Owning your home can be a good investment if you compare it to bonds instead of stocks
Owning your home and that picket fence. It used to be the American dream until the popping of the housing bubble turned into a nightmare for millions.
After ten years, housing prices have rebounded and most markets have exceeded their previous highs.
People are once again asking if a home can be a good investment, whether it’s better to buy or rent. I talked about the buy vs rent decision last week on my personal finance blog but let’s look at the other question.
Is your home a good investment? Should you consider your home as part of your nest egg or just somewhere you hang your hat?
Buy vs rent but is home also a good investment? Should you consider your home as part of your nest egg?
Is Your Home Part of Your Nest Egg?
Your house is definitely an asset, something of value that you own, but there’s disagreement whether it should be counted as part of your savings or nest egg.
Some people say that since your home doesn’t produce any kind of income, it shouldn’t be counted as a financial asset. Owning your home means you don’t have to pay rent but unless you’re renting out rooms then it isn’t producing any income you can use.
Your home isn’t included in the net worth calculation to be an accredited investor. That’s the point where the SEC says you can legally invest in hedge funds and some other high-risk investments, when you have over $1 million net worth not including your home.
But I would disagree. Just because you don’t collect an income from your home every month, doesn’t mean it’s not a financial asset. People invest in gold and silver and consider them financial assets, even if neither create any form of income.
People certainly consider investing in real estate a good investment when it's not an owner-occupied home. That money you’re paying to the mortgage and not paying rent is a very real asset that you can someday use to fund your retirement.
But is your home an investment?
Let’s look at some of the numbers and other another perspective.
The Numbers Behind Your Home as an Investment
Home values generally keep up with inflation but don’t do much better than that unless you’re in one of those rare housing booms like we saw in the 50s and before the 2008 crash. Outside of those major real estate booms, home prices have increased at about 3.7% annually in the 30 years through 2017.
Maintenance, insurance and property taxes are a big drag on home ownership and mean losing about 4.6% a year. That’s not much of an investment if you’re constantly losing money just to hold the asset.
Not paying rent is where home ownership evens out to a good deal. People generally save about 5% a year buying their home instead of paying rent.
Adding all those up gives you a return of just over 4% before accounting for non-financial benefits of owning your home.
You’re certainly not going to get rich with a 4% annual return. At that rate, your home doesn’t look like much of an investment.
Of course, there are intangibles at work in the case against your home as an investment as well. The website I Dream of FIRE makes the argument for the flexibility you get in not being tied down to a home. The average American changes jobs 12 times in their lifetime. While many of these will be in one city and close to home, there might be opportunities away from home you could take.
Jim Dahle of the White Coat Investor offers a detailed example of renting vs buying including different fees and expenses. Buying becomes even better as time passes and your house is paid off.
Why You Should Invest in a Home
Even if the return on owning your home isn’t great, it can still be considered an investment and for a lot of the same reasons we talked about in the buy vs rent article.
When people think of an investment, they usually think of stocks. On that comparison, the return on your home is abysmal. Compared to bond investments though, the return is much more persuasive.
The return on your home shouldn’t be compared to that of stocks because there’s far less risk involved. You buy insurance to prevent any catastrophic loss and the return by not paying rent is virtually guaranteed if you keep up with the mortgage.
Corporate bonds rated Aaa by Moody’s currently yield 3.6% a year, well under the return on your home.
Even comparing your home against stocks as an investment might not be as lop-sided as it appears. Stocks may produce an 8% annual return on average but how much are YOU making?
The average investor earns just 4.6% due to high fees and poor investing decisions according to researcher DALBAR. That’s only slightly above the return on your home and with a lot more risk.
Your home probably isn’t going to make you rich and your money is locked up in the asset until you sell. That doesn’t mean it’s not a good investment though. The money you save from renting and the marginal appreciation you get above inflation makes your home just as much an investment as many other financial assets.