It’s Time to Change Your Mindset: Your Home Is Not an Investment

Here's why buying a home isn't always the best use of money.

You’ve likely read or heard the stories: A neighbor bought their home for $150,000 and sold it for $1,000,000. They’re rich! Or, maybe you’ve simply believed the myth that owning a home is a clear path to wealth.

If you still believe this, it’s time to change your mindset. Your home is not an investment. Owning a home can be a suitable alternative to renting a place to live for various personal reasons, but one shouldn’t look at owning a home as an investment — the math just doesn’t make sense. In fact, a recent GOBankingRates study found that in certain states, owning a home is considerably more expensive than renting a home:

StateMedian Rent, April 2018  Avg. State Mortgage RateEstimated Monthly MortgageMedian List Price, April 2018Which Is More Expensive?By How Much?
Hawaii$2,3004.43%$2,839$599,950 Owning$539
Montana$1,2004.42%$1,525$315,900 Owning$325
Utah$1,4954.44%$1,685$350,000 Owning$190
Wyoming$1,0254.40%$1,200$246,000 Owning$175
District of Columbia$2,6004.48%$2,760$579,900 Owning$160
Idaho$1,2904.42%$1,428$295,000 Owning$138
Colorado$1,9004.37%$1,991$419,000 Owning$91

I’m not telling you not to be a homeowner; I’m just telling you to stop thinking your primary residence is a financial investment. 

When It Makes Sense to Own a Home

Don’t get me wrong — homeownership can be a great idea. There are a lot of perks to owning a home that you don’t get with renting.

For example, you can typically customize your home more. You don’t have to worry about your landlord selling and then having to move out. You don’t have to worry about rent going up. Once you pay off your mortgage, your home is effectively yours, and nobody can take it. And, it’s usually shielded from bankruptcy or business losses.

However, most of these reasons for homeownership aren’t based on the value of your home or the equity you have in it. These are personal choices that you’d prefer to own a home versus a preference for not owning a home.

See: The Best City in Every State to Buy a Home

Why Renting Isn’t a Bad Alternative

Renting isn’t a bad alternative to homeownership. In fact, for many, it could be a better choice — especially if you’re on the path to financial independence and early retirement.

With renting, you have a fixed monthly cost and that’s it. Something breaks? Call your landlord. Property taxes? Not your problem.

Of course, there are drawbacks — like uncertainty if your landlord sells the property or raises the rent. But if you can tolerate that, renting can be cost-effective.

Renting vs. Buying: The Dispute and the Math

The big dispute is always this: “When you rent, you’re throwing money away. When you buy, you’re building equity.” And there is some truth to that statement. But remember, we’re talking about whether your home is an investment. Let’s talk math.

According to the GOBankingRates study, the average cost to own a home is more expensive than renting in seven states as of April 2018. But that just factors in mortgage cost versus rent cost. There’s more to it.

With renting, there is a sunk cost of your monthly rent each month. Let’s say that’s $1,500 per month.

With homeownership, there are also a lot of sunk costs:

  • Mortgage interest
  • Homeowners insurance
  • Property taxes
  • Maintenance
  • Homeowners association dues
  • Buying costs (escrow, appraisal fees, etc.)
  • Selling costs (escrow, realtor commissions, transfer fees, etc.)
  • Improvements needed to keep up with market value

Those sunk costs of homeownership can get to be very expensive. For example, my neighbor recently sold her house for $700,000 that she bought in 1980 for $250,000. Let’s say she put down 20 percent — $50,000 — and had a 30-year mortgage at 4.5 percent, which would have been low for that time.

Also See: Here’s Why It Costs $1,204 a Month to Maintain the Average Home

Based on these assumptions, over the course of her homeownership of 38 years, she paid roughly the following in sunk costs:

  • $164,000 in mortgage interest
  • $22,000 in insurance premiums
  • $95,000 in property taxes
  • $114,000 in HOA dues
  • $2,000 in buying costs
  • $35,000 in selling costs

She also told me that she spent $200,000 on a kitchen and bathroom remodel about five years prior to selling, which allowed her to get “top dollar” for her home. This is also ignoring other maintenance items, her gardener, etc.

That means she spent roughly $632,000 over her 38 years of homeownership in sunk costs to realize $700,000 in a sale. Her equity grew from $50,000 to $68,000 — just $18,000 in gains on that original $50,000 down payment.

That’s a little less than 1 percent per year in growth — and a terrible return on investment over 38 years.

Learn These: 15 Best Money Habits to Have When Renting an Apartment

Other Aspects to Consider About Homeownership

Now that you’ve seen the math, you have to take some other points into consideration. When you have home equity, the only way you’re going to realize this “wealth” is by selling. But you’re still going to need a place to live.

Chance are, the market in your area has probably seen similar growth to your own house, so prices to buy will be akin to the prices you’re selling. You then see your equity basically go away.

You could geo-arbitrage and move to a place with a lower cost of living, but most people don’t do that due to jobs, children, etc.

Basically, home equity alone is pretty worthless as an investment because there isn’t an easy way to tap it as an investment.

Check Out: The Best and Worst States for House Flipping

Don’t Overthink Homeownership

The bottom line is that homeownership is not a bad thing. There are many reasons to own a home: security, personalization, preference. But the key is not to think of it as an investment — it’s simply a choice to own versus a choice to rent.

Real estate can be an investment, but when you’re buying real estate as an investment, it’s a very different mindset and execution versus homeownership. You buy investment real estate for cash flow potential or equity-value growth — that is, flipping.

When it comes to your home, you’re living there and it’s typically not an investment — unless you’re house hacking. Any equity growth you see is an added bonus, not an investment.

So, buy a house because you want to — not because you think it will make you wealthy.

Click to read more about the cheapest places to rent.

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