Is Your Home an Investment?

“Why are you throwing away money on rent when you could own?” Have you ever heard this? It says that renting a home is an expense while owning a home is an investment. For most homeowners, however, this may not be true. There are still plenty of great reasons to buy a home, which we’ll get to later. Before we dive in, let’s start with a working definition of an investment as something you buy today expecting that it will pay income or be sold for profit later. So, is this a reasonable assumption for your house?

Owning vs. Renting

In most cases, owning is more expensive than renting in the early years. How much more? Multiple studies reported an average of 40% higher, but range from 25% to 50% higher. This means a home that could be rented for $2,500 per month would cost $3,500 per month to own when factoring in mortgage, taxes and insurance. I tested this with a friend’s home in my neighborhood and found owning would be 43% more than renting.

Let’s look at a case study of the acquisition and monthly costs of a $500,000 home.

• $100,000 down payment – 20% to avoid the added expenses of private mortgage insurance
• $15,000 closing costs – 3% of purchase prices, though they can range from 2-5%
• $1,909 per month for a $400,000, 30-year mortgage at 4% interest
• $425 per month for property taxes – a bit over the 1% average for property taxes
• $100 per month for homeowner’s insurance
• Acquisition costs total $115,000 and monthly costs total $2,434

Let’s also consider future growth, using the last 10 years as a benchmark according to the Freddie Mac House Price Index.

• Home values nationwide increased about 4% annually
• Homes in the Greater Seattle area increased just over 7% annually, though ownership costs are also higher
• Inflation averaged about 2%

This doesn’t include inevitable maintenance costs that would generally be covered by a landlord – a new roof, major appliances, windows, plumbing…all those things that drive homeowners up that wall they just bought. While these costs don’t necessarily eliminate your house’s profit, they do chip away at it.

All investments have costs that must be factored into their total return, but we expect retirement accounts and rental properties to eventually pay you income. And, while home equity will add to your net worth on paper, you’re unlikely to spend the equity to help you reach goals like retirement. The long run benefit is the money you could save by paying off the mortgage and eliminating that expense. Why is this distinction important? Because realizing that long term cost savings all comes down to your choices.

Saving Money vs. Making Money

Saving money and making money are not the same. In this case, “saving money”, means reducing future costs, not putting money in a bank account. For example, I recently furnished my home office and chose to spend more on a quality chair for two reasons. First, it’s more comfortable – a lifestyle improvement. But, second, I expect this chair to last longer – a way to save on future replacement costs. So, while I hope to save money on replacement costs in the long run, this chair isn’t an investment because it will never pay me a dividend or be sold for profit in the future.

Buying a house can be similar. You generally spend more up front with the down payment and a variety of furnishing costs to make it your home. But, once you’ve paid off the mortgage, you don’t make another payment to the bank ever again. If you had been renting, you’d still be sending in that check every month for the rest of your life. The future savings has nothing to do with the sale value or rental income your home could generate if sold.

As we previously mentioned, you’ll only benefit from this future savings if you make the choice to stay, but according to Five Thirty-Eight, the average person moves 11.4 times. I moved four times as a kid and, in my 15 years of marriage, we’ve moved three times. We have three elementary-aged kids who are growing constantly and accelerating that wear and tear on the house. We’re determined not to move 11.4 times, but it’s quite possible we’d move once more while they’re in the house and once more after they’ve left the nest. That would make nine moves in total, with the last one being in our early 50’s, leaving a 30 year mortgage that would be paid off in our early 80’s unless we chose to pay that off faster.

Stay in your house long enough and you could save a great deal of money, but it’s not likely to make you money. However, most people don’t stay long enough to reap the rewards of that rent savings.

It’s not just a house, it’s your home.

So…why buy a house? My goal certainly isn’t to persuade you to rent a home forever. My goal is, however, to reframe the homebuying decision from “investment” to “lifestyle”. There are many lifestyle benefits to owning a home.

• You make all the decisions. Paint, rearrange, and remodel all you want. It’s yours! This isn’t always possible in a rental.
• You have security. Once it’s yours, it’s yours and only you can decide to sell. A renter always carries the risk that a landlord will decide to sell or increase rent to an unaffordable rate.
• You can plant and invest in the community. You can buy a home near schools you want your kids to attend, gathering places you love like your gym or church, and near activities that are important to you.

Additionally, home ownership does provide financial options that renting doesn’t. For example, in later years, if other funds are exhausted, a home can be sold to provide funds for long-term care. Home equity can also be tapped through a refinance or line of credit. You also increase the impact of your wealth on future generations. While you shouldn’t plan to spend your home’s equity, your kids or charities you care about certainly can if you leave the home to them.

Your house is your home. It shelters you and your family and is where you live most of your life. Shifting the decision from “investment” to “lifestyle” frees you up to focus on what you want for your life. Yes, it could save you money if you stay for the long run. Yes, if could end up making you money if you sell and downsize. But, don’t count on it. Be financially independent apart from your home because, for most, it’s not an investment.