Today, I’m venturing a ways off the strictly insurance-related path to discuss a topic that is more closely tied to general personal finance. While it’s an important topic to address, the majority of financial bloggers/writers/authors tend to screw it up.
For most people in the United States, home ownership is some great symbol of having “arrived,” or at least, having fulfilled a big portion of the American Dream. If you grew up anything like me, you often heard the phrase, “Your house is your greatest investment.”
For most of my life, I bought into that without giving it any additional thought, and it really wasn’t until I bought my first house back in 2001 that I began to question the notion a bit.
Now, what I have to say might sound crazy, but hear me out.
Buying a house is not an investment.
How do I know for sure?
Well, I’ve bought and sold three houses so far.
With the first house, I came out ahead, but I lost money on the second and broke even – kind of – on the third. The funny thing is, I consider myself lucky because most people can’t even say with certainty whether they made or lost money in buying and selling their houses.
While they know how much they paid for it and how much they sold it for, they have no accounting of all the expenses in between.
They didn’t keep track of how much interest they paid on the mortgage (assuming they borrowed at least 75% of the purchase price), the property taxes every year they owned it, all of the repairs they made while owning the house, etc.
One of life’s greatest mysteries
The true cost of a house can never be fully accounted for. I have a theory that if you were to keep complete track of all those hard dollar costs, you would undoubtedly come out negative in the short run and more than likely in the long run as well.
And, I’ve not even factored in the soft costs—inflation, the fact that you “own” a highly illiquid asset, and the fact that you are now bound to that property even if some great opportunity comes your way that might require a relocation.
Now, there is something to be said for the security of outright home ownership…I will concede that. However, you should probably not think of it as an investment when it clearly and most certainly is not.
That being said, as a father of five children, I believe there is value in buying a house. But, the true value can’t be measured quantitatively. Warren Buffett agrees with me:
“For the $31,500 I paid for our house (in 1958), my family and I gained 52 years of terrific memories with more to come,…though I would have made far more money had I instead rented and used the purchase money to buy stocks.”
Buy your house as a place for your family to enjoy, to build memories, and to have some sense of security. But, don’t buy more house than you can comfortably afford, and what you can afford should also cover things like new roofs, HVAC systems, and plumbing issues, which will require you to spend additional money in the future.
Always remember that cash is king. Don’t put every bit of your available cash into buying a house. One day, you might need it. If this post has turned your world upside down and you don’t know where to turn, contact us.