Homeownership--still a good investment?

September 22, 1991|By Jonathan Lansner and Andre Mouchard | Jonathan Lansner and Andre Mouchard,Orange County Register

Your real estate agent knows real estate.

So does your brother-in-law, your postman and your dog's psychiatrist.

Everyone, it seems, knows real estate. Especially residential real estate.

Of course, what most people "know" about real estate is that it's a great investment, a tool for the average person to build wealth.

But is it?

Analyzing a home purchase purely as an investment is exceedingly tricky business, enough to make a calculator overheat. One must factor in property taxes but also large income-tax breaks; enormous fees when buying and selling; upkeep and insurance; a huge down payment but also the leverage that permits you to reap the profit off a $200,000 investment with just a $40,000 initial payment.

In fact, no one has ever derived a formula for figuring out bottom-line gain or loss on a home sale that everyone could agree on.

And it's just as tricky trying to figure out the flip side: What is the actual long-term gain of stocks or bonds if you factor in the cost of renting an apartment all that time?

Such confusion leads to confusing signals from the experts:

The real estate consulting group at the Arthur Andersen & Co. accounting firm recently issued a bullish report on homes as an investment.

Meanwhile, Jon Fossel, chief executive of Oppenheimer Mutual Funds in New York, is sticking to his prediction that real estate "will be the worst investment in the 1990s."

The bottom line:

As investments go, buying a home is no sure thing. Of course, renting isn't necessarily a lucrative alternative. Ultimately, say advisers, your decision to buy or rent should be based more on lifestyle considerations than hopes for a financial windfall.

That said, what follows are positive, negative and neutral factors when considering the home as an investment, as opposed to shelter:

* A healthy track record. "Some people are saying you can get more for your money by renting [a house] and investing in a T-bill than you can by buying a house," said Ed Mauss, 27, who recently purchased a two-bedroom condominium in Laguna Hills, Calif., with his wife, Debbie.

"But we figure that even if a worst-case scenario comes up and we only make 5 percent a year for the next few years, we'll still make money," Mr. Mauss added. "Historically, home prices never go down in Orange County, [Calif.]"

History might side with Mr. Mauss. Stock gains (11 percent a year) beat homeownership profits nationwide (8.3 percent), says study of price changes between 1947 and 1982. But in some areas, such as Southern California, annual price appreciation from 1968 to 1990 favors property over stocks, 10.1 percent to 9.8 percent.

* A savings habit. When you own a home, you have little choice but to make those monthly payments. From an investment standpoint, that forced payout is healthy: It means that like clockwork, you are putting money away.

Of course, banks, mutual funds, credit unions and insurance companies also offer savings plans that automatically take money each month and sock it into investments -- from stocks to bonds to gold.

"Those are nice plans," said Michael Sumichrast, a Maryland real estate expert. "But people just don't want to save -- unless they're forced to it."

And the ultimate forced savings plan is a house.

These regular home payments -- often dubbed "building equity" -- do not guarantee you'll make any money. The only way your investment return will be positive is through price appreciation.

"The two most important things to remember when investing in real estate are location and timing. If you don't hit both of those things just right, you can lose your butt," said Roger McKinnon, owner of Roger's Realty in Corona del Mar, Calif.

But even if your house appreciates little, come the end of three decades, you still have an asset likely worth many thousands of dollars.

* Tax advantages. Homeownership's biggest tax lure, say some investment experts, is its ability to shelter profits from income tax.

Say you bought and sold stocks and made a killing. Unless those trades came in a qualified retirement account, you must pay taxes, which can cut returns by as much as 40 percent.

After a home sale, no tax is due if you repurchase another one at the same or greater cost within two years. And after age 55, $125,000 of home-sale profits are free from taxation.

These tax breaks can dramatically improve after-tax returns.

What isn't as well-known -- and what some home sellers discovered this past tax season -- is that losses from the sale of stocks and bonds and investment real estate are tax deductible. A loss from the sale of an owner-occupied house is not.

Of course, there is the mortgage-interest deduction, the only consumer debt that's still a tax write-off. That deduction translates into a 20 percent to 40 percent write-down on a monthly mortgage bill. But the after-tax cost must be compared with the cost of renting to get a true value of this "tax break."

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