Please don’t misunderstand the title of this post.
I am not saying that property investment is a bad thing – that would be crazy as it is what I do and what I recommend you do to gain the freedom that you want.
What I am challenging here is the old adage that buying your own house is the best form of investment.
I certainly don’t believe that owning your own property to live in is a bad thing. I have owned my own properties and there is a great peace of mind and a feeling of security when you own the place where you live.
But is it really a good investment?
Please read this post in full and come to your own conclusions with this. I would love to hear your views so please leave a comment.
House Prices normally Rise but that doesn’t mean they are a good Investment
If you look at how house prices have risen in different countries over the last century then in most cases the increase are only just above the rate of inflation. For example in the United States the average value of properties saw a gain of less than 1% each year when you take inflation into account.
The United Kingdom does a little better than this but the increases are still only around the 3% mark. Are there not better and less riskier ways to invest your money that would equal that kind of return or even surpass it?
It is certainly true that sometimes property values can see dramatic increases. They can also see dramatic decreases in value as well so buying your own house on the basis that it will increase in value is certainly not a sure thing. A real investment has to provide more than the possibility of a value increase.
Your House has a more important Purpose than Investment
The main reason to purchase a house is to provide shelter and security for you and your family. With other investments you have a lot more control over when to buy and sell than you do with home ownership.
Think about investing in the Stock Market. You buy stocks and then you monitor their performance over a period of time. When the time is right you can sell your stocks quickly so that you make the maximum return on your investment.
But it is not the same story with home ownership is it? Your house is where you and your family reside so you have a lot less control over selling it than you do with alternative forms of investment.
During the 2008/2009 global financial crisis, this timing issue for selling really caught a lot of people out. Many homeowners paid top prices for their homes just before the crisis and found themselves in a negative equity situation very soon afterwards. They could not sell their home quickly and when they did sell it they got a lower price than they paid for it.
OK this is an extreme example and all investments carry risk. But not being able to cash in fast to minimise loss or maximise gain is certainly a weakness with thinking about your house as an investment.
If you never sell your House how can it be an Investment?
Most people do not buy a house to sell it again quickly when the market prices are at their peak. At the end of the day you have got to live somewhere so if you do sell your home then you will have all of the upheaval of moving.
What most people that sell their house do is to purchase a house of higher value using the equity they made with the original purchase. While it is lovely to move into a larger and fancier home you trap your equity when you do this.
The only way to gain from your original home purchase is to downsize by purchasing a smaller property or moving to an area where the house prices are a lot lower. Of course you could always switch to renting a home as another option.
Considering your House as an Investment can be very risky
People that consider the home that they own to be an investment will often borrow money against the equity that they have in the property. Re-mortgaging your house is a common thing to do but you need to be aware of the risks.
If the housing market were to crash for whatever reason (Brexit might be an example!) then this can leave you in a situation where you are unable to pay your new higher mortgage repayments. You will not be able to sell your house for a high enough price to clear your debt either.
Taking out another mortgage or a re-mortgage on your house may make you feel a good deal richer at the time but it is hardly a solid strategy for long term investing. There are people that will squeeze every last penny out of the equity in their homes by re-mortgaging but this often ends in tears. This is why I don’t consider my own house as an investment.
House Maintenance Costs nullify it as an Investment
If you participate in other forms of investment then there will be no requirement for you to spend any more money to keep the investment going. It is a totally different situation when you buy your own house.
As a minimum you will need to pay to insure your home so that if disaster strikes you can rebuild it and not be out of pocket. Then there are the inevitable repairs. No matter how new your house is it will need some repairs in a fairly short time.
If you live in the United Kingdom then the elements will be battering your house a considerable number of days each year. Eventually this will take its toll on your roof, windows, exterior paintwork and other areas.
Then there are the internal costs. When you move into your house it is unlikely that you are going to be totally happy with the decoration so you will spend money on making this how you want it. Even if you do this yourself you are talking a not insignificant sum here.
Larger projects such as bathroom or kitchen remodeling will cost you a large chunk of money as will a new garage or a house extension. People will always tell you that these things “add value to your home” and while this is usually true does this expenditure really represent a good investment?
Let’s look at an example:
Ten years ago you purchased your house for £200,000. Today you can sell it for £300,000. Sounds great right? Well let’s take a look at what it actually cost you to own your home over the last decade:
- Your mortgage repayment (principal and interest), insurance and taxes cost £1,000 a month
- You spent £300 a month on utilities
- You spent an average of £3,000 per year on repairs and upgrades to your house
- Over ten years you have spent £236,000
- When you sell your house there will be estate agent fees to pay and other costs.
- Then you need to take inflation into consideration.
So it wasn’t that great an investment after all was it?
There is no Cash Flow Generation with your House
Not only are there the costs of home ownership to consider but in most situations you will not generate any cash flow from your property. With other forms of investment you would expect to have some cash flow from your initial investment. This could be in the form of dividends from shares or interest earned in a savings account.
You can then choose to reinvest with the cash flow that you earn to make an even higher return over time. Unless you decide to rent out sections of your house you will not have that option with a house purchase.
Rising House Prices are never Guaranteed
Relying on the appreciation of your house value is not a sound investment strategy. When house prices are on the up then people will always refer to their property as an investment. But when the prices are flat or experiencing a downturn then this is certainly not the case.
You cannot guarantee that your house will increase in value. There are things outside of your control that can jeapordise this. The general state of the economy and unexpected changes like Brexit can have a devastating effect.
I want to make a couple of things very clear to you. I am certainly not against owning your own home. It is far better than renting because usually you do end up with an appreciating asset. But I do not think that it is the best form of investment. What do you think?