Is Real Estate the Best Investment You'll Ever Make?

Perhaps, but let me begin by stating: the ideal that everyone in America should own a home is as flawed as the messianic ideal that everyone in the world should be Christian, capitalist and live in a democracy. Everyone in this country has the right to own a home, but there are many people who- given their nature, age, lack of integrity, maturity and socio-economic means are either not able or unwilling to make the commitment and assume the (usually) long term obligation that comes with having a mortgage.

While I do not have the data to support this, I rest my argument upon the rapidly unfolding "sub prime" fiasco. I concede that renting is, from an investment standpoint, just throwing money out the window, but there are many people in the USA who rent their homes and who are happy. My 82 year old father is one. I am another. One of the great advantages of renting a home is that it is liberating- I sleep better at night because I know I can serve notice to my landlord at any time and move someplace else if I want to.

I have owned both an apartment in New York City and a nice house in Greenwich, Connecticut. While both turned out to be pretty good investments I speak from experience when I say that the house was every bit of a money pit as I had feared it would be. The adage about "The 2 happiest moments in a boat owner's life..." applied to me and my house. I was elated when we sold it- not so much because we made a nice profit, but because the Sisyphean endeavor (improvements, renovations and maintenance) was finally over.

And despite the prevailing "wisdom" that your best investment is your home, or real estate in general- it all comes down to location and to timing. Pick the wrong location and get the timing wrong- and you will loose money on property. I believe that the Empire State building was built (completed in 1931) for around $25 million. Add that to the value of the land, and the total cost was $41 million.

The building was not profitable until 1950. It was sold a year later- 20 years after it was completed for $50 million. Now of course it is arguably a billion dollar piece of real estate. Obviously there is a huge difference between investing in residential and commercial real estate, but consider this: the so-called "lost decade" in Japan (the 1990's). Between 1985 and 1990 real estate prices in and around metro Tokyo tripled. I do not have the break down between residential and commercial property markets here, but indulge me.

These prices then fell steadily over the next 13 years to where- in many cases they retraced to 1985 levels. Land values alone plummeted 84% from their peak in early 1990 until 2003 (source: Bank of Japan, Financial and Economic Statistics Monthly; Ministry of Public Management, Home Affairs, Posts and Telecommunications, Consumer Price Index; Japan Real Estate Institute, Urban Land Price Index.) So is real estate the best investment you will ever make? Ideally it should be part of a diversified portfolio of investments- but if your house constitutes well over 80% of your assets, that is a very large bet on a single asset class.