Is buying a house a form of investment?
In my post this week, I define what the word investment means. Next, I share the details of the return on my investment from my first home. Finally, I address if buying a home is a good investment or a bad investment.
Defining the word Investment
According to Investopedia, an investment is an asset or item that is purchased with the hope that it will generate income or that it will appreciate in the future.
Here are my thoughts after reading this definition. First, unless you plan on becoming a landlord and renting your home, your home will not generate income in the future. Yes, you will make money, but you need to consider all of the expenses and investments you’ve put into the house.
Second, you have no control on whether your home will appreciate in the future. But it will likely maintain some value. Therefore, I guess by definition buying a home is an investment.
My first house… the numbers
Below is a quick breakdown that shows what a 5% return on my money over 5 years would have been if I would have invested my monthly house payment. My house payment consists of principal, interest, taxes and homeowner association (HOA) payments. You see that my return if I would have invested the money instead, would have been just over $72,000.
I was able to sell my house after 5 years for a little more than if I had invested the money – $75,000 after all of the selling expenses. I admit, I got lucky buying when I did, and I got lucky the market rebounded nicely.
My townhome was built in 2006 and sold for $250k – I purchased the home in 2011 for $116k. The principal and interest payment for a $116k home was around $560/month, which was less than what I could rent for. Instead of one bedroom, I had three. I also had three bathrooms and my own garage!
If I rented, I would have needed to live somewhere and pay rent. And in the Twin Cities, rent for a one bedroom apartment in a decent neighborhood will run AT LEAST $700/month. Therefore, if you are looking to purchase your first home – look for a good deal. Don’t look at the biggest house or one that is way outside of your budget.
Buy the house that you can afford and that will work for you. Additionally, I would recommend that you stay well below what you think you can afford because the total cost of ownership for a home is likely more than you will initially anticipate.
Finally, if you purchase a home that is comfortably within your budget it permits you to build equity, while at the same time enabling you the flexibility to do other things in your life that you want to do (e.g. pay off debt, go on vacation, or save!). Then, as your family grows you will be able to upgrade your home by hopefully rolling the equity into your next house. That is what I did 🙂
Buying a home: good investment or bad investment?
You can’t rely too heavily on your house as a true investment because you just don’t know what is going to happen with the housing market. You could argue the same is true if you invested in the stock market; however, the stock market has provided a good return if you invest over the long haul. Figure 1 supports the claim that the stock market provides a solid return, 7%, over a long period of time.
There is also a limit to the max return you can get on your house – the value will not continue to grow and at some point you are going to pay off your home. Once that happens, you will have a set amount in your portfolio under your real estate bucket – it may go up or down, but it is not going to continue to compound like a normal investment.
But I don’t think that a house is a bad investment – I think that it can be part of your investment portfolio. However, it shouldn’t be the largest piece of your portfolio. I also think that there are many important considerations for buying a home.
Most importantly, do what is best for your family. We are in the process of closing on a new home – we sold our home the day after Thanksgiving, and we recently found a new home that we move into in January. In addition to finding a nice home, here is what I considered and what was important to me when we looked to move from a townhome that was in a fun, hip area in Minneapolis – out to the ‘burbs.
Was the house in a good school district?
Would my commute improve?
What was the total cost of the house? Not just the monthly payment, but what were the taxes in the area. What needed work on the house and how much would it cost to fix? How much more was insurance on a single-family home compared to a townhome?
How much would it cost to rent in the neighborhoods I was looking?
Buying a home is important to me because I want to be able to create memories with my family – similar to how I grew up as a kid with my family.
Being part of a community is important to me, so my family and I can meet new friends.