Buying a home is an investment

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.

Even though buying is usually a better deal than renting, you'll still usually be "in the hole" by buying.  That means over, say, 30 years, you'll spend more on your purchase than the house is ultimately worth.  This is normal.  If your house wound up being worth more than you put into it, that means you'd been living for free.  Does anyone really expect to live for nothing?  So you'll usually be a little "in the hole" by buying.  But you'll usually be way more in the hole by renting.  So buying a home is a way to cut your losses.  You're still going to be out some by buying, because you have to pay for your housing, but you'll be out less by buying instead of renting.

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:

1. Part of your mortgage payment builds equity in your home. In effect, you're paying yourself.
2. The house gets more valuable over time from just sitting there. This is called appreciation.
3. Once you've paid off your loan (typically after 30 years), you no longer have to make monthly mortgage payments. This allows you to live very cheaply, since your only home expenses will be taxes, insurance, and maintenance.

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.

Return from buying

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:

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:

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.

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.

Things get even better once the loan is paid off

But even though our 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:

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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