Please tell me why a primary home is NOT an investment

[undercover]

I don't understand the logic by certain bloggers/forum members saying that a primary home is not an investment. It's a pretty cut and dry investment in my opinion. Well, it can be at least. Can we agree that saving money is the same thing, and sometimes more powerful, than making it?

We all need a place to live. I think we can agree on that. The first step is narrowing down SPECIFICALLY what you need/want in a home.

Once you've narrowed down the location/style/size/amenities/etc. that you want, you can start looking at the market.
Then, like any savvy investor, you do your research and run the rent vs. buy numbers on homes that are damn near replaceable, if not very similar. You could go one step farther and look at buying a lot and building something yourself if it helps the analysis. Of course, the crucial step in actually saving money by buying is the time commitment factor. If you're not willing to stay in the same place long enough to erode transaction costs and lock in your housing costs, then it will of course never be worth it to buy. 

So, after deciding that you're willing to live in the house you buy beyond the breakeven point, and it will indeed save you money over time (after estimating expenses on the HIGH side), you decide to buy. How is this not an investment? The ROI is obviously the yearly amount saved / total costs of the house. ROI will be zero or negative up until breakeven point, but then you'll start to see a return. ROI could also immediately be positive, it just depends on the rent/price ratios in the area.

[UnleashHell]

because you can't access the equity in it until you sell. then you need to find somewhere else to live.

you can rent it out and live elsewhere but you still need to spend.

Its outflow from your funds until such time that you liquidate it.

I calculate the equity in my house as part of my net worth but don;t use that same equity when looking at the liquid funds I need to fire. Because its not liquid!

[mr_orange]

It really depends on how you define an investment.  I do agree with your reasoning though.  Over time owning dominates renting in most places and thus should be considered NPV positive. 

A lot depends on your circumstances.  Many people move frequently early in their careers and thus renting is probably a better idea.  Generally the rule of thumb is that you need to stay somewhere around 5 years to make owning a better decision.  You'd obviously need to do the exact math with a discount rate specific for the individual to get things accurate. 

Since many times people don't know how long they'll be in a given spot I think it is a fair criticism that they don't consider owning their own home an investment.  Everyone on this (and really all) forums tends to project their own personal circumstances to those of others.  The reason it is called personal finance is because you have to make assumptions about the situation of the individual to give informed advice.  This seldom happens on this forum and thus you get carpet bomb advice that is accurate in many cases, but is not "optimal" in all situations.  I always find it amusing when people on here say something is optimal without specifying what they're trying to optimize or taking into account the situation of the person they're giving advice to. 

[DavidInDc]

It absolutely is an investment and as you said an important part of controlling how much you spend. If you are smart, hardworking and\ or lucky you can make money improving and flipping the house you live in. Or trade up while you are working and down at RE.

However the house (or part of the house) you live in is not in income generating investment. So from that point of view you can't count it towards the 4% of your investments that you can live on in RE, unless you downsize or rent all or part of it.

In the big picture as we are all learning what you spend every year is more important to FIRE then what you make so I totally agree that controlling your housing cost is key. But I think the main point people make is the difference between income generating investments and net worth at the point of RE.

[sunshine]

I can't understand why it is not an investment either. I'm a great saver but not very savvy on the investing stuff. It is worth a lot more than we paid for it a few years ago. It's more than twice the house we need once the kids finish college. We could pull a big hunk $ out of it if we needed to as it was bought with cash.

[undercover]

In the big picture as we are all learning what you spend every year is more important to FIRE then what you make so I totally agree that controlling your housing cost is key. But I think the main point people make is the difference between income generating investments and net worth at the point of RE.

You'll need less income generating investments if you don't require as much money per month though - so I think it works out either way. It's like shopping at Whole Foods vs Aldi. If you can get by at Aldi, you need less money per month, thus less invested. Saving $100/mo is the equivalent of having $30k invested @ a 4% withdrawal rate.

