{"id":25611,"date":"2023-06-21T16:06:07","date_gmt":"2023-06-21T20:06:07","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/is-your-home-really-a-good-investment\/"},"modified":"2023-06-21T16:06:08","modified_gmt":"2023-06-21T20:06:08","slug":"is-your-home-really-a-good-investment","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=25611","title":{"rendered":"Is Your Home Really a Good Investment?"},"content":{"rendered":"
\n

Ask almost anyone on the street and they will tell you that owning your home is a guaranteed winning investment but I argue the answer isn\u2019t so simple.<\/p>\n

I bought my first home when I was just 25 in the midst of what was a housing bubble back in the mid-2000s.<\/p>\n

I had saved up enough for a down payment for a modest townhouse in the suburbs of Maryland and there was a bidding war for each and every house.<\/p>\n

When I told my parents, who had purchase their home in 1980, about the process they didn\u2019t believe it. They couldn\u2019t believe homes were going for more than asking price. In their day, which was over two decades ago, homes sale prices rarely exceeded their asking price.<\/p>\n

But that\u2019s how bubbles work – loose lending standards, cheap credit, and lots of willing buyers resulted in a bubble that would burst just a few years later.<\/p>\n

It was during that burst I started to question the idea of the American Dream – owning your own home.<\/p>\n

Buying your own home is basically a rite of passage in the US today. It\u2019s a sign of success that millions of people aspire to. Despite stories about the availability of affordable housing, the homeownership rate is currently around at around 66%.<\/p>\n

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We all have different reasons for buying but if there\u2019s one common message that\u2019s been beaten into our collective psyche for generations, it\u2019s that real estate\u2019s a great investment<\/em>.<\/p>\n

But is your home really an investment?<\/strong> Is it truly the amazing investment vehicle that everyone says it is?<\/p>\n

Let\u2019s find out…<\/p>\n

What is an Asset?<\/h2>\n

Assets are things you own that can provide future economic value. They can be physical or intangible; goods or resources that bolster your bottom line.<\/p>\n

In the simplest terms \u2013 and according to Robert Kiyosaki, the author of Rich Dad, Poor Dad<\/em>, assets put money in your pocket. There are folks who criticize Kiyosaki for a number of his ideas but that basic definition of an asset, versus a liability, is one that I took away from his first book.<\/p>\n

The opposite of an asset is a liability<\/em>. These are the things that you owe; expenses (such as loans, outstanding bills, and lease payments) you have to manage.<\/p>\n

Why Your House Is <\/em>an Asset<\/h2>\n

Why do so many people consider a house an asset?<\/p>\n

It Can Appreciate<\/strong><\/p>\n

First and foremost, the US real estate market has a long and reliable history of increasing in value over time. There are no guarantees, of course; markets fluctuate and economies sometimes crash.<\/p>\n

However, in 16 wealthy countries, the annual return on housing between 1870 and 2015 was over 7% when adjusted for inflation. Not only that, but these returns have skyrocketed in recent years (though that has been reduced because of rising interest rates).<\/p>\n

In the fourth quarter of 2022, the median home price in the US hit $479,500 – before falling to $436,800 in the first quarter of 2023. In either case, the conclusion remains the same: selling a home in which you\u2019ve accrued equity can result in a sizable windfall especially when you consider $250,000 of that gain is excluded from taxation.<\/p>\n

You Can Borrow Against It<\/strong><\/p>\n

A second reason to believe your home is an asset is that you can borrow against the equity you\u2019ve built up.<\/p>\n

Assuming that it\u2019s worth more than the outstanding loan amount, the bank will let you take out a line of credit using your home as collateral, issuing home equity loans or lines of credit against its value.<\/p>\n

Whether you use it or not is up to you, but having that option gives you financial flexibility.<\/p>\n

Why Your House Is Not<\/em> an Asset<\/h2>\n

Given what we\u2019ve just discussed, why do some people claim that your home is actually a liability<\/em> instead of an asset? Let\u2019s find out.<\/p>\n

The Expenses Are Significant<\/strong><\/p>\n

If you\u2019ve never owned a house, you\u2019ve never truly understood just how expensive it can be. You have your typical costs that you expect, like utilities and regular maintenance, but you also have those times when major systems fail and will either need to be fixed or replaced.<\/p>\n

For example, 77% of homeowners deal with unexpected repairs within the first year<\/strong> of buying their house. Even worse, two-thirds of that essential maintenance work costs over $1,000. Throw in the mortgage payments, various taxes, insurance, and utility bills, and the total annual costs involved can be anything but arbitrary.<\/p>\n

