The Brutal Truth: Your House Probably Isn’t a Good Investment

by Miranda Marquit · 28 comments

When my husband and I were looking for homes seven years ago, the real estate agent told us over and over again that we were making an “investment.” Even at the time, I was skeptical of these claims. I couldn’t see how, when we’d be paying $500 more per month (over rent), plus taxes, maintenance, and repairs, we would come out ahead — even with tax deductions. I didn’t think appreciation would help that much.

But you don’t buy a home just for the investment value. There are a lot of other non-financial factors that go into the decision, from security to the charm of having a place you can call your own.

Of course, now that I know I might have to pay as much as $10,000 to sell our house, I really don’t think of it as an investment. We bought near the peak of the market, which was probably sensible considering that it would’ve been practically impossible to get a bank to take my freelance income (our primary source of income) seriously in the two years following the financial crisis.

At any rate, here we are: with a house that is worth less than we paid for it.

We’ll be lucky to get what we owe on the mortgage, and then we’ll still have to pay all the closing costs and commissions that come with selling. We could sell it ourselves, but then we’d still have to pay closing costs and probably wouldn’t get as much for it — which means we’d still be out close to $10,000. And For Sale By Owner is a lot more work than having a real estate agent take care of most of it.

Why Buying a House Is a Gamble

I recently read an article on CNN Money saying that the current housing market is a crapshoot. You just don’t know what you’re going to get.

We’re beyond the point where you could buy a house, sell it two or three years later, and break even or enjoy a profit. If you really want to get more out of your home, you have to be in it for the long haul. We’re talking at least 10 years, but probably it’s better if you can stick with it for 15 or 20.

According to the article, which quotes Karl Case (of Case-Shiller fame), “If you’re not buying it for the long haul, don’t buy because there’s a good chance you’ll have to sit through some down cycles.”

If you’re not going to be staying in the home through tough times — and you can’t ever truly predict when those will be — chances are that you’re not going to come out ahead. By the time you account for the interest, taxes, repairs, maintenance, utilities (especially if your home is bigger than your rental), and other costs, it’s hard to even break even.

Before you take the plunge and purchase a home, seriously consider what you’ll get out of your primary residence. If you know from the get-go that you can’t count on your house as a financial investment, you’ll be less disappointed when you try to sell it later.

Do you think buying a house is a gamble? If you own one already, are you happy with your decision?

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{ read the comments below or add one }

  • Sergey says:

    If you own your own home – you are completely neutral, unless you are underwater or do not have 20% equity.

  • Bob says:

    I think you should think of the purchase as an investment, meaning you’re considering potential profit and loss instead of making an emotional decision. That does not necessarily make it a good investment.

    My condo was an amazing investment. I bought at the bottom of the market for dirt cheap. My mortgage was paid off in less than 4 years and my property taxes are so cheap I didn’t even realize I was getting a homeowners exemption (can still be refunded, but, really, not a big deal). Now I just pay association fees, a couple hundred for insurance, and my insanely low property taxes. It’s about 1/3 of what I would be paying on rent. Plus, if I ever decide to upgrade I actually can rent it out. My advice would be to get something way cheaper than what the mortgage company says you can and please be sure to read your Federal Truth in Lending Disclosures. If you make the minimum payment, you will pay almost triple what the house is worth and that doesn’t even include closing costs. Just take the number you’re authorized for, divide by 3, and go from there.

  • drake says:

    Investing in a home really is a gamble, depending on the market. Even if you purchase the home and improve it throughout the period of owning it, your overall profit from the property could be cut depending on what the market is. You may earn back the money spent on the purchase of the home but not from the overall improvements.

  • Spanish Homes says:

    I don’t agree or disagree – for nine years I have been renting (dead money) basically paying landlords mortgages one after another! We were very close to buying in 2006 and then the financial crisis hit. Luckily we didn’t buy as the property that we were looking at is back on the market again – but nearly 50% cheaper than when we were looking at it in 2006. Buying has that element of risk involved however it can work for you instead of against you!

  • fredjohnson says:

    I’m agreeing with the author on this one. A home is NOT a good investment. I’d even consider it a liability, but that’s my opinion. I paid $530k for my house 13 years ago. We are in Mpls. Since the Recession, the house is still worth less than what we paid for it. Now, consider my other big investment—my stock and bond fund portfolio in index funds. It has grown over 9% a year on average those same 13 years. And, I put big money in the market right after the low in 2009, so some of my money has grown over 200% in 5 years. Now…………there’s an investment. And it’s one that costs me $10k a year in property taxes, $4k in insurance and $5k a year in utilities, not to mention a few thousand a year in maintenance.

    • Dave says:

      You were stupid to spend that much on a home in MN. You probably could have purchased a modest home for cash to take care of your needs. I hope you the best in McMansion. Become accustomed to snow, polar vortex, having to bundle up
      to go to the store, which is hot inside. Primary home is not an asset but a liability. How much in REAL dollars grown in the stock market? You are playing monopoly money, Get the heck out of that house, take your growth out of the stocks. We have a 20 trillion dollar deficit. I am just warning you that there will be a big correction after the 2020 election, especially if the dems get in. Because they think the only way the only way to make the poor richer, is to make the rich poorer. A quote I don’t remember ” of all the sad words of tongue or pen, the saddest are these: it might have been.” Watch the market closely, it will plummet no matter who gets or stays in we are in a bubble because if election it is going to stay that way.

