In writing an article on why homes are often terrible investments, I cautioned that there are times when a home is not a terrible investment and actually makes sense. There are definitely other justifications to invest in residential real estate, but I’m going to focus on the asset side of the home ownership argument by first addressing homes as investments and then looking at asset protection. The bottom line is that homes are mediocre investments typically; however, from an asset protection angle, buying a home isn’t a terrible decision.
The Investment Angle
Probably the most obvious reason for buying a home instead of renting is that you believe that residential real estate will outpace costs of ownership plus inflation, which makes it a savvy investment. My issue with calling a home an investment is that I’ve noticed even the smartest investors fool themselves and claim they “broke even” ignoring the costs associated with tax recapture at the sale, buying/selling commission, roof replacements, broken toilets etc.
My dad has an adage about gamblers that I believe also applies to home owners: “When they tell you they broke even, they lost money (but maybe not a lot); when they tell you they made money, they likely broke even; but when they tell you they lost money, they got taken to the cleaners.” From an investment perspective, it is pretty clear that home ownership does not really outpace inflation even if you have minimal costs associated with it, but there are exceptions to the rule.
For every Akron, Ohio, there is an Austin, Texas (though the same logic holds true in reverse). We bought in Austin last year because the entire Nasdaq 100 seems like they are here or are moving here. Additionally, I was heavily impacted by a past experience when my wife was evicted by an Afghan landlord from our rental in Virginia while I was deployed to Afghanistan. The irony of that situation (yes, that really happened) was only eclipsed by my desire never to leave our family in that sort of position again.
Accordingly, I am willing to pay more for the privilege of not being evicted. Have I written previously about the perils of Eminent Domain? I digress. This really is supposed to be a post about the positives of home ownership.
In the year since we bought, our home has appreciated according to Redfin by more than 10%, though I want to emphasize that paper gains and actual gains are obviously very different. Nonetheless, this is a fabulous pretend rate of return. This extreme rise in value also portends a lot of other problems such as higher taxes and increased homelessness among them.
Every homeowner reading this, who hasn’t already quit in disgust, is probably thinking: “I’d rather pay for my house than pay a landlord and get nothing.” I’ve heard this theory many times, and there’s definitely some merit to it, but allow me to recount a conversation I had on a tangentially-related topic.
A few years ago, I went to visit a banking friend in his lavish office, and we had a great time catching up. At one point in the conversation, almost out of the blue, he gazed out the window and said, “all of this is ours.” His arm made a slow, sweeping motion extending from downtown commercial real estate to neighborhoods in the distance. One takeaway from this anecdote is that bankers are more pompous than lawyers (I’m not sure this is actually true by the way), but regardless, his implication was clear: the owners of these dwellings, from wealthy businesses to families, did not in fact own their homes. They used leverage; the bank owned those assets.
If you own your home outright and are not paying the bank, the math is typically much more favorable – though you are still paying a debt of sorts in the form of property taxes. I’ve heard plenty of counter-arguments to this point on leverage, but I never seem to get a response to my follow-up question: “if you lose your job and can’t pay your mortgage, what happens to that home you owned part of?”
The Asset Protection Angle
In my opinion, there is one unassailable reason to own your own home: Asset Protection. Preventing creditors from recovering assets is arguably among the most under-appreciated reasons to own your own home.
Homestead exemptions work to protect the assets of anyone who is facing bankruptcy, as long as the home is your primary residence. Moreover, when you earn a high income (doctors) or have a lot of wealth (business owners) and therefore have a bullseye on your back, these exemptions are especially handy at shielding assets from greedy attorneys.
This is the case in our home state of Texas, but this “homestead exemption” also exists currently in South Dakota, Kansas, Florida, Iowa, Washington D.C., and Oklahoma. In each of these states, 100% of the equity is shielded from creditors. Some states offer six figure protection, while many offer nominal sums of monetary protection that may require the sale of the home to satisfy the debt. A few states (New Jersey and Pennsylvania) do not offer any homestead protection.
Under 11 U.S.C. § 522(d)(1), the federal government allows you to exempt $25,150 from creditors. The exemption amounts and rules for each state as well as the federal government vary (to include steps necessary to qualify for the “homestead exemption”), and they are subject to the whims of politicians, so buyer beware.
There’s no denying the utility of asset protection, which makes buying superior to renting, especially if you might need to shield assets from creditors (or predators like certain types of attorneys). Of course, if you live in a state without homestead protections like New Jersey, that will not help, but then again if you live in Jersey, you’ve probably got bigger problems.
