Why Buying a House is a Bad Investment

Why Buying a House is a Bad Investment

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Homeownership is the American Dream. At least it used to be. 

Some of the shine wore off after the 2008 housing crash. For the first time, many Americans began to see how buying a home wasn’t the good investment they thought it would be. 

When you look at buying a house in the cold light of real estate investment strategy, it is easy to see how buying can be a bad decision. It blocks your cash flow, limits your diversification, and costs you money just to hold with no guarantee that you will ever see a profit.

So, from an investment perspective, maybe renting is the better choice?

Why is a House a Bad Investment?

Purchasing a home isn’t a bad thing. There is nothing wrong with owning a home as a means to keep a roof over your head. But from a real estate investment strategy perspective, purchasing a home might not be a good investment to pursue. 

Investing is all about growing your wealth and financial security. In fact, investing is defined as “expend[ing] money with the expectation of achieving a profit or material result by putting it into financial plans, shares, property, or by using it to develop a commercial venture.”

So a good investment is anything that can help you grow your wealth (achieve a profit). Stocks, mutual funds, cryptocurrency, precious metals, bonds. These are all types of investments. Even real estate is an investment type. So why is buying a house a bad investment?

Well, there are two reasons. 

The first relates to your investment strategy. Houses are expensive, they eat up a lot of cash, both upfront and throughout the duration we own them. This limits your cash flow and has a negative impact on your diversification. 

The second reason regards investment performance. Would you buy a stock knowing that it won’t make you any money? Probably not. Taking out a mortgage without any intention of ever selling your home is the same thing. 

And even if you do sell it, there is no guarantee that depreciation and inflation won’t deprive you of profit. 

Traditional real estate investing takes place in the form of purchasing REITs or by becoming a landlord and renting out a home or other investment property. This offers the real estate investor a cash flow, potential diversification, and potential for long-term growth. 

When comparing that to purchasing a home to live in, it begins to become clearer as to why buying a home is a bad investment.

It Blocks Up Your Cash Flow

If you purchase a home with the intent to make it your primary residence, then as an investment, your mortgage, or monthly payment, will kill your cash flow. 

Real estate investors who purchase a home to rent out, take rent money in and pay loan money off. If they’re smart, they are charging more for rent than the monthly mortgage payment. Which means they have a positive cash flow. 

Once you tie up a significant portion of your cash in a home purchase, this can slow your overall cash flow to a trickle. If you are wondering, How Much Credit History Is Needed to Buy a House?, check out our article!

If you instead took the down payment money and mortgage payment and invested it in a diversified index fund, you would likely achieve a 6-8% return and begin earning passive income. 

Lack of Diversification Because of Blocked Up Cash Flow

Ever heard of the old adage, “never put all your eggs in one basket”? If you are like me, you are probably tired of hearing it, but it is still a great way to communicate the basic tenet of investing: which is diversification. 

In this case, the basket is your house. With the median house price in the US hovering around $440,000, that is a pretty sizable basket. 

Depending on your overall investment goals, and whose advice you listen to, it is recommended that real estate make up only 5% – 40% of your portfolio. So, unless you have another $510,000 to $6.5 million sitting around in other investments, then you are not properly diversified. 

And why is diversification so important? Well if you drop your basket, you have no more eggs. Likewise, if you lose your home, you have no other investments with which to cover your loss.  

You Might Never Sell Your Home

If you view your house as your forever home, then sorry to break it to you, it’s not really a real estate investment property. 

The same applies to anything else you buy with no intention of reselling. Would you call your car an investment? Your iPhone? Your custom-made death star fire pit? No. 

So, if you never intend to sell your home, then at best, you can call it an asset, and your mortgage an expense. 

Even if you do choose to sell your home, there is no guarantee you will make a profit. Sure, you can consider it an investment in this case, if not a bad one. 

And even if you do manage to sell your home for a sizable profit, you could be hit with a tax bill if you don’t meet the qualifications for a tax break on the sale. 

