Is Buying a House a Good Investment?

There are many schools of thought in terms of whether buying a house should be considered an investment. I’m not sure. What I do know is that it’s expensive to rent a decent apartment and it’s unlikely I’ll splurge on on a nicer apartment when I know I’m throwing rental money “down the drain,” so to speak. My quality of life, therefore, would undoubtedly be better if I were to buy. That doesn’t mean such a choice would make sense as an investment, however.

The Motley Fools poses “Your Home Isn’t a Good Investment and Won’t Make You Rich.” Real Estate has generally appreciated 4% to 5% a year on average, compared to 9.1% for an S&P index fund and 7.16% for the “safe” 30-year Treasury. Then mortgages make your house cost more than it’s worth (and you’re throwing THAT money away too. “There are good investments in real estate, but your home isn’t one of them” the post argues. A rental property, where tenants pay rent that covers the mortgage, can earn 9.8% vs just 3.4% for a lived-in property. A commenter notes that rental property can end up with an even higher return, especially once the mortgage is payed down and all that’s left is rental income that has increased over the years.

In this post by Pragmatic Capitalism titled “A House is Not a Great Investment” the author explains on a $200k house you’d pay $6000 commission, $4000 closing costs, and $500 for an inspection. Then your annual costs would be $2100 on taxes, $12400 on a mortgage, $775 on property insurance, and $400 on maintenance. (This doesn’t even account for HOA fees that would have to be paid if you live in a condo or townhouse.) “Even in the best periods where real estate returns 4.8% the total return is STILL NEGATIVE.”

Economics Nobel Prize winner Robert Shiller agrees a house is not a good investment. “Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems,” he said. “And there’s technical progress in housing. So, new ones are better… If you think investing in housing is such a great idea, why not invest in cars? Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won’t want our cars. It’s the same with our houses. So, they’re not really an investment vehicle.” (See more on Business Insider.)

The ultra-long-term reality is that, according to data from Shiller, the real (inflation-adjusted) return on house prices has been just about 0%, albeit punctuated by some sharp booms and busts along the way.

The Wall Street Journal recently asked a heaping of smart people what they thought about this topic.

Burton Malkiel, the Chemical Bank Chairman’s professor of economics, emeritus, and senior economist at Princeton University, is author of the investment book “A Random Walk Down Wall Street,” says that buying a house IS a good investment. He cites low mortgage rates and housing prices, plus tax advantages for owning. “Buying today should prove to be a rewarding long-term investment.”

Michael Kitches notes that, “while many have built significant long-term equity in their homes, it has been less about real investing returns and more about the simple result of investing with leverage in something that appreciates at the rate of inflation, and having a mortgage obligation as a form of ‘forced savings.'” He notes that if your mortgage interest ends up costing more than you would be paying in rent, then you’re not actually doing yourself any favors.

Here’s the real truth, from Sheryl Garrett: “For most of the last several decades homes have kept pace with inflation. A home can be considered an inflation hedge, but I wouldn’t call it an investment. It isn’t liquid, it isn’t highly marketable, you cannot convert it to cash quickly, it doesn’t pay dividends, it requires expenditures for maintenance and the woodwork tastes horrible.”

My belief is that a house is a horrible investment. I’m torn over whether I would want to own a house one day because I think ultimately being a renter for life is a wiser financial decision. Again, the biggest challenge is committing to a certain standard of living and not selecting the cheapest rental complex just because I’ll be able to save more of my income. Psychologically it’s much easier to pay a larger mortgage for a nicer property that you’ll one-day own outright, but really a mortgage is just as wasteful as rent.

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4 thoughts on “Is Buying a House a Good Investment?”

  1. I take different perspective on this. I believe it is both possible to make a real estate purchase be both home and investment, but only if you take a non-traditional approach. A mortgage benefits someone, but that someone is likely not either one of us. As with most other forms of debt it allows us to have what we want at the moment while robbing us of our future time. It seems to be a ridiculous sum of time, fifteen or thirty years, to pay for a place to shelter us from the elements and allow us protection while we sleep.
    If you purchase a house at retail and finance it with traditional means then I would agree that it makes for a horrible investment. However, if you take some time and research your area for a distressed property and do most of the renovations yourself then things can look very different. Even if you act as general contractor and hire out much of the work you will likely come out ahead. If you make it a cash purchase then things get even better.
    I have to admit though I might be a little biased. I’m currently doing the above scenario. 🙂

  2. For us renting is cheaper but only because we’re living in a tiny place without full kitchen even. The kind of place we’d want to live in long term (esp if we have kids) would be basically on par rentwise with paying a mortgage (but yes, the other things like rates and repairs excluded). I honestly don’t see a major fall in the market in Auckland longterm because it’s such a desirable place to live and I definitely don’t want to be paying rent here when I’m retired.

  3. Investing in rental property is always better if you intend to become rich or have an alternate source of income. But having your home as a source of investment in the anticipation of good returns never happens unless you are lucky that lots of interesting construction sprung up in the vicinity leading to a dramatic escalation in the prices of the property.

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