A home can be a place that provides a permanent place for your family and kids, a great place to hang out with friends and family, and it may even provide you with confidence and pride of ownership. But don’t be fooled by thinking your house is a good financial investment — because nothing could be further from the truth.
Many people buy a house because they believe it’s a great investment. Your house is not actually an asset — it’s a liability. You are paying your house, your house isn’t paying you. If you want to buy a house because it’s your dream house, a place where your kids can grow up, and a place you see yourself living for a long time — then definitely buy a house. But don’t fool yourself into buying a house because it’s not a good financial investment. A house is a place to provide shelter, nothing more.
The reason people believe their house is a good investment is because from the mid-90’s to early 2000’s everyone saw their home prices rise up until 2008/2009, when we saw the housing market collapse. Since the housing crisis, people have seen their home prices rise again and they continue to believe the myth that homes are a good investment. This is an incorrect and dangerous assumption for 2 reasons: 1) Historically speaking, home prices have barely increased and 2) Other investments provide you a much greater return.
From 1890 to 2012, home prices adjusted for inflation went no where. In fact, from 1890 to 1940 your home price actually decreased. As of 2007, your home price from 1890 went up by 200% from 1980. Sounds good? Nope. That’s a 1.7% increase per year.
On to my 2nd point: other investments provide you a much greater return. We all know the person who tells us that they bought a house for $500k and now it’s worth $1 Million. People hear these kinds of stories all the time and it leads them to believe buying a house is a great investment. But we really need to dig into that story to understand what’s going on. Here’s a simplified & general example, because I believe people are fooling themselves thinking that they’re doubling their money on their houses:
You buy a house in Michigan valued at $200,000. First, you put a down payment of $50k (including fees, etc.). For each of the next 7 years you pay almost $10k per year in property tax, insurance, home upgrades and maintenance, HOA fees, etc. Then you’ve paid your mortgage of $9k per year. So after 7 years you’ve “invested” $183k into your home ($40k downpayment + $19k per year for 7 years). At the end of the 7 years you sell this house for double its initial value at $400,000. But you don’t get that full $400,000 check. In this example, the bank gets paid $150k to re-coup the balance left on your mortgage (including fees). So your final take-home amount is $400k — $150k = $250k. So instead of telling your friends, “I bought this house for $200k and sold it for $400k”, the actual headline is “I invested $173k into this house and sold it for $250k after 7 years” — that’s about a 6% return per year. And this is an extreme example for people that have seen the value of their homes increase — remember that historical return of 1.7%?
Now, look at what you would’ve done differently if you didn’t buy that house. In year 1, you took that $50k and instead of putting it on a down payment to own a house you invested it into the S&P 500, or even invested it into a rental property. Now you have assets that are actually paying you. The $9k you would’ve paid towards your mortgage, now just goes towards rent. And the $10k per year you would’ve paid on property taxes, insurance, etc. can now be saved & re-invested. In the case of the S&P 500, historically you would’ve made ~7% inflation adjusted returns per year. Depending on the rental property you purchased you could make strong returns as well. These sound like much better investments than the 2% per year you‘ll get from your house.
The point of this article isn’t to piss off everyone that’s bought a house. So it’s worth mentioning again that there’s many benefits to buying a house. A home can be a place that provides a permanent place for your family and kids, a great place to hang out with friends and family, and it may even provide you with confidence and pride of ownership. But don’t be fooled by thinking your house is a good financial investment — because nothing could be further from the truth.
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