Is Buying a home a good investment.? We’ve always heard from the media, our parents and older relatives, and, of course, real estate professionals that buying a home is a good investment that always helps to secure your future.
We’re told that buying a home is a good investment that will appreciate over time, and eventually help provide for retirement by not having a house payment in your old age once you’ve paid off the mortgage. Alternatively, you can make money selling the house when you become too old to live alone or just need to downsize to a smaller house or a condo.
On the surface, buying a home looks like a good investment, and it only makes sense compared to renting because when you rent, you get no real return on your money other than a place to live for another month.
Is Buying a Home a Good Investment? You be the Judge
But when you invest in a house, you expect that investment to go up in value over time, and generally that’s what happens, but these, my friends, are different times.
We’ve had the largest housing bust in American history destroy home values over the last few years and ruin that investment for a lot of people. We found out (quite painfully, I might add) that home investments don’t always go up in value like we’ve been led to believe over the years.
But this housing crash is a rare animal, and I think we’ve seen the worst of it. So in this post I want to explore whether or not investing in a home of your own is really a good investment, or if it ever was.
I’ll start with a few basic assumptions. Let’s assume you invest in a $200,000 home at today’s historically low rates of 3.5% on a 30 year loan (see what I recommend here). I’ll also assume that the homeowner spends $100/month on maintenance, and $100/ month on property taxes and $40/ month on homeowner’s insurance. These are lowball estimates and can vary widely depending on the age of the house and property tax rates where you live.
Over 30 years of house payments you’ll pay back the $200,000 purchase price plus $123,312 in interest on your home investment. Also over that 30 years you will have spent $36,000 on maintenance ($100×360 months), and $36,000 ($100×360 months) on property taxes, assuming they never went up during that time, and $14,400 on insurance.
In all, over that 30 year time period you will have spent $409,712 on your housing investment.
Was This Home Investment Worth It?
In order to find out if your investment in a home is worth it we’ll have to find out how much that home is worth after 30 years of appreciation in value. In this case I’ll assume that over that time, your investment appreciated at 3% per year.
Using the Real Estate Equity Calculator at Mortgage-Info.com, you find that if your investment appreciates at that 3% rate for 30 years, your home will 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.
Overall using this scenario, you came out ahead on your home investment. But these were lowball estimates.
Let’s take another look and find out if investing in a house would be worth it if things were a little different.
If you up the interest rate on the mortgage to 6%, which is a little closer to historical norms, you increase your budget for maintenance and property taxes just a little to $125 per month, and increase the insurance to $45/ month, would it still be a good investment?
After 30 years you will have spent $200,000 in principal and $213,676 in interest. Add to that $45,000 in maintenance costs ($125×360 months), $45,000 in property taxes ($125×360 months), and $16,200 in insurance ($45×360 months) you would have spent $519,876 on your home investment.
In that scenario you would have actually lost $28,508 over that 30 year time frame.
So Is Buying a Home a Good Long Term Investment?
Overall you actually can end up with a house that’s worth more than you spent over the years, but it depends on the interest rate you get, how much you spent maintaining the house, property taxes, and insurance.
It will always be hard to predict for sure how well investing in a home will work out for you because you can’t totally predict how much property taxes or homeowner’s insurance may rise, or just how much maintenance that house may need over the years.
But when you consider buying a house, you should always at least make some reasonable preliminary calculations using the calculator mentioned above to get an idea just what kind of investment you’re getting into to help you choose your investment in a home wisely.
Overall, I believe a good home investment, purchased wisely with the help of a knowledgeable professional is almost always better than renting because, over time, you build up equity in that investment and have something to show for all the money you’ve spent over the years.
However, you have to be realistic and realize that unless you have a lot of factors working in your favor, you may not get a great return on the money that you invest in a home. Unless you’re very wise and conservative at the beginning in considering the true costs of investing in a home, you could end up with a home that is worth much less than you paid for it.
But could buying a home still be a good investment even if it doesn’t appreciate in value enough to cover your costs? Find out in my next post when I explore the cost of renting vs. owning your own home and find out if investing in a home is really worth it, or just a long term financial illusion.