Considering Your Primary Home as an Investment

by David Ning · 40 comments

primary home as an investment
Owning your home is a dream that many can relate to. My first experience with real estate came when my wife and I almost bought our first home in March of 2007. We were very excited at the time because it was going to be our first house and we even drove over to see other similar houses in the same neighborhood at 3:00am. We decided in the end to hold off because we thought the housing downturn would get drastically worst.

That turned out to be one of the best decisions we made financially, as we essentially side stepped the worst housing slump in US history. We reside in California where housing prices were going to the moon, and our decision to hold off on buying that house saved us $200,000. Yet, we still felt like we were missing out while we waited because we didn’t get to enjoy a space we can call our own. I know we don’t really own our home until we pay off our mortgage but signing the closing documents certainly brings the sense of ownership that no apartment living can substitute.

Many argue that a house is a good investment if you can comfortably afford the payments and living in it will improve your quality of life. “A house is a lifestyle investment as much as a financial investment”, one might say. And it’s true. We are no longer renting and it’s been a long time since we woke up to a young lady screaming over the phone at a ex-boyfriend who just broke up with her. Finding a parking spot after a long day is also a problem of the past. Though being frustrated at the lack of space was totally unnecessary, I still remember vividly how I felt after circling around the apartment complex for the 10th time.

Who knows how all these little annoyances affected me personally and financially, but is the lack of all these issues worth $200,000, a sum that takes many people a life time to accumulate? How about $100,000? $50,000? Is there an amount that is worth “losing” for owning a home?

Do you consider your primary home as an investment? And what if there is a 100% chance that your house value will go up? Does this automatically mean that you jump at the opportunity even if you can’t afford the house payments? If all the appreciation paid for was your inflated lifestyle at the McMansion for five years, is the eventual move out and having to readjust after you got used to an inflated lifestyle worth the extra stress? Will your kids be able to understand?

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{ 40 comments… read them below or add one }

Philippe Mesritz January 11, 2008 at 8:39 am

This article (Renting makes more financial sense) at http://www.smartmoney.com/home/living/index.cfm?story=rent actually makes a good point with regards to housing as an “investment”. The article discusses the changes within the industry and the fact that your appreciation is negated by many different levels.

My wife and I are looking to buy a house as well, but we’re not approaching it as an investment — we’re approaching it as a way to “do what we want with it”. Renting usually prevents you from changing things around, its rare that you can paint the colors you want or even knock out a wall here or there just because you want to ;)

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Early Retirement Extreme January 11, 2008 at 9:45 am

Not until someone will lend money below the rate of inflation at which point the arbitrage will be tremendous … at least for a while ;)

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Tim May 29, 2011 at 11:35 am

With a 30 year fixed at 4.75 %, I expect to beat inflation at least part of those years. No guarantees but prices sure seem to be rising now, and as the Fed keeps printing money like its going out of style…

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My Trader's Journal January 11, 2008 at 10:11 am

I consider the house I live in an investment, but just not a good one compared to stocks. My view is that aside from taxes I’ll be able to live rent free one day. I also consider my house an investment in an intangible asset – I couldn’t rent the kind of feeling we get from knowing we can stay in this house the rest of our life if we want to and make the improvements to it that fit exactly what we need.

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Fiscal Musings January 11, 2008 at 2:17 pm

I don’t consider our own house an investment, but that doesn’t mean that it won’t ever be. The first house we owned, we eventually converted into a rental property. Knowing we wanted to do this, it made sense to buy with an investment perspective.

But while I’m the one living in it, I wouldn’t consider it an investment.

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david August 25, 2011 at 1:06 pm

I agree. Since you have to live somewhere, even though you may spend less than if you rent, the house you live in is technically en expense, not an investment.

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Praveen January 11, 2008 at 4:06 pm

I voted yes.

Your primary residence is an investment, but not in the sense of stocks, rental property, etc.

