We often hear that our home is our biggest investment. In fact, many people are told to buy the biggest home that they can afford since that is the path to financial freedom. Really?
In fact, a home is often a liability. There is upkeep, property taxes, and insurance. You forget about all of the money spent on paint, lawn equipment, plants that die and need to be replaced, and repairs. And, if you want to be fashionable, there are the kitchen and bathroom upgrades every ten years or so.
Still, when you reach retirement age, assuming that you have paid off your home, you now have this big stack of cash you can get if you sell your house and move somewhere cheaper. For many people this will be all of the money they will have. So it must have been a good investment, right?
Well, in my case I have lived in my home for about 13 years. In that time it has increased in value by about $34,000, which sounds like a lot of money. But here is a list of my expenses:
Property Tax: $23,400
New kitchen floor (linoleum) $1500
Windows (because the old ones leaked) $3000
New Roof: $5000
New AC/furnace: $3000
Replace patio (built wrong, flooded crawl space): $6000
Yard upkeep: $500 per year = $6500
Home Upkeep: $500/yr = $6500
Property Insurance: $13,000
Note that both the yard and home upkeep are probably a bit low. Also note that there are no expensive kitchen remodels or the addition of a whirl pool tub or anything. Everything we have done has pretty much been replacement of what has worn out.
So, over that 13 years, even with only fixing what needed to be fixed, I have a net loss of $33,900 (the difference between the amount of money I’ve made on the place from appreciation and my costs). Of course, I have saved money on rent, right?
Well, if I had rented an apartment for about $500 per month, which would rent a fairly nice 2 bedroom where I live, I would have spent about $72,000 in rent, so I have saved about $38,000, right?
Unfortunately, I have not included the interest I paid on the loan. I took out the lowest interest loan I could find, put 20% down, and then refinanced into a 15 year loan with a lower rate when I could. Most people would have put 5% down, paid more in interest, and paid mortgage insurance. Still, I paid about $54,000 in interest, so that more than wipes out my whole savings from not renting!
Of course, I did pay a lot less owning than I would have paid had I rented an equivalent house for all of that time, but if I were renting I probably would have been happy with a 2 bedroom apartment. I would have also saved all of that cost for yard work and repairs. I also have lived very frugally compared to how most homeowners live. Many people by now would have redone the kitchen twice and added onto the home, probably spending about $80,000 in the process. And yet, I still have not gotten a substantial return on my “investment.”
The point here is not that you should not buy a house. It is that you should realize a home will probably cost you more than you get out of it when you sell. It is true that you will build up a lot of equity, but you will put far more than that into the home. You should therefore only buy as much home as you need (or, once you have enough wealth that it doesn’t matter anymore, as much home as you want). Make your investments in things that you actually make money on – not in your home.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.