I was reading the January 7, 2008 post of “I will teach you to be rich.”  I agree with Ramit that buying your first home is a huge step and should not be taken lightly, especially in high-cost areas like San Francisco, where buying an average residence can run over a million dollars.  However, there is a distinction drawn between your personal residence and investment real estate.  Purchasing a home has many benefits: it puts a roof over your head, you can deduct mortgage interest, and you are building home equity (hopefully with a traditional mortgage).  However, too many people view a personal residence as an investment property, when it really is for personal consumption.  Bankers, when reviewing a person’s net worth, typically exclude the value of the primary residence.  Why?  Because your home is the roof over your head; it is not a liquid investment or a cash-generating investment property. 

Unfortunately, a lot of people failed to take this into account in the recent real estate bubble.  Several of my friends made very costly renovations to their homes.  One older couple sunk over $200,000 drawn from their home equity line of credit to expand their living room and add another bedroom.  They didn’t need the space, but wanted to make the home improvements in order to sell their home for a premium amount when they retired.  Of course, the real estate agent that they invited over convinced them that they could command such a high selling price with the renovations.  Needless to say, since that time, the market has softened considerably, and it is highly doubtful that they will reach that desired selling price before retiring in the next 3 years.  Another friend, with her then-husband, spent large sums of money, partially financed by credit cards and a home equity line of credit, to convert their townhouse into a “smart house” complete with an array of electronic voices that greet you upon entry.  Basically, they overimproved the property for the neighborhood.  Although my friend is getting the home in the divorce settlement, she is “house poor,” with a lot of equity but little liquid savings.

 Contrast a personal residence home with investment real estate.  Although many of the so-called real estate gurus on those endless infomercials (e,g, Carlton Sheets), oversimplify matters, investing in real estate can be very profitable IF you choose the right deal, i.e., you buy a property with a high rate of return, positive cash flow to you and a steady tenant.  Real estate markets are regional: buying commercial property in most parts of California will yield far less in return than properties in parts of the South or Midwest.  However, with the help of commercial real estate websites like www.loopnet.com and national real estate brokerage firms like Marcus and Millchap, an investor in California can find a nice strip mall in Tennessee or a warehouse in North Carolina yielding 8 to 10 percent.  I do not live in the South but have had good luck with several commercial properties in Tennessee and Alabama, not only with the positive cash flow but also the ultimate selling price.  In future posts, I will talk more about commercial real estate investing.