Schrödinger’s House: Why your home is both an investment and…not so much
Almost exactly a year ago, we bought our first home. After a year of saving, searching, and negotiating, we finally signed the paperwork and took the keys to the front door. Walking into the house for the first time, it immediately felt like coming home. But faced with a six-figure mortgage, it was a mixed moment. I had always heard that buying a home was an investment — that’s what I had always been told — but now I wasn’t so sure.
To clarify, I’m not talking about buying a house to rent or “flip” (i.e. sell) to others for profit. Those activities are, no doubt, investments — though the latest mortgage crisis demonstrated that they’re nowhere near foolproof. In this case, I’m asking the question: Does buying a house for you and your family to live in qualify as an “investment,” or is it just a purchase?
When I need answers I hit the books, and two stood out for their passionate arguments on whether buying a home should be considered an investment. In Rich Dad Poor Dad, author Robert Kiyosaki argues strongly against thinking of homes as investments. He writes that people should only invest in assets, things that “put money in their pocket,” like stocks and bonds (and rental properties). Your home will never make you a profit, even when you pay for it in full. It will always leak money from your pocket in the form of property taxes and maintenance, and houses are very illiquid assets. If you wanted to sell your home tomorrow for its market value, would you be able to find a buyer? Probably not that quickly.
On the other hand, in The Automatic Millionaire, author David Bach argues persuasively that owning a home is a prerequisite for becoming wealthy. After all, if you buy a home with a traditional 20% down payment, your mortgage payments might be higher than renting a similar property, but those mortgage payments will eventually stop when you pay for the house in full, and the value of the land may increase over time. But rent payments are forever, and even if you pay on time for 30 years, you own nothing to show for it (but you’ve made your landlord very happy).
So is buying a home an investment? The answer is frustrating: yes and no. If one of my clients has a mortgage, I calculate their savings rate by considering their mortgage payment as “savings” (minus the mortgage interest and, God forbid, PMI) but I also include an alternate calculation that considers mortgage payments as a straight expense. This allows them to view their home both as a purchase like any other, and as a source of equity and financial stability.
The bottom line is that we encourage our clients to buy a home that fits their needs but is not excessive, because having a place to live is a foundation of happiness and financial security. Living in Versailles would be nice, but would certainly be a drain on anyone’s finances, and a waste of space to boot.
While we’ve settled the question of whether a house is an investment (sort of), I won’t even try to go into how to get the best value out of a home. Should I rent or buy? Townhouse or single family? HOA or no? Cash or mortgage? Buy or build? Each of those questions could fill up a full blog post, and probably will at some point down the road.
Alejandro is a financial planner with Monte Largo Financial Advisors LLC.