Why Buying a House Is A Liability, NOT an Investment

When it comes to planning for the future, many people assume that buying a house is a great investment. This idea is common but can mislead homebuyers. Understanding the true nature of homeownership can help you make more informed financial choices. Let's explore why a primary residence is not usually a financial investment unless it actively generates income.

The Misconception of Home Ownership as an Investment

The common belief that owning a home is a solid investment primarily stems from the idea that property values appreciate over time, which can yield profits when the home is sold. However, this outlook neglects crucial aspects of home ownership, particularly the ongoing costs of maintaining a property and the fact that a primary residence typically does not produce income. And, if the home only makes money when it sells, then that means that potential income is completely tied up until you decide to sell. For people who purchase their "forever" home, this profit will be realized never. And when you factor in the ongoing holding costs and the cost to sell, you may barely turn a profit at all.

Investments vs Liabilities

At its core, an investment is something that puts money back into your pocket over time. This could be through cash flow, dividends, interest, or capital gains. Real estate investments, for example, generally fall into two categories:

• Income-producing properties: like rental homes, which generate monthly rent.

• Appreciating assets: properties bought and sold for a profit after increasing in value, such as with house flipping.

  
  

For something to be a true investment, it must increase your net worth beyond what you initially put in, ideally while also generating some kind of ongoing return.

A liability is something that costs you money on a regular basis. If you are not renting out part of your home and instead just paying the bills yourself every month, your home is the exact definition of a liability. It only has the potential to be an investment if you can profit from a sale, which then leaves you with a) no home, or b) in the exact same position having to buy a new home.

Why a Primary Residence Usually Isn’t an Investment

When you buy a home to live in, it doesn’t work like the typical investments mentioned above. Here’s why:

1. No Cash Flow: Unlike rental properties, your primary residence does not generate income. Instead, it usually costs you money every month — mortgage payments, property taxes, insurance, utilities, and maintenance. Something that costs you money is the opposite of an investment: its a liability.

   
   

2. Ongoing Expenses: Owning a home comes with a continuous stream of costs. These include repairs, upgrades, HOA fees, and sometimes unexpected issues like plumbing or roof repairs. These expenses reduce your overall financial gain.

   
   

3. Opportunity Cost: The money you put into your home—down payment, closing costs, and monthly payments—could have been invested elsewhere, like stocks or bonds, potentially earning dividends or interest. By tying it up in a home that doesn’t produce income, you lose out on those alternative investment returns.

   
   

4. Market Risk and Liquidity: Real estate markets can be unpredictable. While some homes appreciate, others may stagnate or even lose value, especially if the local economy suffers. Plus, selling a home can take time and involve significant transaction costs, making it a less liquid asset.

   
   

5. Emotional vs. Financial Value: Your primary residence provides a place to live and emotional benefits like comfort and security. These are invaluable, but they don’t translate directly to financial returns.

Renting vs. Owning

To get a better grasp as to why a primary residence may not be a true investment, consider the differences between renting and owning. For instance, renters pay monthly fees to occupy a space with minimal responsibility. Homeowners, on the other hand, take on costs like mortgage payments, property taxes, insurance, and upkeep. Think of it like this: rent is the most you'll pay for your home every month, the mortgage is the least you'll pay.

In high-cost areas, these combined expenses can easily surpass the cost of renting. In fact, according to a report from Realtor.com, in many urban centers, the total monthly cost of owning a home can be 15% to 30% higher than renting. Additionally, while renters have the freedom to relocate with relative ease, homeowners often feel trapped by their mortgages, making it challenging to sell and move without incurring financial losses.

The Costs of Home Ownership

Repairs and renovations are expensive

To determine if a primary residence qualifies as an investment, it’s vital to assess all associated costs. These expenses can erode any potential profits and highlight the harsh reality of home ownership.

Maintenance and Repairs

Ongoing maintenance and repairs can be a significant burden. Homes require regular upkeep, which may include lawn care, plumbing issues, and replacing appliances. A survey by HomeAdvisor found that homeowners spend an average of $2,000 annually on repairs and maintenance. Unexpected problems can arise at the wrong time, putting additional strain on finances.

