Is a home an investment?

Many people don’t think of their home as an investment vehicle. Unless it’s a property you plan to rent out or fix-and-flip, you might think a house is just a place to live.

But the truth is, your home an investment in many ways.

You’ll be putting a lot of money into the property — and its value can rise or fall with the economy. Plus, unlike renting, a house helps you build wealth.

Many experts believe buying a home is a great investment because it’s a fairly safe place to put your money, and home values generally increase over time.

However, the returns aren’t as large as you might see on other investment vehicles.

So, is buying a home the right financial decision for you? That all depends on your goals.

In this article (Skip to…)

• Is buying a house a good investment?
• How homes build wealth
• When to buy a house
• When not to buy a house
• Investment properties
• Should you buy a home?

“Purchasing a home is generally regarded as a good investment compared to renting because you can build equity. When you rent, all you do is pay someone else’s mortgage,” notes Annie Kou, owner of AK Luxury Properties and a contract attorney in Los Angeles.

“If this is where you intend to live for at least three to five years, it makes more sense than leasing in many markets,” she continues.

“Also, rent, unlike some homeownership expenses such as your mortgage interest and property taxes paid, is not tax-deductible in general.” Buying a home can have tax benefits such as deductions and even tax credits.

Of course, there are some cities in which renting is significantly more economical — especially for a one- or two-bedroom apartment — than purchasing a starter home, says Michael Fischer, director and wealth advisor for Round Table Wealth Management in New York City.

“But as with other investments, real estate ownership can be a great way to pass wealth to the next generation,” Fischer adds.

Ask Nadia Evangelou, senior economist with the National Association of Realtors in Washington DC, and she’ll tell you purchasing a home is a smart investment.

That’s because your home’s value is likely to increase over time, which in turn increases your wealth.

Financial benefits of buying a home

“Consider that the typical home has appreciated nearly $150,000 in the last nine years,” Evangelou says.

“Especially for risk-averse people, purchasing a home is often a safe investment that has traditionally been a great inflation hedge to protect against a loss in purchasing power of the dollar.”

Put more simply, while homes and real estate lose value (as they did during and after the Great Recession), home values have been on an overall upward trend throughout recent history.

“While home values can go up or down, they are generally much less volatile than the stock market” –Brian Koss, Executive Vice President, Mortgage Network

In fact, U.S. housing stock gained about $2.5 trillion in value in 2020, per Zillow.

Data firm Black Knight reports that yearly home price growth has seen a 25-year average return of 3.9% (not bad for a low-risk investment).

“While home values can go up or down, they are generally much less volatile than the stock market,” explains Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts.

Potential risks of home buying

Still, others caution that money put into housing can often yield better returns elsewhere.

“Too often, people make the mistake of spending too much of their income on a house and effectively crowding out other investment opportunities,” says Robert Johnson, professor of finance at Heider College of Business, Creighton University, in Omaha, Nebraska.

“These include investing in stocks and bonds and funding 401(k)s and retirement accounts, especially if doing so could earn a full match by their employers,” he continues.

Budgeting is crucial

Before buying, you should evaluate your cash flow and monthly expenses to make sure you can afford the payments on a home, while still making smart personal finance moves like contributing to retirement accounts and maintaining an emergency savings account.

Don’t forget — mortgage payments include homeowners insurance and property taxes as well as principal and interest due on the home loan.

You can use a mortgage calculator or talk to a lender to figure out what you an afford.

Real estate investing — buying rental homes and investment properties — is a different matter altogether.

If you’re purchasing a home to lease out via long- or short-term rentals, or you plan to fix-and-flip the property, it’s easier to view the home as a bona fide investment tool.

Unlike a primary residence (the home you live in), investment properties are intended to generate cash flow through rental income. Thanks to the low interest rates on real estate, this can be a relatively low-cost and stable way to create passive income.

But that doesn’t mean you can’t lose money on this venture.

“Rental properties can create an ongoing income stream for their owners,” says Evangelou. “But choosing the right property and location is key, as is crunching the numbers. You must first calculate the profit that you can potentially make from the net income generated versus your expected operating expenses.”

Those expenses can include management, upkeep, and maintenance costs.

“If you don’t like collecting rents, personally handling repairs, or paying a third party to operate and maintain your investment property, owning investment real estate may not be for you,” says Koss.

Verify your new rate (May 11th, 2021)