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There is no question about it: Buying a house is an
investment.
The naysayers claim that buying isn't an investment
because the long-term appreciation rate isn't greater than the rate of
inflation. That's 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. Even if you "invest the difference". 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). You have to compare
buying to renting because you can't live for free. So the
proper question is, "If I buy instead of rent, will I wind up with more
net value?" In most cases the answer is an emphatic YES.
You'll wind up with more net value by buying. Here's another way to look at it. 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. If you liked this site then you might like some of my other sites: Entire site ©1999-2010
Michael Bluejay Inc. • All information is "use at your own risk" Contact |
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