100 Words On: Why A Home Shouldn’t Be Considered an Investment

It’s often said that a house is our biggest investment, yet the primary function of any house is to simply provide us with a place to live. Yes, handsome gains can be had for those with good timing. However, as investments go, houses rarely match the long-term returns of stocks. And most people forget that property taxes, maintenance costs, insurance, and even real estate agent fees eat into those returns.

The bottom line: It’s a mistake to rely on your home as a sure-fire piggy bank of future wealth. It’s wiser to diligently save and soundly invest your income over time.

Photo Credit: Charles D P Miller



Comments

  1. 1

    Terry says

    Your home is not an investment, it is insurance, and those who are least able to acquire it are the ones who need it most.

    Owning a modest home with a 30-year (or shorter) fixed-rate mortgage and a decent interest rate means you can expect to eventually retire the mortgage as long as your income holds up if you are adequately insured and do not refinance the mortgage.

    For low earners, this is crucial to being able to retire with a reasonable standard of living, as opposed to paying half your income for ever-rising rent and never being able to retire.

  2. 3

    keithrackett says

    if you know how to play the real estate market, you can get much much higher returns than stocks, especially in todays economic environment. your articles seem to be very one sided and for the extremely frugal.

    • 4

      Len Penzo says

      Not frugal, keith, so much as pragmatic. By your own words (“if you know how to PLAY the real estate market…”) you’re advocating using the housing market to gamble. You’ve missed the entire point of this piece.

    • 5

      says

      But if you don’t, you can lose your shirt. Or more.

      I don’t consider real estate an investment unless I were buying a rental property. I do like the person above who called it “insurance”.

      We bought our house (poor timing) in 2004. It is now worth approximately 90% of what we paid for it. At the floor, it was 60%. It’s hardly an investment – it’s a place to live. Some day, if we remain gainfully employed, we will be able to retire and it will be paid for. Insurance.

  3. 6

    Spedie says

    I consider a home and/or property a good investment if you can keep it maintained, keep the taxes paid, and keep it for a very, very long time. To heck with timing. My ex in laws bought a house in South Orange County, CA nearly 40 years ago. They paid $30K for it, kept the taxes up, and kept up with maintenance, although not perfectly. Nearly 40 years later, they sold it to a cash buyer for $365K, and this was right after 9/11 when the housing market tanked there for a bit.

    I consider this better than dealing with the Wall Street sharks and investment “brokers”. Wonder why they call them “brokers”? Because they get paid and you get broker!

    House/land is tangible. Stocks are not. Stocks go up and down if a cat crosses the road!!

  4. 8

    says

    Interesting post, Len. Housing, whether you own or rent, is a cost that none of us can avoid. I tend to align with Robert Kiyosaki’s definition that a home is a liability because unless you are earning more than it costs to maintain, it is a hit against your income.

    I live in So Cal, like some of the others who commented here. I bought my house in 1994 and paid it off within 15 years. I “carry” the value of my home at a level far below what the market says it’s worth because I never want to be caught short if I have to sell it.

    My long-term plan includes using my home’s value as a form of “long-term care insurance.” I would rather have a paid-for home as my back up plan than spend money each month to insure me against a problem that may never arise.

    Oops, my comment is probably longer than your entire post…sorry!

  5. 9

    says

    I agree 100% with this. I wouldn’t even consider a house an asset in the typical sense for the simple reason that: you need shelter. It’s one of the three basic needs. If you have a second home, that’s an asset because you can sell it and not be homeless.

    Some people might say, “but i can sell my home and downsize.” From my experience, this is extremely difficult. Assuming you sold your home yourself (a big if in most markets) and got a good price and didn’t have to fix the home too much to get it to market and didn’t have to make too many concessions to the buyer and you found another home significantly cheaper that was also for sale by owner and they were willing to chip in for closing costs, you COULD consider most of your homes value as an asset, but that’s a *lot* of “If”s.

