Home Ownership Isn’t a Money Losing Proposition

by Kay Lynn

Gray winter house with a white picket fence, San Mateo, California, USA

Do you believe homes are not an investment?  That seems to be the prevailing thinking in the personal finance blogosphere.  Being a homeowner seems to be a bad thing to some authors.

After owning seven homes over the past three decade, my experience has shown it does make financial sense.  Of course, you should follow some common sense guidelines.

Don’t Buy in Housing Bubbles

A lot of the negative feeling towards home ownership is a result of the housing industry meltdown.  Too many people bought high and ended up losing enough equity that the mortgage is greater than the value of the property.  In many cases by very large numbers.

It’s not a good idea to buy in a hot market where sellers get multiple offers in a day and buyers don’t even bother touring the property.  Real estate is cyclical and things will turn around so even if you did pay too much, prices will go up eventually.  Rent money never comes back.

Get a Fixed Rate Mortgage

During the real estate frenzy a co-worker told me an interest only loan wasn’t a bad deal.  His reasoning was that the market would continue to go up and the borrower could sell the home and make money without paying a dime of principal.

I’ve always been a proponent of a fixed rate mortgage because you never know what will happen.  Adjustable rate mortgages were very attractive until they adjusted to the point people could no longer afford their payments.

You may not get raises every year and the interest rate could be 5% higher in five years.  Plan for the unexpected by keeping your mortgage payments constant with a fixed rate mortgage.

Plan to Stay

Never buy a home if you don’t plan to stay long enough that it is less money than renting for the same period once you factor in selling and borrowing costs.
Unless you bought a fixer-upper, most people lose money if they don’t stay long enough to gain equity in the home.   There are a lot of costs associated with selling even if you are able to raise the price somewhat higher than what you paid.  Trust me, we bought and sold a home within a year and lost a lot of money that would be good to have in the bank.

Buy Less than You Can Afford

It’s good to have some breathing room in your budget.  If you’re approved for a $250,000 loan that doesn’t necessarily mean you should spend that amount!

Figure out your budget and what house payment comfortably leaves you able to meet all goals and save for the unexpected.  Don’t forget to add in the costs of property taxes, maintenance and other new costs associated with the purchase.

When we sold our last home, the selling price was 10 times the purchase price.  If we had paid rent for those 30 years , there would have nothing to show for the money.  I do think buying a home is a good financial move…at the right time in your life.

Do you it makes sense financially to buy a home?

photo by  Wonderlane

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Little House December 26, 2011 at 11:57 am

I definitely agree that buying a home is a better investment in the long run than renting indefinitely. I’m still working on saving my down payment, but I know that buying will be a better long-term option than renting for eternity. And I agree that a lot of people right now have a bad taste in their mouths regarding buying because they bought during the bubble. I was approved for a loan during the bubble, but I turned it down because prices were out of control and I didn’t want to buy a fixer for half a mil!

Kay Lynn January 4, 2012 at 9:20 am

Little House, I bet you and your husband are so relieved you didn’t buy during the housing bubble! We bought and sold during the downturn in 2007, but it didn’t matter really impact us negatively because we stayed in the same market (and have so much equity already).

her every cent counts December 26, 2011 at 1:44 pm

I think it depends where you live. In my area, which is one of the most expensive regions to buy in the US, even a basic 1br condo would cost me $500k (this 1br is going for $600k! http://sfbay.craigslist.org/pen/reb/2769372174.html) And that doesn’t include HOA which is likely $400-$500 a month, plus taxes.

I’m not sure exactly how much of a loan I would be approved for on my $90k salary, but I’d never be able to “buy less than I can afford.” Meanwhile, I am paying $650 a month on rent, sharing a 3br apartment with two other women my age. Sure, it would be great to own my own place, but I just don’t see that being possible for the foreseeable future. It seems like a much wiser move to save the money and invest it in the stock market. That could be a dumb move if the market crashes again, but it’s much more likely I will make more money in stocks than in a house right now, based on what I can afford. Then, maybe one day my stocks and dividends will earn enough interest that I can actually buy a house.

