Is Buying a home a good investment.? We’ve always heard from the media, our parents and older relatives, and, of course, real estate professionals that buying a home is a good investment that always helps to secure your future.
We’re told buying a home is a good investment that will appreciate over time. It will help during retirement by eliminating a house payment when you're older and have a paid off mortgage. Alternatively, you can make money selling the house when you become too old to live alone or just need to downsize to a smaller house or a condo.
On the surface, buying a home looks like a good investment. It only makes sense compared to renting because when you rent, you get no real return on your money other than a place to live for another month.
Is Buying a Home a Good Investment? You be the Judge
But when you invest in a house, you expect that investment to go up in value over time. Generally that’s what happens, but that isn't always the case.
A few years ago, we had the largest housing bust in American history. It destroyed home values and ruined that investment for a lot of people. We found out (quite painfully, I might add) that home investments don’t always go up in value like we’ve been led to believe over the years.
But this housing crash was a rare animal. Thankfully, the housing market is back into full swing in most areas.
in this post I'll explore whether investing in a home is really a good investment, or if it ever was.
The Numbers on Buying a Home
I’ll start with a few basic assumptions. Let’s assume you invest in a $200,000 home at today’s historically low rates of 3.5% on a 30 year loan (see what I recommend here). I’ll also assume that the homeowner spends $100/month on maintenance, and $100/ month on property taxes and $40/ month on homeowner’s insurance. These are lowball estimates. They can vary widely depending on the age of the house and property tax rates where you live.
Over 30 years of house payments you’ll pay back the $200,000 purchase price plus $123,312 in interest on your home investment. Also over that 30 years you will have spent $36,000 on maintenance ($100×360 months), $36,000 ($100×360 months) on property taxes, assuming they never went up during that time, and $14,400 on insurance.
In all, over that 30 year time period you will have spent $409,712 on your housing investment.
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Thinking about buying a home? Here are a couple of good resources you can check out, especially if you're a first time home buyer:
The Complete Idiot's Guide to Buying a Home
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Was This Home Investment Worth It?
In order to find out if your investment in a home is worth it we’ll have to find out how much that home is worth after 30 years of appreciation in value. In this case I’ll assume that over that time, your investment appreciated at 3% per year.
Using the Home Equity Calculator at Ultimate Calculators.com, you find that if your investment appreciates at that 3% rate for 30 years, your home will be worth $491,368. So if your home is worth $491,368 and you spent a total of $409,712 on the house, mortgage interest, maintenance, and property taxes, then you made a total of $81,656 over 30 years.
Overall using this scenario, you came out ahead on your home investment. But these were lowball estimates.
What About a Different Home Buying Scenario?
Let’s see if investing in a house would be worth it if things were a little different.
If you up the interest rate on the mortgage to 6%, which is a little closer to historical norms, you increase your budget for maintenance and property taxes just a little to $125 per month, and increase the insurance to $45/ month, would it still be a good investment?
After 30 years you will have spent $200,000 in principal and $213,676 in interest. Add to that $45,000 in maintenance costs ($125×360 months), $45,000 in property taxes ($125×360 months), and $16,200 in insurance ($45×360 months) you would have spent $519,876 on your home investment.
In that scenario you would have actually lost $28,508 over that 30 year time frame.
Is Buying a Home a Good Long Term Investment?
So is buying a home worth it in the long run?
It depends.
Overall you actually can end up with a house that’s worth more than you spent over the years. But it depends on your interest rate, how much you spent maintaining the house, property taxes, and insurance.
It's hard to predict for sure how well investing in a home will work out for you. This is because you can’t totally predict how much property taxes or homeowner’s insurance may rise, or just how much maintenance that house may need over the years.
But when you consider buying a house, you should always at least make some preliminary calculations. Use the calculator mentioned above to help you choose your investment in a home wisely.
So Is Buying a Home Wise, or Should You Rent?
Overall, I believe a good home investment, purchased wisely with the help of a knowledgeable professional is almost always better than renting because, over time, you build up equity in that investment and have something to show for all the money you’ve spent over the years.
However, you have to be realistic and realize that unless you have a lot of factors working in your favor, you may not get a great return on the money that you invest in a home. Unless you’re conservative at the beginning, you could end up with a home that's worth much less than you paid.
But could buying a home still be a good investment even if it doesn’t appreciate enough to cover costs? Find out in my next post when I explore the cost of renting vs. owning your own home and find out if investing in a home is really worth it, or just a long term financial illusion.
Until then… do you think homeownership is a wise choice for you?
Let me know in the comments
Resources:
This is a good analysis. I would also add that if you save $1,000 a month for 10 years in a fund with about a 6% return, you’d actually have $165K CASH to buy the house outright. In which case, you would save on interest and have a better investment. Cash is KEY here.
