A Home is NOT an Investment

 “I bought my home in 1970 for $24,000 and I sold it when I retired in 2000 for $130,000. Your home is your best investment.”

Okay, boomer.


You may have heard a similar story before, or just the general advice that “your home is your best investment”. I’m here to tell you that’s a bunch of BS. 

Why?

  1. Profit calculations on buying and selling a home are often erroneous.
  2. Your home is a liability, not an asset.

I should specify: when I say your “home” is not an investment, I’m referring to your primary residence. I’m not trying to say that real estate isn’t a good investment. It definitely can be, but that doesn’t mean that the home you live in is a good investment just because it’s real estate.

Let’s get into it.


Erroneous Profit Calculations

Consider the example above: a home purchased in 1970 for $24,000 and sold in 2000 for $130,000. (That was the approximate median value of a home in the US in those years.) If you just look at those numbers, it sounds like a great investment, right? I mean $106k profit on a $24k investment. I’ll take that any day. 

However, it is inaccurate to simply look at the sale price versus the purchase price, especially over such a long period of time. This is the comparison that convinces many people that their home was a good investment, but let’s dig deeper into the numbers.

First, of course, is inflation. $24,000 in 1970, is equal to about $165,000 today. 2000 sounds much more recent, but there’s still been a considerable amount of inflation since then. That $130,000 is equal to about $203,000 today.

Okay, so in today’s dollars the home cost $165,000 and sold for $203,000. Still a $38,000 profit, right? 

Meh.

First, even if we were to call that our profit, which would be inaccurate, that would only be an overall annual return of 0.69%.

Oooooh. Wooooow.

But now we’re going to get into item #2…


Your Home is a Liability, Not an Asset

We’ll keep the definitions simple: an asset puts money in your pocket, a liability takes money out.

When you own a home, it may have value in and of itself, but it doesn’t earn you any money. Instead, there are a variety of expenses tied to homeownership that will continue taking money out of your pocket every month:

  • Property Taxes
  • Insurance 
  • Maintenance

Let’s calculate these costs for the median-value example home above:

  • Value of the home: $165,000
    • This is the original purchase price, but adjusted for inflation to keep things in today’s dollars.
  • Property Taxes: 1%, or $137.50/month (less than the national average of 1.1%)
  • Insurance: $25/month (pretty cheap)
  • Maintenance: 1%, or $137.50/month (a general rule of thumb)

That totals $300/month coming out of your pocket. Not much of an investment.

Lastly, to get an accurate portrayal of the return on “investment”, we need to include these expenses in our earlier calculation. We were originally sitting at $38,000 profit, or so we thought, after adjusting for inflation. 

$300 per month for the 30 years we owned this hypothetical, median-valued home totals $108,000, so we’re actually looking at a $70k loss


All that is to say, when you adjust for inflation, and include your expenses along the way, your home is not an investment. Sometimes it’s even better to rent.

A lot of the “appreciation” is due to inflation, and many people tend to overlook some of the expenses that come along with home ownership, which eats into your investment returns.

Now, there are opportunities where you could earn a healthy profit on the home you live in. It’s definitely possible, but the blanket statement that “your home is your best investment” is misleading. We just saw that what originally seemed like a $106k profit was actually a $70k loss.

It’s always best to run the numbers yourself. You know? I’ll probably never buy a home.

2 comments

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s