Buying a house is a great investment — if you need a home

Erik J. Martin
Erik J. Martin
The Mortgage Reports Contributor
May 11, 2021 - 7 min read

Is a home an investment?

Many people don’t think of their home as an investment vehicle. Unless it’s a property you plan to rent out or fix–and–flip, you might think a house is just a place to live.

But the truth is, your home is an investment in many ways.

You’ll be putting a lot of money into the property – and its value can rise or fall with the economy. Plus, unlike renting, a house helps you build wealth.

Many experts believe buying a home is a great investment because it’s a fairly safe place to put your money, and home values generally increase over time.

However, the returns aren’t as large as you might see on other investment vehicles.

So, is buying a home the right financial decision for you? That all depends on your goals.


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Is buying a house a good investment?

The short answer is that it depends what you mean by ‘investment.’

Buying a house versus investing in securities

If your main goal is to turn your money into more money, a home purchase likely isn’t the best investment you can make.

That’s because, when compared to stocks, bonds, and other investment vehicles, you’ll likely see lower returns on the money you spend on your home. Real estate has earned 3–4% per year historically, versus around 10% per year on stocks.

But when compared to alternative forms of housing – such as renting – buying a home is typically a much better investment if you can afford it.

Buying versus renting

“Purchasing a home is generally regarded as a good investment compared to renting because you can build equity. When you rent, all you do is pay someone else’s mortgage,” notes Annie Kou, owner of AK Luxury Properties and a contract attorney in Los Angeles.

“If this is where you intend to live for at least three to five years, it makes more sense than leasing in many markets,” she continues.

“Also, rent, unlike some homeownership expenses such as your mortgage interest and property taxes paid, is not tax–deductible in general.” Buying a home can have tax benefits such as deductions and even tax credits.

Of course, there are some cities in which renting is significantly more economical – especially for a one– or two–bedroom apartment – than purchasing a starter home, says Michael Fischer, director and wealth advisor for Round Table Wealth Management in New York City.

“But as with other investments, real estate ownership can be a great way to pass wealth to the next generation,” Fischer adds.

How a home helps you build wealth

Ask Nadia Evangelou, senior economist with the National Association of Realtors in Washington DC, and she’ll tell you purchasing a home is a smart investment.

That’s because your home’s value is likely to increase over time, which in turn increases your wealth.

Financial benefits of buying a home

“Consider that the typical home has appreciated nearly $150,000 in the last nine years,” Evangelou says.

“Especially for risk–averse people, purchasing a home is often a safe investment that has traditionally been a great inflation hedge to protect against a loss in purchasing power of the dollar.”

Put more simply, while homes and real estate can lose value (as they did during and after the Great Recession), home values have been on an overall upward trend throughout recent history.

“While home values can go up or down, they are generally much less volatile than the stock market” –Brian Koss, Executive Vice President, Mortgage Network

In fact, U.S. housing stock gained about $2.5 trillion in value in 2020, per Zillow.

Data firm Black Knight reports that yearly home price growth has seen a 25–year average return of 3.9% (not bad for a low–risk investment).

“While home values can go up or down, they are generally much less volatile than the stock market,” explains Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts.

Potential risks of home buying

Still, others caution that money put into housing can often yield better returns elsewhere.

“Too often, people make the mistake of spending too much of their income on a house and effectively crowding out other investment opportunities,” says Robert Johnson, professor of finance at Heider College of Business, Creighton University, in Omaha, Nebraska.

“These include investing in stocks and bonds and funding 401(k)s and retirement accounts, especially if doing so could earn a full match by their employers,” he continues.

Budgeting is crucial

Before buying, you should evaluate your cash flow and monthly expenses to make sure you can afford the payments on a home, while still making smart personal finance moves like contributing to retirement accounts and maintaining an emergency savings account.

Don’t forget – mortgage payments include homeowners insurance and property taxes as well as principal and interest due on the home loan.

You can use a mortgage calculator or talk to a lender to figure out what you an afford.

When is it smart to buy a house?

The argument is simple: You need a place to live full time anyway. So why not own a home nstead of “borrowing” it in the form of renting?

