Tuesday, December 5, 2017
Buying a Home as an Investment? Really?
I think our society needs to escape the crazy idea of owning a home as an investment. Now to be perfectly clear, I am speaking about the home you live in, not a rental property. Rental properties are investments because they do one thing primary residences don’t do: Generate money! The home you live in is not an investment and will never be one. For some reason, the white picket fence glam idea morphed into the Wall Street, speculative investment nightmare. This was seen over the past few years here in Southern Ontario as we watched a real estate market go haywire. A home should be bought for one reason and one reason only, a place to live. In this post, I will give my 5 reasons why thinking your home is an investment is a sure-fire way of being a money moron. Now I am not trying to dissuade you from buying a home, I do think it is an extremely valuable thing to do. I just want you to do it for the right reasons or you might have expectations quashed.
1) Homes don’t always increase in value
Yes, it is true, your home is not guaranteed to increase in value. Do you not remember the housing crisis of 2008? Many people’s homes dropped tremendously in value. It is also important to understand that although you home might have skyrocketed in value lately because of the housing bubble, like any item that goes up in value very quickly, it can go down just as quick. There is also the tricky little item of inflation. If you bought a home for $200,000 in 1990, simple inflation would make that home worth $332,653 in today’s dollars. It would be worth a lot more if you put upgrades into it, but those cost money and time. The moral of the story is, don’t buy a home thinking it will automatically increase in value. If it does great. If it keeps up with inflation you have done alright in my opinion.
How Much is Your Home Worth? – House Values
2) You can’t liquidate a home easily
What makes an investment a truly good investment is if you can liquidate it easy. If you have all your money tied up in your home, you’re truly cash poor. You cannot sell your home overnight and if you do you might lose out on its true value. You could also be at the whim of a cold seller’s market, with sometimes homes being up for sale for months even years. This is especially true in down economic times when people are terrified to be making any long-term commitments. Sadly, times like those are when people actually need the money selling their home could generate for them. Homes don’t generate cash if it is your primary residence like investments do. Make sure you understand that owning a home can be a long-term commitment whether you like it or not.
3) You need to live somewhere
Even if you can unload your home, are you now going to live in a dumpster? Are you now going to rent and use the money you got from selling for that? Are you going to fund the purchase of another home and put the money towards that? You have to remember that you must live somewhere so unloading a home is not the end of the story. If you use the funds from selling to buy a new home, you have just made a lateral move. Even if you upgrade to a better home, you still have a mortgage balance on that to pay. If you were able to buy it outright, good for you but all you did was transition from one place to another and made some real estate agents and lawyers happy in the meantime. What I am getting at is that the value of your home is only realized when you sell and when you sell you must find a new place to live. If you never plan on selling your home, then you don’t have any money from your home. It’s just that simple.
My 5 Point Home Buying Checklist – Budget Boss
4) Equity is not an investment, it’s your money
There is a crazy idea out there that home equity is part of your investment portfolio. I will dissuade that notion right here. Home equity is not found money, it’s your money. You made your mortgage payments, with interest I might add, and now you can borrow from that. That is borrowing from yourself, my friend. It is essentially a forced savings program. Actually, it is worse than a forced savings program because when you take your savings you are not obligated to pay them back like you are the bank. Well, you might say, “I don’t have to pay it back, I can just sell the home.” See the above paragraph for my rebuttal on that one. Remember you have to live somewhere. Now I am not saying home equity is a bad thing, it’s just not an investment. It should only be used for two things and two things only. To save you money or to make you money. Using it to pay off costly debt is a good move or using it to upgrade the home and thus increase its value is alright as well. Any other reason is not okay in my books.
5) The carrying costs of a home make it not an investment
What other investments cost you money to hold onto. None, that’s right! Now I am not talking about adding additions or upgrading your home which can be very costly. Simple home maintenance costs all homeowners thousands every year. If they don’t cost you, that much that means you aren’t maintaining your home and it will depreciate. Not only that, home maintenance costs you the most valuable commodity we all have, time. You will never get back the countless hours it takes to upkeep your home. Let us not forget about the major costs that will occur like a new roof, heating system or landscaping. If you spend $3000 a year on simple home maintenance, another $30,000 for major repairs like the ones mentioned, and $500 monthly on various forced expenses like property tax and insurance; it will cost you $210,000 after 20 years. If your home appreciated in value from $200,000 to $400,000, congrats you lost $10,000. Well actually you lost $98,495 (10K plus $88,495 in inflation). No investment should ever cost you the amount a home does to carry it.
By the tone of this post, you would think I am saying buying a home is stupid. Quite the contrary. I think buying a home is a great thing to do. It provides a stable, predictable asset that anyone can benefit from. The problem is that many people go into home buying for the wrong reasons and then have their expectations shattered. You should buy a home for a place to live and not as an investment. If you end up making money from owning a home, great! Don’t go into it expecting that because when you crunch the numbers, it just not that easy to do. The value of a home comes from the fact that you have a place to live and a sellable asset when you loan is gone. That is why you should buy. If you want a valuable investment, I have some swampland in Florida you might be interested in.
Thanks for tuning in today as Money Moron Week continues at Budget Boss. Tune in tomorrow as we discuss timing the Market and how it can cost you big time. If you want to discuss buying a home or mortgages, please message me at joe@budgetboss.ca. Don’t forget, our “2018 Financial Goal Setting Workshop” is next Tuesday, December 12 at 5 PM from Innovation Works in Downtown London, Ontario. Have a great day Bosses!
“Words are the money of fools.” – Thomas Hobbes
Email – joe@budgetboss.ca
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