A Home is not an Investment

I fell for it like an idiot. Stop throwing money away by renting and buy a home, they said. So I bought a home and found out that it was all a pack of lies. Houses are weapons of life destruction.

home-sunset
Don’t get me wrong, there’s some upsides to owning a home. This was the view from our dock.

I’m sure you don’t believe me. Everyone does it, how bad can it be? Your grandparents bought their house for like 4 bucks and sold it for their retirement. Sounds like a solid deal, right?

Nope. All lies.

Disclaimer: If you like owning your home, that’s great and wonderful. Keep doing things you enjoy! I’m taking issue with people talking about how much money people claim to make on their houses.

Disclaimer part two: I’m also not talking about rental property or “flipping” (buying dilapidated houses to fix up and sell at profit). Only personal homes.

Simple proof of how a home is not an investment

Over the life of your home loan, you will pay double the buying price of the home due to interest and taxes.

Here’s a mortgage calculator to show how you’re paying $400K to own $200K.

Let’s say your house cost $200K. You will pay $400K over that 30 year mortgage on interest and taxes. In what universe does paying $400K to get $200K become an “investment”? If I walk up to someone and tell them if they give me $10 then I’ll give them $5 back, they’d rightly punch me in the face.

“But this person bought their house for $30K and sold it for $400K decades later!”

That’s called “inflation“. When grandma talks about how everything in her day cost a nickel, she’s basically showing her ignorance on simple economics. The US government aims for 3-4% inflation every year. Basically that means that prices on everything will rise by 3-4% every year. If you kept $100 under your mattress for a year, that $100 would feel more like $96 because prices had gone up.

When adjusted for inflation, homes only gained 0.2% value each year for the past 100 years!

After adjusting for inflation, prices for homes has been essentially flat

Homes gain value at the rate of inflation. Is dropping six figures on a house better than stuffing it in your mattress? Absolutely. If you were to buy your house with cash, you’d “only” lose a ton of money instead of an insane amount of money, because…

Houses need constant maintenance

Every single home has a “Honey, do” list that is never completed. I bet even Michelle rides Barack about the mold in the bathroom.

Replacing the furnaces, AC units, roof, driveway, gutters, paint, etc, are all crap that needs to be done every 10 years or so. And on top of that, sometimes the basement floods or the pipes burst. Our neighbors wanted to renovate a room and found water damage. Goodbye front of their house, hello six figure second mortgage.

Your home is plotting to destroy you financially. It’s waiting until you’re cash strapped and then BAM! Ice dams wreck the roof. Sure your insurance covers it, but that $3K deductible sucks. And then your insurance goes up because you’re now high risk.

The tax breaks are pitiful

Anyone who claims tax breaks are the reason to own an home is delusional. You can only deduct the interest paid. So on a $200K home you’re paying ~$125K in interest over the life of that loan. So the tax breaks “save” you tens of thousands of dollars. That’s good until you realize that $125K you’re paying is just for the privilege of getting a loan. That’s what interest is: the price you pay to borrow money.

Hooray, tax breaks mean you paid $95K instead of $125K!

“But my renovations and improvements will drive up the value!”

Nope. Again, homes have only gained 0.2% over inflation over the past 100 years. Other people have updated their homes. The math doesn’t lie: you will not get that money back from the master bath you put in.

I’ve read a pile of books on rental property. The books all say that “curb appeal” is the biggest difference maker and is something people will pay for. I’ve found this to be correct. On our rental property, we did updates like replacing the windows with energy efficient models and put gutters on to control water flow. Did any of the renters or buyers care about the windows or gutters? Not a single one. But the new paint made it look far more appealing. It also cost nothing in comparison.

By the way: when in doubt, take advice only from people who have made money from their expertise and ignore everyone else (This includes me! See bottom for profit made.).

You can’t recoup that money anyway

Since you’ll always need somewhere to live, you’ll always have hundreds of thousands of dollars tied up in your house. Sure you can cash out that $$$ when you move into a retirement home, but what would you rather have: a million dollars at retirement when you’re feeble or a nice vacation every year for 40 years?

I have people bragging to me all the time about how much their house is worth. Yet these same people don’t have money to spend because it’s tied up in their house. If you can’t use the money, it doesn’t exist.

