10 reasons your house is (usually)not a good investment
So, there’s yet another news article on the costs of home ownership.
Apparently, 90 percent of recent homeowners underestimate the real cost of owning their home.
Yes, we’ve all heard the story “your house is your biggest investment”. We’ve all heard the saying “paying rent is just throwing your money away” or “I'm not paying somebody else's mortgage”. For decades, we have been told these things, but I'm here to argue that the home that you live in is rarely an investment. According to this CNBC article- amongst others- a growing segment of our population is disappointed with this age old wisdom.
Reasons your personal home is not an investment you think it is:
It has a main job- Its first and most important job is to provide you and your family with shelter. Anything else is just a fringe benefit.
Location flexibility- One of the big criteria of picking a house is proximity to work. Being located within a 40 minute commute time to the office has nothing to do with whether it’s a good housing market or its future growth potential. The home also can be an anchor, limiting potential job options to that immediate area.
It’s like having a second job, without the income- Enjoy spending your Saturday off doing plumbing, Don’t want to pay $10,000 for a new roof? Too bad. Fridge needs replacing, snow needs shoveling, grass needs cutting, dry walling. There's a never ending list of projects that you either have to do, or hire somebody else to do, either way, you have to sell your time. A renter’s favorite phrase is “not my problem, it’s the landlord’s”.
You have to get another one- Any other investment can be sold and used to buy something, anything, else. You can sell stocks and use it to buy food. You can sell bonds and buy plane tickets, You can sell cryptocurrency to fund a jetski. Since your house is your personal residence, you have to move somewhere else. This means that some (or all) of your profits from the sale will have to be used to either buy or rent a new residence. This can be reduced by moving to a cheaper area, downsizing, geoarbitrage, living in a van, etc.
Imagine selling Dell stock shares, to be able to only spend it on a new PC...A Dell PC
Other houses have also increased in price- As mentioned before, you have to move to a new place. Say you sold your house for twice what you paid for it...it’s reasonable to suspect that other houses in the area have also doubled in price. Rent probably has increased as well.
It’s illiquid- Liquidity, the ability to sell something you own quickly and with minimal costs. Stock and bond funds can be sold with little if any transaction fees and will appear in the bank in 3 days. Selling a house is loaded with fees, time consuming, and in a bad housing market can take weeks or months to sell. Zillow estimates these fees can be up to 10% of the home’s value https://www.zillow.com/sellers-guide/costs-to-sell-a-house/.
You have to pay to access your own house’s value. If i needed $1,000 for some reason, I could sell $1,000 worth of any combination of investment classes. You can sometimes even sell fractions of shares. Your house is 1 large thing: we can’t sell a couple of windows for spare cash; unless you want some guys jumping in and stealing your couch! The only easy way to get cash out of your house is to go to the bank, use the house as collateral and get something like a HELOC (assuming you have equity at all). That’s right! You have to pay interest to the bank...to access the value...of your own property. Plus if you can’t pay it back:
You can be foreclosed and kicked out: Most of us remember the 2008 crash. Part of the problem was that lots of people used the equity in their house for cash, with the house as collateral. When prices dropped, the bank came in and kicked folks out. You can borrow against the value of assets like stocks and bonds, too. The difference is that if they crash or you can’t pay it back, the worst that happens is they liquidate (sell) some of your shares. That’s not a great situation, but much better than the bank kicking you out the house. We don’t need Microsoft shares, but our families need a place to sleep at night.
Climate change..yes Climate change- Will drought conditions in the Southwest cause people to flee? Will sea level rise scare people out of Florida? Will the South become too hot to live in? Will tornadoes in ____ State become too destructive to insure? I don’t know and neither do you. Lots of unpredictability makes any location a gamble.
Emotions- Investing requires a calm head with the ability to see objectively. Over the years and decades, many of us have an emotional bond with our home. It could be where you raised your family. Maybe your son got married in the backyard. You built a swingset for your grandkids. Those emotions can cloud your judgment during a sale. Ask yourself: will you tear up if you sell your “VRESHFVF mega stock/bond index derivatives whatever REIT fund”? Probably not.
The buy vs rent debate is a bit trickier than we’ve been led to believe. It’s a personal life decision, but I still think it’s not the best pure investment.
Remember, your housing investment return isn’t your sale price.
Your housing return is: Sale price- cost to get a new home- closing costs- maintenance costs- total property taxes paid- total interest paid to the bank- HOA fees (if applicable)- replacement of appliances-upgrades-etc
