Homeownership is typically something that people all across the world strive for. A place to call their own and settle down while making their home whatever they want. For years, having a home has been thought of in a positive light and as a good investment in your life.
Sentiments are beginning to change. Many financial experts are now refuting the fact that owning a home is a good investment, with some even going as far as to say there is no worse choice.
Learning why buying a house is a bad investment may save you both time and money in the long run. From hidden fees to untalked about caveats, purchasing a home is a lousy investment decision compared to other options. Let’s dive deeper into why.
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Renting vs. Buying
Before getting into specific reasons for why buying a home is a bad investment, let’s quickly cover the differences between renting and owning a property.
Perhaps the largest difference is the fact that a renter can move on with no penalty once their lease ends. This also means that your landlord could sell the property and force you to move with relatively little notice, but it’s a trade-off for flexibility.
When you rent, you aren’t building any equity, but are just sending payments to your landlord who is, in turn, paying the mortgage to the bank.
From one lease renewal to the next, your monthly rent will be known. That’s not to say that your landlord won’t increase the rent the next time your lease is up for renewal though. Besides this cost, as a renter, there are no other housing fees to expect.
You also may need to call your landlord if you would like to make changes within the home itself.
On the other side of things, a homeowner controls everything with their home. When you have a fixed mortgage rate, your monthly payments won’t increase. There are some other facts (touched on below) that may increase, but your monthly cost never would.
Problems may arise within your home that you will be expected to cover, whereas a renter would call a landlord to fix problems.
However, owning a home provides a sense of stability and pride. At the end of the day, homeownership has always been touted as something to strive for, but the differences between renting and owning are not too extreme.
With that said, here are a few reasons why buying a house is a bad investment:
1. Unexpected Expenses
When it comes to a standard investment, you can be fairly sure of the principal cost. However, when it comes to a home, there could be a number of unforeseen future expenses.
For perspective, a wind storm might knock a tree down and take part of your roof with it. This could cost thousands of dollars to fix, going far beyond what you were expecting the principal cost of your home to be.
The longer you live at your property, the longer unexpected expenses such as this will arise.
Closing costs alone on the purchase of a home hit around 2-5% on average and comprise of everything from lender application fees to pure mortgage interest. Additionally, the 1% rule of maintenance tells homeowners to expect to pay 1% of the home’s value on maintenance per year.
In the case of a $600,000 home, you could expect to pay around $6,000 a year in maintenance alone.
2. Overall Costs
The expenses that come with owning a home go far beyond unexpected costs. All homes come with carrying costs that are the recurring expenses a property owner will face, typically in a month, for as long as that property is owned.
Again, these carrying costs add to the principal payment that a homeowner may have been expecting to pay.
Things such as mortgage payments, insurance, property taxes, and utilities go into these recurring costs. Investments don’t typically have these types of costs associated with them.
Additionally, some areas may have a homeowners association that takes care of some basic home maintenance items, but there’s usually a decent monthly fee to be paid in return.
This is why homeownership isn’t considered an investment, especially in the short term. These monthly costs help ensure that it takes years of homeownership before you actually earn back everything you’ve put into your “investment”.
3. Appreciation Isn’t Everything
Those who think of homeownership as an investment typically refer to appreciation as one of their biggest selling points. In truth, appreciation is rather overrated.
In the long run, average real estate values have only gone up by just under 1% over the last 100 years once inflation is accounted for. For short periods of time, a home’s appreciation may outpace inflation dramatically, but it’s not enough of a guarantee.
Appreciation also comes with a major risk: depreciation. In the case of economic fallout, home prices may drop drastically and become less of an investment and more of a burden.
The hope of owning a home as an investment is that you’ll be able to earn a profit from the sale of that home. However, in the case of economic troubles, your investment may be wiped of its value in just a few months and take years to recover.
4. You May Never Sell
On top of the above, if you have any intention of staying at your home forever, it should certainly not be considered an investment. The point of an investment is to earn a profit from your principle at some point.
If you never expect to sell your home, though, you will never realize a profit. Even if you do choose to sell, you likely won’t have stayed in your home long enough to realize a profit.
The average homeowner stays in their home for 13 years which is just barely enough time to make back your total principal.
Going further, if you are not a real estate investor and simply a traditional homeowner, you will likely need to use the profits from selling your old house to purchase a new one.
