Before we jump in, let me tell you a story about my father conviction about his life greatest investment; his family house.
I grow up in Italy, and you know, Italians are all about family. The family home’s residence is the “sacred cow”.
The Italian social life orbit around the family house (primary residence) where we enjoy “La Dolce Vita”; wine, macaroni and share moments with the family.
If you don’t know what I’m talking about, watch this part of “The God Father” movie. It’ll clear your mind about the Italian family lifestyle.
I heard for so many years from my father that the house is his biggest investment. That’s true. He has thrown in all his life saving for 34 years. Ouch.
My father is so convinced that the house has been an incredible investment till today. So I decide never tell him; “Dad, the house has been a poor investment”.
I want to see my father happy and be proud of his life achievement.
So, why to tell you instead?
I believe you are here because you are trying to figure out if you should buy a house as an investment. I want to help you to grow your wealth by making smart decisions.
You only have to do a very few things right in your life so long as you don’t do too many things wrong. – Warren Buffett
If you bought a house already and spend hours working the garden, buying furniture, redecorate, just to realize that your house isn’t contributing to your bottom line, then something isn’t aligned – HOUSE=INVESTMENT.
Okay. This sounds pretty obvious, but – “Mith or fact that your house is an investment?”
The statements I heard all the time:
- “I’m sick of throwing money away on rent.”
- “Buying is always better than renting.”
- “Your home is your biggest investment.”
The only way to find out if the house is a good investment is to apply mathematic and common sense.
Let’s establish a few premises:
- This article is about your primary residence (the place where you live most of the year).
- This is not an article about real estate investing.
Pal, I don’t think I’m asking too much. If you’re about to make the biggest purchase of your life, you need to understand the basic concepts of real estate.
It’s not your fault if others are pushing you to buy a house. I won’t blame you if you decide to buy one after you understand how real estate works. There should be never a judgment.
Before dive in, watch the video below (it’s super fun) with some solid financial advice and the thoughts of jlcollinsnh about owning a house.
What do you thing about this video? I hope you got out some solid investment basics.
If you are interested, I will tell you the reasons I will never own a home (and be homeless for life).
THE BRUTAL TRUTH ABOUT THE HOUSE AS INVESTMENT
In short, a home is not an investment because it doesn’t pay you every month. In fact, you have to chip in for the privilege to own a house; taxes, maintenance, spend on new local regulations just to name a few.
[clickToTweet tweet=”In short, a home is not an investment because it doesn’t pay you every month” quote=”In short, a home is not an investment because it doesn’t pay you every month”]
That’s why a house is not an asset, it’s a liability (debts). Nothing is a good deal if you have to feed it constantly (my only exception to this rule is my wife).
Below, I’m explaining each financial reason in detail that keep me away from investing my money in a house as primary residence.
1. Low Return On Investment; Whenever I consider investing my hard earned money, I prefer to send them where they are best treated. Do you?
According to research by Yale economist Robert Shiller, one of the leading experts on housing in the U.S., noted that from 1890 until 1990, the real inflation-corrected prices of homes showed almost no change.
Robert predicted in 2005 (3 years in advance) the collapse of the housing market in the US during the recession. How?
Simply by looking at U.S. housing prices dating back to 1890, stripping away inflation till today.
Image credit: The New York Times
The price of houses in the US didn’t change much compared to inflation in more than 100 years, except for post 2WW and recent times.
You might say; ” Housing is booming now”.
Correct, but the S&P500 which is the index of corporate America triple in the same period. So your investment in the stock market would have returned better earnings.
S&P 500 triple in the last 8 years
One more point here. The US is a “sweet” housing market, and rarely you lose money in real estate if you hold for a long period. However, in Asia, your property lose value when aging because there is a constant supply of new homes.
Harald story is an eye opener to the Asian property market, where new buildings overshadow old one. He lost about US$15.000 without counting inflation, taxes, and other costs by investing in a condo in Bangkok.
