Please tell me why a primary home is NOT an investment

[bogart]

In choosing investments, I look for things that will give me the best return with the lowest risk, consistent with my circumstances, time horizon, and so on.

In choosing a primary residence, I look for a place I want to live, which involves a lot of factors that don't relate to return or risk.  Not that none of the things related to my choice of a home don't, but a bunch don't.

I spend money to have a place to live (I have done this by purchasing a single-family home, though of course I could have chosen a different approach).  As with other expenditures, I try to do this in a way that doesn't involve spending more than necessary to get the features I want and can afford, but I'm not looking for return, I'm looking for a place to live.

[fa]

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.

There is also an opportunity cost.  If the stock market returns an average of, say, 10% per year on average, and you have spent $500,000 on your house, the theoretical opportunity cost is $50,000 EVERY YEAR.  You lose out of $50,000 per year because your money is tied up in a house instead on making you money with investing.  On the flipside, you avoid the cost of renting, which can be substantial depending on the RE market where you live.  But, houses need maintenance and updating.  This also needs to be added into the cost of owning.  Plus the risk of being stuck with bad neighbors, sudden unexpected house maintenance expenses, etc.  I own my house fully paid off and enjoy living there, but I am not blind to the hidden costs.

[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.

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.

So if I invest in stocks and end up with an extra 500 a month from dividends its a return, but if I invest in my primary residence and the dividends are paid off in reduced long term living expenses of 500 a month, its not a return?  Oh wait...you are right...its a tax free return!

There is also an opportunity cost.  If the stock market returns an average of, say, 10% per year on average, and you have spent $500,000 on your house, the theoretical opportunity cost is $50,000 EVERY YEAR.  You lose out of $50,000 per year because your money is tied up in a house instead on making you money with investing.  On the flipside, you avoid the cost of renting, which can be substantial depending on the RE market where you live.  But, houses need maintenance and updating.  This also needs to be added into the cost of owning.  Plus the risk of being stuck with bad neighbors, sudden unexpected house maintenance expenses, etc.  I own my house fully paid off and enjoy living there, but I am not blind to the hidden costs.

The opportunity cost logic is faulty unless the person paid lump sum for the house...otherwise the main thing is that you would have been paying rent anyhow.  The only opportunity cost was your down payment, unless your option was somehow mortgage or free house.

Considering that...the average long term appreciation of real estate in the US is 3% a year.  If you have 50k for a down payment and throw it in the market and paying rent, your 10% stock gains would be 5k a year and you would be building 0 equity on your rental.  Use that same 50k to make a down payment on a 500k house.  3% of 500k, since real estate appreciation is based on the property value and not your equity, is going to yield a return of 15k.

Plus...the "opportunity cost" of a down payment isn't all it appears.  Just going off numbers I worked with in the past since that's what I'm familiar with...I put 20k down on a property and ended up with roughly an 800 payment and 200 of it was going towards principal which was going right straight towards equity.  200x12=2400 a year in built equity...or a 12% return on my 20k down payment.  20k in the market at 10% would have been a 2000 dollar return and rent of 9600 would have would have been a 100% loss.

So let's review the numbers for the first year...
rent - 20k+10%=22,000-9600(rent)=12400
own - 20k+2400=22,400-(12*600(portion of mortgage not going towards principal))=15200+1800(3%x60k appreciation)=17k
Oh wait...how did that opportunity cost leave me with a higher net worth?

Plus at some point your mortgage ends...so you won't be building equity in your property any more but your monthly expenses are going to drop significantly, and I don't know about you but anything that either gets my income up or expenses down is something I'd like to do.  You mention the hidden costs of ownership...but at the end of the day if you rent your landlord will be paying these hidden costs and passing them on to you so you won't escape them one way or the other unless you find an altruistic landlord who enjoys renting properties out at a loss.

I just cringe every time I hear that opportunity cost argument.  It leaves me with the impression that people feel once you put a down payment on a primary residence that money is simply gone and not doing nothing for you anymore, when the fact is that money is still working for you even if the benefits of ownership are not easily recognized on a monthly or quarterly statement like form your 401k or brokerage account.  When you are working your monthly budget or calculating your net worth its easy to see the benefits of owning.