Property Taxes and Insurance

Property taxes represent another major expense for homeowners. Depending on your location and the value of your property, these taxes can be quite substantial and often rise over time. In some states, property taxes can reach 2% to 3% of a home’s value annually. Homeowners are also required to carry insurance to protect against damages, adding another layer of financial obligation.

Opportunity Costs

When you invest in a primary residence, you face opportunity costs. The money tied up in your home could be invested in stocks, bonds, or other income-producing ventures. For example, the stock market has historically returned about 7% to 10% annually. By choosing to prioritize home ownership, individuals may miss out on these potentially more profitable investments.

The Concept of Home Equity

Home equity is often viewed as a form of wealth accumulation through home ownership. It’s the difference between the home's market value and the mortgage balance. While home equity can grow over the years, it is not liquid, meaning homeowners cannot easily access these funds unless they sell their home or take out a home equity loan. Both options can be time-consuming and complex, as well as expensive when factoring in interest and closing costs (taking out a home-equity loan also costs money!).

Realizing Equity vs. Available Income

It's important to note that equity becomes cash only if the home is sold or refinanced. Unlike rental properties and dividend stocks that provide ongoing income, home equity does not generate cash flow. This underlines the fact that, while you may have equity in your home, it’s not money you can readily spend.

The Argument for Rental Properties

It’s crucial to differentiate between primary residences and investment properties. Many real estate investors purchase rental properties explicitly to generate passive income. Unlike a primary residence, a rental property brings in consistent revenue each month and can appreciate in value over time.

Investment properties not only offer potential appreciation but also come with tax benefits, such as deductions for property management and maintenance. This distinction highlights why rental properties can be a smarter financial move than a primary residence.

When Can a Primary Residence Become a Real Investment?

A primary residence can turn into a genuine investment if it generates income or appreciates substantially beyond all costs. Examples include:

• Renting out part of your home: Renting a basement apartment or extra room can bring in cash flow, offsetting expenses and effectively turning your home into a partial investment property. This is called "house-hacking", and is one of the best ways for new and lower-income home owners to make some significant cash with their house. I do this myself with my garage ADU, which not only pays all of my housing costs, but allows me to actually get paid to live at my home. For more information on house-hacking, check out this post:

  
  

• Significant appreciation: If your home’s value rises sharply over time, outpacing inflation and the costs you’ve paid, the eventual profit on sale can be seen as investment growth.

  
  

• Home equity loans or refinancing: Using your home’s equity to invest in other income-generating assets can also transform it into a financial tool. If you have significant equity, you may choose to pull some out to use as a down payment on your next property. Just remember to do your research and do not take this decision lightly; not paying back the loan can cause you to lose your home.

Considerations for Buyers

If you’re considering purchasing a home, it’s vital to think critically about your decision. Here are a few key points to reflect on:

Long-Term Plans

Consider your long-term housing goals. If you plan to stay in one location for many years, buying a home might be a sound financial decision. However, if you anticipate relocating within a few years, renting could save you significant amounts of money.

Financial Stability

Assess your financial situation before committing to home ownership. Make sure you have a stable income, sufficient savings for a down payment, and a budget that accommodates your mortgage along with other related expenses.

Real Estate Market Trends

Research market trends in your desired area. Are home prices quickly rising, or are they projected to remain the same? Understanding these trends can guide your decision on whether purchasing a home is a wise financial choice.

Final Thoughts

While owning a primary residence may appear to be a sensible financial investment, it’s crucial to recognize that it often does not generate income like traditional investments. Unless you rent part of the property out, refinance, or sell, your primary residence will only be a significant cost to you every month. Instead of viewing a home merely as an asset, consider the various costs and challenges of ownership.

Real estate can be a lucrative investment, but only when approached with a clear understanding of what constitutes an income-generating asset. If you're looking to invest in real estate, think about rental properties or other options that provide steady cash flow.

In the end, the choice to buy a primary residence should reflect your unique financial situation and long-term objectives. Do not buy a house because everyone around you is telling you its a "good" investment. Being well-informed about the realities of home ownership will help you make the best choice for your financial future.