Additional Costs Associated with Owning a Home

The single best feature of renting is the fact that you are not responsible for maintenance, the landlord is. But when you own the house, you’re the landlord. 

On average, routine home maintenance costs the average homeowner 1% to 4% of their home’s value each year. And that doesn’t include expensive one-time fixes like replacing the roof. 

And maintenance isn’t the only homeownership cost. There are also the dreaded taxes that seem to go up every year. Depending on whether you live in a rural or populous area, taxes range from 0.3% of a home’s value up to 2.21% of a home’s value. Yikes! 

Some other costs you may need to watch out for when owning a home include: 

  • Insurance
  • Homeowner’s Association (HOA) fees
  • Mortgage insurance
  • Utility deposits
  • Utility payments (when you can’t shop providers)

And don’t forget about all of the hidden fees associated with purchasing that home. Closing costs, inspection fees, loan origination fees, etc. You’ll likely never see any of that money back again. 

Appreciation Isn’t Guaranteed

When the market is hot, it can make buying a home seem like a great investment. Housing prices always go up, right? Wrong. 

I must remind you of the 2008 housing bubble and subsequent market crash where home prices fell to rock bottom prices leaving many people underwater on their mortgage loans. Especially those who had bought into the “anyone can start investing in real estate” fad. 

But, a major market downturn isn’t the only reason a home can lose its value. 

If the major employers in an area leave, this could kill the housing market, i.e. Detroit after the car manufacturers left. Natural disasters can permanently wipe out an area’s housing values. For example, when Katrina hit New Orleans. 

Or maybe the government steps in and builds a new highway or pipeline in your backyard. 

And the house itself could have unforeseen problems that kill the value. A foundation issue that you find a few years from now could tank your home’s value and/or force you into a very costly repair.  

Renting vs Buying

How many times have you heard that renting is just a waste of money? That homeownership and building equity is the way to go? 

But is it really? 

While your rent money doesn’t earn you home equity, that doesn’t mean you are getting value for your money. Aside from a roof over your head, you won’t need to pay a dime for maintenance, that is the landlord’s responsibility. 

If a tree falls on the roof, you might need to replace a few of your things, but the repairs to the house will come out of your landlord’s budget.

And if the county or school district decides to raise property taxes, yep, it is the landlord’s responsibility to fork over that cash. 

Once your lease is up, you are free to move, with your only cost being the transport of all of your stuff and maybe some lost deposits. 

In contrast, owning your own home means the cost of all maintenance, repairs, and taxes comes out of your pocket. And when you get ready to move, you have to go through the lengthy home selling process before you can move on. 

That doesn’t mean that there aren’t upsides to owning a home. 

If you want to repaint a wall forest-green, go for it, you own it. If you want to chop down a tree, have at it, just watch for power lines. 

While you are renting, the landlord could decide to sell the place and kick you, the tenant, out. Which is one nice thing you don’t have to worry about when you own your own home. 

And of course, you could build equity in your home. Just be aware that interest is loaded on the front of the loan, so you may not be building equity as fast as you thought you were. If you want to calculate your net worth, also check out our article, The Best Net Worth Trackers in 2022.

Buy a House with the Correct Mindset

Buying a home is a big decision and one that shouldn’t be taken lightly. Put aside the “you need to buy a home” advice for a minute and evaluate your life goals and financial situation to determine if buying a home is the right move for you. 

Aside from the considerations on whether or not taking out a mortgage is the best financial decision for your family, you need to figure out if the home will be an investment property or an expense.

Once you have this figured out, then you can approach the home buying process with the appropriate mindset and expectations.

To continue learning about financial literacy, see the following articles in the series:

7 thoughts on “Why Buying a House is a Bad Investment”

  1. I would say a mortgage is a liability, not an expense. There’s a slight difference.

    I wouldn’t think having a mortgage payment is a cash flow disadvantage because the alternative is a rent payment. Needing shelter will always be a drain on cash either way.