You might not make money, but you will most probably end up spending less than if you rented the same class of property, over a long period of time.

This is because:

1. Unlike your monthly rent, a major part of your monthly mortgage is tax deductible.

2. There will be appreciation over time. Even if it does not make you money above what you spent for the after-tax interest and property tax, it will still mean you spent more than rent.

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Larry H August 30, 2011 at 8:58 am

Unbelievable. Your primary residence is a liability, not an investment, period. It may be less costly over the long term than renting (due to mortgage pay down, appreciation (we all hope), tax advantages, etc.), but that does not make it an investment.

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HK November 1, 2012 at 8:06 am

Primary residence is a liability and Rent is also a liability. I remember when they asked me for five times income to rent ratio because my wife was not working. So what did I do? I bought a house with a mortgage equal to my rent and never looked back. Anyway you slice it, in my experience if you know how to run the numbers, owning beats renting financially and psychologically.

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Praveen January 11, 2008 at 4:07 pm

I mean less than rent

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Double Journey January 11, 2008 at 9:58 pm

absolutely not an investment. It actually makes me sad when I hear people talk about rising home prices as a good thing. The only way that you can “profit” from rising home prices is if you sell your house and then don’t buy another one. Otherwise, the next house you buy also will be more expensive. Since most people don’t downgrade over time, all that happens is inflation.

Only recently, have housing prices appreciated like they have making them seem like a good investment. People just have short memories.

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Jason January 12, 2008 at 1:48 am

I don’t think its a good idea to think of your home as an investment, because it is purely speculative at best. Most people buy a home, assume it will go up, sell later and call it an investment.

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Toronto houses January 12, 2008 at 3:51 am

I share both opinions. The time comes when it`s worth to think about your home as an investment. I agree also with the idea that your cosy home is something that really belongs to you with all the memories. I think that we should find balance between the two alternatives. I also have nearly the same problem because I’ve seen lovely houses for sale in Toronto. Anyway, I won`t refrain from the idea to think of my home as an investment.

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Stuart January 12, 2008 at 6:40 am

Maybe not an investment as such, in terms of making money, but even if it is more expensive to pay a mortgage, maintenance etc, at least at the end of 20-30 years you will have something tangible. If you rent for that same period you have nothing at the end of it, plus you need to keep paying rent, you have to live somewhere.

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Dorian Wales January 12, 2008 at 7:18 am

I’ve written quite extensively on the matter. A home is not a very good investment since it is not diversified amd it is very risky. That being said you do have to live somewhere. It is important to understand these questions at the very basic level. I believe there are hidden psychological and financial aspects to whether or not buy a home. I’ve written on these in my blog. Regards, Dorian

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Clyde Harris January 12, 2008 at 10:32 am

If you unsure as to whether something is an investment or a liability, ask your self this question,
“would it be listed on the asset or liability side my net worth statement and the most defining question is how much income does it produce. Investments produce money liabilities take money, Economics101.
Then of course income producing houses would become an investment. Is it smart to buy your primary home certainly.

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Living Off Dividends January 12, 2008 at 1:08 pm

if you house is your biggest investment, it just means you don’t have any real investments.

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Greg "Debt Repair Online" January 12, 2008 at 7:35 pm

Interesting question. I voted no because when I bought my house I approached the entire process and deal for other reasons. If I were buying it for an investment I would have focused more on the “return” numbers.

Greg

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ChampDog January 12, 2008 at 9:10 pm

Yes, it is a perfect investment indeed but you need to manage it well. Not only just a good investment, you can enjoy it. What investment you can buy and use it for enjoyment at the same time?

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Ronald Su January 12, 2008 at 8:13 pm

Real estate is certainly a type of investment. But this type of investment generally involves great risk and time. Just becareful.

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MoneyNing January 13, 2008 at 7:00 pm

Everyone: Decisions decisions decisions. I’m sure my fiancee will want me not to treat it as an investment but it’s quite hard to put the commitment to buy something that you know will depreciate significantly in the short term.

