In today’s society it seems like everyone is trying to complete a checklist of goals. Along with completing University and getting married one of the main items they want to check off that list is buying a home. The reality is buying a home may not be the correct decision for everyone at this time. I am an advocate for purchasing real estate it is not a financial decision that should be taken lightly or rushed into.
The average house does appreciate at a greater rate than inflation but just because there is potential for an asset to appreciate that does not qualify it as a good investment. Throughout this blog I will be discussing a home as your main shelter and not as a secondary property. Unlike stocks or other monetary investments a home provides shelter and for that reason you cannot capitalize on market highs or cut your losses at a market downturn. To a certain degree you are tied to your investment and the collapse of the market in 2008 has shown that people are not under control of their investment as they were forced to sell their house/default on their investment at an inopportune time.
The operating or carrying cost of a home is very high. This is similar to the expenses or commissions tied with investments which has the industry trending towards self-directed investment accounts. In the majority of investments it does not require the investor to consistently input cash. There are many expenses that are associated with a house that are not included in the overall evaluation of the home. From real estate taxes, insurance, utilities to repairs, maintenance, renovations. Not to mention the expense associated with major repairs such as siding, roof, fence, windows. Many of these expenses which are not carried by the renter in an apartment. The main argument against renting is that you are throwing your money away but renting provides you greater flexibility with less of the responsibility of repairs. At the end of the day your house may appreciate by $100,000 and although it may be nice to have an extra $100,000 in your hand you have not accounted for the fact that inflation has risen, commission fees on realtors and cost of living in the home for that time frame.
Given that your home is your primary residence your house will not generate any cash flow similar to what a dividend would do. Renting a portion of your home can help cover some of the cost of your mortgage and insurance. It can be a great source of cash flow for the home owner but being a rental property owner is a very difficult task. Some of the struggles associated with renting include finding a suitable renter, preparing the unit, maintenance issues, changing the rental price. An investment property can be a great source of income but also carries all of the same struggles as renting out of your own home and more.
I have discussed many of the reasons why a home is a poor investment but there are many reasons why a home is said to be a good investment. One of the reasons is that the housing market is not too volatile. Although the market has faced its ups and downs the market is shown to be more consistent than the stock market. As your mortgage is paid down there is a significant amount of equity that can be gained from a home. Long term it does appreciate and especially if purchasing a home other than your primary residence it can be a good long term investment that helps to diversify your portfolio.
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The Rich College Student 