Ask the Readers: Is Your Home an Investment?

There is a great comment discussion in a recent post about it being an ideal time to purchase your first home.  With real estate being a hot issue these days, the discussion evolves to a topic which everyone has a different opinion.  That is, if home ownership (principal residence) is considered an investment.

Here’s my take.  Owning a home is typically a decent long term bet providing that you purchase at a decent price with affordable payments.  Real estate has proven to beat inflation over the long term by a couple percentage points, thus a long term inflation hedge.  However, it isn’t a replacement to being invested in the markets over the long term. Equities have returned at least inflation + 4.32% over any 30 year period since 1950 with an average inflation adjusted return of 6%.  You can view the long term market data here.

In addition, I think that real estate should be counted towards your total asset allocation.  That is an asset allocation consisting of: stocks, bonds, real estate and cash.  Renters can get their real estate exposure by investing carefully in REITs or even second mortgages.

So, even though you live in your home, I personally consider your personal residence a long term savings account or even an investment.  Even with the maintenance and upgrade costs, they could simply be considered the management expense ratio (MER) of the investment.

When it all comes down to it in the rent vs buy argument, I believe that it boils down to affordability.  If you live in Vancouver (or Toronto) where housing prices are sky high (maybe not for long?), then renting is probably the only practical way to live.  That way, renting can keep living costs relatively low with hopefully money left over to invest for the long term.

What do you think?  Is owning a home (principal residence) an investment?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Jeff
11 years ago

My House (Primary Residence) is an investment…My employer contributes $1500/mth Tax free directly to the Mortgage. I also rent 4/6 rooms which generates $4050/mth in rental income. My total out of pocket expenses including P+I, utilities, prop tax are $2600/mth. I took possession in Dec 08 and paid 650K. Conservatively the current market value is 750K. I would consider this a good investment.

Typically though I believe otherwise, if it doesn’t generate you income it is not an asset until you liquidate it.

Oh in case you’re wondering how in the world i do this. Two words, Fort McMurray. :-)

Great discussion though a lot of very valid points on both sides.

Cheers!

m
12 years ago

Josh,

mcknight`s idea is right, except for the psychological aspect of renting forever: limited choice of property styles, presence of neighbours and neighbourhood choice to consider, how much do you really want to spend on decorating/renovating someone else`s house, the owner take back the home at any time, etc.

Owning a house is a lifestyle choice, and the intangible benefits are hard to get if you are renting. The additional costs of owning a home are presumably the costs of those intangible benefits.

But I do agree of course; renting is often a far cheaper solution and one that usually leads to excess free cashflow (depending on where you live, i.e. downtown manhattan, neither renting nor buying is affordable for most). What you do with the excess cash determines your outcome. If you invested heavily in equity markets from 2000-2009, you would have wished you had bought that house 15 years ago.

Josh Moore
12 years ago

Steve McKnight, a well known property investor in Australia (and author of ‘from 0-260+ properties in 7 years) has an interesting take on your house as an asset.

His older site covers this issue here:
http://www.wealthtipsonline.com.au/pwt/pwt5.html

Alternatively, his newer site http://www.propertyinvesting.com covers more on this topic.

Finally, I have my own take that it depends on your circumstances and goals, and what you want to achieve. I have written a post on this at http://www.moorethought.com/2009/03/wealth-pillar-five-make-your-home-asset.html

All the best,
Josh Moore

mojo30
12 years ago

a personal residence is never an investment, it’s a financial burden first and an asset second (once paid). The reason we had this bubble is because of the word ‘investment’ being thrown around like a rag doll. If people actually started to do some basic math they can figure out that there is no investment in a personal residence.

If I put a dollar in the stock market and 10 years later its worth a $100, that’s an investment as I dont have to make further payments, no maint, no interest paid and so on after my initial $1. Even if someone paid cash for their house, there is still prop taxes, maint, utilities and so that would eat into any profit you would of made. Buy a house you can afford with ease to live in and not to profit, unless you plan on selling and living under a bridge with a suitcase full of money

m
12 years ago

A home is not an investment but a money sink. Do you know many self-managed equity investments that have annual carrying fees in the order of 3-5%? (maintenance, taxes, repairs) without any sale taking place?

