Please don’t misunderstand the title of
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
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
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
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
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
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
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
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
- You spent an average of £3,000
per year on repairs and upgrades to your house
- Over ten years you have spent
- When you sell your house there
will be estate agent fees to pay and other costs.
- Then you need to take inflation
So it wasn’t that great an investment after all was
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
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?