Of course I make all these statements under the assumption that you actually compare renting vs buying looking at similar properties, and that you are going to have to pay for a place to live one way or the other, otherwise your best bet for wealth building is to throw your money in the market and go live in a cardboard box.

[Bertram]

There have been several studies in the past years that half of home owners in Germany had either a negative return on investment or one below inflation. It's hard to make the numbers work in your favor, most people just go by gut feeling which - for most people - does not work out well.

I think much like running a restaurant seems like it should be easy to do and lots of people give it a try even with little specific/relevant experience, but you need a specific set of skills and hard work to make it work. I think the people that can make it work don't need to be told that it can be a good investment. And for the rest the (individual) risk is not worth the return.

[SirFrugal]

There have been several studies in the past years that half of home owners in Germany had either a negative return on investment or one below inflation. It's hard to make the numbers work in your favor, most people just go by gut feeling which - for most people - does not work out well.

I'd agree.  I posted some numbers earlier in the thread that didn't dispute this point...but my entire argument is owning is better for your net worth than renting, which it is.  I never expect my primary residence to generate income for me while I'm living in it, but I knew when I bought it 10 years ago that coughing up some money for a down payment would lead to lower expenses for me down the road, which it has.  I also have the added benefit of knowing when/if I do sell and move I get a nice little lump sum on my way out the door, where as renters aren't going to get back any of the rent they paid.  Its really no different than throwing money in stocks hoping they pay dividends down the road...either way you are hoping investing XXXX dollars today will add XXXX dollars to your budget surplus in the future.

[AnEDO]

Asset: It pays you to own it.
Liability: You pay to own it.

A house is half asset/half liability.  It "pays" you the rent that you would otherwise have to pay someone else.  It pays you any appreciation when you sell it.  It costs money to maintain, insure and pay taxes on. 

[seattlecyclone]

There have been several studies in the past years that half of home owners in Germany had either a negative return on investment or one below inflation. It's hard to make the numbers work in your favor, most people just go by gut feeling which - for most people - does not work out well.

I'd agree.  I posted some numbers earlier in the thread that didn't dispute this point...but my entire argument is owning is better for your net worth than renting, which it is.  I never expect my primary residence to generate income for me while I'm living in it, but I knew when I bought it 10 years ago that coughing up some money for a down payment would lead to lower expenses for me down the road, which it has.  I also have the added benefit of knowing when/if I do sell and move I get a nice little lump sum on my way out the door, where as renters aren't going to get back any of the rent they paid.  Its really no different than throwing money in stocks hoping they pay dividends down the road...either way you are hoping investing XXXX dollars today will add XXXX dollars to your budget surplus in the future.

This bolded bit is a key distinction for me. I view an "investment" as something you buy for the purpose of generating some sort of return on your capital. This return could take the form of interest, dividends, or capital gains. Sometimes investments go down in value, which is part of the risk you take. However if you're buying it with the expectation that you'll probably put more money into it than you'll get out of it when you sell (as that German study and others will make clear), then I don't see how you can really consider it an investment.

Let's compare this situation to cars. We generally consider a personal vehicle to be a purchase, not an investment. In most situations, if you're going to have a car at all it's better to buy one than to lease one. The same is true for houses: buying is often better than renting. However just because you're paying for something in the most financially optimal way doesn't mean you're investing.

[Jack]

I'm not looking for return, I'm looking for a place to live.

Who says you can't pick a property that satisfies both?

My primary residence has appreciated (at least) 100% since I bought it six years ago, and/or it saves me (at least) $500/month compared to renting a comparable place. More importantly, I specifically chose it expecting it to do that: if it weren't "on sale" in the depths of the recession and in a gentrifying neighborhood, I wouldn't have bought it.

Granted, I did have to compromise a little -- my wife preferred this 3/2 house; I preferred a 2/1 with a 1/1 carriage house that I could have rented out -- but it nevertheless is both a residence and an investment.

