Is buying a house a good investment? The idea that owning a home can be an investment comes from the fact that, historically speaking, real estate values tend to increase over time — and that’s still true today and still true tomorrow.
According to Zillow, the average value of a home in the U.S. has continues to trend up.
A home purchased for $250,000 in 2020 would be worth about $350,000 in November 2023, for instance.
But the prospect of an increase in value alone over a period isn’t enough to make a house a true investment.
Here are the reasons why your house is not a good investment or even considered an investment.
Are you one of those folks who believes your home is the best investment you’ll ever make? Well, I hate to burst your bubble, but it’s time we had a little heart-to-heart about this common misconception As someone who’s spent years analyzing personal finance trends, I’ve noticed that this idea of homes as investments is deeply ingrained in our culture – but it’s not always accurate.
The Great Housing Debate: Investment or Utility?
Let’s face it, bringing up real estate as an investment topic is almost as controversial as talking politics at Thanksgiving dinner! Some people swear by real estate as the ultimate path to wealth, while others see it as a financial anchor that can drag you under.
Here’s the truth Your primary residence serves as more of a utility than an investment. That means it’s something you use rather than invest in, and that’s not a bad thing. A home can provide a sense of stability and security That is worth something, even if it’s intangible
But before you close this tab in frustration, hear me out! Understanding this distinction can actually lead to better financial decisions and realistic expectations about your home purchase.
The Cold, Hard Numbers Don’t Lie
When we really crunch the numbers, the reality might surprise you:
- The real return on a single-family home is typically around 1% or less (and that’s being generous!)
- This tiny return doesn’t even account for all the money you pour into your home while living there
- For most homeowners, the actual return is probably negative when all factors are considered
Let me break this down with a simple example:
Imagine you buy a house for $300,000 today. Ten years later, you sell it for $400,000. Sounds great, right? You made $100,000!
But wait… let’s look at what you spent during those 10 years:
- Property taxes: ~$30,000 ($3,000/year)
- Maintenance and repairs: ~$30,000 ($3,000/year)
- Home improvements: ~$25,000
- Insurance: ~$15,000 ($1,500/year)
- Mortgage interest: Easily $100,000+ depending on your loan
- Closing costs (buying and selling): ~$25,000
Suddenly that $100,000 “profit” doesn’t look so hot, does it? And we haven’t even factored in inflation yet!
Why We Keep Fooling Ourselves
So why do we keep believing homes are good investments? A few reasons:
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Emotional attachment: Our homes represent security, family, and memories – not just dollars and cents.
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Survivorship bias: We hear stories about people who made a killing in hot markets, but rarely hear about those who lost money.
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Ignoring true costs: Most people only look at purchase price vs. selling price, forgetting all the money that goes into a home in between.
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Forced savings effect: Mortgage payments force you to build equity over time, which feels like “investment growth” but is really just paying yourself back slowly.
When Real Estate Actually IS an Investment
Now, I’m not saying real estate can’t be an investment – it absolutely can! But there’s a big difference between:
- A single-family home you live in
- Investment properties that generate rental income
- House flipping for profit
The latter two are business endeavors that can certainly qualify as investments. But your primary residence? That’s a different story altogether.
The Utility Value: What Your Home Actually Gives You
Instead of thinking of your home as an investment vehicle, consider it as a premium utility that provides:
- Shelter from the elements (kinda important, right?)
- Privacy and personal space
- Stability for your family
- Control over your living environment
- Protection from rising rent costs
- Emotional benefits like pride of ownership and sense of community
These benefits are REAL and VALUABLE! They’re just not the same as investment returns.
A Personal Note: My Own Housing Journey
I remember when I bought my first home in 2010. I was SO EXCITED about what a great “investment” I was making. The mortgage broker, the real estate agent, and even my parents all reinforced this idea.
Fast forward seven years, and I sold that house for about 15% more than I paid. At first, I was patting myself on the back for my brilliant investment acumen… until I sat down and did the math on all the money I’d put into that house.
Between the new roof, updated kitchen, landscaping, and regular maintenance, I had actually LOST money when adjusted for inflation. This was during a period when the stock market nearly doubled!
This experience fundamentally changed how I view homeownership. I still own a home today, but I think of it as paying for a service (housing) rather than making an investment.
Rethinking Your Home in Your Financial Plan
So what does this mean for your financial planning?
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Don’t count on your home as your retirement plan. If you’re thinking “I’ll just sell my house and live off the profits,” you might be in for a rude awakening.
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Focus on true investments for wealth building. A diversified portfolio of stocks, bonds, and other assets is likely to outperform your home over the long term.
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Buy a home that meets your needs, not your investment dreams. Choose a home that works for your lifestyle and that you can comfortably afford.
