Most people are convinced that buying a home is a very smart investment.
After all, real estate has always appreciated over time, and with cheap mortgages available, why wouldn't you buy a home with the bank's money and build equity instead of paying a monthly rent? On the other hand, paying rent is often seen as the equivalent of throwing money in the trash.
To be fair, in some cases, owning a home can be a very smart investment. Some markets are much stronger than others and if you can buy a discounted, rapidly-appreciating asset with a cheap mortgage, the returns can be very compelling over time.
But in most cases, that isn't the case. In fact, I would argue that buying a home is rarely a good idea from a financial perspective. There are 5 reasons for that, which I will highlight below, but before I get into it, let me be clear that I am still a proponent of homeownership because there are many non-financial benefits. As such, even I own my home.
However, the main point of this article is that you shouldn't see a home as a smart investment. Rather, you should see it as an expense, which also implies that you should be really careful as you determine what you can truly afford to pay for a home.
In what follows, I present 5 reasons why buying a home is rarely a good investment:
Reason #1: Huge Opportunity Cost
I have read many articles on the topic of buying vs. renting and noticed that most people forget about an important detail.
That's the opportunity cost of buying.
When you are renting, you pay a fixed monthly payment and that's all.
However, when you are buying, you need to inject a significant amount of capital into the property, even despite taking a mortgage.
Assuming you are buying a $500,000 home and financing 20% of it with equity, that's $100,000. Then you put another $100,000 in the property for fixing and furnishing, resulting in $200,000 being stuck in the property.
If you were renting, this $200,000 could have been invested in the stock market, earning a ~10% annual return. Therefore, your opportunity cost is $20,000 per year. This $200,000 would have compounded over time, turning into $1.35 million in 20 years!
That's the main benefit of renting.
Investing in stocks has historically generated far higher returns than buying a home, on average. This is particularly true when you consider that buying a home will inevitably lead to lifestyle inflation and there are many additional hidden expenses that only increase the opportunity cost of owning. That brings us to our next topic:
Reason #2: Inevitable Lifestyle Inflation
If you are renting a place, you will probably be more reasonable about what you can afford. You probably also won't spend much money on things like furniture, designing and fixing.
But when you are buying a home, it is the opposite. It is a very emotional purchase because you will see yourself living there for a very long time to come, and therefore, you won't want to cut corners and sacrifice living quality.
In most cases, this will lead you to the path of lifestyle inflation. You will spend more than you can really afford, leaving you with a tighter budget that prevents you from investing in the end.
You will spend a lot of money on fancy expensive furniture to impress your family, friends, and neighbors, but that will only lose value over time.
All that extra spending that results from lifestyle inflation could have been invested, earning a return, increasing the opportunity costs discussed earlier.
Reason #3: Significant Hidden Expenses
Typically, people compare their monthly rent with their monthly mortgage payment and quickly assume that owning is cheaper.
But that would widely underestimate the true cost of owning, which includes:
Property taxes alone are often 1-2% of the property value each year!
Then all it takes is one bad surprise like a leaking roof, and you could get stuck with $50,000 of repairs and water damage. Again, all that money could have been invested, increasing the opportunity cost further. It will also take a lot of your time and energy, which could have been used to work a job, earning you additional income that you could have invested.
Moreover, when you are buying a home, you will need to pay a lot of transaction costs. These can easily run at about ~5% of the property value. That's money that is 100% lost on day 1. Again, that could have been invested.
Finally, all these costs will only grow over time.
Often, people only track the growth in value of their home, but they don't properly track all the expenses incurred to achieve this growth in value.
If your property grows in value from $500,000 to $700,000 in 5 years, but during this frame, you also bought $100,000 in furniture that's lost half of its value, paid $50,000 in property taxes, another $50,000 in repairs, and $30,000 in diverse expenses, your real appreciation is far less than you may think.
Reason #4: Loss In Flexibility Reduces Your Earning Capacity
Your main revenue generator is your career/business, and whether you want to admit it or not, owning a home will also cause you to miss a lot of potential career/business opportunities.
You will lose flexibility because you will be more tied to a specific place, whereas if you were a renter, you could much more easily move from one place to another.
It is hard to quantify how much this flexibility is worth, but in many cases, it could be very significant.
Let's assume that you are working as a plumber in city X and earn $70,000 per year. But now you receive an offer for a similar or better position in city Y with a large pay raise because that city doesn't have enough plumbers.
If you own your home in city X and put a lot of time, effort, and money into that home, it will be much harder to justify the move to city Y, even though it would make a lot of sense from a financial perspective.
