A Personal home as an "investment"

[MgoSam]

I keep hearing that term being thrown around, but I don't see it as one. I think real estate can be an investment if you are either
a. Renting out the rooms or the property
b. Buying an undervalued or fixer-up and repairing it to flip

Both of course have their risks, but buying a personal residence in my opinion shouldn't be considered an investment. Sure the value of a house should appreciate in the long-run, but it does require a sizeable investment, continued investment (mortgage, taxes, upkeep), and is illiquid. I think that buying a house can be a good decision for some people as making mortgage payments can be a form of 'forced savings,' but as someone that already invests, this situation is not applicable to me.

Your thoughts? I'm looking into possibly buying either a condo or a house, but my goal is to look for a house that I can afford on my own income (not touch into my funds except for the down payment), and rent out the rooms to pay down the balance faster.

[minority_finance_mo]

Well, if the interest on your mortgage + property taxes are less than the cost you would pay for rent, it already is an investment with a positive ROI anyways, right?

So if interest is $x/mon, property taxes are $y/mon, and misc. ownership expenses are $z/mon, as long as $(x + y + z) < cost of equivalent rent, the house is an investment, regardless of appreciation in price; the principal payments are just an asset transfer from cash to the house.

[arebelspy]

It depends on how you use the word.

It's absolutely an asset. 

It may or may not be an investment.

There's been miles of commentary on this, here and elsewhere.

What you need to compare is owning to renting, and see which makes financial sense (and sometimes you might make the choice that is sub-par financially for emotional reasons).

[Louis the Cat]

I consider my personal home an investment in a couple of ways. 1. Our monthly cost for PITI is less than $50 more than our rent was on a place with 800 fewer sqft and virtually no yard. 2. We bought a house that had been badly maintained for under market value and have fixed it up to be worth far more than our cost which we've paid for all out of cashflow except for the mortgage (mortgage payment is cashflow of course). 3. When we're ready to FIRE, we'll downsize and expect to come out even or ahead meaning we'll then own our home outright and quite likely have extra cash to invest.

[slugline]

The MMM way is to challenge yourself to in-source as many services as possible.

http://www.mrmoneymustache.com/2011/09/13/domestic-outsourcing-practical-or-wussypants/

I see personal home ownership not really as an investment, but rather as an opportunity to in-source the tasks of your landlord and property manager.

[undercover]

a. Renting out the rooms or the property
b. Buying an undervalued or fixer-up and repairing it to flip

c. Instant ROI from not paying rent. Once property is paid off, take comparable rent - taxes/insurance/maintenance and that is your true ROI. So if your house cost $150k and it would normally rent for $1000/mo and you are only paying around $3k a year for insurance + taxes + maintenance then your ROI is 6%, guaranteed. Of course those numbers are very estimated, but you get the idea.

I think the thought of buying a house and waiting for it to appreciate is pretty rare and isn't a wise way to invest. Housing stays pretty flat over the long term anyway, and short term speculation is way too risky on something as illiquid as a house.

But of course buying is not always the "best" route to go. Say you already have the $150k in hand. You could either invest it and rent or buy the property. Either way, you're getting a return on your money. But with renting you'll have MUCH more control over your return because you can easily change where you live by downscaling once the opportunity arises. Or you can upscale if your heart desires.

For someone with limited/no interested in stocks/bonds then buying a house is not a bad way to go at all if their income is steady and prospects are good. I'd definitely consider it an investment.

[jzb11]

As a single guy in a lower cost of living area of the USA, renting makes way more sense as property taxes, maintenance, and insurance will cost as much as renting a 1 bedroom apartment.

The only way I would buy is if I could pickup a foreclosure on the cheap (under 50k).

[SaintM]

I completely agree with OP's assessment that one's personal residence is not an investment. It is a consumable that requires constant infusions of cash (interest, property taxes, HOA, and maintenance) just to keep the property from foreclosure or disrepair. Because of that, I wouldn't call it an asset either.

An investment/asset should pay the owner, not hhe other way around.

[James]

"Personal homes" cannot simply be categorized as an investment or not. Some might work as an investment, others might not, but categorizing all personal homes as either investment or not oversimplifies the matter. But in the regard to the typical "common knowledge" that personal homes are classified as an investment I do agree, it's not good for the public to think that way.

[MrMoogle]

I consider my personal home an investment in a couple of ways. 1. Our monthly cost for PITI is less than $50 more than our rent was on a place with 800 fewer sqft and virtually no yard. 2. We bought a house that had been badly maintained for under market value and have fixed it up to be worth far more than our cost which we've paid for all out of cashflow except for the mortgage (mortgage payment is cashflow of course). 3. When we're ready to FIRE, we'll downsize and expect to come out even or ahead meaning we'll then own our home outright and quite likely have extra cash to invest.

This is along my thinking.  If you can get a 30 year mortgage and all other home expenses for even slightly more than renting, it's better in the long run to own the home.  This makes sense for a family, but for an individual, if you weren't renting out rooms, I don't see how it could be an investment.