Unless you have a set plan for cashing out on your equity, selling a home may just serve as a transition point to a new home.
5. There is No Cash Flow
Another reason why buying a house is a bad investment is that there is no active cash flow coming in, assuming you live in the property you own. Real estate investors can earn a profit by renting out their properties to others and earning a profit from the paid rent.
If you are living in the property, though, then you will have no cash flow coming in. Investments in stocks may earn you dividends, for example, which can help make an investment worth it.
When it comes to a home, there is no active cash flow if it is your primary place of residence. Even if you were banking on your home being a long-term investment, it would only be worth it if you were to be receiving a consistent positive cash flow.
6. No Diversification
Even for full-on real estate investors, a lack of diversification in investments can prove detrimental. The best investment portfolios are invested across different industries and varying assets.
By properly diversifying, an investor can reduce risk. If one asset tanks in value, other assets can offset the loss. However, if an investor has placed all their money in that asset, they will suffer a total loss.
The goal of diversification is to decrease the correlation between your assets. If you only own your own home, you are not protected from decreases in home prices or other factors.
Once again, as an average homeowner, you may be subjected to major decreases in your home value unexpectedly and not have other investments covering this loss.
7. Limited Freedom and Flexibility
Perhaps one of the largest reasons why buying a house is a bad investment is a limited flexibility you have. If you are the landlord of multiple homes, you still need to live somewhat close to your properties.
Should one of your tenet’s call you for maintenance or other needs, you may have to drive out to the property and be there in-person.
Additionally, an investor wants some flexibility and freedom with their investments. You want to have the option to sell and gain a profit whenever you want.
You may receive this with stocks or bonds, but not with a home. When you own a home, there may be a number of reasons you need to sell. Whether personal or financial, you may not have the option of capitalizing on the investment you made.
A house is primarily a roof over your head and only serves that purpose. This makes controlling the investment timing far more difficult.
8. A Home is Not a Safe Asset
Along the same theme of diversification, a home is generally a riskier asset. There are a number of factors, both external and internal that go into a home’s value. To truly flip a profit off a house as an investment, all of those factors need to go in your favor.
The likelihood of that happening isn’t very high.
An investment like a house is not an investment that you want to be volatile considering the time going into it. Long-term investments are typically supposed to be safer than short-term investments.
Considering earning a profit from a house is no short-term endeavor, it is extremely risky to hold a house as an investment in the long-term.
When it comes to standard investing, such as stocks, and investors will put large sums of money away into assets that see steady growth. That money is expected to continually grow and be safe.
However, investors will also dabble in short-term riskier assets that can flip them a profit quickly. Options trading is such an example. In this scenario, a home is a long-term pick that has the potential volatility of an option.
Due to this, a home is simply an unsafe asset to be investing in for the long term.
Why You Shouldn’t Look at Your Home as an Investment
At its core, an investment is essentially the putting away of money for the result of income or profit. Based on the definition alone, it should be clear why buying a house is a bad investment.
Unless you a fully-fledged real estate investor who owns multiple properties for the sole purpose of earning a profit, homeownership shouldn’t be a viable strategy for investing.
For example, you put money into your college education because you expect that your lifetime salary, which you are able to get due to your degree, will be higher than the amount you paid for the education.
Choosing to purchase a home isn’t a bad choice, but treating it as an investment is. Renting costs less upfront than owning a home, and only become less if you stay at your property for years to come.
In some cases, it may take as long as a couple of decades to recoup the money you have put into a home. That’s hardly an investment.
As a homeowner, your home should be viewed as a roof over your head and a place to settle down for a number of years, but it’s best not to look at it as something you can earn a profit off of.
Final thoughts to keep in mind
While owning a home may be a bad investment, some people may enjoy the freedom of being able to do whatever they want in their home without needing to check in to a landlord.
Additionally, those in a wealthier income bracket don’t typically stress about the costs and caveats outlined above.
With that said, recognize that homeownership has stipulations that many don’t discover until after they purchase a home. Buying a home at a young age may be a rude awakening when you discover just how many hidden fees and factors come into play.
If you aren’t looking at a home as an investment, then the choice between renting and purchasing should be entirely subjective. However, if investing is your main goal or you plan to live at your properties, then choosing alternative options may suit you better.
