Is your home your biggest investment?
Or is it simply your biggest expense?
We’ve been told the former as far back as we can remember, but it it true today. Or was it ever true?
Mind you we’re talking about your primary residence here, not real estate in general. Lots of investors have made millions putting their money in apartments, land, development, and commercial properties.
About two thirds of American households own the home they live in –- the American Dream — or at least they have their name on the title even if they owe most of the cost of the house to a bank or lender. Most people move every 5-8 years and never pay off their home.
The case against buying a home
When that’s the case, would you make more money putting those resources in the stock market or some other investment rather than the house you live in? Here are some reasons why that might be true:
- The stock market grows 7-10% over time in normal markets. Houses increase in value generally less than 4%, Both markets have their runs and plummets, as most of us have experienced, but that’s the long-term history.
- Stocks market investments are easy, quick, and inexpensive to make. Houses are complicated, slow, and expensive to buy and sell.
- Stocks you can sell quickly; houses take months.
- Stocks require no maintenance or repairs. Houses constantly do.
- You can’t take a house with you if you move to another city. Other investments are generally no problem.
That’s why some advisors say put your money into the investment that will grow the most for you, not the one that will require the most work.
The case for buying a family home
On the other hand, buying a house to live in as the family home makes sense for some not only as the “home” but also to ensure your financial security. Here are some of those circumstances:
- No matter what percentage of the house you have paid off, you get 100% of the appreciation.
- You have to live someplace whether you buy or rent, and often the cost is about the same. Even if the gain isn’t as much as traditional stock market growth, you’re spending money to live somewhere that you would be spending to live somewhere anyway.
- It forces you to put money into something of value rather than just spending it.
- Eventually, some people pay it off, meaning either that they have a valuable property they could sell to fund their life or they have permanently paid for one of the biggest costs of living. That’s much more important to retirees whose income traditionally declines.
- You can improve your house, making it not only more valuable but also better to live in.
- The interest is tax deductible, which might make itemizing expenses work better for you, which also might allow you to count other deductions.
- While your taxes might go up (did I say “might?”), you’re not going get hit with rising rents like your renting neighbors. You control your housing expense.
- While housing transactions are expensive, you don’t have to sell it. Once you’ve built equity, you could borrow against it, buy another primary residence and make it an income-producing rental. (I did this with my first home, bought with the GI Bill, and it’s now a paid-off income-producing asset.)
Non-financial considerations about buying a home
All of these arguments ignore probably the biggest reason why families buy houses in the first place: for the security and ability to truly make it their own home. It’s difficult to put a hard number on your ability to mark your kids’ height on the door jamb every year, to plant trees, to add a room, to paint it any color you want.
To call it “home.”