Your House is a poor financial investment but your Home is the best investment you will ever make.

Cian Brennan
Sep 6, 2018 · 6 min read
  • This article is about your primary residence (the place where you sleep).
  • This is not an article about real estate investing.

Buying/not buying a house/home is such a sensitive topic to many out there. I think saying “I don’t own a house” or “I am a renter for life” is akin to saying to a meat eater that you are vegan or to a vegan that you only eat meat. It just rubs people up the wrong way and regardless of facts, people are married to their own view.

I believe it is because people confuse the purchase of a physical house with the creation of a home. They are not the same.

If you want to buy a house to stay in one spot for a very long time (30+ years) and create a home, buying a house is a fantastic investment. The most successful investor of all time, Warren Buffet, bought his house in a quiet neighborhood of Omaha, Nebraska for $31,500 in 1958 and still lives there to this day. He says that purchase of his home and the memories it created was one of the best investments he ever made. But as a financial investment…not so much.

Warren Buffet’s House bought in 1958 for $31,500. He still lives there today.

Imagine a board room of rotund rich bankers, tumbler of whisky in hand, jokingly listing the attributes of a terrible new financial product that they were working on rolling out to the public buoyed by fantastic marketing that “everyone deserves to own own home”.

What would these attributes be ? (Credit: JL Collins)

  • It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner.
  • It should be illiquid. We’ll make it something that takes weeks, no — wait — even better, months of time and effort to buy or sell.
  • It should be expensive to buy and sell. We’ll add very high transaction costs. Let’s say 5% commissions on the deal, coming and going.
  • It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.
  • It should generate low returns. Certainly no more than the inflation rate. Maybe a bit less.
  • It should be leveraged! Oh, oh this one is great! This is how we’ll get people to swallow those low returns! If the price goes up a little bit, leverage will magnify this and people will convince themselves it’s actually a good investment! Nah, don’t worry about it. Most will never even consider that leverage is also very high risk.
  • It should be mortgaged! Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.
  • It should be unproductive. While we’re talking about interest, let’s be sure this investment we are creating never pays any. No dividends either, of course.
  • It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist. Sometimes and in some places, none at all!
  • It should be subject to the fortunes of one country, one state, one city, one town…No! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes it’s owner’s net worth, but does so even as they are losing their job and income!
  • It should be something that locks its owner in one geographical area. That’ll limit their options and keep ’em docile for their employers!
  • It should be expensive. Ideally we’ll make it so expensive that it will represent a disproportionate percentage of a person’s net worth. Nothing like squeezing out diversification to increase risk!
  • It should be expensive to own, too! Let’s make sure this investment requires an endless parade of repairs and maintenance without which it will crumble into dust.
  • It should be fragile and easily damaged by weather, fire, vandalism and the like! Now we can add-on expensive insurance to cover these risks. Making sure, of course, that the bad things that are most likely to happen aren’t actually covered. Don’t worry, we’ll bury that in the fine print or maybe just charge extra for it.
  • It should be heavily taxed, too! Let’s get the Feds in on this. If it should go up in value, we’ll go ahead and tax that gain. If it goes down in value should we offer a balancing tax deduction on the loss like with other investments? Nah.
  • It should be taxed even more! Let’s not forget our state and local governments. Why wait till this investment is sold? Unlike other investments, let’s tax it each and every year. Oh, and let’s raise those taxes anytime it goes up in value. Lower them when it goes down? Don’t be silly.
  • It should be something you can never really own. Since we are going to give the government the power to tax this investment every year, “owning” it will be just like sharecropping. We’ll let them work it, maintain it, pay all the cost associated with it and, as long as they pay their annual rent (oops, I mean taxes) we’ll let ’em stay in it. Unless we decide we want it.

What about the argument of “I’d rather pay off my own house than be paying someone else's?”

If you buy one house that you live in for 30+ years. You are absolutely right. Pay your own mortgage and not someone else’s.

Consider this — Every time you sell or buy you are going to have fees (legal, real estate agents, taxes) — This amounts to ~3% every time you go in and come out of the market.

Times have changed over the past 50 years. Gone are the days where you stay with one company (and as a corollary the same place) for your whole career. Today, on average we change jobs 10 -15 times over the course of a career which means that there is a high possibility that we will have to change, towns, cities and even countries multiple times over our career.

In addition, housing has gotten so expensive in relation to annual salary that young professionals cannot afford to buy a house that will actually last them 30+ years. They have to get on the ladder right at the bottom.

Typically the life cycle goes something like this:

  1. Get on the ladder with a 1–2 bed apartment = Pay costs into the market
  2. Married+ 1 child— Apartment too small. Move to a bigger house = Pay costs out and costs back into the market
  3. Additional children and getting into their teenage years— Move to a bigger house again = Pay costs out and costs back into the market
  4. Children move out. House too big — Downsize to a smaller house. Pay costs out and costs into the market

This is a very costly process that compounds over the years.

We do not have time to go into it here but I will link an article HERE that goes into the numbers on renting vs paying mortgage but the key takeaway is that you’re not building much equity, especially during the first decade-and-a-half so most of your mortgage payment gets “thrown away” on interest, taxes and insurance.

I wonder if this article stirred up some feelings in you? I know it did for me. I still want to own my house and for that house to be my home, put my own paintings up on the wall (I always find it amusing that people seem to use this as an reason to buy vs rent but I get it!) and live there for a long period of time.

If you enjoyed this article, we have 3 FREE VIDEOS to give away that will help you understand what you need to do to leave the Middle East financially secure. Get them HERE

7&Out

7&Out shows expat professionals in the Middle East how to return home financially independent within 4–7 Years

Cian Brennan

Written by

Managing Director at 7&Out - Showing expats how to leave the Middle East financially secure www.sevenandout.com

7&Out

7&Out

7&Out shows expat professionals in the Middle East how to return home financially independent within 4–7 Years

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