There is a massive difference between earning $50,000 post-tax and earning $100,000 post-tax, and renting could help get into the higher brackets faster since your universe of job opportunities will be far larger.
Reason #5: Your Time Is Valuable
Finally, another major expense that's rarely considered by home buyers is that you will need to invest a significant amount of time into:
Researching the market
Finding the right properties to visit
Visiting them
Asking questions and double-checking answers
Negotiating a deal and making an offer
Getting financing
Interviewing contractors and planning fixes
Designing and picking the right furniture
Monitoring the progress
Etc.
When I bought my home, I hired an interior designer to help me with all of that, and it still cost me a lot of time and effort, which I could have used more productively on my business.
The time and energy invested in buying a home have a cost, and it needs to be taken into account. If you could earn $30 per hour working a job, then that's the opportunity cost that needs to be added into the renting vs. buying comparison.
Moreover, these costs won't end once the house is bought. You will still need to deal with a lot of time-consuming things that you wouldn't if you were a renter. Time is money and renting allows you to use your time more efficiently on higher returning tasks.
Bottom Line: Buying A Home Is Not A Smart Investment In Most Cases
Exceptions exist, but in most cases, you won't earn a great return by owning a home, if you properly account for the opportunity cost, the lifestyle inflation, the hidden expenses, the loss in flexibility, and the value of your time.
In most cases, it is actually a very poor financial investment.
However, owning a home still makes a lot of sense from a non-financial perspective. It will give you full control over your own residence, which can give you great joy and peace of mind. Moreover, if you are poor with finances, which is the case for most people, then the forced monthly savings from the mortgage payment may also help you in the long run.
The bottom line is this: you should see buying a home as a luxury that has a cost, and not as a smart financial move that will really put you ahead. In most cases, renting, investing, and preserving your time and flexibility for your career will get you much further.
Best of all, today, it is easier than ever to invest in real estate with publicly listed REITs (VNQ).
Therefore, you don't need to get your real estate exposure through your home. You can also get it by buying shares of large real estate investment vehicles that are now publicly listed.
Historically, REITs have generated ~12% annual total returns and outperformed most stocks (SPY), including even tech stocks (QQQ) over the past 20 years:
If you are selective, you may of course do even better than the average. There are a number of high-quality REITs that have managed to compound investors' capital at closer to 15% per year over the past decades.
This includes blue chips like AvalonBay (AVB), Mid-America Apartment (MAA), Invitation Homes (INVH), Realty Income (O), American Tower (AMT), Prologis (PLD), and Public Storage (PSA).
I own a home, but realistically, I know that my returns will have to come from REITs, and not from my home. REITs are far smarter investments.
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That is, unless you own an investment property and rent it out. Whether you own a multi-family home and rent a unit or two out, you rent out the whole house, or you simply rent out a room, this is the only way you'll make any sort of profit.
If you're financially stable and need a place to live, buying a home can be a great investment. With fixed mortgage rates, you could save money on rent, build equity and enjoy the tax deductions of being a homeowner.
Even after buying the property, you have to pay property tax, society maintenance, pay for repairs, etc. Moreover, if you have rented your property, there are chances of damage to the property, which is an added cost to you. All these expenses do not make real estate a good investment option.
Real estate investments tend to have high transactional costs, especially in legal and brokerage fees. The process of acquiring a new property is also very long and tedious with lots of legal formalities. Another disadvantage of property investments is that they are not easy to liquidate.
Moving into a home can be costly. A longer commitment will be required vs. renting. Mortgage payments can be higher than rental payments. Property taxes will cost you extra — over and above the expense of your mortgage.
As a general rule, you'll need an annual household income of at least $225,384 in order to afford a million-dollar home. However, specific salary requirements depend on factors like your interest rate and the size of your down payment.
Historically, the biggest advantage of owning a home is long-term financial security. For decades, home ownership in America represented stability because the housing market almost always went up in value, rewarding homeowners with equity and also a way to borrow money, should the need arise.
Nearly 75% of Americans say that owning a home is a more significant measure of achievement than having a successful career or even raising a family, according to a survey from Bankrate.com of about 2,500 adults.
Given the financial definitions of asset and liability, a home still falls into the asset category. Therefore, it's always important to think of your home and your mortgage as two separate entities (an asset and a liability, respectively).
The 50% rule in real estate says that investors should expect a property's operating expenses to be roughly 50% of its gross income. This is useful for estimating potential cash flow from a rental property, but it's not always foolproof.
If you're looking for a long-term investment, real estate may be the better option. There are no guarantees, but real estate tends to appreciate in value over time. If you're looking for a more passive investment, stocks may be the way to go.