[frugal_c]

It is an investment.   In Canada I am sure there are people who have seen their home's value increase more in percentage than their stock portfolio over the last decade.  That isn't even taking into account any saving from not paying rent.  Obviously we are in a bubble and that is probably a one-off but it just shows how much variance there can be in returns.  Over longer periods, while it might do great I wouldn't expect it to out-perform inflation.   I think of it more as a way to diversify.

[mastrr]

what type of cash returns are you getting every month on your primary home?

[mr_orange]

what type of cash returns are you getting every month on your primary home?

Where is it written that cash returns monthly == investment?

The last time I checked an investment is supposed to make you wealthier than you would have been given the alternatives.  Just because something doesn't deliver cash every month doesn't mean it isn't an investment.  You can think of the amount you save past the break even rent/purchase point as accumulated equity where the cash flow is realized if/when you sell or refinance.  If you don't sell you can consider the extra money you save after the break even point as money that can be deployed in other investments.  Either way you're better off owning long term in most cases than you are renting. 

The whole "your house is a liability, not an asset" garbage talk is from Kiyosaki enthusiasts that haven't taken basic finance classes.  Your house is an asset.  The mortgage is a liability.  The difference (possibly less transaction costs if you intend to sell) is equity and thus is accretive to your net worth. 

The Mortgage Professor has a calculator that takes into account the MANY factors you need to control for (not all of them) when you make a decision about whether to rent or buy.  Here is the calculator:

http://www.mtgprofessor.com/Calculators/Calculator6a.html

[use2betrix]

Houses can be a good investment for many reasons and depending when you buy. Correct me if I'm wrong, but over a huge timeline, some day, won't the increase in housing value have to average out with the cost of inflation and earnings?

At some point, houses can't continue to grow so much faster than inflation, in which case less and less people will be able to afford them.

[mr_orange]

The cost to build housing, also known as the replacement cost, will generally track inflation over the long term.  The price of goods and services will track these numbers.  However, building methods will vary over time and it is not inconceivable that building costs will be lower in the future because of technology breakthroughs.  Housing stock from 100 years ago is also different from a functional standpoint than housing stock built last year is.  This is similar to phones of 20 years ago being different than your iPhone today. 

What is generally scarce is the LAND the housing is built on.  There won't be any new land near the center of a major city.  What may change is the development code, which may modify density or the ability to build on certain parcels and thus the economics of land can change as well.  In general though land will get more expensive when it is more scarce and sought after. 

The economics of real estate is governed locally because of these factors.  Submarkets in real estate operate differently than the stock market operates.  National financing markets drive pricing, but so do local ordinances and economies.  Job growth and zoning may dominate the financing market conditions at certain points in time for the "investment" you make in your personal residence. 

The investment you make in your primary residence is subject to risks (interest rate risk, municipal risk, etc.) just like any other investment is subject to risks. 

[frugal_c]

To reiterate on what is mr_orange is saying, I look at the cash return on my house as being the difference between what I would pay for rent and what the house costs me (excluding the mortgage).   I include money for infrequent reno's in these calculations, such as a bathroom reno every 25 years.   For me, this difference amounts to 4-5% of the value of the house but it will vary dramatically city to city, property to property.   In my case, if the house goes up in-line with inflation I will therefore get a 4-5% real return.  The house is also tax advantaged because I do not pay capital gains on increase in value and therefore can "hold" my house outside of an RRSP.   

[Shane]

Maybe because a home used solely as a personal residence costs you money to own it every month, even after it's completely paid off. If you bought shares of stock in a company and then every month, for the entire time you owned those shares, you were required to pay more money just for the privilege of continuing to own the stock shares, would you consider that to be an investment or a liability?

I'm not sure, though, that anyone is arguing that owning a personal residence is "not an investment." What I've heard argued more often is that, "your house is a terrible investment." There's a difference between not being an investment and being a terrible or inefficient investment.

[mastrr]

what type of cash returns are you getting every month on your primary home?

Where is it written that cash returns monthly == investment?