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traineeinvestor January 14, 2008 at 6:52 am

Absolutely an investment. It has value and that value may go up and down. It has cash outflows (maintenance, rates etc) and cash flow savings (rent). It may or may not be debt financed (a balance between tying up equity and committing to debt repayments). All of these things require it to be analyzed much like any other investment.

The fact that it may be a good or bad investment does not alter the fact that it is an investment. People can make or lose a lot of money on their investment in the home. (Given what has happened to property prices since we brought I am so glad we did.)

The fact that other investments may perform better does not mean that your home is not an investment. (And it certainly should be included in your net worth calculation:

The fact that other properties may have gone up or down is, of course, irrelevant to the question.

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Mike February 16, 2009 at 4:16 pm

Are you out of your mind?? I love when people talk about their primary home as an investment and they do so with such enthusiasm and confidence. They do so with minimal knowledge of amortization and denial of maintenance and other expenses that go into their house. They do so with the mere fact that their primary home will appreciate over time and be worth more than what they paid for.

Folks your primary residence is not an investment if anything it’s a liability.

Let’s say you buy your house for $400,000 and then you sell your house for $600,000 10 years later. You’ll actually pat yourself on the back and be proud that you made this great investment over the last 10 years. You’re house went up over $200,000 what you paid for it. Nice a profit…. of $200,000

Now you can think that or you can read on…….. some of you are better off stopping here. For the others that are more in tune should read on…..

Now lets say for instance that when you purchased it. You put down down $80,000 and took out a mortgage for $320,000.
Over 10 years at a rate of6% you made a monthly payment of just mortgage of $1900 a month.
That means over 10 years (120 payments) you paid $230,000 in payments
and you have a balance of $268,000 left on your house. (1)
Now did you pay taxes on that house: Lets say on average you paid $3500 a year over 10 years.
That means over 10 years you paid $35,000 in payments to your taxes (2)

Home Owners Insurance?? $600 a year average? ($6000 in payments)

Now did you have the cut the grass?
Did you do landscaping at the house to keep it clean?
Did you add any additions to the house?
Did you buy carpeting?
Did you upgrade appliances? the kitchen?
Did you paint??
How about the water heater?
Did you redo the basement?
The roof??
The siding on the house??
Or did you leave the house in the exact same condition from when you bought it and it magically went up because of your foresight you had 10 years earlier :-)

Yeah, lets add in these costs too…… because after all you kept up with your investment didn’t you?
I’ll let you come up with a price for this: (4)

Now lets do the math.
1. $230,000 in payments +
2. $35,000 in taxes +
3. $6,000 in home owners insurance
——————
$271,000 in payments that you made over the 10 years.

Now you are left with
$600,000 house – $268,00 mortgage – $maintenance = $332,000 of equity

$600,000 sales price comes with a 6% realtor commission right? $36,000 off the top of that investment… (huh, what’s that?? why???)

$332,000 –
-$36,000
- $271,000 in payments
—————————–
$ = $25,000 profit
– (maintenance+repairs+additions) of 10 years.

not bad for an $80,000 investment.

Now…… that to me is an investment….

And of course your home purchase that you buy today will always go up in value because thats what everyone says… even my realtor who started working in the business 6 months ago and my mortgage guy who is looking out for me :-)

Well…… I bought my house for $400,000 and sold it for $600,000 who’s better than me?.?.

Now over 10 years I’m in the positive for $25,000 – (maintenance for 10 years)

Ohh yeah…… now where am I gonna live?
Should i buy another house?

Think Mcfly…. think…..

Ok I’m tired…

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traineeinvestor February 16, 2009 at 8:06 pm

Um…yeah, all of these costs you mention do need to be factored into the buy v rent decison. Anyone who does not allow for these things is deluding themselves. You also need to allow for the rent that you will not be paying if you live in an owner occuped home.

