A big part of the American Dream is to be a homeowner: to have that plot of land with your own private home to live in and raise a family. You certainly can’t put a price on that….but I am.
Looking at homeownership from a financial investment point of view only, I think it is a horrible place to put your money. Here’s why:
- Illiquid – One of the parameters that I use when choosing investments for my clients is liquidity. This means how fast and how easy it will be for me to buy into, and sell out of, an investment. As you know, buying and selling a home is neither fast nor easy, so it is considered a very illiquid investment. This is a bad attribute of an investment, particularly when you need to sell quickly.
- Buying on Margin – Buying on margin means that you’re borrowing money to purchase an investment. It is a great way to leverage your money by buying more than what you can buy outright with cash. I never use margin to purchase an investment for my clients because margin calls are not good calls to get.
When you get a mortgage to buy a home, you are using margin or leverage. You pay interest on that loan and although you may get a mortgage interest deduction tax break, it still eats into your return on investment (ROI). More importantly, a margin call on your home means you’re getting kicked out of it!
- Taxes & Insurance – Property taxes, homeowners insurance, flood insurance, liability insurance all eat into your (ROI).
- Maintenance & Repair Costs – Besides regular maintenance like landscaping, you have to pay for repairs to your home, which could be huge (roof or HVAC system replacement). And guess what? These costs eat into your ROI as well!
I recently found a very comprehensive buy versus rent calculator on the NY Times website (https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html) that can help you figure out if it makes sense, financially, to invest in a home or rent and invest the difference.
I didn’t write this to discourage people from buying a house. Heck, I have owned several houses over the last 25 years. I just wanted to lay out the facts for you and make sure that you are owning a home for other reasons than as an investment.
Please let me know if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