Buying a house gives you ownership, privacy and home equity, but the expensive repairs, taxes, interest and insurance can really get you. Renting a home or apartment is lower maintenance and gives you more flexibility to move. But you may have to deal with rent increases, loud neighbors or a grumpy landlord.
Failing to Focus on the Market and Not Staying Educated
In real estate investment, timing is essential, and failing to take the time to study and analyze the market can be a mistake that ends up losing you time and money.
While stocks are a well-known investment option, not everyone knows that buying real estate is also considered an investment. Under the right circ*mstances, real estate can be an alternative to stocks, offering lower risk, yielding better returns, and providing greater diversification.
Many studies over the years have shown that homeowners are, on average, happier than non-homeowners. In my own calculations, using the General Social Survey, 21 percent of people who own their home are “very happy,” compared with 16 percent of those who pay rent.
Experts suggest you might need an annual income between $100,000 to $225,000, depending on your financial profile, in order to afford a $1 million home. Your debt-to-income ratio (DTI), credit score, down payment and interest rate all factor into what you can afford.
The overwhelming majority of millionaires own real estate, making it by far the most popular alternative asset class. That includes their own home, second homes, investment properties, and fractional ownership of investment properties through partners or programs like Arrived Homes and Roofstock One.
To determine whether you can afford a $650,000 home you will need to consider the following 4 factors. Based on the current average for a down payment, and the current U.S. average interest rate on a 30-year fixed mortgage you would need to be earning $126,479 per year before taxes to be able to afford a $650,000 home.
Key Takeaways. The best age to buy is when you can comfortably afford the payments, tackle any unexpected repairs, and live in the home long enough to cover the costs of buying and selling a home. Legally, you must be at least 18 in most states to buy a home.
1) Financial stability. In terms of both lifestyle and monetary stability, buying a home provides a new sense of reliability to first-time homeowners. ...
Over the past decade, the median-priced home in the U.S. gained $190,000 in value, making the typical homeowner 40 times wealthier than if they had remained a renter, according to a new report.
According to Lyubomirsky, “pleasure from the house can't come close to matching the pain and worry of eking out monthly mortgage payments.” Boost your bliss: Research increasingly shows that experiences, not things, make us happy.
A home is a long-term investment. If you buy a home as a primary residence, it can increase in value over time and provide a financial windfall when you sell. You gain equity in the home over time, which can provide a source of emergency funding if your financial situation takes a turn for the worse.
An asset is anything you own that adds financial value, as opposed to a liability, which is money you owe. Examples of personal assets include: Your home. Other property, such as a rental house or commercial property.
Despite the common misconception that you need a lot of financial capital to begin investing in real estate, you can start with as little as $5,000. Your chances of success can increase if you diversify your investments — especially should some deals not go as planned!
2% Rule. The 2% rule is the same as the 1% rule – it just uses a different number. The 2% rule states that the monthly rent for an investment property should be equal to or no less than 2% of the purchase price. Here's an example of the 2% rule for a home with the purchase price of $150,000: $150,000 x 0.02 = $3,000.
The 80% rule means that an insurer will only fully cover the cost of damage to a house if the owner has purchased insurance coverage equal to at least 80% of the house's total replacement value.
Real estate has proven itself a worthy investment that provides cash flow and appreciation over time. Whether you're an aggressive or conservative investor, it's a great way to diversify your portfolio and can pay off in the short-term and long-term.
Despite what some may think, 2023 is still a good year to invest in real estate, thanks to advantages like long-term appreciation, steady rental income, and the opportunity to hedge against inflation. Mortgage rates are expected to decline, but the housing market is likely to remain competitive due to low supply.
In this regard, there's no real competition. Over the long run, the S&P 500 has returned about 10% annually to investors on average vs. just 3% or 4% for real estate.
The big goal of real estate investing is to increase your cash, otherwise known as building capital. When you sell a property that has risen in value, you'll boost your capital. The key, of course, is to invest in the right properties that will rise in value.
To be sure, there's a lot that can go wrong when you invest in real estate. You can overpay for a property, buy in the wrong area, use the wrong lender or loan product, or overestimate the rent you're likely to receive, just to name a few. The list of mistakes is far too long to discuss every possibility here.
In general, it's best to buy when you have your eye on the horizon and you're thinking long-term. Experts largely agree that you shouldn't own unless you plan on staying in the home for at least five years. That's because, thanks to their high start-up costs, houses don't usually make great short-term investments.
As a renter, you don't build equity over the long term and if you leave, you don't get to take any profits with you. Owning a home can be empowering and emotionally rewarding. The money you spend on your mortgage every month and improving your home yields a long-term investment benefit for you instead of a landlord.
