Friday, October 22, 1999

A Taxing Investment


Today I received my annual "love note" from the local property taxing authority. The property tax in Texas is the primary funding vehicle for local schools, and also pays a portion of other city and county services (hospitals, emergency services, etc.). In short, it's what I owe the local government for the privilege of being a home owner.

Now, I live Foolishly in a home that costs less than my annual income. But lot's of people live in a home costing more than two times their annual income, and many will tell you their home is their largest investment. But over time, is this a Wise choice?

Back to my property tax bill. This year I will pay the locals more than 2% of the value of my home to settle my tax account. According to local real estate and insurance pros, my home has appreciated about 4% for each year that I have owned it. Pretty good compared to my other homeowning experiences, which include one break-even and one big loss. But that 4% must be reduced by the 2+% in taxes and the 1/2% in insurance, not to mention maintenance. In short, even in a good market where my home increases in value each year, the overhead of owning keeps me from enjoying any real appreciation.

Don't get me wrong. I don't like renting, and the other intangibles like good schools and a safe, stable neighborhood make me glad I'm a homeowner. But the question of "how much home do you need" still needs to be answered. Certainly the mortgage company would be happy to lend me funds for a much more expensive domicile. And the monthly commitment that goes with it could put a kink in my current financial plans. Yet I think some people are tempted to buy more home than they "need" because they are fooled (little "f") into thinking it's a great investment.

Buy and hold investors don't pay taxes on their investments (until they sell). And then they are only taxed on the gain, not on the total value. Moreover, you don''t have to buy fire insurance to protect your favorite securities. And certainly the historical returns of the S&P 500 (or the Foolish 4) beat the pants off the mythical 4% gain my home is getting.

So buy as much home as you need, and enjoy what you have. But save the "investment" moniker for something with real returns.

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