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Steve's note: Contributing today's essay is my friend Porter Stansberry. We've known each other since we were kids... and he's the publisher of DailyWealth.
 

How To Lose Money on a House

By Porter Stansberry
Wednesday, April 11, 2007

I remember the advice my father-in-law gave to me when I bought my first house. This, I bet, will sound familiar to you, too...


"Porter, buy the most house you can possibly afford. I wish I'd bought twice the house I did 20 years ago. We could have afforded it, but I was conservative. Now I wish I'd bought the lot next door, too. Whatever you think you can afford, buy a little bit more – you can't lose money on a house."

Two things have fueled thereal estate boom in America – cheap financing and the belief that everyone makes money on their house. Well, the second part of the equation isn't true anymore. Let me show you how I lost money on my house.

In 2003, I bought a new townhouse in Baltimore's popular Canton neighborhood. The property was, by Baltimore standards, high end. It had private parking, two rooftop decks, a third-floor kitchen/bar, and all of the latest home technology. It also had an unobstructed view of Ft. McHenry and the Inner Harbor. The waterfront was about 500 yards away. The town square, with restaurants and bars, was six blocks to the north. How could I go wrong, I thought, buying top-quality "waterview" property, in the best neighborhood in a rapidly growing city?


I paid $385,000 for the three-bedroom, five-bathroom, 2,400-square-feet townhouse. I put $80,000 down (20%) and got a 30-year fixed mortgage with a 6% rate. I thought I'd want to own this property for a long time, given its prized location. But after about two years as a resident of Baltimore, I'd changed my mind.

My cars kept getting broken into. A cocaine dealer lived behind me. He'd have parties three or four nights each week. There was always garbage in the alley behind my house, which would end up blown all over my decks. The city was a constant hassle. It would fine me when I'd go out of town because someone would put his trash in my parking spot. I noticed that more and more of the houses on my street were being turned over to renters.

And then there were the taxes. Last year, the City of Baltimore – the heroin and syphilis capital of America – charged me $8,100 for the pleasure of living on its rat-infested waterfront. That's more than 2% of my purchase price.

We listed the property at $525,000. It sat on the market for six months. We didn't receive a single offer. I met with my realtor. "Frank, you've got to drop the price. Look at the listings. You can buy a lot more house for that price." He dropped the price to $499,000. Two more months went by before we got our first (and only offer) – $440,000. I took it, happy to be rid of the property and the tax burden.

"Porter, congratulations," my realtor told me yesterday at the closing. "You made a little bit of money off the deal, and you had a great house to live in for three years."

No, actually, I lost money. About $833 per month while I owned the property.

Look at what I put into the house: down payment ($80,000), 3.5 years of interest expense ($63,000), 3.5 years of taxes ($28,000), and one major improvement, plantation shutters ($10,000). So... in total... I spent $171,000 on this house. And yesterday, I got a check for $136,000 at the closing of the sale. That's a loss of $35,000.

No, I couldn't have rented a property for less, so at least I got good value for what I spent. But I certainly didn't make money.

I bet most of the people who have bought property since 2000 are in the same boat. When you add up taxes and interest, I was spending $26,000 per year to be the owner of this property – that's 6.7% of the total value. For me to have made money on this house, the property needed to appreciate by at least 7% per year. Historically, housing prices have grown by about 4% a year in the United States.

Housing isn't a sure thing anymore.

Good investing,

Porter Stansberry

Steve Sjuggerud's note: The supply of homes for sale is at levels not seen since the last recession at the beginning of the 1990s. Not so coincidentally, the last time we saw 12-month falls in the prices of existing homes was the beginning of the 1990s. With the supply of homes on the market so high, many homes will get stuck for sale for many months. 

As an investor (or potential home buyer) you may be able to pick yourself up a bargain in the next 18 months. Imagine that a seller has had his home on the market for a year, and you're the first offer he's seen. He might just take it. 

Bid low and keep trying. You may just get lucky and get one well below the market price. It only takes one seller to accept your offer...





Market Notes


THE BULL MARKET IN MINING IS BACK ON

In the January 2006 issue of True Wealth, Steve shared the easiest, safest way to make a fortune in China: Just sell the country everything it doesn’t have... but desperately needs.

Specifically, our "China plan" is this: You can make a fortune over the next few years simply by owning the companies that supply China with the resources it needs to keep building – lumber, steel, cement, copper, aluminum, etc.

One of the easiest ways to supply China is through longtime True Wealthholding BHP Billiton. Based in Australia, BHP is the world's largest diversified producer of commodities. After moving largely sideways for the past year, BHP has broken out to a new all-time high this week. Thank China-driven base metal prices for the surge.

The conclusion from this bellwether's price action is simple: The bull market in mining is back on.




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