[BTDretire]

Speaking as a person that will retire at 61, from 25yrs old to 40yrs old we owned 3 houses. Each one was sold for more than the purchase price. Those were investments.
  Now I'm living in what is probably my last house, it is a liability in that it costs me to live there, taxes, upkeep, etc. It also ties up assets that could earn money.
  It does have use as an insurance policy in case of portfolio failure, a reverse mortgage
on my home would hopefully give me (or you) enough income for the rest of my life.
 

[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.

There is also an opportunity cost.  If the stock market returns an average of, say, 10% per year on average, and you have spent $500,000 on your house, the theoretical opportunity cost is $50,000 EVERY YEAR.  You lose out of $50,000 per year because your money is tied up in a house instead on making you money with investing.  On the flipside, you avoid the cost of renting, which can be substantial depending on the RE market where you live.  But, houses need maintenance and updating.  This also needs to be added into the cost of owning.  Plus the risk of being stuck with bad neighbors, sudden unexpected house maintenance expenses, etc.  I own my house fully paid off and enjoy living there, but I am not blind to the hidden costs.

I understand what you are saying. There are no hidden costs really. You know as a homeowner you will be spending $ on upkeep and budget generously for it.  I still can see our last home tripled at sale including every dime that went into it. It made us a nice chunk of change. I personally don't worry about opportunity cost. We have a percentage of our assets that will never see the market. I'm ok with that as it lets me relax. If I really wanted to invest the $ I could tap the equity.  You know I never thought about neighborhoods changing as I have always owned a home on acerage. You do have a good points. My friends house used to be an ok area 20 years ago. It is now all college rentals.

[big_owl]

Has anybody done any work to analyze housing prices in a flat or rising interest rate environment?  We've been in a decreasing interest rate environment for a generation which has surely helped to support the increase in home prices in the past 20 years.  Just curious how it would stack if rates were to remain flat or rise over a decade or two. 

[unno2002]

Personal Opinion:

Owning a home eliminates the requirement to pay rent for a similar living facility.  While home taxes and insurance will go up, they will not go up as much as rent would. 

In a rental, I cannot “upgrade” to further eliminate ongoing costs, such as adding insulation, more efficient appliances, solar panels, etc.

And all the avoided expenditures come with NO “income tax” on the money saved.

[Bearded Man]

I generally don't bother to debate this with naysayers anymore. I've made about 300K in a few years off my primary residences going up in value. I convert them to rentals when I move. I always think it is hilarious when people try to claim my house is not an investment. OK...enjoy the rising cost of housing for the rest of your life. I'm fixing mine for the life of my loan (I have one paid off house and cash to pay off another) and I stop paying at some point. I can also tap the equity or sell and downsize in a LCOLA.

[SirFrugal]

There have been several studies in the past years that half of home owners in Germany had either a negative return on investment or one below inflation. It's hard to make the numbers work in your favor, most people just go by gut feeling which - for most people - does not work out well.

I'd agree.  I posted some numbers earlier in the thread that didn't dispute this point...but my entire argument is owning is better for your net worth than renting, which it is.  I never expect my primary residence to generate income for me while I'm living in it, but I knew when I bought it 10 years ago that coughing up some money for a down payment would lead to lower expenses for me down the road, which it has.  I also have the added benefit of knowing when/if I do sell and move I get a nice little lump sum on my way out the door, where as renters aren't going to get back any of the rent they paid.  Its really no different than throwing money in stocks hoping they pay dividends down the road...either way you are hoping investing XXXX dollars today will add XXXX dollars to your budget surplus in the future.

This bolded bit is a key distinction for me. I view an "investment" as something you buy for the purpose of generating some sort of return on your capital. This return could take the form of interest, dividends, or capital gains. Sometimes investments go down in value, which is part of the risk you take. However if you're buying it with the expectation that you'll probably put more money into it than you'll get out of it when you sell (as that German study and others will make clear), then I don't see how you can really consider it an investment.

