Most people have been told at some point that buying a home is a good investment. We’ve heard from our parents, the media, relatives, and real estate pros that buying a house is a good investment that will help you to secure your financial future.
We’re told that investing in a home that appreciates over time will help you secure your golden years by paying it off in your younger years and leaving you without a house payment when your older. It also provides you with a large chunk of money once you sell it and downsize to a smaller house or an assisted living community if you ever need to make that transition.
On the surface, buying a home looks like a pretty good investment. It makes perfect sense compared to renting because when you rent, you get no return on your money except for a place to live for another month.
But when you invest in a house, you would expect that investment to go up in value over time, and for the most part it does. But these are different times than we’ve seen in the past.
The largest housing bust in American history has destroyed home values over the last several years. That has ruined that important investment for a lot of people. Many of us found out, quite painfully, that investments in houses don’t always go up in value like we’ve been told.
However, this housing crash is kind of a rare thing, and I think we’ve finally seen the worst part of it.
So in this article I’d to explore, by the numbers, whether or not investing in a home of is really a good investment, or if it ever was.
Let’s start with a few basic assumptions.
- First, we will assume you invest in a $200,000 home at today’s historically low rates of 3.5% using a 30 year loan.
- Let’s also assume that the homeowner spends $100/month on maintenance, $100/ month on property taxes, and $40/ month on homeowner’s insurance. These are lowball estimates that can vary quite a bit depending on how old the house is and the local property tax rates.
Over 30 years of making house payments you will pay back the $200,000 purchase price plus $123,312 in interest on your home investment.
Also over that 30 years you’ll spend $36,000 on maintenance ($100 x 360 months), and $36,000 ($100 x 360 months) on property taxes, assuming they never went up during that time, and $14,400 on home insurance.
In all, over the 30 years of payments, you will have spent $409,712 on your housing investment.
Was The Home Investment Worth It?
In order to find out if your investment in a home is worth the effort, you will need to find out how much your home is worth after 30 years of appreciating value.
In this case, let’s assume that your house investment appreciated at 3% per year over the 30 year time frame.
You can use the Real Estate Equity Calculator at Mortgage-Info.com to calculate that if your investment in a home appreciates at a 3% rate for 30 years, your home is going to be worth $491,368.
So if your home is worth $491,368 and you spent a total of $409,712 on the house, mortgage interest, maintenance, and property taxes, then you made a total of $81,656 over 30 years.
Using this conservative scenario, you came out ahead on your home investment to the tune of over 80 Grand.
But these are lowball estimates.
Let’s try a different scenario and figure out if investing in a house would be worth it some of the numbers were only slightly different.
What if you crank up the interest rate on your mortgage to 6%, which is much closer to historical norms, you up the maintenance and property taxes to $125 per month, and increase the home insurance premiums slightly to $45/ month, would your home still be a good investment?
After paying payments for 30 years you will have spent $200,000 in principal and $213,676 in interest.
Adding to the total is $45,000 in maintenance costs ($125 x 360 months), $45,000 in property taxes ($125 x 360 months), and $16,200 in home insurance costs ($45 x 360 months). With these totals, you would have spent $519,876 on your home investment.
In that scenario you would have actually lost $28,508 over 30 years worth of payments.
So is Buying a Home a Good Long Term Investment?
In the long run you certainly can end up with a house that’s worth more money than you spent over the years. However, it depends on what kind of interest rate you get, how much you spend on maintaining the house, property tax rates, and cost of insurance.
Predicting whether or not investing in a house will work out for you is difficult, if not impossible, because there is now way to precisely know how much property taxes or homeowner’s insurance may rise, or how much maintenance that your house may need over the years.
So when you are considering buying a house, it’s always wise to make some reasonable preliminary calculations using the calculator mentioned above.
That way, you can at least get a general idea of just what kind of investment you’re getting into so you can choose your investment in a home as wisely as possible.
In the long run, I believe investing in a good home, purchased wisely with the help of a good professional realtor is almost always better than being a renter.
This is because, over the long term, your payments allow you to build up equity in your home investment. Therefore you end up with something tangible to show for all the money you’ve spent over the years.
Be Realistic About Your Home Investment
However, it pays to be realistic by understanding that unless you have a lot of factors working in your favor, you may not get a great return on the money you invest in a home.
Unless you make the effort to be wise and conservativeat the beginning when considering the true costs of investing in a home, you could end up with a home that is worth quite a bit less than you paid for it.
Is that necessarily a bad thing? In my next post I’ll hash out the cost of renting vs. owning your own home and find out if investing in a home is really worth the money, or just a house of cards.
Your number crunching does not take into account the fact that you also lived in your home. Since you must live someplace, and since housing is not free, you should factor that in, in my opinion.
My current home thus far has not been a good investment at all. I hope the value will increase in time, but who knows? Let’s hope. 🙂
I agree. You have to subtract out whatever you would have spent on rent during those 30 years. I get that this is meant to be simplistic to make a point, but the present value of those mortage payments decreases over time so that they are worth much less at the end of the 30 years. And rent will be lots higher because it will go up with inflation.
On the other side, both home maintenance and property taxes are probably higher than assumed. Perhaps the location is a big factor (on my $230K condo in Chicago I pay $250/month for property taxes.
Right, over 30 years rent keeps going up, but the house payment stays the same, actually getting cheaper over time.
In your old age rent continues to go up, but the homeowner (hopefully) has his house paid off. That’s when the real benefits of homeownership really kick in.
Location, location, location… Seems to be more pertinent than ever, with property value trends fluctuating wildly from geographic locations.
We fell in love with the dream, but find that it’s not really worth it as an investment. There’s too much yard to contend with, and there’s a distinct lack of time in being able to really keep up with it. I think that home purchasing can be a great decision, but the rules of engagement are changing enough so that research is absolutely crucial. Would I buy a home again? Yes. It’s great to not be subject to the apartment’s rules. 🙂
I agree, owning a home comes with responsibilities that take time and money and can sometimes be a hassle. The thing you have to watch out for is that rent continually goes up over the years, but the house payment stays the same. Eventually the house gets paid off and then you don’t have a payment anymore, freeing up money to live on in your later years.
If you rent, you still have to pay rising rents even in old age, which can severely hamper your lifestyle at a time when your income is usually minimal. I’ll be writing more about that in my next post for EOD which compares buying with renting.
Love this, Jason. It’s great how more and more people are looking into the details of a home purchase before just jumping in. It’s not always beneficial for everyone, as the number show.
Always run the numbers before buying anything. Especially something as costly as a house. You should always know what the risks are so you know what you are getting into and you will know for sure that it’s thr right decision.