I regret buying my first home, and won't be buying another until I'm married possibly with kids.

[MrsPete]

I agree that it's an asset.  It provides utility.  In the long run, it's cheaper than renting. 

But an investment?  No, not quite -- I mean, you can't just up and sell it in the same way you could sell your stocks.  Unless you have unusual circumstances, you're going to have to replace it with another house (or a rental). 

[iamadummy]

MMM is incorrect about personal property.  Bought my first house (3bed/3bath) with $1200 mortgage payment. Got two renters
and started receiving rent for $1000 a month. 

[Jack]

My personal home is an investment for the following reasons:

• I bought it "on sale" during the recession.
• I bought in a neighborhood that's gentrifying so rapidly that it's on various "hottest neighborhood" lists (and bought into that neighborhood because of that rapid appreciation). This has been borne out in the five years since I've owned it: it's already appreciated 100-150%, and values continue to rise.
• It's a fixer-upper, which I am fixing up myself.
• When (or if) I move out, I will convert it to a rental. As a rental, it would have easily met both the "50% rule" and "1%" rule from day one (actually, rents would be about 1.5% of purchase price).

If I had bought a "normal" home in a "normal" area, or bought anywhere without evaluating as and intending for it to be an investment from the get-go, then I wouldn't consider it to be one.

[totoro]

If you want to retire early or reach FI as soon as possible you are wasting a huge opportunity if you don't treat housing as an investment.  Buying strategically is one of the fastest ways to increase wealth.

You have to live somewhere anywhere so put the significant monthly outlay to work for you if you can if you can make the ROI positive. If you can't, maybe you should rent and invest the difference.

The fact is that you only have so much credit and interest rates and mortgage terms are excellent for primary residences.  Sweat equity and renting out part of a home can bring very high ROI in certain markets.

[thedayisbrave]

Your thoughts? I'm looking into possibly buying either a condo or a house, but my goal is to look for a house that I can afford on my own income (not touch into my funds except for the down payment), and rent out the rooms to pay down the balance faster.

The latter is the key thing here, to me.  Buying a house to live in could possibly save you some money in the long run versus renting, and possibly not.  It depends on a lot of factors, many of which are overwhelmingly out of your control (like appreciation, taxes, etc).

House hacking is a whole 'nother animal.  I recently made the "mistake" of buying a property to live in - with the plans of getting a roommate - but I got overwhelmed with stuff so that ultimately fizzled out in the short term.  So I have waaay too much house for just me.  I went into the purchase thinking, finally I get a house that I really like, that has nice upgrades etc.  I thought that the house itself would make me happy.  However I've come to realize that this feeling of wastefulness afterwards - that I couldn't have anticipated - kind of led to it being a mixed bag. 

I like usefulness.  My job as the manager of my money is to maximize its utility, as Joshua Kennon talks about a lot.  So my business model is I buy and rent the extra rooms out.  Doing this, you have to go into purchases with a more strategic mindset - you have to look at how many bedrooms there are, how much they can be rented for at market value, what nearby demand is like, and figure out the people to target as potential renters.  It can be done but you have to make sure your local market supports it.

[DoubleDown]

Yes, absolutely ruling out a personal home as an investment makes no sense. It's YMMV.

Using the colloquial meaning of investment -- I put some money into something with the hope that over time it will go up in value or provide some kind of financial return -- then a personal home can definitely be an investment.

OP, if a personal home can never be an investment, then what do you call this hypothetical situation?:

Joe decides his community is up and coming, has great long term growth and job potential, and he thinks real estate where he lives will likely go up in value. He buys a house for $100,000 (puts $20k down), moves in, and 15 years later it is worth $400,000. He sells it and pockets a profit of $300,000 (minus transaction costs, maintenance costs along the way, etc.).

[Avidconsumer]

I think it really depends where you live, but on average I would say that owning a home is, as in the long run it generally increases your net worth. You can give it whatever names you want. An expense reducer, investment or whatever. In the long run it is best to own your own home to increase net worth. That's just a generalization though.

[neo von retorch]

http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/hbtl-04.pdf

It is generally believed to be a good financial move (compared to renting.) But it's not hard to see why it often isn't.

In my own experience, buying a 3 bedroom house and renting out 2 bedrooms, the maintenance costs (water heater, HVAC, roof, etc) happened to add up so that I was financially on par with a tiny 600 sq ft one bedroom apartment rental after about 7 years! However, with those big things behind me, my interest payment dwindling and the rent continuing to pour in (and slowly rise) it does look like a win long-term. (Plus the obvious - living in a huge house compared to a tiny apartment "benefit").

But it definitely varies based on a lot of things - if you buy a house comparable to what you'd rent (most plan ahead and buy bigger), if you stay put long enough to even out the bumps from big maintenance items, closing costs and initially high interest payments and so on.