I’ve come across several heated debates recently on TV and the internet about whether it’s better to rent or own, with each side slinging mud in an attempt to convince people (themselves?) that their choice (rent/buy) is the “right choice.”
One thing that we’ve heard over and over in the past 10 years or so is that your home is an investment. “Lookie here: renters are THROWING THEIR MONEY AWAY, and buyers are PUTTING THAT MONEY TO USE. Why, real estate has grown at X percent for the past X number of years. Think about all that equity!”
Put aside the fact that the bubble is bursting (some places more quickly than others). Put aside the fact that rents are rising (as evidenced by my predicament). There is no right or wrong thing to do; there are many reasons to rent, and many reasons to buy. As someone toying with the idea of moving from a rental into a home purchase, I am acutely aware of the reasons on both sides of the fence, both financial and personal.
What I take issue with is not the people who are proponents of buying a home. I myself would love to own my own little piece of Manhattan one day. What I take issue with are the people who say that the reason to buy a home is because it is a smart investment. You’ve probably heard variations on this theme: renting is throwing your money away, a home is “the surest” road to wealth, etc.
Ummm…No, it isn’t.
Making more than you spend is the surest road to wealth. Renting is paying for shelter, in the same way that paying (lots of interest on) a mortgage is paying for shelter. And a home as investment? Not unless you’re ok with tying up your money into an “investment” that has traditionally returned about 1-1.5% annually after inflation. And even that ROI can only be touched if you: (a) use your equity like an ATM (ask Joe Schmoe in Foreclosure City how smart that is) or (b) sell your house, leaving you homeless and needing to–rent? Buy another house? I guess you could downgrade your home to keep some of the profit from your home, but again, that’s only if you’re ok with your ROI being around 1.5% annually. I’m not ok with any of my investments performing like that.
Buying a primary home as an investment is like buying high quality jewelry as an investment. It will probably go up in value over a long period of time, but to access that increase in value, you’d have to get rid of the home or jewelry. In both cases, the value is in the use of the item, not the equity that builds as time goes on. Certainly there are financial advantages to buying a home (as there are to renting one), but the home itself is not an investment if you are living there.
A home is not an investment. It is a home. Just that. No more, no less.
You should observe the issue from the aspect of comparison with money. If you have a real estate it`s always a better investment than just to have money from it. There is nothing wrong about that you treat your home as a minor investment. I absolutely agree with your ideas just we shouldn`t forget they are different aspects. As I`m a realtor in Toronto I have this opinion but I think if it wasn`t my profession I would say that is a very objective approach of the topic.
I agree that a home isn’t an investment, but man do I want one!
The problem is there are multiple definitions of the word “investment,” and the way many people use the term (think day traders), then no, your home is not an “investment.”
But it is the surest way to wealth, when financed correctly and held long term. Let’s review: You buy a $100,000 home and put 10% down. After 5 years your home is worth $120,000 (less than 4% appreciation per year) and you owe $85,000 (30 yr fixed at over 7%). So your $10,000 downpayment has turned into $25,000 in equity. A 150% return.
Yes, you have to sell, or take out a home equity loan to access that money, but that goes with every investment – stocks, bonds, gold, coins, or homes.
SavingDiva–I know! Me, too!
Meg–There are a lot of reasons that a home makes sense financially; I won’t (and can’t) deny that. And certainly real estate CAN be an investment (you know that from your rental properties). The problem, and what I was addressing in this post, is that your primary home is not an investment. Your $10,000 downpayment hasn’t turned into $25,000 in equity, because you’ve been making payments all that time on it. And selling your primary home is not like selling stock, bonds, etc, because once you sell your primary home, you have to use that money to find another place to live. It might be a wise financial decision, but it is not an investment. There’s a difference.
I can understand both sides of the arguement.
However, I do think a home is an investment. Look at it this way…
Until you own your home outright, you are always going to be paying for shelter.
When you are renting, you pay are paying for shelter, period. The price of that shelter payment will go up every year (maybe not this year or next year with long term leases, but it eventually catches up with you).
