Is buying a home the best way to invest your money?

A recent survey, shared by keepingcurrentmatters.com indicates that 93% of Americans believe that buying a home is a better investment than stocks. But is it?

A home is certainly a good way to spend your money, for several reasons. Most homeowners are familiar with most of these reasons. Yet being a homeowner doesn’t necessarily mean that one understands investing . And this survey sheds some light on that fact.

Some would question whether buying a home is an investment at all. To be clear, there is a distinction between investing in real estate and owning a home. Owning a home can be a profitable, if one treats it like an investment.

But home ownership has limitations compared to other forms of investment. First of all, where’s the income? With stocks, you have dividends. With rental properties, you have rental income to cover costs and pay the mortgage. Basically, the tenant is covering your mortgage. So the equity you’re building in a rental property is true profit. When you live in the home and pay the mortgage out-of-pocket, any equity you build is equity you paid for, not profit.

At the end of the day, you only make money on your home when you sell it --- if it has appreciated in value. And one also needs to consider inflation. In order for home ownership to be profitable, your home needs to appreciate faster than the rise of inflation.

It’s worth noting that, of all forms of investing, real estate has the least liquidity. Even if you own rental homes and are building equity in those properties, it’s not exactly quick and easy to access that capital. With an investment like stocks, you can liquidate some or all of your capital quickly.

That means your capital is quickly accessible if you 1) need to spend it, or 2) come across another investment opportunity. Not the case with home ownership.

But it’s not all bad. Indeed, home ownership is a great (some would say necessary) step to building wealth. You can make money on it. More importantly, you’re investing in your own financial independence. Instead of paying the rent so somebody else can build equity/wealth, you’re working toward a position where you’ll no longer need to pay rent or mortgage.

The point is, buying a home is not necessarily an investment. However, it can be treated like one so that one (hopefully) sees a modest profit. Still, buying a home should not be seen as investing, nor should making money ( saving money, perhaps) be your primary motive for buying a home.

Home ownership is for those who want the benefits of home ownership. And if that’s you, you need to decide for yourself what your priorities are. Some people know exactly what they want in a home, and turning a profit on it is low down on the list.

Luckily, though, the same things that tend to make a home appreciate in value are the same things that most people are looking for in a home. So it should be within most people’s ability to land somewhere in the break-even to modest-profit range, when they do eventually sell.

What makes a home appreciate in value?

First off, note that it tends to be the land itself which appreciates over time, not the house. This is because there is a fixed supply of land, and an ever growing demand for it. But don’t fall into the trap off assuming this will always apply to all land, all the time.

While one market is appreciating, another can be depreciating due to factors like dying job markets or increasing crime. Housing markets can be seen as competitive. If you get into one that is losing, you can’t expect appreciation.

Also, since land is the real asset, the buildings on your property have less to do with appreciation than does the land itself. The house matters. But it matters less than location and the features of the property. Houses are impermanent, and homeowners accept that the perfect home is a combination of 1) finding a good deal, and 2) some level of customization. Indeed, throwing money at remodeling is actually, typically, a “losing investment”.

Let’s distinguish between remodeling and maintenance, here. Remodeling is something you do to customize your home, so that it works better for your needs. It’s highly unlikely that any changes you make will bring you as much value in appreciation as you spend on those changes.

Maintenance is necessary to protect your asset and recoup your money. And this brings us to another point about investing: homes have a high cost of ownership, in both time and money. Things like stocks don’t.

So if you’re going to buy a home, buy it because you want a home that is yours , to do what you please with. Buy it because you want to own an asset, rather than cover the cost of somebody else’s. Buy it because owning a home serves your needs better than renting.

Then, learn what you need to learn about your market, be a smart homeowner and, hopefully, turn a modest profit. But if turning a profit is your top priority, you’re setting yourself up for heartbreak. Life throws curve balls, and life plans change over the years. You might not have the option of waiting till the market is on the rise before you move.

So buy for the right reasons, be informed about your market, and then do what you can to maximize your chances of selling for more than you bought for.

The best way to find a property that suits your needs and tastes is to partner with a motivated agent that knows your market. If you’re looking for properties in the Puget Sound region, you can contact Better Properties Eastside by filling out one of our contact form here.