SMS 158 – Your House is not an Investment

Your House is not an Investment

Just because your house appreciates in value does not mean it meets all of the criteria of an investment.

I am not saying real-estate is a bad investment, real-estate that you are not emotionally invested in can be a good investment. The house you live in, by its very nature, is an emotional investment.

Investopedia:

What Is an Investment? An investment is an asset or item acquired with the goal of generating income or appreciation. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.

Why your house is not a true investment:

  1. You are too emotionally invested  – can’t make rational investment decisions
  2. No cash flow mechanism  – an investment that never pays out is not much of an investment, HELOC creates debt
  3. High carrying costs – far too high to be considered a good investment (interest, insurance, taxes, maintenance)
  4. Highly leverages – this incorporates too much risk
  5. Transactions costs  – lower cost options exist, too many hands in the purse
  6. The opportunity costs – lack of diversification, there are better returns on investments

What your house does represent:

  1. A place to live – you can’t live in an index fund
  2. Provides stable living environment for raising a family
  3. A great wealth building tool through forced savings
  4. An opportunity to leverage a purchase that will usually increase in value

Home Repair vs Home Improvement

Home Repair – if it’s broken fix it

Home Improvement – Everyone likes to refer to their home as an investment. If you investment additional money into your house “investment” you should expect and have some reasonable expectation of the return on that additional investment.

JL Collins – Why your house is a terrible investment

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