Real Estate is a fantastic investment, but you may be surprised to hear a realtor say that your home, i.e. your primary residence typically does not make for a good investment.
What do I mean by that?
Well, first let’s define investment.
investment: the outlay of money usually for income or profit.
Real estate makes for a great investment when it is an income-producing asset, a rental property. You buy a rental property using leverage, and enjoy tax benefits and depreciation on said property while at the same time collecting rental income. Over the long term, buy and hold, rental property typically has very stable and favorable returns.
Your own residence? Not so much. Your own home is more of a liability than an asset. Your own home costs more up front than renting, which is often cheaper than buying in the short term, when you move every several years. If you make a “smart purchase,” stay in your home a long time, it could cost you less than renting over the same duration, but that still doesn’t necessarily make it a good investment. It’s more of a good financial decision.
Even if it costs you less than renting over that duration, buying a house still costs you more money than it makes you, at least for a very long time.
Taxes, Insurance, Maintenance, mortgage interest, transactional fees (upon purchase and if you sell) and Inflation all add up to counteract most or all of the price appreciation you may enjoy.
Now, that doesn’t mean that you should not buy a home, and that doesn’t mean buying a home is a bad financial decision, it just means its probably not a good investment from a strict definition of investment.
A Home will in many cases afford you a certain lifestyle. For instance, in Denver, single family homes in certain neighborhoods are rare as rentals, so if you desire to live in a single family home with a yard, you may have to purchase to get that type of lifestyle.
Will it save you money over the alternatives in the long run? Let’s say you want a home in a certain neighborhood because of a certain school. But there are no rental homes in that neighborhood or the few rentals that exist have very inflated prices. In that case it makes perfect sense to purchase a home and would be a good financial move.
The memories that you will create in that home, and the joy it will bring cannot be quantified and will not show up in investment calculations.
My wife and I own the home we currently live in, but we don’t view it as an investment in that when we go to sell it, sure we’ll sell it for more than we paid for it, and we will have paid down the mortgage, but we’ve also put lots of money into it in insurance, taxes, maintenance, improvements, inflation, etc. to the point where the return on investment will be very low, especially as compared to other investment vehicles like rental real estate, or dividend-paying stocks.