Kay Lynn January 4, 2012 at 9:24 am

Her Every Cent Counts, I know we’d have to live out in the burbs if we were in the Bay area. In that case, investing your money in something else does make more sense.

Jeffrey Trull December 27, 2011 at 6:39 am

I think a home can be a good investment, but only under the right circumstances. If you bought during the housing bubble, you’re going to have to wait a LOOONG time to see the value increase again. A house may not be the “best” investment, either. In the last 100 years or so, real estate has only appreciated about 3% a year while similar investments in the stock market would have returned closer to 8-10%.

I think there are a lot of non-financial benefits to buying a house that will make it worthwhile and are definitely worth consideration, like wanting to stay in the same place to raise a family.

Kay Lynn January 4, 2012 at 9:26 am

Jeffrey, I think that if owning is about the same as renting, you are usually better off owning a home. My husband and I can sell our home (after 35 years of building equity) and have a pretty big nest egg for retirement. If we rented all those years, we’d have nothing to show for that rent money.

Evan December 27, 2011 at 6:02 pm

It isn’t that they aren’t investment they just aren’t a good one for most people. If you are talking a 3% historic growth rate then after mortgage interest, taxes, repairs, etc. I don’t think many people turn a very impressive profit if they sell before 10 or so years.

Kay Lynn January 4, 2012 at 9:27 am

Evan, absolutely it’s a must to keep the house 7-10 years. I would advocate renting to anyone thinking they wouldn’t stay at least that amount of time.

Maggie@SquarePennies December 27, 2011 at 11:58 pm

Buying less than a lender says you can afford is the best way to go if you can. They always want to lend you the maximum. If possible get the loan based on just one person’s income in case one of you loses their job.

Shaun Somers December 28, 2011 at 12:29 am

Selling your home for 10 times what you paid for it is great! You do have to consider how much you put in for renovations and maintenance over the 30 years you owned it, and all the property tax you paid, as well as the interest you paid to the bank. Perhaps most importantly you need to figure in the inflation that has taken place to inflate the dollar amount your home sold for. Then there’s the costs of selling which you mentioned.
Studies show the REAL (that is, adjusted for inflation) long term rate of return on your own home is actually 0%. Yes, ZERO percent.
Owning a home isn’t necessarily a money losing proposition, but it certainly can be if you’re forced to sell at the wrong time. Planning to stay is great, but plans fall through. Renting can be a much better option for some people.
For those who do decide it’s best to buy, your advice to buy less than approved for is excellent.

Grace December 28, 2011 at 8:02 am

Houses are an OK financial investment. But they are usually a significant and satisfying emotional investment–there’s just something about owning the four walls that surround us. I agree with all of your points and would add one more: Resist the opportunity to treat your home as your piggy bank. It’s you home–nothing less, but nothing more than that, either.

Kay Lynn January 4, 2012 at 9:31 am

Grace, excellent addition! Many people who got in trouble the past few years were homeowners that did exactly that! I remember one story about a couple that refinanced so they could buy new cars and a big boat and ended up getting so upside down when the value went down.

Maria@moneyprinciple December 28, 2011 at 12:12 pm

Buying a house is not bad as an investment; one is in real trouble if this is their only investment (or for that matter most of their wealth is in non-income generating real estate; trust me I know). There are cases where renting makes sense though – if you can rent a house you can’t afford to buy or if you can rent for less than what the capital tied up in your house will make if invested.

UltimateSmartMoney December 28, 2011 at 6:32 pm

I also believe buying a home is better than renting. I just hate to see people throw away all that rent year after year when they can put it instead into home mortgage. I think now is a great time to buy since it is not a seller’s market. People should consider buying a home as long term investment as well. It usually works out in the end as long as you can pay your mortgage every months.

Kay Lynn January 4, 2012 at 9:33 am

UltimateSmartMoney, glad to know I’m not alone. Renting my 3 bedroom 3 bath condo would cost me 3 times my mortgage amount. Rents keep going up, most mortgages don’t.

