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 gold – a safe haven – or even stocks. Then there are property taxes, maintenance costs, insurance, and even real estate agent fees, which eat into those returns.
The bottom line: It’s a mistake to rely on your home as a piggy bank of future wealth. It’s wiser to diligently save and soundly invest your income over time.
Photo Credit: Charles D P Miller
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.
Terry, this is really true. We live in South Orange County and the prices for rent are shockingly high. Thank God we bought our house 18 years ago, because we definitely couldn’t afford to rent it now.
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.
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.
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.
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!!
Is that such a great return?
If you would have invested that initial 30K in 1962, you would only need a 6.5% return to yield 365K in 40 years.
And the inflation rate during that same period averaged 4.9%.
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!
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.
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.
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.
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.
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
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.
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.
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.
I know more than a few people who did the same thing — and they are now miserable. One couple lost their home.
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.
I think you are spot on, Darlene. There will be a time to buy real estate again — but now is not the time.
Good post.
We’ve never looked at our houses as investments. Why? Because we never planned to sell them.
We own two and were able to build the second without having to sell the first. We lease it to our son and daughter in law.
Both houses will go to the kids when we’re gone.
I guess we’ve been fortunate in how things have worked.
Our investments? The market, and the first house as rental property.
Interesting read. But we’d still prefer to pay off our mortgage as soon as we can so that we can feel assured about investing in other profitable streams.
Bought my first home in 1981 at age 24, and suffered through the 18% interest rates that unfolded….. eventually broke even when sold in 87. Bought my 2nd home in 1987 in a new location for a new job, for $63K, and sold it in year 2,000 for $300K, not a bad return as we were also mortgage free by then. We then bought another place to fix up with an additional 16 acres zoned residential for that same $300K, renovated the place while still working full time and living there, and this year we were assessed at over $2million. Our rental pays all taxes and insurance as we are in a rural low tax area. We take care of our own services which means a drilled well that is beyond adequate supply and a septic pump out every 5 years for $350 cash.
Are we going to sell out and buy something cheaper, as an investment return? No, because we don’t have to. It is our home, not an investment. When we die the kids will make that decision. It is a home to be thankful for.
The main investment savings of home ownership is becoming mortgage free, and that applies to anywhere, and everywhere. If it all goes to economic crap we could comfortably get by on $1,000 per month at today’s inflated prices. In town we would need $2500 per month. As a tradesman I do all maintenance and upgrades, and believe me, it isn’t rocket science. Most people can learn to do it and it takes little time to accomplish. Motivation? I have gone through periods of under employment when I had to work away from home and I vowed to never be victimised by circumstances ever again. I was laid off at age 24, about 3 months after closing on that first house. And that was the incentive. My boss at the time was a malevolent a-hole who took great delight in laying off 1/2 his crew on Nov 24th (1987) so he would not have to pay Christmas/Boxing Day stats. I never went back to work for him or waited for recall and just moved on to work for decent employers, elsewhere. Incentive to own home outright = new mortgage+2 month old daughter+ wife at home and a layoff notice.
Here’s another bonus of being mortgage free. Your employer knows your situation and treats you better as he/she knows you can walk at any time. Plus, you always have cash in your wallet. Always. When we were paying the mortgage off I had an empty wallet. Always.
For new prospective 1st time buyers here is a glaring major difference between then and now. I have never made big wages, ever, unless I worked piecework and was paid by-the-mile flying bush planes. But as a carpenter I was paid the going hourly rate. But back in 81 and again in 87 my house purchase prices were 2X my yearly take home net pay. The mortgage payment was similar to rental rates. A new vehicle might be 1/3 of take home in total. Nowadays that first home purchase will be what?….10X a yearly wage? 7X? Whatever it is, it is insanely too expensive. And rent is the same. The cost of bread has gone up 500%, your home by 700%, your vehicle 800%. I don’t know about you folks but my wages never kept pace over time, not even close.
The rich get richer, the middle treads water barely….maybe sinking, and the poor get poorer by the day. There is a reason why the homeless and downtrodden are growing in numbers everywhere these days. The corporations own the Govt and people like Musk and Bezos fight unions every step of the way. In Canada, the average CEO makes 246X the average workers wage. In the Us it is 344X the average pay. In 1965 it was 22X.
No easy answers but being mortgage free is a worthy goal for regular working families. I know of no other route to security.