The last time I checked an investment is supposed to make you wealthier than you would have been given the alternatives.  Just because something doesn't deliver cash every month doesn't mean it isn't an investment.  You can think of the amount you save past the break even rent/purchase point as accumulated equity where the cash flow is realized if/when you sell or refinance.  If you don't sell you can consider the extra money you save after the break even point as money that can be deployed in other investments.  Either way you're better off owning long term in most cases than you are renting. 

The whole "your house is a liability, not an asset" garbage talk is from Kiyosaki enthusiasts that haven't taken basic finance classes.  Your house is an asset.  The mortgage is a liability.  The difference (possibly less transaction costs if you intend to sell) is equity and thus is accretive to your net worth. 

The Mortgage Professor has a calculator that takes into account the MANY factors you need to control for (not all of them) when you make a decision about whether to rent or buy.  Here is the calculator:

http://www.mtgprofessor.com/Calculators/Calculator6a.html

According to dictionary.com...

Investing - the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.

Assets - items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate

Can a home be an asset without being an investment?

I agree that owning long term basis is better.  Increasing net worth through equity is a good way to build net worth.  I like investments that make cash returns so I can invest more.  But I don't want to be sinking extra money into equity just for the hell of it (compared to putting it in VTSAX).  Equity is where money goes to die because it doesn't produce cash returns that allow you to invest more.  So if it is an investment its not a great one.

[mr_orange]

So pull the equity out and invest it in VSTAX then.  I'm not a fan of reducing leverage either.  Mortgage debt on your primary residence is probably the best debt most people can get in their lifetime and it is easy to beat the cost of this debt on a real basis. 

Saying you have to feed the "investment" ignores the fact that you NEED a place to live.  Even if you eliminate the house you'll NEED to "feed" your rental or any other alternative; including a rental.  Since you need a place to live for shelter the best selection from the set is probably to buy long term.  That is, unless you wish to be one of those ERE folks that is a vagabond and doesn't wish to have a family.  In that case mooching off of others is probably the "optimal" choice of what to do for your shelter needs. 

[frugal_c]

Maybe because a home used solely as a personal residence costs you money to own it every month, even after it's completely paid off. If you bought shares of stock in a company and then every month, for the entire time you owned those shares, you were required to pay more money just for the privilege of continuing to own the stock shares, would you consider that to be an investment or a liability?

The house costs you money but if you didn't have the house you would pay rent, which is generally much more.   Imagine if you bought a house for $250k, if the house costs say $1000 per month but to rent a comparable house it would cost $2000 per month, then what is the house costing you?   In my mind the house is making you $1000 per month.   Now the exact numbers are going to vary but the general concept holds.  Money saved is money earned, this is a very real $1000 per month that is not flowing out of your bank account.

[Shane]

Anecdote:

We're getting ready to sell our primary residence. In 1997 we bought the land for $90K cash. Over the last 18 years we've "invested" ~$320K to develop the land, i.e., build a house, a guest house, put up fences, outbuildings, build a 600' long driveway etc. If we're lucky, we're going to walk away with about $600K from the sale of our place. Great investment, huh?

The problem is, if we had invested the same amount of money in an S&P 500 index fund, we'd be sitting on around $830K, which means it's cost us ~$230K to own our home for 18 years. We're totally fine with this outcome. If we had rented for those 18 years, we would have had to pay around $1K/month rent for a place which wouldn't have been near as nice as our own home.

Our place has also brought in some income over the years from farming and rentals, but I'm pretty sure that extra income was less than the extra stuff (not included in estimate of how much we "invested in the property) we bought over the years that we probably wouldn't have bought if we had been renting: ladders, shovels, picks, rakes, wrenches, wheelbarrows, saws, drills, paint, nails, etc. Also, our home is in the country, far from work, stores, and many activities we would like to be involved in. If we had rented for an average of ~$1000K/month for the past 18 years, we would've lived in town, closer to work, shopping and entertainment. Had we lived in town, we could've not owned cars for all these years, which has been our single biggest expense besides housing.

