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Monday, June 7, 2021

Why Buying a Home is usually a Bad Investment

A home can be a place that provides a permanent place for your family and kids, a great place to hang out with friends and family, and it may even provide you with confidence and pride of ownership. But don't be fooled by thinking your house is an excellent financial investment — because nothing could be further from the truth.
 
Many people buy a house because they believe it's an excellent investment. When I was young, I also thought a house is a good investment because housing prices always go up. But did you know that your house is actually a liability? Owning a home requires you to pay taxes, maintenances, insurance, and many more. All of these other things happen with your home that you've got to pay for. This is why I am not leaving my parents' house yet, and decide to keep living with them until I am financially ready.
 
You shouldn't treat your home as an investment; however, if you are buying it for personal use, then it's okay. In this article, I will explain why you shouldn't treat your home purchase as an investment. In addition, a home is a lousy investment, and don't fool yourself into buying a home as an investment. You should only treat purchasing a home if you want a place to settle down.
 
It's Not an Investment just because It Appreciates. 
For the sake of this argument, we're going to ignore the fact that, over the long run, average home values appreciate only slightly more than inflation. (Over 100 years, average U.S. real estate values gained less than 1% when adjusted for inflation).
 
Assuming a home's value increased only at the inflation rate, a property purchased in 1970 for $100,000 would be worth $625,873 today, a 526% increase. The real reason your grandfather's house appreciated so much over 40 years? It's simply inflation.
 
It's not to say real estate values cannot appreciate dramatically. They can and do. But such appreciation is more likely in specific, desirable real estate markets. But guess what? It doesn't matter. Whether or not your home's value outpaces inflation, there are other reasons your home isn't an investment.

 
When Buying Real Estate Can Be a Bad Move.
Although owning a home can have many benefits, it can have devastating effects if you're not financially ready. For example, if you stretch your budget or drain your savings to buy a home and then lose it because of job loss or other circumstances, this can impact your credit—and budget—for many years to come.
 
Experts advise that borrowers buy a home well within their budget. Dual-income couples might consider getting a mortgage that would still be affordable under one income. This gives you room in your budget if someone loses their job.
 
"It doesn't make financial sense to purchase a home if you are currently renting and you're having a problem paying your bills, or you have a minimal extra in disposable income," says Joseph J. Zoppi, managing partner at Templar Real Estate Enterprises in New Jersey. "Owning a home takes considerable money; you have to factor in your mortgage, property taxes, insurance, utilities, and maintenance of the house."

Finally, if you tend to move around often, owning a home can equate to spending a lot of money (on broker's fees and closing costs) that you don't have to.


Losing Other Investment Opportunities.
Besides investing in a house, you can simply invest your money in the stock market. The S&P500 Index performed at about 10% annually in the long run. The S&P 500 Index originally began in 1926 as the "composite index" comprised only 90 stocks. According to historical records, the average annual return from 1926 through 2018 is approximate 10%–11%. The average yearly return since adopting 500 stocks into the index in 1957 through 2018 is roughly 8%.
 
I'm pretty sure that investing in a house doesn't perform at this rate. This is why I am not purchasing my own home now and still want to invest my money in the stock market instead. I know I can get a better return in the stock market than using the money to purchase my own home. Even Warren Buffett claimed that if he had invested the money he used to buy his first home, he would be wealthier now. I believe Warren Buffett lives in the same house he purchased in 1958 for $31,500 has made him rich because he could invest the rest of his money in the stock market.

 
Upkeep Expenses
Another reason why a house is a bad investment is that you have expenses you need to pay for. You are responsible for the bills of owning my own home. This can be tax, electricity bill, water bill, maintenance bill, and many more. If you are not renting your house, you have cash outflow for owning the home you purchased. This is why I am not moving out of my parent's house at the current moment. 
 
By living with my parents now, I can save money from paying my own expenses of owning my own home. I know this is considered cheating, but I can use the money I have saved up to be invested in the stock market instead. If I own my own home, I can't compound my wealth more aggressively since I have expenses I am responsible for that can be invested.

 
When Should You Buy a House? 
The only time you should buy a house is when you want to use it to settle down. You shouldn't treat purchasing a home as an investment but a purchase for you to live. Buying a house should primarily be about matching your needs for space, community, and family, and secondarily about adding value or resale. As an investment, it's not as preferred as owning stocks, mutual funds, or exchange-traded funds.

If you're solely looking for investment opportunities, buying a home to live in might not be your best option. But if you need somewhere to live, a home could be the most intelligent investment you'll ever make. I am only going to purchase my own home when I am financially ready. I don't want my home to be a burden on me financially. Like Warren Buffett, I want my home to be a small percentage of my overall net worth.


Final Thoughts
The fact is, investing in real estate will not get you 20-30% annual returns. Or double your investment in about 3-5 years any more as it did back in golden years of 2001-2007. With all these factors working against real estate, we can at best expect a nominal return in the next decade or so. I believe owning a house as an investment is not that great. It is better than owning a car that depreciates in value, but I know I can get a better rate of return if I invested my money in the stock market. 
 
Yes, I will still live with my parents now; however, I plan to own my own home in the future when I am financially ready. I want my home to be a small percentage of my overall personal net worth. I don't want my home to be a financial burden on me. Besides, I enjoy living with my parents; I don't have to worry about upkeep expenses, and it lets me keep compounding my wealth. I hope this article gives the message to readers as to why a house is not an excellent investment. So it's better to purchase a house when you want to live in it. If you intend to buy a home as an investment, it is better to have it invested in the stock market instead. 

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