Speculating on your own home?

Ryan, who is upside down on his own mortgage asks:

I agree that plenty of investments, if not most, will give you a better APR than your house, but what about leverage?

$500,000 House( $400,000 Bank’s money, $100,000 Your Down Payment) * .05(expected year 1 appreciation = $25,000

$100,000(Your would be down payment) * .15 (from a successful investment or business venture) = $15,000

This is POSSIBLY true IF you gain market appreciation; that’s called speculation.

On the other hand, if you put the same money into a cashflow positive rental, then you make money on the rents and any future appreciation is a bonus; that’s called business.

A case can possibly be made for using your own home as a ‘business’ investment IF you presume to (nominally) charge yourself market rent for the same type of accommodation …

… but, would you pay that same rent rent to somebody else?

The answer must be ‘yes’ for this to work.

If so, then compare how the property then stacks up as an investment if you were the owner and renter i.e. is the pseudo-rent greater than the mortgage?

But, there is still a catch: you also lose most of the great tax benefits of a true investment (e.g. depreciation), even though as home owners in the US you gain some (capped) tax-benefits – particularly in relation to your mortgage interest.

But, there is a solution: buy a house to rent out, and rent the identical one from somebody else!

Rent out the one that you own and rent the other one from the owner: this way, you ‘force’ yourself to treat the one that you own as a real cashflow investment and the other as a place that you live in.

What do you give up?

Probably that sense of ‘ownership’ (but, hey … you do own the identical one, right?) and security of tenure.

But, you must weigh this up against the benefits:

1. True investment ‘status’ … buy, sell, hold, refi as the numbers dictate

2. Gain depreciation benefits for anything that you add (works great if this is a new’ish house!)

3. Full, uncapped tax-deduction on mortgage interest, etc.

4. ???? [you tell me?]

In fact, if you have a friend, why don’t you each buy a house and rent it to the other? Now, that is a strategy worthy of a millionaire … in training! 🙂

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