Most people dream of owning their own homes. The middle class invests disproportionately more in housing. The middle class rarely invests in the stock market. The middle class holds a lot of real estate.
Most people who own real estate don’t buy it outright. They borrow money to buy the property. This investment decision has a significant impact on their lives. In America, there is a phrase called ” House Poor.” This term describes people who make a good amount of money. They are forced to live impoverished lives because they owe most of their income to the banks as mortgage payments.
Slowly, millennials realize that their real estate dreams may not be worth it. The millennials prioritize spending on education and travel over purchasing a home. A house was traditionally thought to be a good investment. We will discuss seven reasons why buying a home is not a good investment.
- Investing is useful when you need to sell them quickly. Stocks and bonds are a good example. Stocks and bonds have a market that allows them to be traded for cash within minutes. Gold and silver are also suitable investments.
- Middle-class investors hold real estate as the most liquid investment in their portfolio.
- Real estate sales are complex in any market. In times of economic downturn, the process becomes more challenging. Sellers often need to wait six months to a year to receive cash for their property. Middle-class investors should only invest a few of their portfolios in asset classes from which they can easily withdraw money.
- Real estate is not only opaque but also illiquid. The listed price of bonds, stocks, and other securities is the same as the transaction price. In the case of real property, however, the listed price differs significantly from the actual rates at which transactions occur.
- A buyer may need help determining the exact price. If buyers and sellers are careful, they can be protected by unscrupulous intermediaries.
- The transaction costs for real estate are also abnormally high. First, every time a real estate transaction occurs, a substantial amount of money is paid to the government. In addition, every real estate deal involves legal fees, appraisals, and brokerage.
- Explains that each time an exchange takes place, approximately 10% of its value is lost in transaction costs. It also adds to the issue of illiquidity that was mentioned earlier. The bottom line is that because the transaction costs are high, buyers will be stuck with their property even if they made a mistake.
Low returns and high expenses
- Real estate investment is known to provide low returns. Real estate investment returns have historically been lower than inflation.
- Only in the last few years has there been a surge in capital appreciation on real estate. Rents are negligible. Rent is also difficult to earn because it takes time, effort, and money. Renting out houses can be difficult in many cases. There is also a risk involved.
- Real estate returns are similar to those of risk-free investments, even though a high level of risk is involved. Real estate is a bad investment for middle-class people because of this.
- Real estate purchases force a person into settling in a particular area. Real estate can only be purchased and sold occasionally because of the costs involved.
- One of the problems with settling down in a particular area is that opportunities are severely restricted. The millennial generation chose not to purchase a home for this reason. With layoffs, job changes, and the like, owning a home is a liability rather than an asset.
- Real estate is usually purchased with leverage, as we have already stated. In other words, people pay large amounts of interest on their income. All of these payments are made on the assumption that property prices will increase. Investors will lose money if prices do not rise.
- Investors can lose money even if the price does not fall. Even though the price remains stagnant, the investors have already lost an enormous chunk of the savings they paid in interest.
- The real estate sector consumes most of a middle-class person’s salary and, therefore, their entire portfolio.
- Most middle-class savings are invested in the housing market rather than a portfolio that protects investors from a downturn. When the housing market crashed in 2008, the economy was in ruins.