A house is a terrible investment. But for many people it is the best investment.
Let’s unpack that.
Unless you buy a new home, you will probably lose up to 1% of the value of the home on maintenance each year.
Something breaks. Pipes burst, roofs leak and every now and then the whole thing burns down. I live by the ocean so the maintenance is relentless – constant leaks, not to mention the hurricanes. Plus you have to pay to insure it, you have to pay the property taxes and you have to pay for everything else. And that comes on top of the mortgage.
Normally you wouldn’t classify something that costs you money as a good investment.
But home prices rise over time, right? Sure, over a 40-year time horizon, I’m pretty comfortable with the price of my house going up, if only because of inflation.
But the price of a house can also fall.
It’s a place to live
People need to stop thinking of their home as a… trade and start thinking about it as a place to live. For most of American history, that was all.
And besides, most people can’t time when they buy a house. They do it when they move for a new job, when they expand their family, and so on.
If people realized how risky buying a house was, they would panic. I’ll walk you through an example: my first home purchase over two decades ago.
We bought an apartment for about $179,000. Our down payment was about $40,000. And we sold it about two years later for $300,000. So we made $121,000 on a $40,000 investment. That’s a return of just over 300%.
It worked well for us, but it didn’t have to. Let’s say we bought our apartment for $175,000 and sold it for $135,000. Our equity would have been wiped out – we would have walked away with nothing. A loss of 100%.
If you can make 300% on something or lose 100% on something, I wouldn’t classify that as a safe investment. And yet, a home is the best investment many people ever make.
Most people are bad at saving. And a mortgage with a fixed-rate period of 30 years is a forced savings program.
With each monthly payment, you pay off a small portion of the principal. And over time you build up equity. It’s slow at first and then it’s faster. Soon you will own 30%, 40% or 50% of your house.
If you repay early, you significantly shorten the term of the mortgage. It doesn’t take much. Pay just a little bit in advance and you’ll be years off the mortgage.
Building equity in your home is super important. Myrtle Beach, where I live, is full of people from places like Queens, NY, who have sold their homes for $800,000-$900,000 after paying off the house over 30 years. Many of these people have no other savings. So they sell their house, take the money, move south, pay $300,000 for a house and live off the rest.
Let me be clear: these people often have no other savings apart from the equity in their homes. And they live well in retirement. Magic.
When to rent?
And yet not everyone should buy a house. You must rent if:
You don’t have a pillow when things go wrong.
You wouldn’t take good care of a house.
You are irresponsible.
Your rent payments will be less than an after-tax mortgage (including property taxes and insurance) for a comparable home.
You think houses are too expensive.
Renting carries a stigma. People think you are not a responsible adult when you rent.
Actually renting could mean that you are equal more from a responsible adult, as you are not depriving yourself financially just to own a house.