Ramit Sethi, author of I Will Teach You To Be Rich<\/em>, has often said – \u201cRent is the maximum you will pay, but a mortgage is the minimum you will pay.\u201d<\/p>\n

I experienced this first hand when a pipe burst in our house, flooding our laundry room and kitchen, and requiring repairs of nearly $70,000. We were fortunate insurance covered the cost but it was still a significant time investment and it was, of course, extremely inconvenient.<\/p>\n

The Opportunity Cost<\/strong><\/p>\n

Remember, every cent you spend on your home is money that could be used elsewhere. For example, the tens of thousands of dollars you paid toward the mortgage could have been used to buy dividend-paying stocks, build a profitable business, or pay for a course that teaches you monetizable skills.<\/p>\n

The opportunity cost involved is made worse by the fact that \u2013 unless or until you buy it outright \u2013 your home is really the bank\u2019s<\/em> asset. You may be able to borrow from it but if you can\u2019t make your payments, they can take back the house.<\/p>\n

You Only Get the Gains When You Sell<\/strong><\/p>\n

Gains on paper are wonderful but ask anyone who has lived through a bubble bursting, whether it was dot com stocks in the 2000s or cryptocurrencies in the 2020s, you only get the gains if you are able to sell.<\/p>\n

The value of your house may have increased since you bought it but there\u2019s only one way to enjoy those gains is to sell<\/em>.<\/p>\n

For many people, though \u2013 especially when they\u2019ve lived in their property for a long time \u2013 the idea of selling loses its appeal. Their house has too much sentimental value! Plus you\u2019d have to move!<\/p>\n

They\u2019ve raised kids there, shared countless happy memories within those walls, and are too comfortable in the space to move. Their wealth may exist on paper, then, yet they might never realize<\/em> those appreciation gains.<\/p>\n

Accruing Equity Can Take Time<\/strong><\/p>\n

The length of time it takes to accrue any meaningful amount of equity in the property comes into play too. It could be decades<\/em> until you actually own your home outright. Worse still, if you default on those mortgage payments, you\u2019ll soon discover that the true owner is the bank.<\/p>\n

If you look at the amortization table for your loan, the bulk of your first payments go to interest. This isn\u2019t nefarious, this is because the tax code lets you deduct interest. The loan is set up so you can maximize your tax deductions earlier. That\u2019s all fine except it delays how quickly you gain equity.<\/p>\n

This situation relates to a common point many people say about renting vs. buying.<\/p>\n

\u201cRenting is throwing away money!\u201d<\/p>\n

\u201cYou are paying your landlord\u2019s mortgage!\u201d<\/p>\n

If you started your 30-year loan today, say July 2023, the first payment in which the portion that goes to principal is greater than the portion that goes to interest is January 2040<\/strong>.<\/p>\n

Until then, more than half of your monthly payment is still going to interest.<\/p>\n

If you don\u2019t believe me, play with an amortization schedule calculator and look at the schedule.<\/p>\n

You might not be paying a landlord, but you are<\/em> paying the bank.<\/p>\n

Should You Buy a Home?<\/h2>\n

Like many things in life, there\u2019s no single answer for everyone. Not everyone should buy a home and not everyone should rent.<\/p>\n

The answer to this question comes down to intention and personal choice. One of the things they don\u2019t tell you about home ownership is that it\u2019s not for everyone.<\/p>\n

If you\u2019re buying a personal residence because you think it\u2019s going to be a good investment, there\u2019s a good argument that the money could be better invested elsewhere \u2013 like the stock market.<\/p>\n

But if you\u2019re looking for a roof over your head, have sufficient income to cover the expenses associated with homeownership, and like the potential<\/em> of future gains, then buying that house might be a good idea.<\/p>\n

If you aren\u2019t sure, pump the brakes and give it some thought (especially given interest rates right now).<\/p>\n

We lived in our first townhouse for six years, watching the housing bubble burst and eventually selling our home for a five figure loss after including all maintenance and repair costs. Looking back, it was still a win because we effectively paid approximately $500 a month to live in a townhouse – a fantastic deal.<\/p>\n

There\u2019s no rush to enter into a 30-year relationship… you have time to think it through.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Ask almost anyone on the street and they will tell you that owning your home is a guaranteed winning investment but I argue the answer isn\u2019t so simple. I bought my first home when I was just 25 in the midst of what was a housing bubble back in the mid-2000s. I had saved up […]<\/p>\n","protected":false},"author":1,"featured_media":25612,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-25611","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news","tag-featured"],"yoast_head":"\nIs Your Home Really a Good Investment? | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Ask almost anyone on the street and they will tell you that owning your home is a guaranteed winning investment but I argue the answer isn\u2019t so simple. 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