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The naysayers claim that buying isn't an
investment because the long-term appreciation rate
isn't greater than the rate of inflation. This
is like saying a bicycle isn't transportation
because it can't fly. A bicycle doesn't have
to fly to be transportation, and a home doesn't
have to appreciate faster than the general
inflation rate to be an investment. Let's start with the common-sense
approach: As you can see from my rent-vs.-buy
calculator, buying a home is a better deal than
renting in the vast majority of cases. How could
this be, if buying weren't an investment? The
obvious conclusion is, buying is an
investment, when you compare it to renting (which
is the way you should compare it). Before we do the technical analysis, let's
see the plain-English reasons why buying is an
investment: Let's look at what you get back from buying.
When you buy, you do spend some money that's
"thrown away" just like rent (it doesn't build
value). These expenses are taxes, insurance,
maintenance, and interest on the mortgage. But you
get value back in three different ways: Those three things you get back will outweigh
your "thrown away" expenses, in most cases.
This is the first reason why buying a home is an
investment. And the other, as we said, is that if
we didn't buy, we'd have to rent, and renting is
usually a worse deal. Now let's do the technical analysis.
According to my
calculator, here's how the numbers look after
30 years, if you do an incomplete analysis, like
some other financial writers might: Return from
buying after 30 years (INCOMPLETE
analysis) -715,327 Cash Spent +188,000 Paid Equity +339,677 Appreciation -187,649 Final Balance This looks likes a loss -- you put nearly a
million dollars into your home and you lost most of
it, winding up nearly $200,000 in the hole. But
what this neglects to consider is the value you
got from having a place to live. To quantify
that, we'll compare it to how much we might have
spent on rent for the same period: Return from
BUYING, after 30 years (PROPER
analysis) -715,327 Cash Spent +188,000 Paid Equity +339,677 Appreciation +619,472 Rent we didn't have to pay +431,823 Final Balance And now we can clearly see that our
investment did pay off. We made a 60.4%
over 30 years. This is only 1.6% annualized, but
hang on, we're not done yet. The first thing we
need to do is compare this to the return we could
have made by renting instead of buying. So let's do
that. We consider that since buying a house takes a
little more cash each month, when we rent we'll
take our monthly savings from renting instead of
buying, invest it in the stock market, and get an
6.5% return over 30 years. Return from
RENTING, after 30 years -619,472 Cash Spent +295,682 Return on investment -323,790 Final Balance So by renting, we paid out $619k, and got
only $296k back, meaning we lost a whopping
$324k. We lost over half what we put in.
This is what's supposed to convince us that
buying isn't an investment?! Sure, by buying we
made only 1.6% a year, but that's a hell of a lot
better than losing 1.41%. By buying, we came
out over three percentage points better than
renting. And buying is still an investment even if you
lose money. Guaranteed profit isn't the
criteria for something to be "an investment". After
all, stock market returns are anything but
guaranteed. People invest in the stock market, and
many of them lose their shirts, but just because
they lost doesn't mean they weren't investing.
Buying a home is an investment even if you come up
with a net loss. And if buying loses money, but renting loses
more money, you'd be crazy to not think of
buying as an investment. If you can reduce your
losses by buying instead of renting, then buying
isn't just an investment, it's a good
investment. But even though are case is already
overwhelming that buying is indeed an investment,
there's still more great evidence for our
position. So far we've only looked as far as
year 30. But what happens after year 30 once
the mortgage is paid off? We still have to pay for
taxes, insurance, and maintenance, but we no longer
have a mortgage payment to make. Here's how things
look for us in year 31: Return from
buying in Year 31 -$16,841 Cash Spent +$18,469 Appreciation +$33,682 Rent we didn't have to pay +$35,310 Final Balance In year 31, we made $35,310 profit on $16,841
invested. That's a 110% return! For just one
year! And every year past 31 tells a similar story.
Does buying a home look like an investment now? You might think the paid equity and appreciation
are only a theoretical value, since they're locked
in the house, and you can't eat your home. Ah, but
the equity does benefit you. Here are just
two examples of how. First, once your home is paid
off, your equity is what's earned you the right to
stop making any more mortgage payments. Second, any
time after you turn 62 you can get a Reverse
Mortgage, which lets you cash out the value of your
house (either as a lump-sum or a monthly amount),
while still living in the house. In fact, as long
as you live in the house, you don't have to pay the
Reverse Mortgage back! That will be up to your
heirs, but it will be easy for them to do so, since
they can just sell the house to get the money. And
third, you can always sell your home and move into
another one, cashing out your equity that way. Naysayers might say that we have to consider
the full value of the home as being invested
($527,677), not just the cash out for year 31.
In that case, the one-year return is only 6.5%, but
that still compares very nicely with the stock
market -- especially since it's safe. In conclusion, buying a house is indeed an
investment. Anyone who says otherwise should
back up their claim with actual numbers. |
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If you liked this site then you might like some of my other sites: Entire site ©2006 Michael Bluejay Inc. • All information is "use at your own risk" Contact |
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