Owning Your Home: Do NOT Consider It an Investment

Ahh, I can hear the screaming already.

The costs of homeownership – and rent, for that matter – keep skyrocketing, to the point that few Millennials are confident they will own a home. “But you should!” cry out a lot of current homeowners. “That’s how you’ll make good money! IT’S AN INVESTMENT IN YOUR FUTURE!!!”

A lot of people have made their millions by investing in real estate. Whether residential or commercial, there’s definitely a lot of money to be made. If you follow someone like Paula Pant you’ll see the play-by-plays of how you can do it, too.

But you’ll notice one very important caveat: owning ONLY your main residence and NOTHING ELSE in real estate does not a good investment make. Hell, that’s not an investment, period.

You’re Not Buying a House to Make Money

Keep in mind: owning a home is one of my top dreams. A custom-built mountain fortress specifically, but I will be very happy with any of the homes I see on the market. Unlike my other top dreams of, say, having a million invested dollars generating income for me in my old age, I don’t expect my house to be an income-generating asset.

A rental I own might produce income, sure. Or a home I purchase and flip for a higher value. Or some part of the house I’m not using that can be rented out on Airbnb. But a house I want to live in doesn’t give me income. It sucks away income instead; houses have a long list of property taxes, maintenance, mortgage payments, renovations, repairs, and all the associated fees just to move in the damn place. No, if you expect your home to pay YOU instead, you’re gonna have a bad time.

Buy a home because that’s what you want, NOT because you expect it to go up in value. Am I expecting my future home to fund my retirement? Not even remotely. I’m instead expecting it to be a place of comfort and joy for the rest of my life, one that makes me happy despite the taxes and maintenance costs and surprise repairs it will inevitably need. If I eventually sell it for a profit, that would be wonderful. But under absolutely no circumstances should I assume I’ll get that profit from a sale. It’s for happiness I’ll be purchasing a home, not for money.

Is Homeownership Good or Bad for Financial Health?

This is a HOTLY debated topic in the finance community. Some say YES!! like top corporations. Others say HELL NO!! like most money experts with no skin in the game.

It is true that it sometimes makes more financial sense to buy a house than it does to rent. Using a rent versus buy calculator like this one tells you plainly which is better for you and your particular area. If I stick around Boston it’s best if I continue to rent. The math worked out the same for Millennial Revolution in Toronto, where it is loads better to rent. HOWEVER, once I move to my dream place in the New Hampshire mountains it will likely be better to buy. Rent payments will likely be much higher than a mortgage payment will.

A good rule of thumb is seeing how much half a million dollars will get you in a real estate market. If it can only get you a sad little shack, don’t buy. You’re better off investing that and cruising to a million in a decade or less, WITHOUT the headaches of homeownership.

The only exception to this is if you happen to be well-versed in local real estate. I don’t mean you’re friends with a smart realtor. I mean you actively study local real estate laws, business projections, real estate markets, zoning rules, population growth, and infrastructure projects. As a start. On top of that you need expectations of when your house will return money back to you.

A house can only be considered an investment if you can tell me how you get money out of it every year. In other words, you need at least some kind of plan or educated expectation. Otherwise, your house is on the same level of “investing” as Beanie Baby investing was: little more than gambling.

Expecting a Someday Profit is Expecting a Lottery Win

According to Zillow, my childhood home was sold in 1993 for roughly $170,000. I don’t know if my parents bought it as an “investment,” but I hope they didn’t. In the last 26 years of homeownership that property has lost over half of that $170k worth, according to the county. Property taxes are taxed at what their inspectors say the value is, and the county taxes the property at a value of $83,000.

Ouch.

But in some counties they underestimate what the house will actually sell for! Does the local real estate market support this valuation?!

Unfortunately, yes. I grew up in a three-bed ranch in the Middle O’ Nowhere County, USA. Three-bed ranches in MON County are for sale between $75k and $115k. If my parents bought this home as an investment they’d be in deep doo-doo.

Again, a house can only be considered an investment if you have a plan to make money off of it. You wouldn’t invest in something that might give you a return in three decades, would you? Of course not, there’s much better investment vehicles that pay you much sooner and that you can sell much more easily.

Everything comes with a price. Don’t hurt yourself with a poor understanding of how real estate finances work.

Have you thought about real estate investing before? Are you more drawn to real estate or fund investing as your main strategy to wealth?