Is Your House an Investment?

Photo by Scott Webb on Unsplash

There seem to be some subjects that people simply cannot agree on. In the world of personal finance, one of those topics is whether or not we should consider our house an investment.

Let’s break it down and lay out the case FOR and AGAINST the idea that your house is an investment.

The Case Against Your House Being an Investment

I start here because I lean towards the idea that your house is not an investment. That is not to say you should not own a home. I think that depends largely on your financial situation and what the price/rent ratio looks like in your city.

While I don’t consider your primary residence an investment, there is no question that it is an asset. It has a market value that you can put on the open market and sell, possibly for more than you paid for it.

Just because something is an asset does not make it an investment. for a couple of reasons.

  1. It produces no income
  2. Home equity is the most worthless form of wealth

Your Home Produces Zero Income

The first is that your house does not produce you any income. If you invest in income-producing assets such as stocks, bonds or rental properties you receive dividends, interest or rent from these investments. If you “invest” your money by buying a house, you receive an annual property tax and maintenance bill.

Not only does your house not produce income, but it also has a significant negative impact on your cashflow. I have a hard time considering something an investment if it produces nothing but bills for me to pay.

How much cash does your home cost you? A common rule of thumb is that you should be prepared to pay 1% of the purchase price in annual maintenance fees. So, if you bought your house for $350,000 be prepared to put $3,500 back into it each year.

Home Equity is the most Worthless form of Wealth

Having equity in your home is well and good but what does it really do for you? Not much.

The equity in your home is the most non-liquid wealth you will ever own. While you could access that equity by selling your house, you would then need to buy another house and either get a mortgage or use your equity on the new home.

The other option is that you could sell your house and choose to rent. While you could then fully access the equity in your home, you would add a new lifelong expense of renting.

At the end of the day, you still must live somewhere. I don’t know about you, but I am not wild about the idea of having most of my wealth tied up in something I live in.

Unless you sell your house and either move to a city with lower real estate prices or downsize your home it’s difficult to access much of the equity in your home.

The Case for your House Being an Investment

Your House Forces Your Savings Rate Up

Without some type of nudge, people simply will not save enough money. The best argument I’ve heard for considering your house an investment is that it forces you to increase your savings rate.

The simplest way to increase your savings rate is to go from renting to owning your home. When you are renting, 100% of the rent goes into the pocket of your landlord.

When you own your home, a portion of your mortgage payment goes into the pocket of the bank (the interest portion of the payment) and a portion goes into your pocket (the principal portion of the payment).

How much of your mortgage payment goes towards building equity in your home depends on your amortization, your payment frequency, and your interest rate on your mortgage.

Let’s say you have a $100,000 mortgage with a 25-year amortization which you pay monthly. Your monthly mortgage payment will be around $500. Of that $500 about $287 goes to interest and $213 would pay down the principal of the loan. That’s $213 more saved per month compared to if you were paying rent of $500 per month.

For some people that is the difference between saving something and saving nothing. Whether or not you consider a house to be an investment, I do believe it has value as a savings vehicle.

Once the Mortgage is paid off, you receive a Lifetime Reduction in Living Expenses

While it is true your house does not produce any direct income, once you’ve paid off your mortgage, you will produce indirect income.

Using the same example of a house with a $100,000 mortgage, once you pay off that $100,000 mortgage you own 100% of your home and your $500 mortgage payments go away. That is a lifetime reduction of your monthly living expenses. That’s the equivalent of having an asset that produces $500 per month in guaranteed income.

House Hacking

The major strike against your house being an investment is that it produces no direct income for you.

But what if it does?

If you are engaged in any form of house hacking;

  • renting out a spare room or basement
  • living in a multi-family property and renting out the other units
  • putting your house on Air Bnb while on vacation

Then your house is producing direct income. Under that circumstance, it would be difficult to not consider your house an asset at this point. Depending on the level of income being generated it may not be the best investment, but an investment none the less.

If done properly, house hacking can take your living expenses down to zero and in some cases even produce a surplus cash flow every month. All the while you continue to have your tenants pay down your mortgage and you put yourself on the fast track to wealth creation.

For an Expanded Conversation of Whether or not your House is an Investment Watch this Video

I’d love to hear from you guys.

  • do you own your own home?
  • do you consider it an investment?
  • have you ever engaged in house hacking?
  • are there any points I should have included in this article? Let me know in the comments below.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.