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<I'm not sure I agree. Most people forget to include the very significant annual carrying charge when they talk about real estate returns -- namely, real estate taxes. If you were to buy a smaller home (or not buy at all) and keep the money in a retirement fund, you might end up quite a bit ahead. Add in the net after-tax, out-of-pocket cost for the mortgage and I'm confident the retirement fund is the better choice.>

Many may correctly argue that their home values have increased significantly over the years. In some of the hotter markets those increases tower over the annual costs or being in the house. However, I am still with Ira on this one.

Maybe my thought process is skewed because I do not think a home should really be classified as an investment. With a stock or a mutual fund I know my cost basis as well as my history of dividend payments. It does not need infusions of cash to maintain itself. I also know the exact price of my investment at any point in time. As such, calculating my total return or annualized return is a relatively easy thing to do.

With a home if you are serious about tracking your total return you need to know what all of your costs and expenses are. Such things as upgrades, repairs, maintenance, insurance costs, taxes, mortgage interest and some utilities are good for starters. They are offset by any tax benefits you receive from your annual 1040 filings. The biggest piece of the puzzle that is often missing is a reasonable estimate of what your home is actually worth at any point in time. You do not know what you will get until you actually have a buyer at hand. Even then you may well have a number of transaction costs (comissions, taxes, repair allowances, fees) that should be figured into the mix. Here in NJ we were hit with a 3k plus realty transfer fee last year (it was only a few hundred a few years back). Our 140% "profit" based on gross sales price minus gross buying price turned into about 4.5% per year when I figured out the math as honestly as I could. It beat inflation but not by much.

Even if you have managed to make a really good profit on your sale, most of us have to buy something else. In most cases that something else is another home that is also grossly overpriced. I will admit that those who deliberately plan on selling their overpriced home and moving to a lower cost area will be able to realize a tangible gain on their transaction. That is not the case for most people aged say 25 to 55.

Finally, owning a home is usually an emotional experience. That alone takes it out of the "investment" world to me. Many spending choices are made based on emotions rather than detailed cost/benefit analysis. The bottom line is that a true investment should be something that is measurable at any time. I suspect that most people who own rental properties understand that concept very well. The ones who are successful at it are very good at knowing and measuring whether they are cash flow positive or not. Most of the rest of us (myself included) are not nearly as good at determining an accurate rate of return on our homes.

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