Hey, cash is always a good plan!
What’s wrong with renting??
People should save their money until they have 20% or more. Cash only is ideal! Learn from the past people!
Of course they look at me like I’m crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from Insurance Panda. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).
You live exactly like people did in the 1970’s, and suddenly there’s tons of money. Usually moderate earners can save $500 a month on these types of luxuries. May not seem like much, but it’s usually the difference between being in financial trouble, and at least not losing ground.
My point is that it’s so odd that people seem to forget all the little things we have, buy, use – that they didn’t in the “better” times. That stuff isn’t free.
Yep, all those little things we think we “need” are really just luxuries disguised as needs. Simplifying can definitely save a lot of money, and a lot of financial stress too!
I think it’s so ingrained in our heads by now that buying a home is a good investment and that we should almost be ashamed for not buying (i.e. "You’re just paying your landlord’s rent!") that people jump right into it without doing the math as you’ve done. This leads to bad decisions….
Sometimes home ownership is not the best decision in certain cases. But it can be a huge benefit once the home is paid off because there will be no more payments. However, the renter has to pay rent forever after. So even though a home is not necessarily good as an investment, it has its advantages in the long run.
Sure, I don’t think renting or buying are universally good. It could, over the long run, be cheaper. But even in that case, it’s important to take all the costs — interest, property tax, insurance, maintenance, repairs, etc. — into account (as you did) and see which one comes out on top. In my own post on the topic, I also mention some less obvious things such as being tied down to one spot (unless you sell, pay closing costs) and not being able to go bigger when you have kids or smaller when they move out. But you’re right. I’m mostly just saying that it’s more complex than people think.
Absolutely right, it’s not at all a cut and dried subject. Thanks DB!
I couldn’t agree more with you as choosing a home is not an easy job, it requires time and effort. I would like to add a simple tip that would be helpful beside your post, Ask about the schools around the area and which one is the best, as well as the driving time from your home to the school so you may know how much time it will take you to drop and pick your kids from school, or you can just assign them to the school bus. Sincerely Ann Daniel
your leaving out one big factor if you don’t buy you have to rent, how much it cost to rent similar size house and over 30 year how much you will pay on rent, and one more thing is after 30 year you are only paying taxes, insurance and maintenance, while if you are on rent you have to keep paying it (of-course maintenance will increase over time). There is only one caveat to all this buy a house that you can afford, don’t go over budget, while buying house in long run you will be benefited.
Good point. I wrote a post that talks about that very thing. It compares buying vs. renting by the numbers and shows you why one may or may not be better than the other. Here’s the link: https://www.cfinancialfreedom.com/buy-or-rent-which-is-better/
Buying a home is a scam period. Because in thirty years you can have another a**hole who’s gonna change the rules of game and tries to convince you that according to this and that law and this and that contract you signef the banks have the right to do what ever they want.
Good post John…I bought my place at historic lows for price and interest rate. One big factor for me was location and location. In SoCal the home values will go up, but I wouldn’t be able to confidently say that for somewhere like Detroit.
Obviously the better rate you get and the better deal you get on the house are huge factors in whether or not you actually make money on the the thing in the long run. Sounds like you’ve gotten a good start!
There are a lot of things to consider that are easy to conveniently overlook when guesstimating how much your home will be worth. Great job putting it into perspective Dr. Cabler. I agree that owning a property is the way to go, especially if you can pay it off then rent it out while living in a downsized retreat. Can’t beat the freedom of doing what you want like Emilie mentioned.
You have to make sure you set yourself up for the life you want in the future, and in my opinion, owning is the best way to do it. Too many people argue that buying is expensive or the house may go down in value, but in the end it beats throwing your money away on rent every time. Thanks John!
You wrote: In that scenario you would have actually lost $28,508 over that 30 year time frame. I am not arguing with you. There is another perspective, however. You have gained the relative calm of living your own way, of not having a landlord determining whether you can have grass or flowers, move walls, mark the kids’ growth spurts on the wall. Your son can build a massive mud slide mess in the backyard and it is only between you and your son. If your daughter wants to paint her ceiling midnight blue and stick glow-in-the-dark stars up there, it’s no one’s business but hers and yours. You can make friends (or enemies) out of neighbors, plant purple petunias against your orange house or put a rock garden in the daisy bed. No one can tell you "no". For all this freedom to do what you want, bounded only by the limits imposed by city ordinance and your own taste, you have paid less than $1000 a year. There are a lot of things (most of which are not "things") that are so much more important than money. It must not be the only consideration.
Emilie, I think you are absolutely right. Even if your "investment" in the house doesn’t make you any money, you’ve still had a measure of freedom that renters don’t have, and you still come out ahead financially over the renter as well, even if you lost money in the house in the long run. Thanks for the comment!