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 buying a home is a good investment that will appreciate over time. It will help during retirement by eliminating a house payment when you're older and have a paid off 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. 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. Generally that’s what happens, but that isn't always the case.
A few years ago, we had the largest housing bust in American history. It destroyed home values and ruined 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 was a rare animal. Thankfully, the housing market is back into full swing in most areas.
The Numbers on Buying a Home
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. They 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), $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.
Thinking about buying a home? Here are a couple of good resources you can check out, especially if you're a first time home buyer:
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 Home Equity Calculator at Ultimate Calculators.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.
What About a Different Home Buying Scenario?
Let’s see 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.
Is Buying a Home a Good Long Term Investment?
So is buying a home worth it in the long run?
Overall you actually can end up with a house that’s worth more than you spent over the years. But it depends on your interest rate, how much you spent maintaining the house, property taxes, and insurance.
It's hard to predict for sure how well investing in a home will work out for you. This is 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.
So Is Buying a Home Wise, or Should You Rent?
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 conservative at the beginning, you could end up with a home that's worth much less than you paid.
But could buying a home still be a good investment even if it doesn’t appreciate enough to cover 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.
Until then… do you think homeownership is a wise choice for you?
Let me know in the comments