Let's compare this situation to cars. We generally consider a personal vehicle to be a purchase, not an investment. In most situations, if you're going to have a car at all it's better to buy one than to lease one. The same is true for houses: buying is often better than renting. However just because you're paying for something in the most financially optimal way doesn't mean you're investing.

That's actually an awful comparison, considering cars depreciate over time and we all know that.  You buy a car, you use it, it gets old and crappy and worthless.  Houses on the other hand...like all investments, tend to appreciate over time.  The argument isn't that you are going to buy a house and sell it for less down the road, its that housing appreciation generally isn't going to outpace taxes+insurance+maintenance, as evident by the fact that people don't buy houses and let them sit empty for 30 years until they want to harvest gains.

[SirFrugal]

I generally don't bother to debate this with naysayers anymore. I've made about 300K in a few years off my primary residences going up in value. I convert them to rentals when I move. I always think it is hilarious when people try to claim my house is not an investment. OK...enjoy the rising cost of housing for the rest of your life. I'm fixing mine for the life of my loan (I have one paid off house and cash to pay off another) and I stop paying at some point. I can also tap the equity or sell and downsize in a LCOLA.

+1.  Too many people just look at if you have a 300k house owned outright vs 300k in the market...you are looking at long term averages of 3% appreciation on the house and 10% gains on stocks, which is a completely ridiculous comparison unless you have 300k cash and are considering putting it in stocks or buying a 300k house and intentionally letting it sit empty longer term for some reason.

Plus...most of the people I know who subscribe to the "renting is cheaper" crowd do so for one reason and one reason alone...instant gratification.  All they see is you need a down payment to own...the fact that you will save a ton of money over the long term is irrelevant because they want cash in their hand now.  Why throw that money into a home when you really won't see any benefit for at least 10 years when your mortgage is fixed or paid off, and rents have crept up much quicker than your taxes making it obvious you are saving several hundred dollars a month already.  I realize some people on here might do it a little different but what I see in my day to day life is practically everyone I've heard the "renting is cheaper" or "missed opportunity cost" arguments from aren't plowing money into stocks to make it worthwhile, and money that could have been used for either stocks or a down payment is instead being used for cell phones, cars, and vacations, etc.

[seattlecyclone]

There have been several studies in the past years that half of home owners in Germany had either a negative return on investment or one below inflation. It's hard to make the numbers work in your favor, most people just go by gut feeling which - for most people - does not work out well.

I'd agree.  I posted some numbers earlier in the thread that didn't dispute this point...but my entire argument is owning is better for your net worth than renting, which it is.  I never expect my primary residence to generate income for me while I'm living in it, but I knew when I bought it 10 years ago that coughing up some money for a down payment would lead to lower expenses for me down the road, which it has.  I also have the added benefit of knowing when/if I do sell and move I get a nice little lump sum on my way out the door, where as renters aren't going to get back any of the rent they paid.  Its really no different than throwing money in stocks hoping they pay dividends down the road...either way you are hoping investing XXXX dollars today will add XXXX dollars to your budget surplus in the future.

This bolded bit is a key distinction for me. I view an "investment" as something you buy for the purpose of generating some sort of return on your capital. This return could take the form of interest, dividends, or capital gains. Sometimes investments go down in value, which is part of the risk you take. However if you're buying it with the expectation that you'll probably put more money into it than you'll get out of it when you sell (as that German study and others will make clear), then I don't see how you can really consider it an investment.

Let's compare this situation to cars. We generally consider a personal vehicle to be a purchase, not an investment. In most situations, if you're going to have a car at all it's better to buy one than to lease one. The same is true for houses: buying is often better than renting. However just because you're paying for something in the most financially optimal way doesn't mean you're investing.

That's actually an awful comparison, considering cars depreciate over time and we all know that.  You buy a car, you use it, it gets old and crappy and worthless.  Houses on the other hand...like all investments, tend to appreciate over time.  The argument isn't that you are going to buy a house and sell it for less down the road, its that housing appreciation generally isn't going to outpace taxes+insurance+maintenance, as evident by the fact that people don't buy houses and let them sit empty for 30 years until they want to harvest gains.