The point is, that given the amount of money that gets spent on a home, it would be foolish not to think of it as an investment and crunch the numbers accordingly (preferably without the “help” of agents and others with a vested interest in your decision). Sometimes it will make sense to buy (a good investment) and other times it will better to rent (a bad investment). Whether a home is a good or bad investment will depend on the numbers for all the items you mention above. To use our current home as an example, even after the recent decline in values, we are still comfortably ahead even after transaction expenses, maintenance etc are taken into account – and with the interest rate on our 20 year mortgage at 2.2% (I live in Hong Kong), the government having given a partial waiver of rates (property taxes), the monthly outgoings are below the current rental levels. (About 55% of the monthly outgoings are going to principal reduction.)

If I had brought a more expensive place at the top of the market my investment would have had a very different outcome.

Lastly, just for the record, there have been times when I have concluded that it is better to rent than to own.

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John December 28, 2009 at 12:32 pm

It’s not so much that owning a house is an “investment”, but rather it really does follow the arguement, “You gotta’ live somewhere”.

Owning a home is more akin to “stop the bleeding” that comes by shoveling out $$ into rent. Even if you buy and sell your house for the EXACT same amount, if you lived in it for some period of time, you came out “ahead” of the person that rented for the same amount. Period.

It’s just that “ahead” may mean the rentor was -$80,000 and the buyer is “only” -$10,000. Even though the owner STILL lost $$ over the period of time, they lost LESS $$ than the rentor did. Which means their net worth will be MORE at the end of the time period than if they had simply rented.

I’ve seen a lot of articles in the past 6 months or so talking about the “virtues” of renting…and they’ll go through a long-winded math/reading problem showing how you don’t make any real money when you “buy” a house. To that, I say, “SO WHAT.” I’ve LOST $$ in my home ownership (owned for 9 years, on the market to sell, will sell short by about $10k). I’ll actually end up “losing” about $20,000 in the grand scheme of things from “owning” this house once it sells. But in those same 9 years, if I had kept renting my apartment, I would have LOST about $72,000 in the same time period… To me, -$20,000 > -$72,000…

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J November 12, 2010 at 9:53 pm

I recommend the book Rich Dad Poor Dad. A home is not an investment or an asset. It is a cost.

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Chris G February 9, 2011 at 2:47 pm

When you’re doing rent vs. buy analysis of a house, what most people doing the analysis do is not factor in is the simple non-payment of rent on the opposite side and the tax advantages.

Being able to deduct mortgage interest and property taxes from my federal tax return (25% tax bracket, 300K home) saved me from paying $4200 in taxes, this year. Very few other investments are tax deductible, and I’m already at 12% of income going in to my 401k – I do whatever I can to legally reduce my tax bill..

I know my house rents for about $1,500 dollars as, so $1500×12 + $4200 +$100 renters insurance = $22,300 annual “comparable cost avoidance of housing expense” whereas ownership costs me about $20,640 as I put $50k down on a $300k home @ 5.25% considering my property taxes + IPMT + PPMT + Hazard insurance cost = $1720. So annually at this point, i’m cash flow positive by purchasing. Assuming the 1% of value rule per year of house (ie, 1% of house value needs to be invested into the property for maintenance) I should budget $3k annually for maintenance expense, i see owning costs me about $23,640 and renting would cost me $22,300, a difference of $1,000-ish per year.

The sum of my PPMTs per year is more then $1,000 this year, so I would say I’ve come out on top. In the future, my tax deferral will go down, but my PPMT will go up (following the amortization curve) so instead of paying into a “cost” (interest) i’ll be paying into a “gain”, if you will. If the market stays flat, I will continue to have been better off for buying.

OF course, when I go to sell, there are commisions and such to worry about but so do your investment brokerages have those on trades.

