Real Estate

Your Primary House Is an Investment

I’ve read several times that your primary property is not an investment. I don’t agree with this logic. Are houses expensive? Definitely. Are there markets where it’s better to be a renter? I doubt there are many. Here are the reasons why I think that your primary house is an investment.


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A Renter’s Market

Let’s start with the good things about renting.

Not having to do any maintenance such as yard work is great. Sometimes one or all utilities are included which bundles all your payments into one lump sum monthly. You also don’t have to worry about a leaky faucet because that falls on the landlord to fix. Renting is a hassle-free way to live. You get home and enjoy your home and nothing else. There is definitely appeal to that lifestyle.

A Buyer’s Market

Conversely, there are also some not so great things about renting. First of all, equity plays no part in your life at this point. Either the landlord is pocketing the money, or you’re building his equity. Regardless the money you pay monthly doesn’t benefit you at all.

The landlord might be a jerk. I’m a landlord myself, and I’ve gotten lucky with my tenants up to this point. Hopefully, they all have nice things to say about me, but let’s face it; you’re living in their house. They have a key (which hopefully they don’t use too often). And from the stories I’ve heard, they can be kinda pushy at times.

Specific Markets

Another factor to consider is location. There are markets, such as Miami, that renting is outrageously expensive. My mortgage right now is $1750 for approximately 2000 square feet. My rental property rents for $1500 for 980 square feet. This doesn’t include utilities either, the tenant is in charge of those.

The Free House Fallacy

You’re right to think that there are extra expenses when owning a house. Unfortunately, your A/C will break, your sink will start leaking, some unexpected mini-disaster is waiting to happen at every corner.

The real issue comes in with the thought that whether you have a 15 or 30-year loan, the interest you pay will be more than the equity. And I agree with that statement. You are going to lose money on a house no matter how you look at it, but what other options do you have.

What gets failed to be mentioned when people talk about this subject is that you need somewhere to live! Yes staying at mom and dads house forever is definitely cheaper than buying, but how does it compare to renting.

By The Numbers

So I wanted to try to be as fair as possible with these numbers. I tried to not use ‘Miami prices’ for the rentals so I settled on $1300 rent. For the house, I used my own numbers. Let’s say you own a $300,000 house at a 4.75% interest rate. Appreciation value for houses definitely vary from city to city, so let’s average it a little under 2% a year (statistically low). Throughout the year, sending in your payments, you are cutting $4800 off of your principal. Your payment is $1750 a month. You still owe on your loan so your equity is at approximately $77,315.

 

Your Primary House Is an Investment
In case you didn’t like my math problem, I got tables!

 

So overall your net loss for your house is a little over $10,000 a year. For your rental, it is $15,600 a year. Do you expect $5,000 worth of repairs throughout the year? Do your utilities add up to the $5,000? What about next year when your appreciation goes up a little bit higher because of compounding interest?

Your Primary House Is an Investment

So with these numbers, I don’t know how you can not consider your primary house an investment. Is it a great investment? Hell no, you’re bleeding out 13% yearly! But compared to the other realities (living with your parents or being homeless), it seems to be a better investment than others.

 

Do you live in an area where these numbers don’t work? Do you still want to rent instead of own? Tell me why in the comments!



Published by Gabe A

Gabe A. is the creator of The Shiny Dollar. Besides writing and helping others with their finances, he loves to travel and spend time with his family.

18 Comments

This is one of those highly debated topics in the personal finance community where everyone is right and no one is wrong. I am with Camp Liability on this topic; however, I recognize the intangible value a personal residence can provide, such as:

Credit Score – despite whatever one’s score was to procure the home, timely mortgage payments will (in time) improve your score as it shows you can manage a greater capacity of debt. Essentially, decreasing your future cost of debt (capital).

Cheaper Source of Financing – although interest rates are creeping up slowly, they are still advantageous compared to credit card APRs and some student loans. A home equity line of credit (HELOC) might be a cheap source of financing to pay down high interest rate CC debt and swap for a low rate (albeit variable).

Last Resort Retirement Fund – maybe a few years into your debt-free retirement, the market takes a nose dive. The next few years and/or decade looks grim, which just so happens to be a substantial portion of your retirement plans. Your paid-off home could possibly act as a bank with a reverse mortgage helping you keep your head above water.

I love the math provided in this post. Thank you!
Church recently posted…Roth-Lite: A Skeptic’s Strategy for Tax ReformMy Profile

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3 awesome points! I recently took out a HELOC for emergencies. Hopefully I never need it, but with no fees whatsoever, I didn’t see why not!

I didn’t even think of the reverse mortgage and thats an amazing point. It could be a huge deal for some people down the line!

Thanks for the comment Church!

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Is your primary residence an investment ? Yes.
We own our home so it provides a cheap place to live. (Maintenance and taxes so its much cheaper than rent). I don’t use our house in any of our retirement calculations as it doesn’t produce any income but it is our worse case back up plan.

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Hey Steve!

I include my house in my net worth, but obviously not in my retirement plan. I don’t plan on taking out a reverse mortgage, so my house won’t be earning me any income. But like you said, it could be a worse case back up plan.