Buying a house is almost exactly like signing a 30 year lease. Except with a house you have to pay taxes, fix it up, buy insurance, maintain it, and carry a large financial burden that destroys your life if you miss payments. So it’s a lot worse than signing a 30 year lease. Never mind.

“But you always need some place to live, so why not gain SOME equity instead of none?”

Because renting is significantly cheaper: no insurance, no maintenance, no taxes. Instead of getting that equity 30 years down the road, you can save ~30% each month by renting. And invest your down payment, letting it make you money.

 

30 years is a long damn time

Who will you be in 30 years? Where will you be? What will you be doing? I can’t even answer these questions for myself. Props to you if you can see the future.

If you bought your house in your 20’s or 30’s, then over 30 years you: were born, learned to talk, went through puberty, school, became an adult, lost your virginity 1-3 steps ago, got a job, etc, etc, etc. All that shit happened and you think you can see the future? You think your family and job will always be conveniently located within spitting distance of your house for 30 years? You didn’t even EXIST 30 years ago as the person you are now. You were probably still shitting on yourself.

It’s nonsense to think you can plan that far ahead, and here’s why that matters. Every time you buy or sell a house, you pay a gigantic sum in fees. Closing costs, realtor fees, loan origination fees, etc. And the loans are always front-loaded, which means the first 10 years of payments are almost entirely interest and not principle. So that means you’re not gaining [much] equity if you sell your house before the 10 year point. If you sell your home before 10 years, renting was far and away the better option financially.

What will happen to the surrounding community in those 30 years? Detroit became a ghost-town within 10 years after the car manufacturers left. Flint, MI developed lead problems with the water, making it not only dangerous to live there but also destroying home values so people can’t leave. Hurricane Katrina wiped out Louisiana so badly that insurance companies instantly declared bankruptcy. Those people lost their homes with nothing to show for it. Chicago became the murder capital of the country. Even the *good* can be bad: San Francisco is now so expensive that it priced people out of the city.

Commuting is a cost too

Alicia and I have changed jobs and careers every 2-3 years for the past 10 years now. So will most people. Alicia’s commute went from 20 minutes to 45 minutes after a job change and her happiness went way down accordingly. So we moved closer to her work and she got much happier. But if you own a home, that’s rarely an option because of the cost.

Ditching your commute is worth $40,000/year in happiness.

Your commute costs you real dollars too.

Stock Market vs Home Owning

Investing in an index fund has a rate of return of ~11% annually over the past 100 years. And it’s effort-free: buy stock, wait, cash out. You can start with a few hundred dollars and cash out any time.

Investing in a home has a rate of return of ~4% annually over the past 100 years. But you have to maintain it. Upgrade it. Pay taxes. Insurance. You have to start with tens of thousands of dollars on a 30 year commitment.

For those of you who want to point out that the stock market can turn downward, so can home prices. Talk to all the people with “underwater” mortgages. Look at graphs of home prices to see home values swing just as wildly.

“But I OWN it!”

If you have a mortgage, the bank owns it. You’re renting it on a 30 year lease.

“You’re just mad because you lost money on your home!”

We owned our home for four years. Bought it for $540K and sold it for $640K. Lived in it for two years, rented it out for two years.

$100K profit sounds good, right? No, it’s trash.

  • $40K of that “profit” will go to realtor fees and closing costs
  • $10K was spent on painting and other repairs to sell it
  • $70K was spent on mortgage payments for two years (which went to interest we we won’t get back)
    • The renter paid for the other two years

So even though we sold our house for considerably more than we bought it for, we still lost $20K. If we would have lived in it all four years we would have lost $90K on it. To sell our home and make a legitimate profit, we would have had to buy it for $540K and sell it for $740K in those four years.

“So I shouldn’t buy a home?”

If it makes you happy, buy it. Increasing your long-term happiness is always a good life investment. It is possible to trade money for happiness and I encourage you to do so whenever you can.

But realize that you’re paying a premium and limiting your financial flexibility when you buy a home. A home is a large obligation that can be hard to get rid of and can make you less happy.

If you want to be rich or live free, hold off on that house for awhile.

Leave a Reply

Your email address will not be published. Required fields are marked *