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J Smith August 13, 2011 at 8:45 am

Consider the time value of money on your $50,000 downpayment. If you had invested it in the market instead, even in risk-free bonds, you would have earned a small return. In our current economic environment, in Oregon, renting is less risky and a better strategy. My house just sold and now I am seeking a rental house.

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collinco April 10, 2011 at 4:28 pm

….be it ever so humble, there’s no place like home. Only variable to think about is time. If you own a house for 5 years probably better to rent. If you are going to stay there the rest of your life (or own it and rent it the rest of your life), you are better off buying.

Trust me, when you retire you will want to own a house — and have the option of a reverse mortgage. Renter nation people will regret it someday.

BUT I’d still wait until home prices bottom out. They have not done that yet.

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Nightrider May 3, 2011 at 1:45 pm

Yes, definitely – home is an investment.
Real Estate appreciates approx 2% per year. Present economic condition is unusual. So, this 2% appreciation is an exception. It does not happen this way all the time. I would like to call this – a temporary dip – in the real estate life span.

Your home gives you immense pleasure to live in. You cannot put a dollar value on that.

If you are not good at fixing things around home – LEARN. Plenty of help available. Make use of it. The hardware stores want you to be good at it because there is advantage for them in this as well. It is actually better to fix things yourself. Labour costs are zero. So, you can afford to buy quality (hence high priced) items to fix them yourself.

Painting, landscaping, plumbing, electrical, tile works – on and on…… You will find there is pleasure in it to fix and see the results.

Rent a part of your home. It helps to pay towards the mortgage. Keep the tenant for the next 10 or 15 years.

All along do not worry about whether your investment is growing or not. Yes, it is right before your eyes. Just enjoy yourself. By the time you turn 65 or 70 – rent a condo apartment by taking out the equity from your home. Your home is not sold yet. It is your estate that you can leave for your children or loved ones or to your favorite charity and you are travelling or do something you always wanted to do and just LIVE without worrying about anything. START YOUNG. This is the key to a happy future.

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Larry H August 30, 2011 at 9:15 am

Hmm, by this logic, my car is an investment too. Hear me out…if I buy a used 1979 Dodge Challenger, its value may go up or down over the next several years that I own and drive it as my primary mode of transportation. I may or may not put money into it, that’s irrelevant. I may or may not have a loan on it, that’s irrelevant too. So let’s get our definitions correct. A house or a car that you USE is a LIABILITY. One that you buy and DON’T USE (fix/flip the house, rent it out, collect and show cars, etc.) is in investment – the intention of purchase is the hope that you can resell later for a profit, and you do not use that property (real or personal property) in the meantime.

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Tim August 30, 2011 at 6:27 pm

The 1979 Challenger, like most cars of that era, were hopeless piles of dung, sought after only by masochists. Speaking of definitions, I went to Dictionary.com, and nowhere under the definition of investment did it mention “buy and DON’T USE”. So who didn’t get the definition correct? Buy a 427 Cobra for $6000. Drive it a few times, on and off, maybe only at the track. Store it in the barn. In the 1980s you might get 100K for that car. Compare to other investments. If I buy a hot dog stand business and eat a hot dog every once in a while, is that no longer an investment?
A computer is a tool for work, and a source of entertainment.

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Rick August 31, 2011 at 4:46 am

Anything that has a higher chance of going down in value through usage, and the maintenance costs end up running higher than or close to the investment itself, is not an investment to me. I think most cars would fall into this category. But a house is different in my opinion, as it’s value isn’t really going down any by living in it. I have to think my first home is an investment. If times get tough for me sometime, I would hope I can sell it for a higher amount than I bought it for, taking inflation into account. In desirable places with increasing amount of development and population, this is particularly true as living space is likely to only get less and less.

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Kim July 20, 2012 at 3:14 pm

I think people are confusing the word “investment” with the word “asset.” Yes, my primary residence is an investment. I invested my money and time into my home by paying my mortgage and making various home improvements/repairs, with the expectation (hope, really) that the value of the property will equal or exceed the amount of money I paid/put into it. (By the same token, I invest my money in the stock market with the hope that some day the value of those stocks will equal or exceed the amount of money I put into it.) However, as long as I carry a mortgage, I will not classify my house as an asset. It is a debt, plain and simple.

