Is Your Home A True Investment?
Do you view your home as an investment? We don’t, at least not the way most people think of it. Good investments don’t require you to put money into them each and every month. Good investments have the ability to generate income for you. Buying a home does not do any of those.
Many people want to live out the American Dream. Owning a home provides the idea of stability and pride in what you have accomplished. Purchasing a home, however, should not be thought of as an investment and an appreciating money-making machine.
Everyone has their own goals and reasons for purchasing a home. Some of our most financially savvy clients have foregone buying a home to live in. Note the emphasis on “to live in.” They were renters despite the means to buy a home. They saw buying a home as an opportunity cost for them and their financial independence goals. Whether it be putting money towards their business, real estate investments, or other tax smart investments, they realized greater profit prospects and the compound effects of investing during these transformative years.
Instead of putting a large percentage of equity into a down payment on a home that they would have to “feed” in the form of maintenance, they put 30% down on a $400,000 business that had a 20% profit margin and 10% growth rate. After 5 years they would have generated over $60,000 in after-tax profits (at 20% tax rate), paid off their $280,000 loan at 5% interest and continue to own a business with no debt worth over $575,000 and generating substantial free cash flow to them as owners each and every year. In this case, their net worth grew over $530,000 in 5 years or $395,000 after the costs of renting instead of buying.
If they would have purchased a $600,000 home with 20% down, after 5 years of monthly payments they would have paid down their mortgage by $47,000. If they would have benefited from housing price appreciation near the long-term average of 3%, they would have seen an increase in value of nearly $95,000 before any transaction costs. This is a total net worth build of approximately $142,000 before any transaction costs compared to nearly $400,000 for a smart business investment. All told, you can see the potential for accelerated financial freedom can be found in investing and deferred homeownership.
Don’t get us wrong. There are home purchases that can be true investments but they are purchased through a different lens than the typical homebuyer. We will discuss these strategies further in a future article but can include investment strategies such as “live in flips”, renting out rooms in a home you purchase to pay off your mortgage or even buying a multi unit property such as a duplex and renting out one unit. These and other strategies will be dependent on the stage of life you are in personally and financially.
Long term, home ownership can be great. We see many people approaching retirement with no further mortgage payment and the elimination of that major fixed cost. Not having a mortgage payment can free up a lot of financial resources that can be spent in other areas can provide a lot of flexibility.
The fact that homeownership is not the perfect investment is not a criticism of buying a home. It fulfills a lot of emotional and physical needs. Many find satisfaction in owning a house . It provides roots that people can feel safe in and provides forced savings in the form of your mortgage pay down and long-term price appreciation. We encourage everyone to look at homeownership objectively. A home is not a wealth building investment but an investment in your family and peace of mind.