Another key way homeownership helps you build wealth is by providing you with equity in your home—the portion of your home that you actually own outright. As you make mortgage payments and your loan balance decreases, your equity will increase.
Because of the many tax benefits, real estate investors often end up paying less taxes overall even as they are bringing in more income. This is why many millionaires invest in real estate. Not only does it make you money, but it allows you to keep a lot more of the money you make.
“90% of all millionaires become so through owning real estate.” This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago. Some of the most successful entrepreneurs in the world have built their wealth through real estate.
High vacancies are especially risky if you count on rental income to pay for the property's mortgage, insurance, property taxes, maintenance, and the like.
Real estate investments tend to have high transactional costs, especially in legal and brokerage fees. The process of acquiring a new property is also very long and tedious with lots of legal formalities. Another disadvantage of property investments is that they are not easy to liquidate.
Property investment is likely the best way to invest 50k. It would help if you spoke to a financial advisor before deciding to invest money. A savings account is the safest way to invest 50k. You need to know your risk tolerance before deciding where to invest 50k.
The benefits of investing in real estate include passive income, stable cash flow, tax advantages, diversification, and leverage. Real estate investment trusts (REITs) offer a way to invest in real estate without having to own, operate, or finance properties.
The federal government enacted legislation for investors to generate income from real estate investment trusts in 1960, which led the way for people to buy and sell properties for profit. But it wasn't until the recession of the 1980s that real estate investing actually took off.
Real estate is a long-term investment, meaning you can hold it for several years as you wait for it to appreciate. At the same time, if you rent out your real estate you can earn monthly income while you wait for your property's value to rise.
Real estate typically outperforms other assets in terms of value appreciation. Furthermore, it is not as susceptible to short-term volatility as the stock market. Whether you rent out an apartment or a business property for income or buy a home, you obtain a physical, usable asset.
And the fact is that a car represents a significant financial outlay on an asset that will depreciate between 10% and 20% in the first year after leaving the dealership. In other words, looking at it strictly as an investment, you are allocating your money to something that will be worth less money year after year.
According to data reported by the PEW Trust and originally gathered by CoreLogic, as of 2022, investment companies own about one fourth of all single-family homes. Last year, investor purchases accounted for 22% of American homes sold. This is significantly down from the 80% number in 2020-2021, why is this?
Unfortunately, your primary residence is not really an asset. That's because you are living there and will be unable to realize any appreciation gains. The answer may change if you have a plan to sell your house within a set period of time.
A home is a long-term investment. If you buy a home as a primary residence, it can increase in value over time and provide a financial windfall when you sell. You gain equity in the home over time, which can provide a source of emergency funding if your financial situation takes a turn for the worse.
Real estate is a tangible asset that can appreciate in value over time. Real estate investment can generate regular rental income, providing a steady stream of cash flow. Investing in real estate can help diversify an investment portfolio, reducing the overall risk.
As you can see, there's a lot that goes into real estate investment returns. But if you want to know the average annualized returns of long-term real estate investments, it's 10.3%. That's about the same as what the stock market returns over the long run.
While stocks are a well-known investment option, not everyone knows that buying real estate is also considered an investment. Under the right circ*mstances, real estate can be an alternative to stocks, offering lower risk, yielding better returns, and providing greater diversification.
Wealthy people can opt to get affordable loans at a low rate, take a tax deduction that helps subsidize their interest, pay back their loans with "cheaper" money due to inflation, and use the cash they might otherwise have put down on a house to make an investment that stands a good chance of earning a higher return.
There is no definitive answer as to whether renting or owning a home is better. The answer depends on your own personal situation—your finances, lifestyle, and personal goals. You need to weigh out the benefits and the costs of each based on your income, savings, and how you live.
Is real estate or stocks more profitable? Investments in real estate have historically earned 3% to 4% per year on average; contrasted to investments in stock market indexes earning approximately 10% annually over the long-term.
“Property tends to appreciate better than cars do, plus most vehicles lose value for a long period of time until they become collectibles. Compared to home-value appreciation during that same period of time, it makes a lot more sense to buy a home or property than a car.”
The average monthly car payment for new cars is $716. The average monthly car payment for used cars is $526. 39.5 percent of vehicles financed in the fourth quarter of 2022 were new vehicles. 60.5 of percent of vehicles financed in the fourth quarter of 2022 were used vehicles.
In accounting terms, your car is a depreciating asset. This means your vehicle may have value right now and you could sell it. However, while you own the car, that value usually goes down over time.
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