So, in the end we're hoping to sell our house/land for more money than we paid for it, but I wouldn't say that it's been a great investment. Only looking at the financials, we could've made more money renting and investing the difference in the stock market. Overall, though, we're happy with our choice to buy land and build our own house. We've learned many life skills that we would've never learned living in an apartment: how to build a house, painting, fencing, gardening, raising livestock, etc., but money-wise I'd say we've probably lost a little bit.

[Tjat]

If you plan to sell your home, I suppose it's an investment. Otherwise, an investment is something that generates cash flows. A primary home is a place to live.

I think all too often people tie up waaaay too much of their net worth into their primary home, but think it's okay because it's an "investment." But really, they are just not diversified enough and set themselves up for failure with the next RE crash

[Shane]

If you plan to sell your home, I suppose it's an investment. Otherwise, an investment is something that generates cash flows. A primary home is a place to live.

I think all too often people tie up waaaay too much of their net worth into their primary home, but think it's okay because it's an "investment." But really, they are just not diversified enough and set themselves up for failure with the next RE crash

I totally agree.

To me, our house/land seems like an insanely risky "investment." The $600K that we're hoping to get for it is 2/3 or our NW. All it would take would be a hurricane, earthquake or an idiot neighbor to sabotage our prospects of being able to sell at a reasonable price.

A few years ago about a half mile away an absentee landowner decided to lease his property (~16 acres) to some guy he met on Craigslist for a few hundred bucks a month. The tenant and his girlfriend moved on to the property with around 50 dogs! They lived in a tent and tied their dogs to trees in the woods on the property with blue tarps tied between the trees to keep the dogs dry. The dog people made a couple of lease payments to the landowner and then quit paying. Apparently the landowner was afraid to push too hard to evict his non-paying tenants because they had physically threatened him.

The adjacent landowners who live in a beautiful custom-built home on their land had to deal with the dog people for 3 years. It would've been completely impossible for them to sell their home for any reasonable price during the time that the dog people were living next door to them. Repeated letters and calls to the police, health department, planning department, etc., were apparently unsuccessful at getting these vagrants removed from the property. Finally, they apparently moved away on their own just recently.

I'll be a lot more comfortable when our place is sold and the money's all invested in VTSAX. Some people worry that the stock market is risky. To me, our house is a way riskier investment.

[DoubleDown]

Otherwise, an investment is something that generates cash flows.

Source please.

As mr_orange stated, there is no accepted definition of an investment as "something that generates cash flows."

[Vilgan]

If you plan to sell your home, I suppose it's an investment. Otherwise, an investment is something that generates cash flows. A primary home is a place to live.

I think all too often people tie up waaaay too much of their net worth into their primary home, but think it's okay because it's an "investment." But really, they are just not diversified enough and set themselves up for failure with the next RE crash

So what happens if you use a reverse mortgage? It would seem to be generating cash then.

I wish I could reverse mortgage my car, but no one seems to want to take me up on it :P

[mr_orange]

There are always cash flows associated with any financial transaction.  There is an initial cash flow to purchase something and there is a terminal cash flow when it is "sold" (or exchanged, or refinanced in this context) and thus you'd need to know the timing of these cash flows to determine how good of an investment it is.  Long-distant cash flows are riskier and provide less NPV than near-term cash flows.  Investors generally have a liquidity preference too, but this is not always the case if they think far-distant cash flows are mispriced. 

As is always the case with this discussion people are conflating different issues.  One issue is that you need a place to live.  The other issue is that you hope to generate some return in excess of the return you get by renting for having a place to live.  These are two separate and distinct issues. 

One could argue that it is "optimal" to have a place as small as possible within walking distance of all the places you wish to commute to.   You'd need to do a holistic total cost of ownership analysis for this piece of the analysis and know the circumstances around the subject's situation.  In many places you get crappy schools and neighbors living in the "optimal" place looking at things strictly from a dollars in perspective.  However, if you look at the total cost of ownership this analysis is likely to change.  Another issue is that some people need access to vehicles for their business and would LOSE money by riding their bike to work and selecting their place to live based on this myopic selection set. 

