Is your house an investment?

An investment is broadly defined as an “asset purchased with the idea that will provide income in the future or be sold later at a higher price for a profit.” If I buy bonds, I might receive a monthly interest payment for as long as I hold that bond. If I start a business for $50,000, but later that business provides an income of $100,000/year, that is clearly an investment that paid off. Similarly, company stock can be purchased for one price and sold later for a much higher (or lower!) price. Even toys and collectibles can be shockingly good investments. LEGO sets have appreciated in value better than some traditional investments like gold, stocks, and bonds, yielding an average return of about 11% from 1987 to 2015 according to recent economic studies.[i] Recently, a LEGO Captain America and Iron Man set released in 2012 was sold at an auction for $11,200! These are all assets that generate either income or monetary gains in the future. On the surface, it seems that your residence fits the definition, since most houses do appreciate over time.

The primary reason people purchase a home is for shelter. Your home is a residence that you build your life around, and as such, requires a significant amount of “upkeep” and maintenance over time. Not only do you have to make monthly mortgage payments, but you also must pay real estate taxes, homeowners’ insurance, sometimes private mortgage insurance (PMI), and utilities. You pay to maintain the property, which means providing repairs and general maintenance, as necessary. These ongoing expenses are called carrying costs—the costs of holding the asset over time. Repairs associated with being a homeowner can also be significant. Replacing a roof, gutters, siding and doors, remodeling kitchens and bathrooms can be expensive. In 2020, the average cost of replacing a heating, ventilation, and air conditioning unit (HVAC) in the U.S. was $5,750, and the average cost of draining a septic tank about $400. Many personal finance gurus and financial planners have made the case that these carrying costs add up over time, and the result is that even though it feels like you made money when you sold your house, the reality is that you did not. In other words, a home is an asset that has ongoing liabilities associated with it, and when you sum up the liabilities upon the house sale, they might negate your proceeds from the sale.

I understand the logic of these arguments, but I do think that houses can be good investments. Alternatively, they can also be a black hole of endless carrying costs. In other words, there is no “once size fits all” answer to “Are houses investments?” Some houses are going to appreciate much more than their ongoing costs, especially if they are in growing areas with good schools, and others might lead to thousands of dollars in losses by the time they are sold. So, just like some company stock is a good investment over time, and others go bankrupt, houses are similar. There is one final piece of this puzzle that I think most people seem to forget when they argue that houses are not investments. You do not have to pay rent when you own a home! Rent in this scenario is called an opportunity cost. Opportunity costs are the loss of potential gains when one alternative is chosen. In other words, when you choose to rent instead of paying a mortgage, you “lose” the gain in equity that you would be receiving by paying off a home. When we factor this back into the equation, many homes become good investments. However, this is highly dependent on location, rental costs, the housing market, and many other factors. But just like stock, there is an element of risk, and many homebuyers will make poor decisions that will lead to them losing money on their primary home.

[i] Dobrynskaya, Victoria and Kishilova, Julia (2018). LEGO - The Toy of Smart Investors. SSRN, April 2018, published online http://dx.doi.org/10.2139/ssrn.3291456.