Your Home Is Not A Good Investment (and Here's the Math to Prove It)
THE QUICK & DIRTY
If you think of your home as an investment, this is a must read. We’re delving into the often-overlooked financial realities of homeownership. Prepare to reconsider the true cost of that mortgage, property taxes, and those "surprise" repairs. Let’s look at the cold hard math together.
KEY TAKEAWAYS
While a home provides shelter and stability, it's crucial to recognize it as a consumption good, not a guaranteed investment.
Home appreciation is a hype – historical data shows it often barely outpaces inflation.
Build wealth through diverse investments and career growth, rather than relying solely on your home's potential appreciation.
Okay, let's talk about that thing you're told is the "best investment" you'll ever make – your home. Spoiler alert: it's probably not.
Now, before you grab your pitchforks and torches, hear us out. We know everyone from your parents to your friends who just closed on their place have drilled this into your head. But we’re all about challenging conventional wisdom – especially when it comes to your money and all it requires is some simple math.
The Real Cost of Homeownership
So, let's do some simple math. Imagine you buy a $500,000 home with a 20% down payment ($100,000). You lock in a 30-year mortgage at a cool 7% interest rate (ouch!). Over those 30 years, you'll pay roughly $700,000 in interest alone. Add that to your principal, and you're looking at a total cost of $1.2 million – more than double the original price.
"But wait!" you say, "My home will appreciate!" Sure, let's be generous and say your home appreciates at a healthy 4% per year. After 30 years, it's worth about $1.6 million. Sounds great, right?
Not so fast.
Are you telling me that in 30 years, you're never going to want to do any home improvements? Update that avocado green bathroom? Finally get those quartz countertops you've been eyeing? No chance. Add those renovation costs to the pile, and that $1.2 million starts looking more like a down payment on a small island nation.
Also, we need to factor in those annoying expenses that nobody likes to talk about – property taxes (a real b*tch in some cities!), homeowner's insurance, maintenance, and those inevitable repairs that pop up when you least expect them (like when your vintage plumbing decides to stage a revolt). These costs can easily eat up a significant chunk of your supposed "appreciation."
The Hidden Costs of Homeownership
Here's the real kicker with your home as an “investment”, its value is locked up in a physical asset. It's not liquid like stocks or bonds. You can't just tap into that "appreciation" whenever you want. In other words, to actually realize that appreciation, you have to sell your home. And selling isn't free. You'll likely pay realtor fees, closing costs, and potentially even capital gains taxes.
Suddenly, that $1.6 million isn't looking so impressive anymore, is it?
Now, we’re not saying you shouldn't buy a home. A home provides shelter, stability, and a place to build memories (or host epic game nights). But let's be real – it's primarily a consumption good, not an investment. You're buying it to live in, not to generate wealth.
Think of it this way: You wouldn't call your car an investment, would you? Sure, it gets you from point A to point B, but it depreciates the moment you drive it off the lot. A home is similar – it provides a valuable service, but it's not a magical money-making machine.
Historical Home Price Appreciation
Want some more cold, hard facts? According to the Federal Housing Finance Agency, the average annual home price appreciation in the US from 1991 to 2021 was just 4.3%. That's barely keeping pace with inflation! And remember, that's an average – some years will be higher, some will be lower, and some might even see a decline in value (remember 2008?).
So, what are the first home takeaways here?
Be realistic about the costs of homeownership. Don't just focus on the down payment; factor in interest, taxes, maintenance, and selling costs.
Don't overestimate appreciation. While your home may increase in value, it's not guaranteed, and those gains can be easily eroded by expenses.
Focus on building wealth through other avenues. Invest in your career, diversify your portfolio, and consider other investment opportunities that have a higher potential for returns.
The Bottom line
You can still buy a home. Just don't kid yourself by thinking of it as an investment. If it turns out that way, great!
5 Reasons Renting is Not Throwing Money Away
At Stash Wealth, we help HENRYs [high earners, not rich yet] like you make smart financial decisions – whether you're buying a home, paying off student loans, or planning for the future. We're here to cut through the noise and give you the straight talk you need to achieve your financial goals.
Because let's face it – you work hard for your money. It's time to make it work just as hard for you.
Stash Wealth offers financial planning services for 30-somethings who earn six figures.
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Written by Priya Malani
Founder & CEO
Priya is an industry thought leader and personal finance expert for HENRYs [High Earners, Not Rich Yet]. Her relatable, no-bullshit style has garnered attention from the largest media outlets in the country including Forbes, The Wall Street Journal, Business Insider, NerdWallet, and more.
