Your Home Is a Bad Investment.
I can already feel the frustration that this blog post title is potentially creating, and honestly I am okay with it. If you ask anyone who knows me, they will tell you “starting something” is my favorite past time. But in all seriousness, my purpose with this post is to give some clarity on what a good investment is, and how your home does a poor job meeting those expectations. I’m not trying to sway you away from buying a home, but rather explain what a homes real purpose is.
What makes up a good investment:
1. Good long-term growth
3. Cost effective
4. Tax efficiency
5. Time effective
First, home values have closely trailed inflation, and we know that investing in the stock market over the long term has out preformed inflation by 7%.
Second, your home is a really concentrated asset. You could invest in REIT’s which could give you exposure to the housing market across the nation.
Third, the average American spends “x” on their home, where you can purchase an ETF like VTI and pay a .04 expense ratio, which is equivalent to $4 for $10,000.
Fourth, the more your home value increases, the more you are taxed on the value of the home. If your investment grows in value, you are not taxed unless you sell, and with the standard deduction increasing, many do not take advantage of itemizing. Roughly 70 percent of Americans did not itemize.
Time is money, and homes take up a lot of our time
One of the hottest topics is how much home prices have gone up over the last year., How you feel about this reality has a lot to do with what position you are in. If you are planning on purchasing a home, this can have a negative effect on your home options. But if you own a home, this might seem like a positive, but is it really? You only see the benefit of this increase in value if you sell your home at that price; and if you do sell, you have to find another place to live; and it’s not like your house was the only one to go up in value. You will then be joining those who have complained about this expensive market. For those who plan on staying in the home long term, all that happened was you are now paying more in property taxes.
Whenever I buy more shares of an ETF, honestly there is little to no emotional tie, and I like it that way. It is a very objective decision. Now your home, that is such an emotional decision. This is why my heart goes out to young couples who have been beat out on several offers. I know a home purchase is not just based upon the listing price; people envision holiday parties, children’s birthdays, parents visiting, old friends coming to town. Personally, the thing for me would be a sneaker room. These emotions are real and should affirmed, but this shows that a home is not as much of an investment, rather it’s a goal that should be empowered by our savings and investments.
Homes eat away at your cash flow.. So if you are viewing your home as an investment, this could be potentially troubling. Robinhood has conditioned you to believe fee’s are from the devil, so keep that same energy with your home. Every time you make a purchase for the home, that is essentially a “fee”. So that furniture, deck, new carpet, etc.; or that broken pipe, damaged toilet, kids ruined the walls. You have to pay for that, my ETF has yet to call for a leaky roof.
What does this mean?
I think for younger individuals who are recent college graduates, even if you do not see yourself buying a home in the near future, realize that time is on your side, and use that time as an opportunity to invest towards a home purchase goal. Owning a home is not a bad goal to have for yourself. I personally hope to own a home one day. I get excited thinking about my parents coming to visit, or carrying my new wife over the threshold, and bringing my first kid home from the hospital. So knowing this goal is a deep personal decision, I want to use my investment vehicles that have little to no objectivity attached to them to empower this dream of mine.
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.