Is it time to rethink our best investment?

The purchase of a home is often considered to be the best investment we can make. Compared with the option of paying rent it offers many advantages. Not only does one build equity by the systematic paying down of principle on a mortgage but over time the value of homes, whether they be single family or multiple family dwelling units, have tended to appreciate over long periods of time. In addition, for SOME (not all due to IRS limitations), real estate taxes and mortgage interest can provide some additional tax benefits.

These benefits have caused some to believe that more must be better and that buying additional properties and/or bigger homes is a good investment. What are the facts? Is more and bigger truly a better investment compared to other choices? The following table shows the returns of a several investment choices over the past 20 years through June 30th, 2008.

Investment

Gain Per Annum

Standard Deviation

S&P 500

10.9%

14.4%

Lehmann Treasury Bonds

8.8%

8.3%

Gold Bullion

3.8%

13.5%

NCREIF Property (Inv Prop.)

8.7%

3.6%

OFHEO House Price Index

4.9%

1.6%

Treasury Bills

4.5%

1.0%

CPI (Inflation)

3.1%

1.0%

A couple of observations seem to be in order. First, commercial real estate, office buildings, shopping centers and apartment buildings, returned double that of single family homes. One could easily jump to the conclusion that this is the same as renting a single family home and it is possible that it might work but it is important to keep in mind that commercial properties are not seeking only to cover their expenses but expect net cash flow as well. It is difficult to do this in a single family or single unit environment.

Also, if the primary purpose is to build wealth and financial security it appears there are many options that might very well be more effective and would entail much less management personally. A few years ago we wrote a white paper on owning a second home entitled “The Costs and Benefits Of Purchasing a Second Home”. It is interesting to me that the economic dynamics have not changed much over time.

It is a good time to purchase a property. The number of “vacant” single family homes is at a record 2.9%! These are homes that are vacant and need to be sold. As this number decreases the housing prices will stabilize

but as the numbers above show, that even over 20 years, that all options should be considered if your objective is more than your own personal use.

The foregoing content reflects the opinions of White Oaks Wealth Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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