Real Estate is Good Long Term Purchase

Climbing the Property Ladder

Years ago, consumers (and REALTORS) were taught that buying a house or a real estate investment was a relatively long term move.  People bought homes to live in, and raise families, and fix their housing expense (as opposed to rising rents).

Conventional wisdom was that if you bought a home, you should anticipate being in that home at least 5 years, and more likely stay 7 to 10 years before you would sell the property and use the proceeds to move into a better home. One of the difficult concepts to sell young first time buyers was that they couldn’t have everything they wanted in their first house, but they could certainly work their way up to whatever type of house they wanted and was suitable for their needs. Though the term had not yet been invented, we were talking about a stable , achievable property ladder.

In Philadelphia, for most first time buyers, that meant buying a row house as a starter home. There were of course different types of row homes, some older and less expensive, some newer and harder to afford, but the concept was still the same. You would buy the best home you could afford. Live in it, do the things that homeowners do to make a house their home, and add value though careful maintenance and judicious improvements.

After a number of years, your income had increased a little each year, the house was (hopefully) even even then when you bought it, and you had built some equity by paying down the mortgage – and frequently, you were the beneficiary of some appreciation. In fact, the longer you owned the property, the better your chances were of have some appreciation. Even if you owned the property through a market readjustment, then end result was usually significantly higher then the original purchase price.

Movin On Up!

You used this equity to buy your next home. In Philadelphia that might mean a larger semi-detached single family home (we call the Twins). These homes were generally larger and possibly newer, and had more space for your family, and your other interests. Once again we started the cycle of maintenance and improvement and building equity, and with some patience, eventually, if you were prudent and thrifty, you ended up with the move to a detached single family home that was the realization of your family’s dream.  If I hadn’t just read a new blog by my colleague Kelley Koehler  (AKA Housechick) over at Agent Genius , you would be reading about one family’s progress from an 1665 sf of living space in a row home to a 2700 sf split level to 6540 sf of living space on an acre of land. And the down payment on properties two and three came from the sale of properties one and two.

Even buying a real estate investment for most people was a longer term situation.  Rentals were generally bought for cash flow, with the assumption that a minor increase each year would allow you to increase the cash flow over a period of time, and then at sometime in the future you would sell the property and take additional profit, or use the proceeds to buy a better or larger investment. It may sound like this was a lot of work, but I can tell you that it did work in the past, and it will still work today.

Somewhere along the line, a new message came to the forefront of the real estate market. People talked about buying real estate investments with no money down (which begs the question “What are you investing?”) and buying houses based on assumptions of quick increases in value to allow the buyers to leave the property quickly without adding any value to the homes. And for many people for a short period of time , in the hottest market I’ve seen in the past 37 years, it worked. In California, Arizona, Florida, Nevada, Beach Communities, and any place where an already hot market was fueled by additional second home owners and/or investors , the strategy worked – at least until it didn’t – And real estate started getting a bad name as a place to put your money or secure your family’s financial future. The saddest part of this falsehood is that even some real estate people bought into it.

Basics are Still Basics

Well Gentle Reader, it just ain’t so. It may not be the immediate jackpot that people thought it was, but the basics of home-ownership, and building a strong base by owning the place you live hasn’t changed. I remind you once more that anyone who has a monthly housing expense is probably paying a mortgage for someone – and if its not a mortgage you’re paying for me, then it should be one you’re paying for you!