Once you control for lifestyle choices and the holistic analysis of what is optimal you can then select the best way to finance this decision given your intended time horizon.  For some this means renting is the best.  For others owning dominates.  In general owning will probably beat renting if you intend to stay for a longer period.  If you choose to own you then need to select whether or use fixed-rate debt or an ARM and take into account your earning potential and your credit to find the best loan product.  Generally long-term debt provides a lot of upside because it keeps your payments smaller and the excess cash can be diverted to projects that return in excess of what you're paying for the debt.  However, ARMs generally come with lower rates (and thus loan constants) and could be prepaid faster if that is your intention is to prepay them.  When they're recast they also improve cash flows if you prepay them whereas fixed-rate debt only improves the timing of your "terminal cash flow," or really the point at which you can eliminate the cost of your financed lifestyle choice. 

I could go on and on and on.  It depends on your circumstances.  There are very few absolutes with personal finance. 

[2ndTimer]

To much emotional involvement.  You can't make a sensible decision to realize the investment if it's going to upset your whole family's whole life.

[sokoloff]

I'm a very happy homeowner and wouldn't have it any other way, but in my eyes, buying a house to live in is fundamentally an act of consumption, not investing.

When things go well, if you stay a long time in the same place, it happens to be a cost-effective way to consume housing, but it's a terrible investment, IMO.

[BlueMR2]

When things go well, if you stay a long time in the same place, it happens to be a cost-effective way to consume housing, but it's a terrible investment, IMO.

People that treat houses like investments are playing a dangerous game.  I guess you can consider it an investment on par with picking a single company's stock.  Many appreciate in value over time, some stay the same, then some crash and burn.  Sometimes that really nice neighborhood just suddenly goes downhill and turns into gangland where you can't even give a house away.

I consider it net neutral in my calculation, but call it a liability as it's a money suck.  Yeah, I'd need someplace else to live, etc, but just as it's foolish to be on a single company, it's also foolish to count on ever getting value back out of a house.

[nobodyspecial]

Otherwise, an investment is something that generates cash flows.

The owners of the contents of Fort Knox might disagree

[undercover]

Maybe I should clarify. What I mean is, I don't think the purchase of a primary home should automatically be dismissed as an investment. Most people who deny the potential of it being an investment come up with hypothetical numbers that skew a reader's interpretation. I guess the title should read, "Please tell me why a primary home can't be an investment." Also, people are comparing apples to oranges. You have to look at the cost to buy vs rent two different properties that are basically identical in location, size, and quality. You also have to buy sensibly, and with intent to stay, or it will never make sense to buy.

Leaving emotions out of it and choosing to purchase a reasonably sized house, then running the numbers, if buying is cheaper than renting then Istill don't see how it couldn't be considered an investment. So many here are caught up in the appreciation factor. I'm not even worried about appreciation. If it keeps barely keeps up with inflation, great. All I care about is the monthly savings by not renting, which is the return on the investment. Sure, one can certainly buy an unnecessarily large/expensive house - but then you're teetering on the edge of consumerism/over-consumption. That's why we make fun of McMansions here. That's not what I'm talking about at all. After all, comparing a McMansion to a 1br apartment is not the same thing and that's not the point I'm trying to make.

[The Happy Philosopher]

Who cares? Really...

It doesn't matter what you call it. Housing is an expense. Rent or buy, doesn't matter. Run the numbers and asses the risk.

Your home equity is an asset (although a fairly illiquid one) in the same way your car, computer or a pair of pants are an asset (although one that will probably not depreciate significantly). Is your car an investment? I didn't think so. If you are an Uber driver or own a used car lot then maybe it is an investment.

Mortgage, rent, taxes, maintenance...these are all expenses.  You are probably better off thinking this way so you can focus on real 'investments' such as income producing real estate, paper assets or your business/yourself.

[Heywood57]

https://en.wikipedia.org/wiki/Imputed_income

[M from Loveland]

because you can't access the equity in it until you sell. then you need to find somewhere else to live.

you can rent it out and live elsewhere but you still need to spend.

Its outflow from your funds until such time that you liquidate it.