The thing is that houses really don't appreciate that much. The price of a house tends to be well correlated to the cost of materials and labor to build a similar house. This cost does not outpace inflation by enough to offset tax and maintenance costs. The price of the land your house sits on tends to be well correlated with local population. If you're in a popular and growing area you might reasonably expect your overall property value to go up faster than inflation.

This is still pretty irrelevant to my main point. An investment is something you buy for the purpose of getting a positive return on invested capital. Even if you do expect this from your primary residence (which is far from certain as anyone who bought in 2007 will confirm), that's not why you bought it! You bought it because you needed a place to live and a purchased home seemed like a better deal than a rented one.

[undercover]

I've thought this through, along with reading some replies, and I'm honestly starting to (maybe) see some flaws with my original logic.

It makes sense to say something is an investment if you are buying something instead of the alternative (usually renting) in order to save money, at least initially. But when you start to go down the expenses scale it begins to not make any sense. Compare buying an RV to a house. Does it make sense to call the RV an investment? You're paying less upfront, so it's just plain cheaper. Then compare buying a truck to an RV. Again, you're just paying less. Then compare a tent to a truck. Keep going until you compare being homeless to living in a tent. Again, it doesn't make sense to say that being homeless is an investment. You're saving money, but you didn't put up anything to save that money. You just chose not to purchase anything.

So maybe this concludes that it doesn't make sense that doing things that save you money is an investment at all, it's just simply lowering your expenses. It's only when you actually are making a profit through cash flow or appreciation that it's an investment. But, ultimately, no one should care whether their home is an investment or not. They should only care that they're minimizing their housing expense to the best of their ability, whether it's by renting or buying.

But, to go a little deeper and throw everything I just said upside down - can making sacrifices be seen as investments? In choosing to go homeless, yes there is no monetary outlay, but there's assumedly plenty of mental/greater well-being outlay. So you're paying one way or the other for a "profit". (Again, I consider saving money to be the same as making it/profit). This just got complicated.

[SirFrugal]

There have been several studies in the past years that half of home owners in Germany had either a negative return on investment or one below inflation. It's hard to make the numbers work in your favor, most people just go by gut feeling which - for most people - does not work out well.

I'd agree.  I posted some numbers earlier in the thread that didn't dispute this point...but my entire argument is owning is better for your net worth than renting, which it is.  I never expect my primary residence to generate income for me while I'm living in it, but I knew when I bought it 10 years ago that coughing up some money for a down payment would lead to lower expenses for me down the road, which it has.  I also have the added benefit of knowing when/if I do sell and move I get a nice little lump sum on my way out the door, where as renters aren't going to get back any of the rent they paid.  Its really no different than throwing money in stocks hoping they pay dividends down the road...either way you are hoping investing XXXX dollars today will add XXXX dollars to your budget surplus in the future.

This bolded bit is a key distinction for me. I view an "investment" as something you buy for the purpose of generating some sort of return on your capital. This return could take the form of interest, dividends, or capital gains. Sometimes investments go down in value, which is part of the risk you take. However if you're buying it with the expectation that you'll probably put more money into it than you'll get out of it when you sell (as that German study and others will make clear), then I don't see how you can really consider it an investment.

Let's compare this situation to cars. We generally consider a personal vehicle to be a purchase, not an investment. In most situations, if you're going to have a car at all it's better to buy one than to lease one. The same is true for houses: buying is often better than renting. However just because you're paying for something in the most financially optimal way doesn't mean you're investing.

That's actually an awful comparison, considering cars depreciate over time and we all know that.  You buy a car, you use it, it gets old and crappy and worthless.  Houses on the other hand...like all investments, tend to appreciate over time.  The argument isn't that you are going to buy a house and sell it for less down the road, its that housing appreciation generally isn't going to outpace taxes+insurance+maintenance, as evident by the fact that people don't buy houses and let them sit empty for 30 years until they want to harvest gains.

