Your House is a Terrible Investment

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“Want to be wealthy? Then you should buy yourself a house!”… said the person that knows nothing about wealth building. Sure, buying a reasonably priced house is often better than renting, but it’s not a wise investment. Truthfully, buying a house is a terrible investment – one of the worst that you’ll probably ever make.

Your House is a Terrible Investment

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“What do you mean, Derek? I was always told that it was wise to buy a house, and look at home prices today! They’re going up like crazy!”

Let me just jump into it with the facts here…

house is a terrible investment

Average Home Appreciation

Since 1963, home prices have appreciated by an average of 5.4% per year. Sounds pretty decent right?

And let’s just say that in 1963 you bought your first house (assuming you were alive then…and if not, just humor me here. You’ll still learn something I promise) for $18,000 and never moved. Today, your home would be worth $321,100. BOOM! Thank you home appreciation!

a house is a terrible investment

Average Stock Market Appreciation

When people talk about the “average movement of the stock market”, they’re typically talking about the S&P 500. This is simply an accumulation of stocks for the top 500 companies in the U.S. In aggregate, the way the sum of these 500 companies move – that’s the way the market as a whole is moving as well. It’s a great measure and it’s been around for ages.

So you probably know where I’m going with this…. If houses appreciated by 5.4% since 1963, what did the S&P 500 do? Are houses really as good of an investment that everyone claims they are?

As you may have guessed, the S&P 500 earned more than the average home since 1963. Instead of 5.4% growth, the S&P 500 grew by an average of 10.0%.

“Okay.” you say, “So it did better, but only by about 4% a year. I still might rather have a really nice house vs. investing the money elsewhere.”

“Only”, huh…?

You know the chart above with the appreciating values of the average home price? I made a similar chart for growth of the S&P 500. If we started with $18,000 in 1963 (the same amount as the average home price), what do you think that amount would have grown to today? $500,000? $750,000?…

a house is a terrible investment - with S&P growth

Try again… $3.1 million dollars – almost 10X the amount of that “great house investment”… Yikes!!!

And you know what? I could make this chart look even worse. Houses take upkeep (approximately 1% of the home’s value each year). I’ll stop the rant now…I think you get the picture. 😉

So What Now? I Shouldn’t Buy a Home??

So what am I driving at here? If you have the option to buy vs. rent, would I tell you to rent all your life? Absolutely not. If you’re debt free and have at least a 10% down-payment for a house, then knock your socks off. Owning a home will help your financial future…as long as you do it right.

What I am saying in this article is, “Be careful how much home you buy.”

Buying a house keeps you from throwing your money down the toilet in rent each month, but based on the charts above, it’s obvious that it won’t make you wealthy. 

So buy only as much house as you need.

  • If you’re a family of three with an average income, buy no more than a three bedroom house and keep the square footage around 1,500.
  • You’re one guy? Stick with the 1 bedroom condo near your work.
  • If you and your wife are both doctors and earn a combined income of $600,000 a year, that’s great! But don’t spend any more than $1,000,000 on your home please…

You see, wealthy people already understand that a house is a terrible investment. It’s why only 9% of their total net worth is tied up in their house.

rent or buy - traits of the rich house hopping

Related: How Much House Can I Afford?

If you want to be wealthy in the future, don’t handcuff yourself with a huge mortgage. Spend the lowest amount you can while staying content, and then load up on your other investments! You know, the real ones…like the stock market and rental property.

Would you have guessed that a house is a terrible investment? Are you too heavily invested in your house?

 

Recommendation from the Author:

If the stock market is so much better than investing in a home, then where should you go to get started? I’m a big fan of Wealthsimple. The process is simple, they make investing easy to understand, and they’re a socially responsible company (Oh, and they’re available in Canada too!). Get started with a $100 investment, and they’ll give you $50 for free!

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11 comments to Your House is a Terrible Investment

  • Paul

    This idea works just about everywhere but there is one place (I am sure there are others, Manhattan maybe) I can vouch for where it doesn’t, Hawaii. I made more money flipping houses for 30 years than I made working. All I have to do is look at my earnings record on the SS website. Real estate here is completely different than the continental United States.

    • It still works for Hawaii. You just need to buy much less house.

      If you’re continually telling yourself that this article applies to everyone else but not you, you’ll just end with a mediocre house and nothing in your investment accounts in your elderly years. It’s better to be honest with yourself now.

      I don’t mean to be harsh, but I’d rather see you succeed than to say, “Yeah, true.” and let this conversation end.

  • Paul

    I currently am retired with 2.5 million in banks and investments. My custom house sits on 17 acres, mortgage free. I owe all this to flipping houses in Hawaii. 1 example (I have many) Bought a condo in Park at pearlridge with a tenant in it. Never saw the building. Sold it 13 months later and after principle and maintaince costs used the profit to put 30% down on 3 more units. It is still going on to this day. You just need a lot to get started.

  • I think the problem is the mentality that a house is an investment. In my mind, that’s not the proper way to look at a house at all. You buy a house, in my mind, because you need somewhere to live and you want to own your own property. That’s it. Now, if it happens to make money, then great, but that shouldn’t be the primary goal.

    Unless you’re buying to rent or flip, in which case it’s an investment by the strictest term, but my statement above goes to the average owner occupied house.

    • Well said MB! Paul is doing well because he’s renting out his homes, not living in them and struggling to make a steep monthly payment. Sounds like we’re all on the same page! 🙂

  • Paul

    I completely agree with you Money Beagle. At one point I had 7 houses as investments besides the one I lived in. I understand both points you make.
    Paul

  • jeffrey

    nice article, eye-opening for me.

  • Lucas

    I believe the growth in the S&P500 would be realized if a person had 18,000 to invest at once in 1963. Back then that would be a hefty investment. More likely, the home was worth 18,000, and financed over 30 years (what most people could afford). Assuming a 5% down (540) and amortized over 30 years (99@mo), the total amount invested was probably 35,783 to achieve the 321K. At the same time, it provided a home for the family. I wonder one could have achieve that return on the S&P, assuming the income was available to invest?

    I totally agree with you, but was wondering if the variance in growth is that large.

    • Hey, it’s a good question Lucas. I’m sure you realize that I had to keep it simple for the article. I could have put together the payments over 30 years for both the house and the investment, but that would have taken away from the overall point of the article.

      Either way, you can agree that it’s a good idea to buy a modest house and invest heavily for the future instead of buying a mammoth house and inhibiting your cash flow for 30 years.

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