Real estate myth 3

This is the continuation of a feature inspired by a conversation with an acquaintance who revealed a good deal of ignorance about the real estate profession. I think an educated market benefits everyone, so I intend to debunk as many myths as possible, one myth at a time. I hope you find this information useful. Please feel free to comment!

Myth #3 'Our New Kitchen Is a Great Investment'

When folks buy a house, they fret over how many bathrooms and bedrooms they are getting and what sort of remodeling might be needed. But these things won't determine the home's future appreciation.

Indeed, as time, weather and use take their toll, the house itself will tend to depreciate, necessitating costly repairs. Instead, over the long haul, what propels home prices higher is the value of the underlying land. A new home can always be built. But the land has scarcity value.

Which brings us to the subject of remodeling. To be sure, home improvements can add to your property's value. But they aren't a moneymaker.

For proof, consider the annual survey by Remodeling magazine. The 2000 survey found that you might recoup 60% of the cost of adding a sun room, 69% of the expense of refinishing your basement and 81% from a bathroom remodeling.

Numbers like these might sound encouraging. But think again. If you get back 81% of the money lavished on your bathroom, that means you have just lost 19%.

Moreover, Remodeling magazine's estimates are based on selling your home within a year. The longer you wait, the scruffier your home improvements will look and the less you will recoup.

That doesn't mean you shouldn't undertake home improvements. If you get a lot of pleasure from your remodeled bathroom, it is money well spent. But don't kid yourself. It's not an investment.

Thanks to Jonathan Clements of The Wall Street Journal

Real estate myth 2

This is the continuation of a feature inspired by a conversation with an acquaintance who revealed a good deal of ignorance about the real estate profession. I think an educated market benefits everyone, so I intend to debunk as many myths as possible, one myth at a time. I hope you find this information useful. Please feel free to comment!

You'll hear many of these myths at the neighborhood barbecue.

Myth #2 'We made a ton of money on the place'

Has your house been a good investment? To get an answer, many folks simply look at how much they put down on their house, think about how much they might net after paying off the mortgage and then figure out the difference.

But this calculation leaves out all kinds of complicating issues, such as the intervening monthly payments that whittled down your mortgage debt and the home improvements that bolstered your home's value.

The calculation also ignores the continuing costs of home ownership, including property taxes, home insurance and maintenance expenses, as well as the costs of buying and selling the property. Maintenance costs might run to 2% of a home's value each year, while selling usually means forking over a brokerage commission equal to 6% of your home's value.

The calculation's real downfall, however, is that it looks at the wrong thing. As with many other investments, your home's total return includes both income and capital gains.

Over the past 25 years, homes have appreciated at one percentage point a year above inflation.

Thus, if inflation runs at 3% a year, your home might appreciate at 4% annually. Disappointed? Don't be. You don't just benefit from your home's appreciation. You also get to live in the place. How much is this worth? Think about how much you could collect each year if you rented out your house.

Suppose this annual rent is equal to 8% of your home's value. Add that to the 4% appreciation and your home's total return might be 12% a year, before costs. After expenses, your home's long-run performance probably won't rival stocks, but you should outpace the bond market.

Thanks to Jonathan Clements of The Wall Street Journal

Buy land. They aren't making it any more!

Sound advice from my mentor, real estate expert Brian Buffini:

Mark Twain encapsulated what economists had been trying to say for years: that the fundamental law of economics is supply and demand. Outside of volcanic activity on the Hawaiian Islands, no new land is being created. The supply is limited.

The world population grows by approximately 90 million people a year,increasing demand year after year. Human beings have three basic needs for survival: food, shelter and clothing. And I don’t see that changing any time soon. On occasion, the market goes through cycles of having too much resale inventory and too much new product followed by a housing shortage and price increases.

And even in the midst of surpluses like today, there is certain built-in demand. For example, there’s a tremendous shortage of apartment buildings in many cities. Many markets are experiencing a surge in rental prices of single family homes. This creates pressure for the first-time buyer to own and investor clients to buy.

So buy land. Preferably with a house or apartment building on it. They’ve stopped making it!