The thing is that houses really don't appreciate that much. The price of a house tends to be well correlated to the cost of materials and labor to build a similar house. This cost does not outpace inflation by enough to offset tax and maintenance costs. The price of the land your house sits on tends to be well correlated with local population. If you're in a popular and growing area you might reasonably expect your overall property value to go up faster than inflation.

This is still pretty irrelevant to my main point. An investment is something you buy for the purpose of getting a positive return on invested capital. Even if you do expect this from your primary residence (which is far from certain as anyone who bought in 2007 will confirm), that's not why you bought it! You bought it because you needed a place to live and a purchased home seemed like a better deal than a rented one.

Lol, so now it appreciates...but not that much, so it doesn't count?  Seriously?

I bought it because I needed a place to live and considering I had two options, one being to throw money away on rent, and the other INVEST it in owning the property, I chose the more wise decision.

[SirFrugal]

I've thought this through, along with reading some replies, and I'm honestly starting to (maybe) see some flaws with my original logic.

It makes sense to say something is an investment if you are buying something instead of the alternative (usually renting) in order to save money, at least initially. But when you start to go down the expenses scale it begins to not make any sense. Compare buying an RV to a house. Does it make sense to call the RV an investment? You're paying less upfront, so it's just plain cheaper. Then compare buying a truck to an RV. Again, you're just paying less. Then compare a tent to a truck. Keep going until you compare being homeless to living in a tent. Again, it doesn't make sense to say that being homeless is an investment. You're saving money, but you didn't put up anything to save that money. You just chose not to purchase anything.

So maybe this concludes that it doesn't make sense that doing things that save you money is an investment at all, it's just simply lowering your expenses. It's only when you actually are making a profit through cash flow or appreciation that it's an investment. But, ultimately, no one should care whether their home is an investment or not. They should only care that they're minimizing their housing expense to the best of their ability, whether it's by renting or buying.

But, to go a little deeper and throw everything I just said upside down - can making sacrifices be seen as investments? In choosing to go homeless, yes there is no monetary outlay, but there's assumedly plenty of mental/greater well-being outlay. So you're paying one way or the other for a "profit". (Again, I consider saving money to be the same as making it/profit). This just got complicated.

You aren't really comparing buying vs renting at all if you begin to compare living in a 3 bedroom house vs living on the street...

[seattlecyclone]

Lol, so now it appreciates...but not that much, so it doesn't count?  Seriously?

I bought it because I needed a place to live and considering I had two options, one being to throw money away on rent, and the other INVEST it in owning the property, I chose the more wise decision.

I agree that buying a home was likely a wise decision for you. Why is that relevant to the question of whether this particular expensive purchase counts as an investment? Is it really that different from the choices you face with a car? You decide you need a car. You look at the options and decide that buying is better than leasing. You buy a car. Does that mean you invested your money, just because you picked the better deal?

A house is a thing. It's a collection of wood and glass and shingles and wire and pipes and paint and a bunch of other things. These components are all depreciating until they wear out, just like the parts in your car. If you buy a car and keep it in great condition, replacing the parts as needed and maintaining the body and the interior, it will last forever. It may even appreciate if that particular model ends up being considered a classic in a few decades. Even if that happens, there's no way that this appreciation will fairly compensate you for the time and money you spent keeping the car in pristine condition in the time since you bought it. You certainly got a great deal of utility out of the car over that time, and you may even think of car maintenance as a productive hobby, but it's not any more or less of an investment than the pile of wood and brick that you call home.

[Playing with Fire UK]

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.

This is how I think of it, with a caveat that if I am planning to downsize or down-COL (move to a cheaper similar sized house), then the difference CAN be included in my 4% fund.

[mr_orange]

The improvements of your property (the house part of the package) may be "just a thing," but the land underneath it is an investment.  This was discussed above and there were other threads relating to buying property in the sticks and there being a small pool of buyers for them.  This all jives if you think about it. 

