by John Young
(from John Young’s http://yjohn.wordpress.com/.
A single family home these days is quite expensive. In fact, compared to median wages, it’s more than twice as expensive as it was just 30 years ago; even considering the “housing slump.”
When you buy a house, no matter how you slice it, it’s going to cost a LOT of money.
Rather than buying a house as a “tax deduction” or because you think it will appreciate (maybe it will, maybe it won’t), you should look at a home as though your family is a business and the buildings and land are a capital investment. You should then look to see in what ways that capital can generate revenue that offsets the costs.
For our ancestors, their homes were not simply hotels where they slept when not busy elsewhere. Their homes were the center of their economic lives — a center of production where raw materials were converted to useful products. All over America, pharmacists lived in apartments over top of their shops — where they actually compounded many of their own medicines. Blacksmiths practiced their trade out back. Attorneys had their offices in a first floor room of the house. Practically everyone had a garden out back, the basement was used as a root cellar to store produce and the kitchen generated nearly every meal that was consumed.
In other words, homes were not merely a cost center — they were a revenue center as well. By arranging affairs in this fashion, our ancestors were much more economically secure in terms of the basics of food, shelter and clothing.One of the problems we face today, as a people, stems from the fundamental way in which we view our home. We think bigger is better, and we think that the best use for acreage is growing grass for which we buy seed, and then buy expensive mowers to cut. This is a mode of behavior that only makes sense for the independently wealthy. For people who actually have to work jobs — it’s a senseless waste. Instead of the home helping the homeowner — it turns into an endless pit of expenditure from which little is recovered.
Oh — you at the back of the class — what’s that? You say the home will appreciate in value?
Okay. Fair enough. Let’s subject this “appreciation in value” to the test to see if it justifies the bushels of money.
Pretend you bought a house in 1978 for $120,000 and that it is now worth $250,000. At first glance, this looks like you are putting $130k in your pocket in pure profit. But are you?
Well, first off, you paid $839/month for 360 months for that house — which comes to $302,000+. So — now where’s your big profit? And then, over that time, you paid property taxes every year; you paid for insurance and the whole nine yards. You probably spent thousands of dollars over thirty years planting grass seed and mowing the lawn. And let’s not forget the home equity loan taken out to pay off credit cards, and the loan taken to remodel the kitchen, and … and … and …
The bottom line is that buying property for the purpose of realizing a capital gain through appreciation may work for some people in some markets, but is truly no different from betting on the stock market. Maybe you’ll win, maybe you’ll lose. But, in a sense, it is even WORSE than betting on the stock market because most people don’t borrow the money they are using to gamble there. By borrowing the money, you essentially eliminate any gains you would have made by appreciation.
The only way for property to make sense is for it to be viewed as a capital asset that will be USED to accomplish something.
Obviously, when you buy a home you are using it to replace paying rent. So that’s some return there. If you also use it as a place to perform oil changes and minor repairs for the cars in the family, that’s a positive benefit. If you use it as a place to grow and preserve food, that’s a benefit. If you use it as a source of fuel for the wood stove, that’s a benefit. If you use it as a law office — that’s a benefit. If you use it as a place to produce nifty new rifle slings or kits for ham radio operators — that’s a benefit.
The point is that the home, to be anything but a liability, must be turned into a center of production rather than merely a center of consumption.
Think about it.