A good investment? Maybe, maybe not. It all depends on what you consider a “good” investment. It can be easy to assume that buying a home is a smart investment, but that’s not always the case. Sometimes it’s much smarter to rent instead of buy. The answer to whether or not it’s a good investment will all come down to your individual needs.
To be honest, the first thing you should do really is just to stop thinking about your home as an investment. Instead you should be thinking of it as a place you call home. A place that you can relax in. A place that you will live in. These things can be “investments” in your quality of life, but they aren’t necessarily the best economic investment you can make. Sometimes you can get just as good if not better quality of life while renting, and then you can choose to invest your money elsewhere.
Why is buying a home a bad investment?
Wait a second. This doesn’t make any sense. All my life I’ve thought buying a home is a great investment. So why is it a bad investment?
Well, technically speaking it’s not a “bad investment” per se, but it’s just not a good one when you look at the alternatives. For example, if you look up the returns you would have on an investment in the stock market and then compare it to real estate then it would be quite clear who the winner is. The stock market wins by a good margin, and that doesn’t even include all the added costs of owning a home.
When you own your home you have to pay for a lot of things you don’t have to pay for as a renter. Things like, fixing anything that breaks, property taxes, insurance, and the interest on your loan. These things eat into your “profits”. Besides, you’re not going to profit anything until you sell. Which means you’ll have to move into another home where you’ll have to tie up your money over there. (Unless you rent ofcourse whereas you might be actually taking profits then)
When you invest in somewhere like the stock market you’re free to sell stocks and liquidate whenever you need the cash. It’s not so easy with a house.
All this being said, it isn’t always a “bad” investment to buy a home. I recently purchased a home, and I don’t feel that it’s a bad investment. There’s reasons for that though.
What are the reasons behind a home possibly being a good investment?
1- You plan to stay in your home for at least 5 years or more.
This type of thing can’t always be predicted, however you shouldn’t buy a home if you don’t at least plant to live there for at least 5 years. Why 5 years? Well, that’s about enough time for you to be able to live there long enough so that when you do sell you can absorb those home selling fees without it eating too much into your profits of the sale. If you do it too soon then you might be losing money on the sale even though your selling your home for more than you paid for it.
If you can’t plan to be in your home for that long then you’re probably better off renting and putting your money into the stock market instead.
2- Your mortgage plus other expenses is cheaper than comparable rent
This is possible in some parts of the country. It wasn’t the case where I live, but it can be true in some places. When you compare the cost of rent, and the expected rent increase of the 5 or more year period that you plan to be in the house, to the cost of the mortgage plus property taxes, insurance, and estimated maintenance costs you can get a better idea of how much you’ll be paying “per month”. If you’re paying less per month with the purchase then it’s probably a good time for you to buy in your area.
One other important thing to mention here is that you need to have a significant emergency fund in place in case you need to make unplanned repairs. The home we bought passed all inspections, but within a year we found that it needed major repairs to fix problems with roof leaks and other costly problems.
The bill? Around $20,000. That’s a lot of money to put into a house, and we’re not going to ever realize the “profits” of that investment. That is almost like throwing money down the drain “investment” wise. You might think, “but oh no, you’re fixing your home and you’ll get it back eventually.”
Although that may be true, We won’t ever get back what we put in for repairs or improvements. This is just something that has to be done. If we were renters this is something that we wouldn’t have had to worry about and we could have invested that money somewhere else that would make use much more in returns.
Do I regret buying my home?
In the end, it all comes down to personal preference. Are you ok paying a premium to own your own home? For us, that was the real question. We knew it wasn’t the best “investment” when compared to other options we had, but it was also an investment into our quality of life. This is an intangible type of investment that you just can’t calculate monetarily. By buying our own home we are able to do a bunch of different things that we couldn’t do as a renter.
On the plus side, we have locked in a mortgage rate for the next 30 years that is fixed and won’t change. The only variable we have to worry about are home maintenance costs and insurance costs. Our homes property taxes will also rise slowly and we have to allocate for that, but our mortgage payment will remain the same each month.
The other thing we were sure about is the neighborhood and area that we live in. We rented in the area for 3 years before making our purchase. We made sure we loved it here and decided that we were going to stay here for at least the next 5 years. Only time will tell what will actually happen, but I don’t regret my home purchase one bit.