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Not trying to be too argumentative here (I swear!), but here were a few things that jumped out to me in your Rent vs. Buy comparison.
You have $0 for repairs/upgrades on the buy side. I’ve seen it recommended that you budget an average of 1 to 3 percent of the homes purchase price yearly for these items. For renting, yes these get baked into the price by a landlord, but you’re not going to be paying them out of pocket.
Your yearly equity will vary each year over the course of the mortgage amortization- this favors buying if you’re owning for a long time, but hurts you if you only have it for a few years and are paying mostly interest.
If the mortgage is $1750, but the rent is only $1300, I’m going to be investing that $450 savings per month while renting and get an average annual return around 7% in the market. That’s going to make the total loss less than the $15.6k you have in the table.
Definitely not trying to come argue, I just felt those are some important considerations. I’m personally in the rent camp, but that’s probably mostly because I’m currently a renter and want to feel good about my choice. I think really either option can be a good one if you run the numbers and are intentional about your choices. It also, as you said, is going to vary a whole lot based on your local market. Anyway, appreciate the analysis and glad real estate has been working out for you!

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Hey Andy! I was hoping for different point of views! I know this is a topic that can be seen both ways…

I will say this… In my 9 years (or close to it) of being a homeowner, I’ve never spent more than $500 in a year to fix anything… 3% a year is kind of steep. My purchase price was 250,000 for my current house, and Ive spent like $800 in the past 4 years.

Also the rent being at $1,300 was for a house half the size I rent out. If I wanted to rent my exact house, I’d look to pay about $2,200 to be conservative. Im not sure if I understood that right?

But don’t get me wrong, I rented before buying. My life really wasn’t as stable and it was the right choice for me…. And the rental market here is insane. It HEAVILY favors owning… Would love to hear more of your thoughts!

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Definitely agree that it’s hard to do an apples-to-apples comparison of the types of houses available to buy and rent in many of the markets. My point was just that from an investing standpoint it can be better to rent that cheaper place, even if it is smaller, and invest the difference, rather than seeing home equity as the path to wealth.

For me, it’s not an entirely monetary choice (I guess it usually isn’t) because while I could buy the house I’m renting, I appreciate the freedom to leave within the next couple years.

Another thought: you don’t seem to have any numbers about closing costs. That can be a very large expense when buying and hits you again if you end up selling.
Andy recently posted…Video Game Investing LessonsMy Profile

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Well renting that cheaper $1300 place would definitely save you some money, but if you would have bought it, you’d be paying $900 a month instead of $1300..

There is definitely more freedom in renting though. Yes you could leave the house you buy by selling but you gotta pay a realtor a good 6%. Renting it out doesn’t happen one day to the other and you gotta hope its a good tenant.

And closing cost can hurt, but I think if you live in the house for at least 2 years, you’ll more than make up for it. It is a huge commitment and a headache to buy. It was probably the most stressful thing I’ve ever done.

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1000% agree with you.

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Thanks for reading Gerald!

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This is a controversial post! LOL.

I think if a Vancouverite were reading this yes, they would agree. However, there is always a bubble potential and who knows when it might burst.

I don’t view my primary residence as an investment per se but I view it as a place to live, and if it gives me tax free gains when I sell it, that’s a bonus that I can funnel into my investment accounts in the future.
GYM recently posted…5 Money Lessons for Children: What I Hope to Instill in Our ChildMy Profile

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I guess the bubble could be happening right? The way I think about that is.. if I owned a stock and it went down, and there was a high chance it would recover, would I really stress a price drop? Prob not… (Maybe a bit).

But yeah I knew it was controversial as I wrote it but I wanted to give a different angle.

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This makes me cringe – but only because it is VERY difficult to buy a house on a part-time income. I’d love to get rid of the rent and have my money going towards an asset, instead of someone else’s. Also looks like next year it’s a very good possibility I will be a single mom once again, so this dream of mine gets bleaker with every passing day.
Allie Banks recently posted…Saving Money And Time During ChristmasMy Profile

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It isn’t easy…and it’s definitely not a race! You’ll get there at your perfect time. I got my house when I wasn’t even expecting it. I’t made me realize that you don’t know where you’ll be in 3 years. Keep saving! I can’t wait to read about your first home purchase.

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I agree with you it is an asset, end of story….

Just kidding there are always a ton of opinions on this. However, I do agree with you, a big benefit for me is that you are prepaying a living expense for life. Of course you have maintenance, taxes, and insurance but the big piece is the loan. Knocking that out gives you a ton of flexibility and you don’t have to rely on your investments to return x% to continue to make your payments in retirement.
Damn Millennial recently posted…3 Reasons You Should Pay Off Your Debt Before InvestingMy Profile

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lol I like the assertiveness!

Hey like I said… It’s not a great money making investment… But down the line you should see good benefits, right?

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My bf and I have two very different views when it comes to buying vs renting. I wanted to rent because I wanted to save more money. My bf wanted to buy because he sees it as an investment opportunity. He wants to either sell the house and upgrade or rent it out and we buy a second house. I see it as additional stress because of the mortgage payments lol. I guess it depends on the person and their preference. A lot of people we know say that we are very lucky to even be able to afford a home at our age in expensive Hawaii. I’m just lucky and I just learn to live to just go with the flow.
Melanie, Mommy Finance recently posted…How This Crazy Challenge Can Immediately Help You Focus on Important ThingsMy Profile

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How’s the rental market in Hawaii?? The thing is, in Miami, we wouldn’t save money if we rented. It’s easier to afford owning. The problem for Miami folk is they rarely have good credit, or the downpayment ready, or the lie on their taxes and don’t report income.

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