2. Not Diversify; Having most of your net worth in one asset class (real estate) is suicide. Having it in one house is like crossing a 1-ton bridge with a 1.5-ton truck. Serious investors and rich people have a well diversify portfolio. The reason is simple; to reduce risks.
3. Costs; You start with purchase costs such transfer fee, lawyer, agent fee if you use one, mortgage insurance, house insurance.
Then regular costs such maintenance, rubbish tax, government tax, furniture. Isn’t better to buy an index fund that cost 0.07% per year?
4. Maintenance; This is my worst nightmare, it seems something is always breaking down in a house.
You try to fix things by yourself, but you lose precious time away from others more profitable tasks. If you can’t fix something, you need to deal with a professional. You know how hard is to deal with people, don’t you?
In Asia, you never find someone qualified to do the job, and in the West, the bill is shocking. A plumber wants US$40 per hour.
The lesson here is twofold. First, don’t move in an old house – you’ll be setting yourself up for problems. And second, call the landlord to solve the problem. After all, the landlord works for you.
5. You’re stuck; Nowadays being flexible is important to size opportunities. And by owning a house, it’s hard to move away for a new employment or business opportunity.
Here two classic scenarios:
- You move somewhere else and you keep the house. The house becomes a financial burden. You rent it, it becomes your nightmare.
- You try to sell the house so you can move. But selling a house isn’t like selling candies.
AND THEN… THE PERSONAL REASONS
It isn’t all about money, but there are personal reasons too.
1. Freedom; For you owning a house might offer a feeling of planting roots, have a family, feel secure between your walls. Fine!
What about the feeling to move in another location when your neighbor is noisy. Bored to see mountains from your window? No problem, just move by the sea. It’s all about FREEDOM.
Once I stayed without water for a month and found out pretty quickly the problem wasn’t going to be solved for months. I was renting, so I just moved somewhere else.
Having owned the house, I would be stuck to deal with the local water authority. “Haaaaaa! Save Private Ryan!”
2. I feel owned; This might sound strange, but I feel the government has the upper hand on the property. They can impose new taxes and laws to rescue the broken government.
3. Stress; Do you ever stress over your property? Can’t sell, major repairs or struggle to pay every month the mortgage.
I learn early in life; the less I own, the less stressful my life.
The only thing I love is to own great businesses with great management.
4. I love liquidity; Having money tied up in an illiquid asset doesn’t excite me. I prefer cash, bonds, gold and market stock.
BUT RENTING IS LIKE TO THROW MONEY AWAY, RIGHT?
No. You are using the landlord money to pay for your roof.
As a renter, besides the 1-2 month deposit, you only have to pay your monthly rent to live in the house. This allows you to deploy capital in higher yield investments.
The house appreciation is barely above the inflation rate, which at the moment is around 1.5%.
Can you find investments that yield more than 2%? If yes, you better to rent.
I recently ask my landlord to change the fridge, washing machine and kitchen. She agrees.
All this new luxury for me cost her 4 months of rent. The best part she did all the work. Thank you.
But, what about if your landlord isn’t cooperative? Just move on somewhere else. One month notice, and BYE.
I get you, Pal. You might think I’m just an introvert person, and I prefer to be homeless all my life.
Wait a minute, I’m not alone on this matter.
- The couple at GoCurryCracker are renters for life. Traveling the world and enjoy life without working.
- Mr. Money Mustache reports some shocking realization about Rent VS Buy.
- James Althucher share is personal experience and thoughts about owning a home; Business Insider website.
SO, WHAT IS MY ANSWER “Mith or fact that your house is an investment?”
The myth is boosted! The primary house isn’t an investment, but a liability.
It’s fine if you want to buy a residence, but don’t think you are making an investment.
If you want to start investing and make some serious money, use some common sense and invest in good stocks. Invest the smart way.
What are your thoughts? I would love to hear your experiences in purchasing your first home. Please, comment below.
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