The land is either scarce or it is not.  If it is scarce and it has access to sought-after items like proximity to downtown because of traffic, other desirable places, etc. then people will pay a premium for it.  If it is in a poor location because of undesirable neighbors, ridiculous ordinances, overly-zealous HOAs that deter buyers, or is in an area of the country with net job exodus (think Flynt, Michigan), etc. then it may drop in value. 

The land is separate and distinct from the improvements on the land.  The improvements may possibly be valuable if zoning has changed and disallowed new development of the current use of the property.  The could be considered an "investment" because it has unique characteristics that make it scarce.  The more likely case is that the improvements are not unique though and you can simply view this part of the overall real estate bundle "a thing" that wears out over time and demands dollars to maintain. 

So....as is generally the case the conclusion is that "it depends" and you can't really discuss this well in the abstract.  Facts and circumstances matter both for the real estate and the person making the purchase. 

[Bertram]

@seattlecyclone: very well put. In fact I have come across several people that insist their car is an investment because either
A) that Aston Martin has all depreciation already behind it and is a steal for 60.000£, going forward it will only increase in value or
B) a car (any car) is essential to get to work for them and enables them to earn money. And getting that BMW means it's cheaper in the long run, and they are a happier and better person driving in that car, than in a rust bucket. So they are investing in their well being and in better relations with their clients which in turn reflects in the quality of their work and enables them to earn better.

Personally I do not agree with either train of thought, but it shows that with enough stretching the term can be made to fit the oddest purchases, but their objectively no reason to do it, it's often simply used to justify what one wants to purchase  anyway.

[Fishindude]

f 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

This pretty well nails it.

[RetiredAt63]

In my area, if you don't pay your taxes for 3 years, the township can seize your house and have it sold to pay back taxes.  You get the rest. So if for some reason a person's personal financial situation tanks, they lose the house.  So no, a house is not a guarantee of housing security in a bad financial scenario. 

I know of people who got themselves into just that situation - the mortgage got paid because banks don't wait three years, but they sold their house (for far less than they originally wanted) because they were 2.5 years behind on their taxes.  And of course that was a symptom - the people who bought the house said for the first month they had people knocking on the door looking for the previous owner, he had a lot of debts that he walked out on.  Mustachians shouldn't get themselves into that situation because of over-spending, but it could happen if their income dried up, there have been pensions and funds that went belly-up.

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.

[Bearded Man]

In my area, if you don't pay your taxes for 3 years, the township can seize your house and have it sold to pay back taxes.  You get the rest. So if for some reason a person's personal financial situation tanks, they lose the house.  So no, a house is not a guarantee of housing security in a bad financial scenario. 

I know of people who got themselves into just that situation - the mortgage got paid because banks don't wait three years, but they sold their house (for far less than they originally wanted) because they were 2.5 years behind on their taxes.  And of course that was a symptom - the people who bought the house said for the first month they had people knocking on the door looking for the previous owner, he had a lot of debts that he walked out on.  Mustachians shouldn't get themselves into that situation because of over-spending, but it could happen if their income dried up, there have been pensions and funds that went belly-up.

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.

And if you don't pay your rent what happens? Does a unicorn appear and feed you caviar, telling you that you can stay for free as long as you like?

[EarlyStart]

Lazy math:

100 to 120 in 115 years = 0.16% CAGR after inflation

[Dicey]

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.

Oh, this thinking is so flawed! The fact is, you could not have "invested the same amount of money in an index fund", because you only started with 90K. You added the rest, little by little, over 18 years. I'd expect if it was possible to calculate the S&P returns based on the dates you actually invested the money in your house (i.e. not all at once), you'd find the "return" on the money invested in your home not all that different than if you had invested the same increments of money, at the corresponding times, in the stock market. And that is without taking into account any interest deductions on your taxes through the years.

The other, more powerful truth (and more relevant to the OP's question) is that the majority of people would not save and invest with equal vigor as they do with making the mortgage payment. A mortgage is a kind of forced savings as well as a powerful hedge against inflation. Kudos to you for at least mentioning that the house you built yourself was nicer than anything you would have rented. Plus the "landlord" could never decide to sell the house.