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Nightvid Cole January 30, 2013 at 11:36 am

The problem with your idea is that “quality of life” not only means different things to different people, but can even mean different things to the same person at different points in their life, as for instance, before vs. after having kids, etc.

I like living in a tiny apartment much better than I would like having a house to maintain (even if I could afford the latter). I can spend my weekends doing whatever the h*ll I want rather than yardwork and cleaning gutters. And I don’t have to take off work 2 or 3 days if the repair guy cannot tell me when he will come. Nor do I have to spend 3 months arguing with insurance about a damage claim. The landlord handles it all, and I get to go hang out with friends or hike instead.

On the other hand, If I was the type that really enjoyed to renovate and work on projects, etc. then I naturally might prefer to own a house, financial considerations aside. But I am not. And in reality, can’t afford it anyway unless I rent out most of the house. One of the things most of these discussions fail to consider is that by having a house, you lose the financial benefit of having roommates (unless you have enough time and know-how to be a landlord)

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Mary February 24, 2013 at 7:20 pm

I am 76 yrs old and I own two 800 sq ft cottages on a lake. I do all my own grass and landscaping, as well as gardening. I pay all the bills ($900 a yr taxes) utility bills etc. And all on a small pension + social security check total of $2000 mo. When I see people whining about making $75,000 a year I can only come to a conclusion that they are spoiled, greedy individuals who have never learned to live within their means. I find them unable to enjoy a basic life-style that just meeting basic needs of food and shelter in every day life involves. People always seem to desire more than is necessary and the result is unhappiness.

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NYC RE Broker May 31, 2013 at 2:10 pm

I agree with Kim that some folks confuse “investment” with “asset”.
Of course buying a home is an investment. Anything one puts time, money or effort into is an investment. Now, whether or not it’s a good investment… that’s the real question. One that needs time and a lot of qualifiers to answer well.

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R Kawalek August 8, 2013 at 10:33 am

You are absolutely right that you don’t actually own the home until the mortgage is paid off. However, one shouldn’t feel that starting a 30-year mortgage necessarily gets one closer to ownership than saving for a larger down-payment on a 15-year mortgage for example. The latter will bring you to full ownership much much quicker and save you a fortune in interest. Rent until you find the right house and have a hefty down-payment. Nobody rents as much house as they would buy, creating savings each month versus mortgage payments, and building up the war chest for the day when the best home and financing are possible.
And as far as the parking problems and noise at your rental – well, maybe you need to find another rental.

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Mrs HandaYani September 2, 2013 at 10:34 pm

I am from overseas, I just cash purchased a home in a better part of town because:
-it was 30% below market price
-I come to this city twice a year (totaling 3 months stay in a year) spend a lot on hotel bills for these yearly stays.
-My children and grand children will have a place to stay if they go to collage in this City later (5 years later).
-Its nice to have a house abroad.

I plan to rent it out during my absence (high end rentals) to cover the property tax and maintenance costs,
And plan to use a property management company that I know and trust,

I read everything to know about owning a house in California,
I have reserved funds to pay 5 years tax and maintenance costs in case we do not get tenants..

The thing is..
I closed a month ago and..
After excitements of viewing the house, offers and counter offers..
After full payments done.. Came the anxieties, the worries.. OMG have I done the right thing?.. I am so far away , I don’t know the rules and regulations there..

This post is just looking for reassurance that I have done the right thing..
Please be kind.. I cant back out now.

Thank you.

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Gary Kerr February 19, 2014 at 10:51 pm

Homes are consider as well as investment and a biggest assets.Homes gives comfort and protection to family. Many people rely on their home as their primary saving strategy.I would have said thanks, we appreciate.

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