Is a home an investment? Your primary residence is not an asset because it costs money to own and you have to sell it to profit from it. I am not a licensed investment advisor and this article is not investment advice.
People who invest in real estate instead of stocks often believe they will be able to live off their home when they retire.
They prefer real estate because it’s a tangible asset that doesn’t fluctuate up and down like stocks do.
The problem is that a primary residence is not an investment and this way of thinking is flawed.
Of course, I am not suggesting that home ownership is not worth aspiring for. I am personally aiming to buy a place of my own in the next year or two. Owning a home can provide a significant net worth boost.
However, don’t plan on living off your home alone in the future because it won’t work. You must invest in addition to owning a home.
For those who are wondering “is a home an investment,” I will attempt to show why your primary residence is not an investment in this article.
Let’s dive in.
“Your home is not an asset.” — Robert Kiyosaki
Is A Home An Investment? Why Your Primary Residence Is Not An Investment
Imagine the following scenario:
You choose to put all your savings into a home and decide not to invest on the side.
After 25 years of diligently paying your mortgage, you manage to successfully pay it off.
On the bright side, you own an expensive asset and likely have a high net worth as a result.
But on the downside, your asset does not provide any income.
So, to pay for groceries, maintenance, and life in general, you still need an income stream.
In this scenario, owning a home is not really helping your situation.
Here are a few reasons why your primary residence is not an investment.
Is A Home An Investment? Why Your Primary Residence Is Not An Investment
You Have To Sell The Home To Profit From It
If you put all your savings into your home, there are really only two options to profit from it: sell it or rent part of it out.
If you are forced to sell it, you no longer have an asset.
And if you rent part of your home out, your living situation is compromised and less private.
Of course, the main advantage of owning a home is that your living costs will be lower.
Instead of paying rent or a mortgage, you will only have to pay for maintenance, property tax, and utilities.
But you still have to earn an income to pay for those costs, which means you either have to continue working, sell your home, or rent part of it out.
Related: Buying A Home vs Renting
You Must Move And Disrupt Life To Profit
I’m not sure about you, but I don’t want to be forced to move later on in life.
And truthfully, most seniors don’t take kindly to change overall.
In my professional career, I see this all the time. Despite not being able to handle the property maintenance, seniors have a hard time accepting that it’s time to wind down life. Home is their safe place.
This is ultimately why I view owning a home as more of a personal aspiration. It’s more like obtaining your dream lifestyle than it is about investing in an asset. It’s akin to buying your dream car or buying yourself something you’ve always wanted.
Houses In The Same Area Increase Equally In Value
Of course, you might be OK with moving later on in life. Some people find change to be thrilling.
But even if you are ok with moving and plan to downsize later on in life, houses in the same area typically increase equally in value.
In other words, the house you want to downsize and move to will increase significantly in value as well.
So, the spread between the cost of your house and the house you downsize to may not be enough to retire on.
A Home Costs Money, It Doesn’t Make Money
Even if your mortgage is completely paid off, a home still costs money to maintain.
To put it bluntly, housing is just a never-ending cost that all humans have to pay in life.
Whether you own a home or rent, there will always be housing costs.
If your mortgage is paid off, there will still be maintenance, property tax, utilities, and more.
Alternatively, investments don’t cost money to own. They pay you money.
For instance, the stocks I own pay me monthly dividend income for doing absolutely nothing.
Perhaps a better example would be owning an investment property. Ideally, the income generated from the investment property would cover the costs of the mortgage as well as generate extra income.
Simply put, a true asset does not cost money to own.
Closing Costs
Closing costs to buy or sell a property are no joke.
Based on my own experience, closing costs are at least 1% of the mortgage costs. That’s on the lower end and excludes lawyer fees.
Closing costs are an important consideration if you plan to downsize, because they will eat into the profits.
It Boosts Net Worth But It’s An Empty Statistic
I enjoy net worth reports as much as anyone.
However, I personally look at net worth as an empty statistic.
Frankly, a high net worth from a house means nothing if you are forced to sell it and disrupt your life to profit from it.
Hence why I think income streams and low expenses matter more than net worth.
Put it this way — someone who owns a million dollar home with no savings might have less flexibility than a renter with far less invested.
For example, if the renter had $500,000 invested in dividend stocks that pay a 4% yield, they would earn $20,000 annually, which is likely enough to cover their entire rent.
On the other hand, a million dollar home might cost $20,000 per year even if the mortgage is paid off.
Of course, if you are savvy with investing, you could get a home equity line of credit and use the equity of your home to invest and generate income on the side. But not everyone is comfortable with borrowing against their mortgage.
Is A Home An Investment — Final Thoughts
Although it’s true that a home is an asset that increases your net worth, a home is not an investment if it’s your primary residence.
A home is only an investment if it is an investment property or if you make money from short-term rentals.
Of course, I am not suggesting that buying a home is a bad idea. If you can keep the costs relatively the same, I still think it’s better to buy a home rather than rent.
But in my view, the main reason to buy a home is independence. It’s to own your private place that no one can intrude on. Furthermore, a home is a place to build memories and it’s something to aspire for.
Moreover, the best option is to own a home and invest in other income streams as well.
This way, you will not be forced to move later on in life, and you get to keep the equity built through home ownership.
Similar Personal Finance Articles On Home Ownership To Check Out
How To Save For A Downpayment On A House
Should You Pay Off Your Mortgage Early? How Paying Off Your Mortgage Early Gives You Fewer Options
How To Invest To Invest While Saving For A House
I am not a licensed investment or tax adviser. All opinions are my own. This post may contain advertisements by Monumetric. This post may also contain internal links, affiliate links to BizBudding, Amazon, Bluehost, and Questrade, links to trusted external sites, and links to RTC social media accounts.
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