ProfitsOn December 29, 2011 at 9:44 am

With prices/mortgage rates so low in the U.S., buying a house could be worthed.

Here are some numbers. Of course, past performance is not indicative of future results.

Since 1969, the housing market prices topped roughly every 9 years (1969, 1981, 1990, 1999, and 2007) and bottomed every 10 years (1971, 1982, 1992, and 2002). From top to bottom, declines lasted for about 2 years (69/71, 81/83, 90/92, 07/09 (?). New highs were then reached after 3/5 years from the bottom. The current decline started in 2007.

Good post.

Thank you.

shanendoah@The Dog Ate My Wallet December 29, 2011 at 4:56 pm

We sold our first house at the height of the bubble. OUr second house has held value pretty ok, we’re less than $10k underwater on it. While I would love to get some of the property deals that are available right now, I’m still really happy with our location and would probably rather just save up for improvements and stay here another 10+ years. (We’ve been here for about 6.5)

Kay Lynn January 4, 2012 at 9:34 am

In a perfect world, we all would have sold high and bought low!

Jeff @ Sustainable Life Blog December 30, 2011 at 8:03 am

Right now I dont have a house, but my fiancee and I are looking at buying one in the next 18 or so months. I dont think it’s a sure fire win or lose scenario – it’s just a place to live.

Kay Lynn January 4, 2012 at 9:35 am

Jeff, it’s a place to live where you at least have an opportunity to get your money back. That doesn’t happen when you rent.

Dr. Dean December 30, 2011 at 3:33 pm

Great post. Because housing is such a large expense, the decision to rent or buy needs considerable thought.

Jerry December 31, 2011 at 7:56 am

A house is a huge expense but it can lead to making money if you’re willing to wait. People say it’s not a good investment because it doesn’t give the same returns as the stock market but I’m conservative and I’m happy to make some money if not a huge amount. Our mortgage payment with insurance is less than $700 and that’s manageable for us and we love our house.

Romeo December 31, 2011 at 9:51 am

From my snafu and experience, homes that are purchased to live in should not be the same homes that are used soley as an investment –There are way too many emotions involved in the purchase. For example, it’ll be easy to take on a mortgage for $300,000 that yields a $2600 monthly payment, ignoring the prevailing rental prices in the area that goes for say $1200. When or if you move and can’t sell the property is when the problem starts. If we want a home as an investment, we should look at the possible return that it may provide in the event that we sell it OR if we have to rent it out in the event that it doesn’t appreciate enough to sell.

W-at-Off-Road-Finance January 2, 2012 at 4:07 pm

I don’t think US houses will be a good investment for the next 20 years or so simply due to the soon-to-be shrinking population size as the boomers (the largest generation) begin to downsize and eventually die.

That’s not to say individual houses might not do well, but I believe the bulk price trend will be down.

Long winded explanation: http://www.offroadfinance.com/2011/11/07/why-im-a-speculator-rather-than-an-investor/

Kay Lynn January 4, 2012 at 9:41 am

W, I think that will keep the housing market from getting hot, but not from steady increase. Boomers are going to want to own their homes. We’ll move down to the starter size and young families can move into our larger homes.

rachel February 28, 2012 at 8:02 am

Six years ago when I purchased my co-op I thought I was doing the right thing by choosing to own rather than rent but now I’m wishing I spent more time thinking about this major life change. I’m at a point in my life where I’m ready to start a new chapter in my life but as a result of the housing market, feel “trapped” in my co-op — if I were to put it on the market and – best case scenario – sell it, I would make no money on the sell and be lucky if I sold it for no more than $30K less than what I paid. So, as a result of my experience, I would not recommend buying Anything (‘A’ is intentionally in CAPS) until you are SURE you will be there for 20+ years. I’m devastated by the loss I’ll have to take, and wish I had thought twice about purchasing my apartment before I had done so.

Kay Lynn March 1, 2012 at 1:49 pm

Rachel, I’m sorry the real estate downturn was not good timing for you. I agree that buyers should plan to stay put for a number of years but would say 10 as a minimum.

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