I recently bought a home, and my husband has been raving about how it’s investment. Every time I hear him talk about our home as an investment, I cringe. Why? Because I know that a home mortgage is not an investment — well, not for the borrower anyway. It’s a purchase. Logan Flatt, CFA, points this out about a home purchase on his Power Wealth blog:
To make it your home, you must take cash out of your pocket each month to finance it, insure it, maintain it, fix it, furnish it, and pay property taxes on it. Unlike investment real estate, your home generates no income to offset these out-of-pocket expenses. So, while you likely derive much pleasure from owning your home, you lose money on it every month. Don’t fool yourself – your home is not an investment. It is simply a purchase.
Case in point. If I go through with my 30 year mortgage, I will pay back more than $400,000. Interest charges are, well, a real pain. This is on my $187,000 home mortgage. I will pay back more than twice the purchase price of my home if I stick through the 30 year mortgage.
In an email, Flatt further clarifies the “home as purchase” position:
[T]he home need not have a mortgage on it to fail
my “investment test” – even if the homeowner owns the home
free and clear, there are a litany of expenses associated with home ownership
that make it difficult to call a home an investment (because the home generates
no income itself to offset those expenses).
But here’s where the advantages of buying a home, for us anyway, come in. My husband won’t finish his Ph.D. for another four years. If we can sell the house for $215,000 (which is highly likely in the market that I live in – which is one of the few that is gaining right now and the house appraises for $198,000 already), we will be in a better position than if we had paid the $33,600 in rent over four years. Here’s how.
We will mostly offset the cost of the interest, recouping the purchase price and some of what we paid in interest ($58,000 in interest, insurance and estimated upkeep – $28,000 more than purchase = $30,000). We would save $3,600 over if we had rented. And that doesn’t include the tax benefits that come from deducting a portion of the interest payments.
But the real treat is this. If we get $215,000, and our balance (using an amortization chart from bankrate.com’s calculator) is $179,000, we will have $36,000 in our pockets. Even after paying realtor fees, etc. we’ll have a decent chunk of change for a down payment on another home. But I don’t think for a minute that is money that we will “make.” We will already have paid much more than that in interest, for the upkeep of the home, and for insurance.
So, even though our home mortgage isn’t a true investment, we’ll actually be saving some money. And it’s a good way to ensure that we’ll have a big chunk of money (we’ll also be saving) for a down payment on our next home.