An interesting take on whether houses is a good investment or not. Courtesy: Wall Street Journal How Houses Eat Money June 12, 2005 How hot is the real-estate market? Try reading my mail. A few years ago, I could offer warnings on the actual costs of homeownership and I would hear hardly a peep. But lately, when I offer similar comments, I am inundated with blistering emails that belittle my intelligence with language unfit for publication. Along the way, some readers -- based on what, I don't know -- have accused me of being a sore loser smoldering in a Manhattan rental. In fact, for the past 13 years, I have owned the same home in Middlesex County, N.J. And if I were delusional, I would claim I have tripled my money. But instead, I crunch numbers. My discovery: Despite owning a house in an extremely buoyant real-estate market, I have -- by one measure -- made almost no money. And I don't think I am unusual. No Improvement I bought my house in late 1992 for $165,000. Today, it might fetch $500,000, giving me roughly a 200% gain. By contrast, over the same stretch, U.S. homes are up an average 101.7%, according to home-finance corporation Freddie Mac. Time to celebrate? Maybe not. I have an unfortunate tendency to keep good records, so it is relatively easy for me to calculate how much I have spent over the past 13 years on home improvements, property taxes and mortgage interest. And believe me, it isn't pretty. For starters, one reason my home has increased so much in value is because I have spent a ridiculous amount of money fixing it up. The house I bought in 1992 was fairly rundown, and I have ended up revamping the kitchen, adding a bathroom, putting in air conditioning, enclosing the porch, putting on a new roof, replacing the boiler, finishing the attic and goodness knows what else. Tote up the cost of all these projects, both large and small, and the tab comes to some $130,000. It's an embarrassingly large number, and I wince whenever I think about it. Add that $130,000 to my home's $165,000 purchase price and my cost is up to $295,000. I could kid myself that this $130,000 is an investment. And while it is true that these home improvements have boosted my home's value, there is no way I will recoup the full cost when I go to sell. My "new kitchen" is now nine years old and it is showing its age. Nobody in his or her right mind is going to pay me full price for a second-hand kitchen. In retrospect, I would probably have been better off purchasing a house that had already been fixed up, thus buying somebody else's improvements at a steep discount. The problem, of course, is finding a seller who has the same taste. Shag carpeting? I don't think so. Losing Interest Home improvements may have been my largest ongoing cost, but mortgage interest and property taxes aren't far behind. Indeed, if you are feeling a little too cheery, spend some time leafing through Schedule A of your old federal tax returns, where you detail your itemized deductions. I did just that, adding up how much I have paid in property taxes and mortgage interest since 1992. Once again, the numbers are disturbingly large. Over the past 13 years, I have coughed up $63,000 in property taxes and $108,000 in mortgage interest. To be sure, these sums are tax-deductible. But the tax deduction is a little overrated. Fact is, if I hadn't itemized, I could still have taken the standard deduction. It's only the extra deduction over and above the standard deduction that represents a true tax benefit. With that in mind, I went back and found out my standard deduction for each year since 1992. I then subtracted that sum from the total value of my mortgage interest and property taxes. Assuming that the sum above my standard deduction was deductible at a 28% tax rate, I figure I got some $24,000 in federal-tax benefits from my mortgage interest and property taxes -- which means the after-tax cost of these two items was $147,000. Combine that with my $165,000 purchase price and the $130,000 in home improvements, and I am up to $442,000 -- not much below my home's $500,000 current value. The picture would be even uglier if I counted my initial closing costs, routine maintenance expenses and annual homeowner's insurance, to say nothing of the innumerable hours of my own time that I have sunk into the place. And while I have no intention of selling, that day will come. Imagine I sold today, paying a 5% real-estate commission. After enriching the brokers involved, I would net $475,000, perilously close to my total cost. Retirement Home Ever heard people say their home is the best investment they ever made? There are two possibilities: Either they have never done the math and they are totally out to lunch -- or they are making a very astute observation. Homes can indeed be a great investment. You may not make any money on the appreciation, once you figure in all the expenses of homeownership. But while you are struggling to pay the property taxes and keep water out of the basement, something wonderful happens: You get to live in the place without paying rent. True, you might have to make mortgage payments, and many folks think of that monthly check as comparable to paying rent. Unlike rent, however, your mortgage payments will come to an end. Still think the big gain from homeownership comes from price appreciation? Consider this: People usually don't retire simply because their house has gone up in value. But you often hear of folks quitting the work force just after making their last mortgage payment. Suddenly, their monthly costs go way down -- and they can now afford to retire, thanks to the delights of rent-free living.