“Based on the most recent data, a typical homeowner’s net worth was $255,000 compared to only $6,300 for the average renter,” says Evangelou. “That’s a net worth 40 times greater.”

Additionally, owning a home can bring long–term social benefits to homeowners, including nurtured friendships with neighbors.

“Homeowners tend to remain in their homes for much longer – the median length is 10 years – than renter households” (two years) Evangelou adds. “This residential stability provides a wide range of benefits to the homeowner and the broader community.”

Also consider that monthly housing payments stay the same with a fixed–rate mortgage, even 30 years after buying a home.

“This gives you more financial predictability and control than renting, as rents generally go up gradually over time, if not suddenly,” Koss points out.

Finally, home equity can be a great asset. If your home’s value has risen above the purchase price by the time you sell, you could see a large profit.

And, even if you’re not ready to sell, you may be able to cash–out home equity for renovations and other large expenses.

Borrowing against your home’s value at a low mortgage rate can be a much more affordable way to access large sums of cash than paying with a credit card or personal loan.

When is a house not a good investment?

This is not to say that homeownership is the right strategy for everyone.

Many first–time buyers today are priced out of their local real estate markets. Some are unable to afford the steep down payment, closing costs, and monthly mortgage payments involved.

“Single–family existing home prices rose in all metro areas in the last quarter of 2020, while 88% of the metro areas had double–digit price gains,” Evangelou says.

The silver lining to these statistics is that homeowners have quickly built more equity in recent years, and sellers are reaping huge rewards. Today’s prospective buyers may benefit from these same perks over time, too.

“Purchasing a house should primarily be about matching your needs for space, community, and your family, and secondarily be about adding value or resale.” –Michael Fischer, Director and wealth advisor, Round Table Wealth Management

However, Johnson reminds readers that home equity can dissipate quickly, as seen during the financial crisis over a decade ago.

“Real estate is generally very illiquid – meaning not easily converted to cash unless you tap into your home’s equity,” he says.

“Because homes aren’t actively traded and the market is relatively illiquid, many investors assume that home values won’t fluctuate much. Homeowners convince themselves that the value of their home is more stable than that of stocks, but that concept is illusory. Home prices can fall precipitously, as history has shown us.”

Fischer says a home may not be a good investment if you don’t anticipate remaining in or renting out the home for at least five years, or if the local housing market has increased significantly over the past few years.

If the latter is true, “you may be better served looking at a nearby market that has yet to appreciate,” he adds.

What about investment properties?

Real estate investing – buying rental homes and investment properties – is a different matter altogether.

If you’re purchasing a home to lease out via long– or short–term rentals, or you plan to fix–and–flip the property, it’s easier to view the home as a bona fide investment tool.

Unlike a primary residence (the home you live in), investment properties are intended to generate cash flow through rental income. Thanks to the low interest rates on real estate, this can be a relatively low–cost and stable way to create passive income.

But that doesn’t mean you can’t lose money on this venture.

“Rental properties can create an ongoing income stream for their owners,” says Evangelou. “But choosing the right property and location is key, as is crunching the numbers. You must first calculate the profit that you can potentially make from the net income generated versus your expected operating expenses.”

Those expenses can include management, upkeep, and maintenance costs.

“If you don’t like collecting rents, personally handling repairs, or paying a third party to operate and maintain your investment property, owning investment real estate may not be for you,” says Koss.

Should you buy a house?

There are both risks and rewards that come with purchasing a home.

Homeownership can pay dividends, provided that you’ve done your homework and:

  • Understand the seriousness of this financial commitment
  • Qualify for mortgage financing
  • Have a reliable job and a steady source of income
  • Can afford the monthly payments, taxes, and ongoing maintenance that come with homeownership

Ultimately, “Owning a home should be considered independent of your investment goals,” Fischer suggests.

“Purchasing a house should primarily be about matching your needs for space, community, and your family, and secondarily be about adding value or resale. As an investment, it’s not as preferred as owning stocks, mutual funds, or exchange–traded funds.”

The bottom line? If you’re solely looking for investment opportunities, buying a home to live in might not be your best option.

But if you need somewhere to live, a home could be the smartest investment you’ll ever make.


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