I calculate the equity in my house as part of my net worth but don;t use that same equity when looking at the liquid funds I need to fire. Because its not liquid!

+1

[DMoney]

You can't have this discussion with referencing this gem from JL Collins on "why your house is a terrible investment"

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

[frugal_c]

Maybe I should clarify. What I mean is, I don't think the purchase of a primary home should automatically be dismissed as an investment. Most people who deny the potential of it being an investment come up with hypothetical numbers that skew a reader's interpretation. I guess the title should read, "Please tell me why a primary home can't be an investment." Also, people are comparing apples to oranges. You have to look at the cost to buy vs rent two different properties that are basically identical in location, size, and quality. You also have to buy sensibly, and with intent to stay, or it will never make sense to buy.

Leaving emotions out of it and choosing to purchase a reasonably sized house, then running the numbers, if buying is cheaper than renting then Istill don't see how it couldn't be considered an investment. So many here are caught up in the appreciation factor. I'm not even worried about appreciation. If it keeps barely keeps up with inflation, great. All I care about is the monthly savings by not renting, which is the return on the investment. Sure, one can certainly buy an unnecessarily large/expensive house - but then you're teetering on the edge of consumerism/over-consumption. That's why we make fun of McMansions here. That's not what I'm talking about at all. After all, comparing a McMansion to a 1br apartment is not the same thing and that's not the point I'm trying to make.

I think your best bet would be to provide some specifics, I want to buy a 2 br condo.  It will cost this much money per month.   If I rent it will cost this much money.  Then we can actually give you a clear opinion.  Right now this is just a catch-all for everyone's personal experience with real estate and some philosophical debates as to what an investment is.

[undercover]

Maybe I should clarify. What I mean is, I don't think the purchase of a primary home should automatically be dismissed as an investment. Most people who deny the potential of it being an investment come up with hypothetical numbers that skew a reader's interpretation. I guess the title should read, "Please tell me why a primary home can't be an investment." Also, people are comparing apples to oranges. You have to look at the cost to buy vs rent two different properties that are basically identical in location, size, and quality. You also have to buy sensibly, and with intent to stay, or it will never make sense to buy.

Leaving emotions out of it and choosing to purchase a reasonably sized house, then running the numbers, if buying is cheaper than renting then Istill don't see how it couldn't be considered an investment. So many here are caught up in the appreciation factor. I'm not even worried about appreciation. If it keeps barely keeps up with inflation, great. All I care about is the monthly savings by not renting, which is the return on the investment. Sure, one can certainly buy an unnecessarily large/expensive house - but then you're teetering on the edge of consumerism/over-consumption. That's why we make fun of McMansions here. That's not what I'm talking about at all. After all, comparing a McMansion to a 1br apartment is not the same thing and that's not the point I'm trying to make.

I think your best bet would be to provide some specifics, I want to buy a 2 br condo.  It will cost this much money per month.   If I rent it will cost this much money.  Then we can actually give you a clear opinion.  Right now this is just a catch-all for everyone's personal experience with real estate and some philosophical debates as to what an investment is.

Well, even that would be an exercise in futility here it seems. Some people have a mental block that saving money isn't the equivalent of making it. Again, let's say over a period of 10 years, you average a savings of $100/mo by buying instead of renting a similar home. That's the equivalent of having $30k at a 4% WR. That's not even counting investing that extra $100/mo.

[frugal_c]

Yep.  Another way to look at it, how is buying a home/condo and living in it any difference from buying a home/condo and renting it out?  The main difference is you don't have to worry about the tenants non paying the rent.  Isn't there an entire section of this website dedicated to properly rentals?  People seem to make money with property rentals so buying a home and "renting it" to yourself will generally make money if properly executed.

[sunshine]

Maybe because a home used solely as a personal residence costs you money to own it every month, even after it's completely paid off. If you bought shares of stock in a company and then every month, for the entire time you owned those shares, you were required to pay more money just for the privilege of continuing to own the stock shares, would you consider that to be an investment or a liability?