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Be realistic about potential returns. Don’t assume your home will appreciate substantially more than inflation.
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Consider opportunity cost. Money tied up in an expensive home could be working harder for you elsewhere.
The Housing Market Reality Check
The housing market can be volatile and unpredictable, just like any market. Here’s a quick comparison that might help put things in perspective:
| Aspect | Primary Residence | Traditional Investment (e.g., Stock Index Fund) |
|---|---|---|
| Liquidity | Low (can take months to sell) | High (can sell within days) |
| Transaction Costs | High (5-10% of value) | Low (often <1%) |
| Ongoing Costs | Substantial (maintenance, taxes, insurance) | Minimal (small management fees) |
| Diversification | None (single asset in one location) | High (hundreds/thousands of companies) |
| Tax Benefits | Some (mortgage interest, property tax deductions) | Various (capital gains rates, tax-advantaged accounts) |
| Historical Returns | Roughly tracks inflation (1% real return) | 7-10% average annual return |
When you look at it this way, it’s clear that your primary residence isn’t optimized as an investment vehicle.
So Should You Even Buy a Home?
Absolutely! Just do it for the right reasons:
- Buy because you want stability
- Buy because you value personalizing your space
- Buy because you want to put down roots in a community
- Buy because you want protection from rent increases
Just don’t buy primarily because you think it’s going to make you rich.
The Bottom Line: A Home is a Utility with Benefits
Your home is a place to live, a place to create memories, and a place to find shelter. It’s a utility that you use daily – albeit one that may retain some value and provide some financial benefits along the way.
As Eric Roberge wisely points out, it’s important to “distinguish between something that has value (both tangible and intangible) and something that produces a return.” Your house can have immense personal value without necessarily producing financial returns.
So go ahead and love your home, improve your home, and enjoy your home! Just don’t count on it funding your retirement or being the cornerstone of your investment strategy.
I’d love to hear your thoughts! Do you view your home as an investment or a utility? Has this perspective changed how you think about homeownership? Drop a comment below and let’s keep the conversation going.
FAQ: Homes as Investments
Q: But my parents made a fortune on their house! How do you explain that?
A: Some homeowners do see substantial appreciation, particularly in certain markets during certain time periods. However, these are exceptions rather than the rule, and they often don’t account for all costs of homeownership when calculating “profit.”
Q: Isn’t paying a mortgage better than “throwing money away” on rent?
A: This common saying oversimplifies the comparison. Renters pay rent; homeowners pay interest, taxes, insurance, maintenance, and opportunity cost on their down payment. Both are paying for housing services – neither is necessarily “throwing money away.”
Q: What about the tax benefits of homeownership?
A: Tax benefits like mortgage interest deductions are real, but they’ve been reduced for many homeowners following recent tax law changes. Additionally, these benefits typically don’t offset the total costs of ownership compared to renting and investing the difference.
Q: If my home isn’t an investment, should I rent instead?
A: Not necessarily! Homeownership provides many non-financial benefits. The decision to rent or buy should be based on your personal circumstances, financial situation, and long-term goals – not solely on investment potential.
Remember, acknowledging that your home isn’t primarily an investment doesn’t mean homeownership is a bad choice. It just means you’re approaching it with clear eyes and realistic expectations – and that’s always the smartest financial move.
Factoring in carrying costs
Say, for example, you purchase a house for $200,000, and 10 years later you sell it for $300,000. Sounds like a good investment, doesn’t it?
That is, until you take a closer look at all the money you put into it over the years.
If the house cost you $1,000 per month for principal, interest, taxes, and insurance (PITI), plus $300 per month for utilities, you will have spent $15,600 per year, or $156,000 for the decade that you lived in the house.
If you spent another $3,000 per year on routine repairs and maintenance, you will spend another $30,000. And if you did some of the more major repairs, like replacing the roof and flooring, and remodeling the kitchen and bathrooms, you probably easily sunk another $50,000 during that decade.
While it is certainly nice to walk away from the house with $100,000 more than you paid for it, the math doesn’t support the idea of the house as a winning investment. And we haven’t even accounted for transaction expenses (like the realtor commission), inflation, or the fact that the value of the house may not rise that dramatically over the next 10 years.
A house can only be an investment if you plan to sell it
True, houses generally increase in value over time, but the only way to profit from that increase is to sell them. A sale needs to happen for a gain to be realized.
However, selling your house means you’ll have to find another place to live.
So, you’ll have to use some — if not all — of the equity you obtain from your sale to fund that purchase.
If that’s the case, your equity is “trapped,” which means you won’t make a profit, unless you downgrade to a less expensive house, or move to a rental situation.