When you are paying a mortgage, you are paying into a home fund (Principle), and paying for shelter (Interest). When you go to sell your home, you will get back all of your home fund (+/- appreciation and down payment). Your interest (shelter) payment over all of those years decreased every month and at the end of every year (depending on how you filed your taxes) you get a portion of that back.
When you buy your new house, it will be at whatever the market rate is at the time, which is generally higher than when you bought your last home. Your new mortgage payment will most likely be higher, however you offset this high mortgage payment by using the home fund from your last house as a down payment.
Repeat Cycle.
Let’s look at Megs example: You bought a $100,000 w/ 10% down, sold it for $120,000 5 years later. Your montly payment was $600.
Your next house, you buy for $140,000. You now put down $35,000 = $10,000 (original down payment) + $25,000 (equity). Your new monthly payment is $698. If you didn’t have that equity, only the original 10K down payment, your mortgage payment would be $931.
In the mean time if a person started renting at $600, and resigned a lease 5 years later, their rent would, w/o a doubt, go up by way, way more than $100.
The other thing I would throw in, is if you improved upon the house you bought for $100K. What if you added new hardwoods, or upgraded the kitchen. Your equity would increase in value when you sold it.
Just some thoughts
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Oops… the payment would not be $931. It would be $864 if you put 10K down.
I see both sides. The real thing to do is find one of those handy calculators on the internet, and see what makes the most sense for each individual in your own market.
Renting can be quite smart (or at least was at the height of the bubble as long as you are investing the money you are saving by not having a mortgage.
And you will always have to pay for shelter, but if you do own a home outright the cost can be much lower–just taxes and such.
The reason renting is smart for me right now is that I’m willing to rent and live in a space much smaller than something I’d want to own for a long time. It is cheaper to rent a smaller place than buy a larger place, even over the long term.
I totally get what you’re saying, GB. I see both sides, I’ve heard both sides, etc.
Your premise is such a good one. Even recently in the midst of the bubble burst, I always hear people saying, “The surest investment is a house.” All while people go into foreclosure, people are working extra jobs just to pay that mortgage they’re stuck in, homes stay up for sale for months and months, etc. etc.
I want to own a house. But I feel it would only be smart for ME when I’m ready to commit, like long-term. The market won’t give me an immediate return, so I’m not ready.
I’m with you, GB, in that I would not view my primary home as an investment the way I would view rental properties or equity or bond holdings.
One, I live in an area where rent-to-price ratios are way off from the historical norms. It currently costs about twice as much to buy the same place that I would pay to rent it. I would be building equity with mortgage payments, but the opportunity cost of buying is that you couldn’t take the extra money you use to pay the mortgage and invest it in other vehicles.
Two, I HAVE to live somewhere. Thus a primary residence is consumption to me.
Three, the leverage part is indeed a powerful feature of real estate investing. But you can (not to say you should) use leverage with any investment vehicle (although leverage juices up the returns, it can tank you -real- fast. Exhibit A: subprime).
So I agree completely with you when you say buying a home has financial advantages, but it’s not an investment.
But having said all that, I still want to buy a place of my own!!
[...] March 2008 by gildedbutterfly If you haven’t already, join in the great debate about a home being/not being an investment. I am really enjoying hearing everyone’s different [...]
Here’s the definition of “investment” according to dictionary.com: “the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.” ["Investing" means "To commit (money or capital) in order to gain a financial return."]
Interestingly, whether or not purchasing a home qualifies under this definition depends on what your intention is. If you’re doing it and you absolutely don’t expect profit or appreciation or interest income, it’s not technically in investment. However few people would ever buy homes if that was really the case. If you are purchasing a thing you believe will appreciate, though, it’s known linguistically as an “investment.”
I can KIND OF see why you wouldn’t view your home as an investment IF you had just bought/built your dream home and were seriously, actually not planning to ever move or sell. Like my parents. Their home value is KIND OF irrelevant to their net worth since they will never move.
BUT if push came to shove they COULD sell it. They could live with one of their children or buy a MUCH cheaper home somewhere else. It’s been paid off for years. They could also take out a HELOC and make ridiculously small interest only payments (prime rate is 5.25% right now, which is what strong borrowers can get HELOC’s at) if they needed/wanted to. And it’s darn sure appreciated since they bought in 20 years ago and paid it off 10 years ago. So I can’t REALLY see how you could argue that it’s not an investment.