The house costs you money but if you didn't have the house you would pay rent, which is generally much more.   Imagine if you bought a house for $250k, if the house costs say $1000 per month but to rent a comparable house it would cost $2000 per month, then what is the house costing you?   In my mind the house is making you $1000 per month.   Now the exact numbers are going to vary but the general concept holds.  Money saved is money earned, this is a very real $1000 per month that is not flowing out of your bank account.

That's how I look at it. Ours is paid off but add in taxes insurance and maintenance.  If I round up considerably about $850 a month. Your looking at $1700 a month to rent the same size home on 1/8 of the lot.  Rent is expensive. I am shocked what our tenant pay without blinking for rent. There is no ? We save money not renting.

[seattlecyclone]

I think of a house as a purchase. Just like a car (which most Mustachians do not consider to be an investment), it needs expensive maintenance and its value (if not regularly upgraded) is likely to depreciate in real terms over the years as the materials age, fall out of fashion, etc.

The land the house sits on is an investment. Its value may rise or fall depending on local market forces, and this value is relatively independent of how much money and maintenance you put into it.

You generally can't buy a house without buying the land, so if you own one you have something that's part investment, part purchase.

That's how I think about it, at least.

[HPstache]

I can understand a person's primary home not being an "investment" but the equity in it is surely part of one's net worth... when people say it isn't part of your net worth that drives me crazy.

[Bertram]

So, after deciding that you're willing to live in the house you buy beyond the breakeven point, and it will indeed save you money over time (after estimating expenses on the HIGH side), you decide to buy. How is this not an investment? The ROI is obviously the yearly amount saved / total costs of the house. ROI will be zero or negative up until breakeven point, but then you'll start to see a return. ROI could also immediately be positive, it just depends on the rent/price ratios in the area.

If you do it like that, of course it will be an investment.

But a lot of people treat it like any pet project, they spend a lot time and money to change/add stuff, things they will never recoup when they sell it, or they buy much larger than they would rent (because they factor in what they may need seven years from now). And when you do stuff like that the ROI will likely be negative, so rather than beating themselves up over it, they look at it like a hobby/purchase that's meant to be a source of joy, not an investment that needs to make you money.

[Mechanista]

I'm squarely in the camp that if it doesn't provide income, it's not an "investment" in the sense that it doesn't directly help me FIRE. If I own a million dollar house outright, but have no income to support myself month to month and pay taxes on the million dollar home...its of no use to me outside a roof over my head. I do add it to my net worth but with an asterisk. It's only valuable if I sell it.

[HPstache]

I'm squarely in the camp that if it doesn't provide income, it's not an "investment" in the sense that it doesn't directly help me FIRE. If I own a million dollar house outright, but have no income to support myself month to month and pay taxes on the million dollar home...its of no use to me outside a roof over my head. I do add it to my net worth but with an asterisk. It's only valuable if I sell it.

How the hell does owning your home NOT help you be financially independent & retire early?  In your expample of owning a one million dollar home, you OWN a one million dollar home... gee, what could you do with that.  Wow...

[Telecaster]

How the hell does owning your home NOT help you be financially independent & retire early?  In your expample of owning a one million dollar home, you OWN a one million dollar home... gee, what could you do with that.  Wow...

It does of course, but the way it helps you is the imputed income.  That is, the amount you save each month by owning as opposed to actual income.   

That's why retirement planners sometimes don't include home ownership.   Ownership reduces your expenses (in theory) so the imputed income is accounted for, but it is tough to spend the equity. 

[The Happy Philosopher]

How the hell does owning your home NOT help you be financially independent & retire early?  In your expample of owning a one million dollar home, you OWN a one million dollar home... gee, what could you do with that.  Wow...

It does of course, but the way it helps you is the imputed income.  That is, the amount you save each month by owning as opposed to actual income.   

That's why retirement planners sometimes don't include home ownership.   Ownership reduces your expenses (in theory) so the imputed income is accounted for, but it is tough to spend the equity.