A home is an expensive lifestyle choice, albeit a functional and utilitarian use of capital.

You could only consider it an investment if you sell it, and either you will no longer be living in it or any other similarly priced house, or you are getting a reverse mortgage.

Otherwise it is the hardest “investment” to monetize, with huge carrying costs. House rich and cash poor sums it up for most.

On the other hand, investment real estate is another ball game.

Judging by the increased volatility in capital markets due to a number of factors, i would however say that although on paper, equity markets do better over 30 years, real estate has the potential to be much less volatile for most areas in canada except for some areas of bc, alberta and toronto.

Stock markets have become dangerous in a sense: proliferation of new players who can manipulate market direction, instant communications and information/rumors, automated trading algorythms.

All this means equity investors will have to be ready to suffer a -20% or more in a given year. If this big losses are near the time when you plan to exit, ouch!

If you told a broker in the sixties that in 40 years, markets could lose 30% over a couple of years, then lose another 40% 4 years later, they would have thought you were crazy.

Real estate can’t be any where near as volatile (except in very selective areas in Canada and I stress Canada where lending standards aren’t insane like the US), so you could argue that capital preservation or risk adjusted return is a far more useful metric when comparing equities to real estate, while the variability of returns should be carefully examined.

Sampson
12 years ago

From #34.

> 2) Appreciation – banking on appreciation is speculating not investing

On the same vein, banking on a company to maintain profits, and grow them is also speculative. So would ‘expecting’ equities to increase in value also be speculating and not investing?

Most studies show that real estate will at LEAST keep up with inflation. The same can not be said about any fixed income ‘investment’ such as bonds or CDs. Whether RE is a GOOD investment is specific to each case.

3) Tax – Typical PR setup, where you cant deduct the mortgage interest cost (in Canada) is another reason why it is NOT an investment.

Cash Damming.

4) Mortgage paydown – You have to ask yourself who is paying the debt servicing? If it is you or your family – then it is not an investment.

When buying stocks on margin, it is also me or my family that is paying the debt servicing.

I don’t believe your PR is a very liquid or flexible asset. But it ultimately depends on what you plan to do with it. A place to park money (that grows faster than inflation), which can be sold or passed on at death to generate positive returns sounds like a decent investment in my books.

Ms Save Money
12 years ago

I think you’re home is only an investment after you’ve paid it all off and you rent out to other people to get fix income from it.

Otherwise, it’s all a liability.

MStar
12 years ago

Nicely put Dk! I hadnt thought of saying it like that – but that is precisely what I was trying to convey. Thanks.

Again, everyone is going to have a different/personal opinion on this…but for me…I try to focus on acquiring Assets/Investments (that produce +ve CF) and if you continue this over the years – you’ll end up in much better place (financially), as compared to accumulating what people may ‘think’ are Assets/Investments (ie -ve CF).

So, I just wanted to clarify that if you think a typical PR or other -ve CF producing items (ie a business not covering its costs) are assets, you may look back after many years – and wonder why you may have not achieved the financial freedom/ wealth desired.

Dk
12 years ago

If you buy a stock and hold it long-term (something some people may consider ‘investing’), where is the cash flow?

The cash flow is the earnings that the underlying company generates. When you buy a stock you are buying a stake in the company’s cash flow. That’s what gives it value. In theory, you wouldn’t buy shares of a company that has no chance of making money, now will you?

I think what MStar is saying is that a PR is like the company that has no chance of making money. You could buy it but you wouldn’t consider it an investment.

Mockingbird
12 years ago

Well said, Scott.

There’s big a big difference between “cash flow” and investment. Your stock example is pretty good. Also, just storing a bar of gold under your mattress might be a good investment (or investment hedge), but will not give you a cash flow.

It’s what you do with your primary residence (asset) makes it a bad or good or even greatest investment. Hard to beat the leverage that the banks give you when purchasing it (possible 20:1). Agree, many financial bloggers who post here understand this power equity. And for others, it is just a roof over their head.