It’s been a few weeks since I’ve started a flame war by addressing the realities around the costs of homeownership, so I figured we’re due!
I often hear this line: “Owning your home is the best investment you will ever make”. Mathematically, that’s just not true. When you account for all the costs (mortgage interest, realtor fees, maintenance, insurance, property tax, closing costs, etc) your primary residence isn’t a great investment. On average it’s not even a good investment. Over time you’re likely to put more money into your house than you eventually get out (even after it goes up in value).
BUT, it can have the ILLUSION of a good investment if it’s the only investment you ever make. For example, if you buy a house for $300,000 and dump $1,500 into your house payment for the next 30 years. Then you sell it for $500,000 you might think, “hey, free $200K, what a great investment”. But here’s the problem, you actually paid over $500,000 in mortgage payments. Plus you’re not being honest all those other costs I mentioned above which likely total another couple hundred thousand. All in all, you would have had a pretty big negative return on your investment.
But worse yet is the OPPORTUNITY COST. If instead of Plowing $1,500 into a mortgage payment, you were investing that in an index fund returning 10%, you wouldn’t end up with $500,000. You would end up with about $2,900,000.
And for sure you need somewhere to live. And (as much as I’d like to) you can’t live in an index fund. So the message here isn’t “be homeless and put every penny in an index fund”. Rather it’s, “Consider buying or renting a more modest home and focusing your investing dollars elsewhere”.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.