Why your house is a terrible investment
James Altucher calls homeownership a part of The American Religion, so I know I’m treading dangerous ground here. But before you get out the tar and feathers, let’s do a little thought experiment together.
Imagine over a cup of coffee or a glass of wine we get to talking about investments. Then maybe one of us, let’s say you, says:
“Hey I’ve got an idea. We’re always talking about good investments. What if we came up with the worst possible investment we can construct? What might that look like?”
Well, let’s see now (pulling out our lined yellow pad), let’s make a list. To be really terrible:
It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner.
It should be illiquid. We’ll make it something that takes weeks, no – wait – even better, months of time and effort to buy or sell.
It should be expensive to buy and sell. We’ll add very high transaction costs. Let’s say 5% commissions on the deal, coming and going.
It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.
It should generate low returns. Certainly no more than the inflation rate. Maybe a bit less.
It should be leveraged! Oh, oh this one is great! This is how we’ll get people to swallow those low returns! If the price goes up a little bit, leverage will magnify this and people will convince themselves it’s actually a good investment! Nah, don’t worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out.
It should be mortgaged! Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.
It should be unproductive. While we’re talking about interest, let’s be sure this investment we are creating never pays any. No dividends either, of course.
It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist. Sometimes and in some places, none at all!
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