”? Reduce your Financial Crypt Quotient!

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  10. Matt says:

    Locked in to your shelter costs for a very long time normally would be a positive thing. Since inflation and property values tend to increase but your monthly mortgage payment stays the same then you should be coming out ahead. Wouldn’t it be nice if you could find a place to rent that would guarantee that your rate did not increase for the next 30 years the same way it would not increase with a 30 year mortgage? Ok, I know there are things such as taxes and home owners insurance that will increase but the mortgage should never increase.
    You ARE taking a risk that your home will be worth a lot less than when you first purchased it but, [Dare I say it?] you should consider the potential future value for any INVESTMENT.

    • Matt, I think we agree that shelter costs are necessary for independent adults. The question we both acknowledge is we want a fair trade between the type and quality of the shelter and the monthly cost. I am a homeowner too with a 30-year fixed rate mortgage. I don’t consider my home an investment though. There are too many costs and fees and other leeches sucking cash from my wallet to pay for my house with no positive cash flow. I respect your opinion and thank you for the contributions to my blog!

  11. Matt says:

    We must live somewhere. What are the other options? Renting? When you rent, all of these fee’s that the owner of the real estate paid is added to your rent so you are still paying for all of this. In addition, you pay for the profit that the landlord requires to run his business.

    If you purchase a home and only pay these fee’s once in your lifetime or only move 1 -2 times then I beleive that you will come out ahead than if you would have rented. If you buy a home every 2 -3 years and you are constantly moving then this is where all of these fee’s will really hurt you.

    • Matt, I agree that we have to live somewhere and need to consume shelter in some form. The question then is how much do I want to pay for my shelter? If the cost of homeownership is less than renting then home ownership wins. But the market changes rapidly and when you buy a home you are locking in your shelter costs for a very long time. This could be good or bad. Thank you for the comment!

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