The statement “a house is the BEST investment you’ll ever make” has probably been heard hundreds of times, if not more. And while our goal isn’t to suggest that people shouldn’t purchase homes, we do want to encourage you to exercise a little more critical thought when those close to you begin to offer potentially hazardous “investment” advice.
Matt and I both own our homes. They bring us happiness and enhance our life. However, the truth is that primary homes aren’t always the best financial investments. They are rigid, require a lot of time and money to maintain, and provide a poor return on investment in comparison to other available investment options.
We’ll discuss the reasons purchasing a home—to live in—isn’t always a wise financial decision in this post. However, since you’re most likely going to buy a house eventually, we’ll also include some advice for when the time comes!
The idea of a house as an investment has been deeply ingrained in our society However, this notion deserves a closer examination, as it may not be as straightforward as it seems In this article, we will delve into the reasons why your house may not be the ideal investment you might have initially thought.
Debunking the Investment Myth
While it’s true that houses can appreciate in value over time, this appreciation alone doesn’t automatically qualify them as investments Unlike traditional investments like stocks or bonds, houses come with a unique set of challenges that make them less suitable for investment purposes
1. Lack of Liquidity:
Unlike stocks or bonds, which can be easily bought and sold on the market, houses are relatively illiquid. Selling a house can be a time-consuming and expensive process, involving realtor commissions, closing costs, and potential staging expenses. This lack of liquidity makes it difficult to access your invested capital quickly when needed.
2. High Transaction Costs:
Buying and selling houses involve significant transaction costs, including realtor commissions, closing costs, and legal fees. These
Remember the Purpose of Owning
A quick note on *why* people buy homes…
Purchasing and owning a home is primarily a lifestyle choice. Aside from money, you’ll be residing there for the majority of your time, making community investments and creating a “home.” ”.
Thus, it doesn’t really matter if you make less money on a home investment compared to other investments because the purpose of owning a primary residence isn’t to get rich. other investments. It’s crucial to keep in mind that the lifestyle and happiness benefits you may outweigh the financial drawbacks of house ownership.
Renting is Usually Cheaper
When comparing prices, it is generally less expensive to rent than to buy a home in the USA’s major markets, at least initially.
The current economy isn’t helping the situation either. Historically high purchase prices, rising interest rates and high inflation for home goods and services is increasing the number of years it takes to “break even” on a rent vs. buy calculator. Actually, in some markets it is always cheaper to rent.
Here’s an example using data from December 2022 in Madison, Wisconsin, a randomly selected US city:
- The mean monthly rental cost of a house is approximately $1,500.
- The average buying price for a home is ~$350,000. Given a fixed 30-year FHA loan with a 6-percent interest rate At 4%, the total monthly payment (tax, insurance, and maintenance) would come to roughly $3,000 per month.
Renting = $1,500 per month
Owning = $3,000 per month
That represents a MASSIVE difference in monthly housing expenses, not to mention the sizeable down payment a buyer would need to provide.
Renters have a big advantage in situations like this. They can use the remaining funds for investments if they have to pay a significantly smaller monthly rent payment. Over time, this would increase and compound, and they would frequently wind up with more money than a homeowner.
All things considered, renting will probably allow you to accumulate wealth more quickly than buying a home. **assuming you invest all your excess savings!!**.
Why Home Ownership is the Worst Investment
FAQ
Is your home considered an investment?
Is real estate no longer a good investment?
Is it good to own your home outright?
Is it better to invest or buy a house?
Is buying a house a good investment?
Forbes Advisor put this question to nearly two dozen financial and real estate experts. The majority (57%) said that buying a house is a good investment, while 38% said it depends on certain factors and just 5% said that buying a home is not a good investment. “Owning a home is how most Americans build wealth.
Is Your House an investment?
Thinking of their homes as perpetual investments, many engaged in serial refinances, and ended up with an underwater mortgage (owing more on the house than what the house was worth). That’s where thinking of your house as an investment becomes a dangerous assumption.
Why is buying a house a bad investment?
Although this happened over a decade ago, this scenario is not unusual when it comes to the housing market, and it’s one of the reasons that largely disqualifies a house as an investment. True, houses generally increase in value over time, but the only way to profit from that increase is to sell them.
Should you invest in housing or buy your own home?
If you want to make an investment in housing, Sinai says you’re better off doing it in the markets — such as buying shares in a real estate investment trust or an exchange-traded fund. For buying your own home, just ensure it will match your needs for many years to come, independent of what happens in the markets.