    My great grandmother was a landlord in a thriving city when she was younger. Had five homes and duplex she rented out and took care of most of the upkeep herself with the help of her husband and son. That city deteriorated over the years and property values stagnated and eventually began to collapse. She held onto her rental properties but experienced no pricing power for rent. As time passed, the corner cutting on the upkeep eventually resulted in all of the properties going unrented and were eventually sold for less than $50,000, which is about what she paid for them in the late 1940′s. After 50 years of ownership, they’d appreciated exactly 0%. Meanwhile, her AT&T stock had split eight ways from Sunday and she comfortably retired on the dividends from that and a few other stocks.

    Moral of the story? For me, it was property value sucks because the value of the neighborhood is the economy of the area which is, sadly, mobile and most homes are not.

  6. 10

    says

    100% agreed Len. I view homeownership as a roof over your head, walls to raise your family in, a place to invest in your community, and a liability (monthly payment).

    Can you buy high and sell low? Sure, but don’t bank on it. And your average home buyer has no idea when the market is up or when it’s down.

    • 11

      Len Penzo says

      Re: Our home as a liability. Don’t forget property taxes too — the real wild card here. Those property taxes are the reason why we never really own our homes outright anyway — the sad reality is even those who have paid off their mortgages are still just renting their homes from the government, who can foreclose at any time for failure to pay.

  7. 12

    Edward says

    Spot on Len, it’s not an investment! It’s an asset with potential for greater future resale value. It also has the potential to some day be worth far less than its purchase price. An investment is something you put your money into with the intention that it should definitely be worth more eventually than what you paid for it. Making this assumption with real estate is a dangerous game. (As lots of people in Florida, Arizona, New Orleans, and Detroit will attest to.) A home is a place to live, not an investment and certainly not a retirement plan.

  8. 13

    says

    yes.. most of us said that house is an asset but dunno that most of house is liability.
    when it comes liability is when it can’t give profit to us even we sell or rent it

  9. 14

    says

    I don’t remember whether I thought of my house as an investment when I bought it. It seemed like a good idea to give my money to a bank rather than a landlord and own a tiny bit more of it each year.

    Years later, my circumstances changed and I was fortunate to be able to turn it into a rental property with positive cash flow.

    So I guess it was an Unintended Investment. I’d like to think I was really smart but I think I was just plain lucky.

  10. 15

    Ken in NZ says

    Not an investment but can be an asset. Luckily in many poarts of NZ houses are still relatively cheap. Even luckier is that our place has a small self contained falt attached which gets rented out and pays for all the building costs.

  11. 16

    Fencedin says

    I know someone who treated their house like an ATM, tapping the equity every few years during the giant run-up in prices to buy cars, pay off credit card debt, etc. They believed that the good times would never end. They nearly tripled the mortgage, and then came the 2007 crash. Now they’re underwater by about $200K, and can’t afford the house, and can’t afford to move.

    A house is something you live in, enjoy not having a landlord, try to pay off for a somewhat comfortable retirement (whether you stay or retire elsewhere). It’s nice, but it’s not a guaranteed profit-maker.

    • 17

      Len Penzo says

      I know more than a few people who did the same thing — and they are now miserable. One couple lost their home.

  12. 18

    Darlene says

    I agree with the liability position.

    My parents tried to coerce me to purchase a home, telling me that renting is “throwing money away”. I live in a high cost if luving area, the San Francisco Bay Area. My city’s average selling price has risen 70+ percent in one year. Most people buying homes here are paying cash. The only homes that are in the price range are condos. Paying HOA fees is another form of paying rent to me because the normal HOA fees are about half my current rent. Once I presented these facts to my parents, they finally laid off. I’d rather keep my rent controlled apartment than give my money to an HOA or pay property tax for the rest of my life. This isn’t 1986 anymore.

    Sure, the market will correct itself, but its not right now. My realtor, a very honest man, agreed.

    • 19

      Len Penzo says

      I think you are spot on, Darlene. There will be a time to buy real estate again — but now is not the time.

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