Homeownership certainly isn’t for everyone. Not only does it mean taking on a huge amount of financial responsibility, but it also means having to commit to a lot of work over time. That’s why it’s really important to buy a home for the right reasons.
In a recent Bank of America survey, 91% of respondents say they view their home more as a valuable investment than as a financial liability. But if you’re looking at homeownership from an investment perspective, you may be looking at it the wrong way.
You can’t count on making money from a home
Some people insist that the reason to own a home rather than rent one is to avoid throwing money away and instead, set yourself up to make money. But that’s really not something you should count on.
Perhaps you’ll buy a home for $300,000 and sell it for $500,000 down the line. Or, you might buy a $300,000 home whose value drops down the line, and you may end up having to sell that home for $280,000. That’s not a financial gain.
Also, it’s important to realize that even if your home appreciates in value, you’re not necessarily making a profit by selling it for a much higher price than what you paid for it. On top of your mortgage and the interest you’re paying on it, you’re also covering the cost of expenses like property taxes, insurance, maintenance, and repairs over time.
Let’s say you buy a $300,000 home and sell it for $500,000 after 20 years. At first, it looks as if you’re making a cool $200,000 profit.
But what if, between property taxes, insurance, upkeep, and repairs, owning your home cost you $15,000 a year during that 20-year period? That means you spent $600,000 on your home all in between its initial $300,000 purchase price and the $300,000 you spent while living there. So selling for $500,000 doesn’t really put you ahead financially.
Buy a home for the right reasons
Some people are excited to own a home because they want the stability of having a place of their own and the opportunity to make their own rules instead of having to listen to a landlord. If that’s your mindset, then by all means, embark on a home search and start contacting mortgage lenders to see if you qualify to finance a home.
But if your goal is to make money, don’t buy a home. Instead, keep renting. That way, you’ll have predictable, fixed monthly costs for the duration of each lease you sign. And you’ll then have an opportunity to invest your money in assets like stocks that might allow you to grow a large portfolio.
Of course, just as you’re not guaranteed to sell a home at a price that’s higher than what you paid for it, so too are you not guaranteed to make money with a stock portfolio. But let’s say you invest $300,000 in stocks over time and your portfolio eventually becomes worth $500,000. In that case, you’re looking at an actual $200,000 profit, because you don’t have to pay property taxes on stocks or spend money to keep them around.
All told, your best bet in the context of buying a home is to think of it as a worthwhile expense. If it happens to make you some money over time, great. But that’s not something you want to bank on.