PS – if you are planning to potentially move/sell one day, you can and should view your home as an investment (otherwise why would you ever buy?). I bought my condo to build equity and I plan to rent it out when I ultimately move (which I’ll have to if I ever marry). So it’s my home, but it’s truly an investment in every sense. In my opinion, of course.
Ahh the great debate. GB, I also am a renter and have been debating to buy or not.
Last year, I actually had in my hot little hands an offer to buy a condo for $x. I turned it down. The market boomed, the condo went up double in value, and was sold for TWICE the amount a few months ago. This has happened with several of my friends who were homeowners last year; their property doubled and they walked away with $80-100,000 in their pockets, and slammed it into a huge downpayment for a bigger home. (Do they NEED a bigger home? Nooo…. but anyways…)
The thing is, no one knew this was coming. Housing always “appreciates” but so do all the things that go along with owning a home. My rent has doubled in a year, but so did homeowner’s property taxes, condo fees, utilties, etc.
I rent a 614 sq ft 1 bedroom apartment. If I were to buy a place, I wouldn’t buy a 1bd, because the resale would be low. I would buy 2+ and pay at least 2x for it. Therefore, it makes more sense to agressively invest the difference… have liquidity… simplicity… why pay more for space that I don’t need?
Also, I learned how much maintenance costs and how many things can go wrong with owning. In my tiny apartment, I have had EVERYTHING go wrong within 1 year – fridge problems, stove problems, washer and dryer quit twice, dishwasher problems, toilet lever broke THREE times, toilet plugged, and then the guy above me had water problems and my ceiling and kitchen wall turned to mush and needed to be re-drywalled, patched, painted…. I didn’t pay one cent. I rent from a large rental corp. that has 24/7 maintenance man on duty. I called in my leaking ceiling at 11 PM and a guy was there in 25 minutes (he lives on site).
ALSO… I can’t say how nice it is to have the snow shovelled, and on-site security to break up the parties that keep me up at night.
So while renting is “shelter” and throwing away money in a way… it has definately saved me hassle, sleep, worries, and I enjoy the services the company provides. For right now, a full-time working person in grad school, I don’t have a spare second to paint or drywall. I like knowing that the maintenance man is around for that.
Someday, when I come home from work and have nothing to do on weekends and evenings, I’ll get into grass-cutting and painting and cleaning eavestroughs… for now, it’s smarter to focus on a career that will get you the bucks to do those things.
Just my thoughts. Hope they help.
My Home is not an investment and as far as I’m concerned its value can not be put in monetary terms. Home is where the heart is and if you truly have a home it is as much a Church as any religious institutions place of worship.
Unfortunately in our society the government rather we like it or not has made our homes into their investments. They access our homes value in monetary terms and charge us to live there and if we fail to pay them they kick us out of our homes. That this is immoral prohibits home ownership, and makes the American Dream a lie is obvious.
That they have the gall to call them selves servants is ludicrous. Since when can a servant throw the owner out of his house? Since when do we define ownership as some one who must pay money to someone else or they will take what is “owned” from the “owner”. That this is a complete contradiction of ownership is obvious.
That we are the servants and the State is the owner is an undeniable fact. If you had no idea it was the government demanding payment and not a landlord the only difference you would be able to discern from conventional rent would be the terms of your rental agreement. All the material facts that determine who the owner is and what a renter is remain the same. All arguments which try to prove that property tax is not the logical equivalent of rent are based on the justification of the tax and are irrational from the prospective of what is ownership and what is a renter.
Wake up people we all are renting rather it be from a landlord or the State.
Largely taken from the Book “If we free the slaves who will pick the cotton”
Amen.
Actually, it is a consumption expenditure. Just because a home goes up in value doesn’t necessarily mean you made money–it just means you are consuming more house. And just wait until that major repair comes (and it will). I’m not talking about a new refrigerator or air conditioner. Even a minor roof repair is a major expenditure.
A stock market guru once said “You buy a house because you want to live in it. Any appreciation is a bonus.” She was right.