If you outright own a 1 million dollar home you have to factor in the opportunity cost to having 1 million of assets which are not very liquid, have high transaction cost to sell, constantly requires maintenance and will likely have high property taxes. It MAY help with financial independence and early retirement, but not necessarily. Just like the 6,000,000 other internet discussions on this topic the only real answer is to run the numbers for yourself and decide the best course of action. If you have a 1 million dollar home and no other assets you are not financially free. If you have 1 million in liquid assets and no home equity you may be financially independent depending on your spending (4% rule = 40k/yr)

At the end of the day what matters is cash flow. You can't spend what you can not convert to cash. Houses are great. I have one, but mentally I do not consider it an investment. I consider it pre-paid rent to a landlord that wont evict me (myself).

[HPstache]

How the hell does owning your home NOT help you be financially independent & retire early?  In your expample of owning a one million dollar home, you OWN a one million dollar home... gee, what could you do with that.  Wow...

It does of course, but the way it helps you is the imputed income.  That is, the amount you save each month by owning as opposed to actual income.   

That's why retirement planners sometimes don't include home ownership.   Ownership reduces your expenses (in theory) so the imputed income is accounted for, but it is tough to spend the equity.

So what if you did the dumbest thing in the world and reverse mortgaged the theoretical $1MM house you own?  Would you believe me then that owning a house was an investment?  I just don't get your logic, and I'm not sure you're thinking it completely thru either.

[mr_orange]

There is no need to reverse mortgage the house.  A simple cash-out refinance or HELOC will give you the liquidity you need without paying giant transaction costs.  There will be some costs, but they need not be giant. 

[Goldielocks]

Home equity adds to your NW, for certain.

BUT

It does not get included when calculating 4% SWR funds needed to FIRE, except to (hopefully) lower your monthly expenses.   

[Bajadoc]

My house has been payed off for years but the darn thing keeps costing me money. A nice home is a BIG expense. Maybe it turns out to be an investment later when you sell and the sales price makes up for property tax, gardening, landscaping, housekeeping, repairs, transaction costs, and probably a bunch of other stuff.  A nice home is a wonderful thing to enjoy, but an investment, maybe.

[SirFrugal]

what type of cash returns are you getting every month on your primary home?

I get cash returns of about 500 dollars a month, which is how much cheaper it is for me to live in my paid off condo than what the guy next door is paying to rent a near identical unit.

[Bajadoc]

what type of cash returns are you getting every month on your primary home?

I get cash returns of about 500 dollars a month, which is how much cheaper it is for me to live in my paid off condo than what the guy next door is paying to rent a near identical unit.

Nice try. That is not a cash return. If I save $500 a month by driving a junker instead of a new BMW I did not get a cash return. But it is nice to spend less money each month.

[Telecaster]

So what if you did the dumbest thing in the world and reverse mortgaged the theoretical $1MM house you own?  Would you believe me then that owning a house was an investment?  I just don't get your logic, and I'm not sure you're thinking it completely thru either.

No, I would definitely not believe you for that statement alone.  Main reason is that it isn't true.  If you got a reverse mortgage,  it means the house is an asset.  So is a Rolex.    You can get a loan against the house or a Rolex.  It doesn't follow the ability to borrow against an asset makes that thing an investment.  It just means you can borrow against it. 

I did say that retirement planners sometimes don't include the house.*  The reason is simple math.  Ownership (in theory) reduces expenses, but you can't easily withdraw money, so for planning purposes you can simply assume reduced expenses.  Easy peasy.  If you are trying to figure out your target withdrawal rate, the math is the same if you include the house as an asset or not. 



*Note that, again, owning an asset does not necessary equal owning an investment.**

**Note that says nothing about if owning a house is an investment or not.     

[MrsPete]

Of course a home is an investment -- it is a unique investment unlike others in that it has practical value (you can live in it) and hopefully it increases in value. 

what type of cash returns are you getting every month on your primary home?

Because my house is paid for in full, I don't have to write a rent or mortgage check each month, and no matter what happens with the economy, I can stay in this house for the rest of my life.  Not a bad return. 

True, I pay taxes and maintenance, but those don't come anywhere near the cost of rent or a mortage.