Your Home is Not an Investment

Decent article in the WSJ today. http://online.wsj.com/article/SB10001424052970203739404574290052495887922.html

This should not be surprising to people given the current state of the housing market, but it amazes me how many people still view their house as an investment. After adding in maintenance, property taxes, remodeling costs and the opportunity cost I am very skeptical owning your own home makes financial sense. However, with anything it depends on what you pay. Its a purchase made on leverage and when buying anything on leverage your returns are amplified to the up-side and down-side. Taking on excess leverage (debt) involves more risk. As an investor if you are taking on more risk you should be compensated for that risk by purchasing at a discount. Perhaps the best way to value a home would be to value it as many REIT's are valued.

Net Operating Income/Cap Rate

If comparable homes rent for $1500 a month, lets just simply say the annual NOI is $18,000. Cap rates fluctuate given the health of the market, investor required return, etc. However, 7% is probably a conservative cap rate.

$18,000/7% = $257,142

I'll fully admit its a very simplistic way to look at it, but it could be helpful in coming up with a rough appraisal. I would also tack on a discount to that price to compensate for the leverage incurred. Perhaps, its not realistic in todays world with todays prices, but there are a number of ways real estate values have and continue to be artificially inflated. Not knocking anyone for owning their own home. It certainly can make economic sense depending on the price and in many instances personal reasons can constitute enough justification to pay more of a premium. However, if you are viewing your home as an investment then perhaps it would help to think about it more this way.