Why You Should Be Careful in Thinking Your House is an Investment.
Most people have a story about a parent or grandparent that bought a house for very little money 30 years ago and it is worth a significant amount today. Stories like this can be misleading. Making 300% on your house sounds good in theory, but only if you don’t go back and crunch the numbers. Add up the amount of money that they’ve put into the house and then add in inflation… the results might not be as desirable as they first seem.
Making money on houses is dependent on appreciation, which can’t be guaranteed. While there may be some opportunity to turn profits on houses in areas that have a booming housing market in the short term, history shows that these markets often slow down or don’t last. The carrying costs of owning a home as well as their illiquid nature are both reasons to be hesitant of labeling your home as an investment.
Owning a home comes with significant cost over both the short and long term. Closing costs, lawyers’ fees, and moving costs can be expected in the short term. The long term is more of a mystery. While you hope that the house you bought is in good shape, at minimum you can expect to be paying for minor repairs. Unfortunately, as homeowners know, to keep your house from depreciating you could be on the hook for some major and expensive renovations such as a new roof, windows, esthetic upgrades… to name a few. Not to mention the cost of damage from any unexpected events. A good investment is typically something that makes your capital money, not one that demands large sums throughout its lifetime.
A common financial planning misconception is that equity in your home should be used in calculating the amount of assets you will have in retirement. Any equity you have built is just that; it is in your home. There is no ATM available to take cash out of your house if the need arises, so it is best to not include your home in your retirement savings. It is often argued that the house can be sold in retirement and the funds used that way, which is possible, however it is important to consider whether or not you want to get rid of the house you have put so much into. Retirement is when people get the chance to enjoy their properties that they have put so much work and money into. There are ways to tap into the equity of your home, such as a reverse mortgage or home equity line of credit, but these can have undesirable long-term implications that many retirees want to avoid.
Home ownership is not a bad thing, but it should not be typically used as a retirement strategy. A home is meant to be enjoyed and that is what it should be seen as by homeowners. Investors should be careful to avoid overspending on their houses at the expense of their retirement savings. A careful balance between real estate and proper investments is a must to achieve retirement goals.