[arebelspy]

Lazy math:

100 to 120 in 115 years = 0.16% CAGR after inflation

People usually post this as a bad thing, but I see that and go "woo hoo, I got an investment to keep up with inflation!"

An inflation hedge serves a definite purpose in a portfolio.

And if you're leveraged, you're getting real returns instead of just keeping up with inflation. And if you're getting rents, you're getting a lot of real returns. And then there's the tax benefits.

I'm happy with the underlying asset keeping pace with inflation, and making my money on all the rest. :)

[RetiredAt63]

And if you don't pay your rent what happens? Does a unicorn appear and feed you caviar, telling you that you can stay for free as long as you like?

Silly/snarky much?

This guy was underwater for 2.5 years.  Renting he could have moved, instead of taking so long to sell his house - he needed the money badly, and didn't want to negotiate price, and ended up selling the house for much less than he could have, because he was desperate.  Most renters see the writing on the wall and move before they are in so deep - and as discussed earlier, people tend to buy more house than they would if they rented.  Buying gives a (false) sense of permanence, renting has built-in flexibility.  I'm not saying renting is better (I share ownership of my house with my bank) but buying is not the only option.  People need to look at their own situation and decide.

[mr_orange]

People usually post this as a bad thing, but I see that and go "woo hoo, I got an investment to keep up with inflation!"

An inflation hedge serves a definite purpose in a portfolio.

And if you're leveraged, you're getting real returns instead of just keeping up with inflation. And if you're getting rents, you're getting a lot of real returns. And then there's the tax benefits.

I'm happy with the underlying asset keeping pace with inflation, and making my money on all the rest. :)

Well said. 

You also need to account for the fact that the loan amortizes and someone else is paying for it.  Each month I build about $2500 in equity in my projects that I pay precisely $0 for.  That money is not exactly productive because my ROE decreases bit-by-bit each month, but it is still real cheddar that I can tap when we exchange, refinance, or sell. 

Another point about that chart is that it includes all submarkets.  You don't have to be a rocket surgeon to select areas of the country with strong job prospects and growing economies and avoid places with poor economics.  Sure, things may change, but appreciation is a bonus and not something you have to count on. 

[EarlyStart]

Lazy math:

100 to 120 in 115 years = 0.16% CAGR after inflation

People usually post this as a bad thing, but I see that and go "woo hoo, I got an investment to keep up with inflation!"

An inflation hedge serves a definite purpose in a portfolio.

And if you're leveraged, you're getting real returns instead of just keeping up with inflation. And if you're getting rents, you're getting a lot of real returns. And then there's the tax benefits.

I'm happy with the underlying asset keeping pace with inflation, and making my money on all the rest. :)

I don't think it's bad; it just needs to be viewed within the context of the entire portfolio. A real estate investor with a cash flowing rental property will probably be pleased with nominal appreciation = inflation. A stock/bond investor who is also a home owner can probably be equally pleased if they've saved enough to adequately fund their stock and bond allocation.

The typical non-mustachian person who buys the most expensive, non-cash flowing primary residence they can get approved for under the guise that it's an investment will probably be sorely disappointed. So you're right. It's not "bad". It's all about context.

[mikefixac]

This is just my own experience.

Before buying my first place (and it was cheap, paid with cash), I rented. I told my neighbor I was buying a place and she said she would never own, because when her oven breaks she just called the manager.

Buying my first property was a springboard to wealth I never imagined. Association fees, $60/mo, covered electricity, gas, water and trash. Yes, I lived in a sketchy area, but was soon able to buy more properties.

Selling a property and realizing a $250K single $500K married gain with no tax bill ain't too shabby either.

[dachs]

According to the books I've read about this topic it is an investment, however, it's not a very good one in terms of risk/return. A stock/bond portfolio will likely give you a much better return with a comparable risk and has several other advantages. (flexibility)

It is an investment because you will save rent and the house might be worth more over time (even though over the long term this will only compensate inflation in most countries). According to the books, most people underestimate how much they will have to pay in order to maintain the house since those costs are very low in the beginning and will rise a lot when the house is older.