    I think the assessment of owning vs renting needs to take into account a lot more factors: levels of interest rates compared to increases in rents, any tax relief on purchasing a main residence.

    For example, in some countries the mortgage payment on a property could be 20%+ cheaper than renting the same property. Factoring in building insurance, maintenance etc. could mean you end up paying in total the same monthly amount as renting the place.

    A good structural home inspection is a must because you should reduce the purchase price for any major upcoming forseen maintenance bills. Anything unforseen should be covered by building and emergency insurance.

    The other thing to consider is that although interest rates are expected to rise, rental increases are rising at a much faster rate (up by 10% where I live in the UK, whereas mortgage rates have increased 0.25%).

    Then there’s the leverage effect of a mortgage which amplifies your home equity because the bank has basically paid for some of it but doesn’t own it per sé. Of course, there’s huge downside as well because of the leverage. So it’s really important people don’t overextend themselves and borrow more than they could manage to continue paying off if things went a little pear shaped.

    I assume this article is written from a US perspective. In the UK, renters are responsible for paying council tax, so that has no bearing on the rent vs buy decision.

    In the UK, there is no transfer tax / stamp duty on first purchase of a main residence up to £300,000.

    If you don’t plan to move around, I think buying a house can be a wise financial decision vis à vis renting.

    1. Hi Becks, Thanks for weighing in. Yes, this was written from a US perspective.

      You make some fair points. We wrote this article to provide a counter-weight to the housing industry professionals that are always screaming “BUY, BUY, BUY!”

      This article provided one point of view, and you’ve provided a great explanation of some of the nuances to consider.

  2. You are emphasizing the possible downside while ignoring the upside. My mortgage is $700/ more than I paid as a renter for a comparable house, and my morgage has not increased like my rent would have. Note also that if I had to move from the rental, moving expenses are not insignificant. My equity increases about $9k a year. I live in the DC area where housing prices can be counted on to increase over the long haul. Since i bought 3 years ago, my house value has increased at least $40,000, probably more like 60. I “invested” a down payment of $20,000. and have realized at lease $100k in 3 years. While the extra expenses you detail are real. I estimate that I have spent $30k in improvements, which will help at resale time. I have no doubt that this has been a good investment, particularly at today’s mortgage rates. (My mortgage rate is 2.25%.)
    Obviously much depends on the area and whether you got a decent price when you bought. But I think your description is misleading for many people.

    1. Hi Tom, Your individual use case numbers are interesting. Thanks for sharing.

      Compared to renting, many times (most of the time?) buying is better than renting. But compared to investments with high appreciation or lots of cash flow, a house is not an attractive “investment”.

      Again, thanks for your thoughts.

  3. Dave Ramsey won’t agree with you. Our house will be paid off soon as we used the cash from the sale of parents’ home. No more rent or mortgage. And when we die, our kids (or at least one of them, but they need to figure that out) can continue to live in the house, again no mortgage. I do agree that buying too much house and working just for your huge mortgage is a bad strategy, buy a modest home, but true home ownership is mortgage free home ownership and if a home goes from generation to generation to stay in the family, nothing can beat that. Forever renting? Seriously, next time you are going to tell me that you should always lease a vehicle 😆

    1. Glad that you’re able to pay off your home and live debt-free.

      The point of our article here is not to say that buying a home is bad under all circumstances, but rather that it is not really a great “investment”. Houses appreciate quite a bit slower than the stock market and other investments.

      That being said, in many markets, buying a home is a much better strategy than renting.

  4. Interesting comments. Viewed from an investment strategy, who here will invest with me 300k and then pay me 5% a year to let it hang out in my account with a 50/50 chance of some return? Any wizard takers? None? Thought so. What if I told you you could loose it all if you ran into a dry spell. Sign you up? No? Thought so. Great forced savings. Horrible investment.

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