  • Alex @ Credit Card Xpo says:

    Rather buying a house is a good investment really depends on the location and most importantly timing! I bought my first house in 2002 in NY and its current value has doubled and rising. I rented this one out and bought my current home in a more suburban neighborhood in 2005, its current value is only about 10-15% higher.

    • David @ says:

      Doubling in 10 years is awesome for real estate because of leverage. Homes are how many people built their wealth but you are right, timing and location is everything!

  • Rick Mayhew says:

    I always read you should allow 3% or so for annual ongoing maintenance. I think that’s a little low. My wife and I keep track of every single penny we spend, so we know how the ongoing maintenance expenses rack up over time. The FCC apparently released some frequencies recently and our garage door opener quit working, so we had that fixed. Then the springs on the garage door broke and we had those fixed. We were privileged (able to afford) to have a sprinkler system installed years ago. We’ve now spent more on sprinkler system maintenance than we did on the sprinkler system itself. These things add up.

    I believe everyone who can easily afford a house and wants a house should buy one. Just don’t underestimate the ongoing expenses. Your mortgage may stay flat if you have a fixed rate, but everything else is going to go up over time. As one of my more pessimistic friends once said, “Expect the worst and you’ll never be disappointed.” That might be too negative on home ownership, but think carefully before you make that commitment.

    • David @ says:

      Maintenance is a biggie that too many people underestimate. Thanks for sharing your experience Rick.

      One of the things I loved about my renting days was the fact that I could just call the management company whenever something broke. It wasn’t just the money, but the convenience as well because I didn’t have to spend time researching which company could do a competent job!

    • fredjohnson says:

      I have never spent more than 3% on home maintenance. My house cost $530,000 when I bought it 13 years ago. 3% would be over $15,000 a year? What the heck are you “maintaining” for that much money? To be honest, I’ve never spent over $3000 a year in maintenance.

      • Ryan G says:

        3% is a good rule over a certain range of values. It probably doesn’t apply to a $100K home ($3K per year wouldn’t be enough) but doesn’t apply to a $500K home either ($15K per year would be way too much). It also needs to account for the value of the land vs the structure. You can get an idea of this based on the replacement value for the home on your property insurance. If you have a $500K home (lot + house) and the lot is worth $300K with a $200K house sitting on it, then $6K/year for maintenance is much more reasonable. Alternatively a $500K structure on a $50k lot will require more money to maintain.

        You think $3K per year is high, but wait until your home is 30 years old and you need to replace the HVAC, roof, water heaters, and the house hasn’t been updated in 30 years, so you paint, re-floor, do the kitchen, do the bathrooms, replace fixtures & window coverings, etc. $90K will evaporate quickly.

  • Mike Carlson says:

    As far as I know, I am happy with my decision to buy a house. I bought it because of my family, they really want to have a house they can call their own. For me, it’s a good investment. Thanks for sharing this article. Reading this can get a brilliant idea. I will share this to my friends and surely love to read this.

    • David @ says:

      There’s no question that owning a home has its benefits. Your children, especially, will feel more secure when you don’t have to move every couple years. You made a good choice Mike.

  • Nick says:

    Buying a house may be a gamble. But, if you are buying it as an investment then you should treat it as such. This means do your research and due diligence to find what you believe fits your long or short term needs. There are many risks to be aware of with any investment, which is some of what Miranda has outlined in her article above.

    • David @ says:

      Good point Nick. A home purchase is so emotional for many people that they often forget it’s a huge financial commitment. As with any other types of investments, a positive return isn’t a guarantee!

  • Jas says:

    I disagree with this article. Yes, for those who bought at the peak of the market and overpaid for their home, it is extremely unfortunate and was not a good investment. Especially for those who bought above their means, with little to no downpayment and/or more house than they could afford. For those who made wise decisions before the crash or after, they did make a great investment! The market crashing didn’t matter if you were still able to make your payments as long as you weren’t determined to sell within a short timeframe. I think people today need to pay close attention to the bottom line of personal finances before making such a big purchase, and purchase responsibly. Odds are if you have a healthy downpayment, dont purchase and sell a home frequently, and have secure income with an affordable payment a house is still a great investment. Articles like this act like the housing crash is the future, when looking at the last 50 or 100 years of the housing market, that was not typical. This should be a lesson to act responsibly, not to scare off potentional homeowners.

    • David @ says:

      Thanks for bringing the other side of the argument into the discussion Jas. Home ownership isn’t for everybody, but those who keep at it, stay in their homes for a long time are usually better off than those who keep renting for decades.

    • chris says:

      I’m with Jas on this one. It’s not that I totally disagree with the article… but you can’t just poison the well saying that buying a home is a bad decision for everyone just because you suffered bad timing. There’s always going to be someone who got the timing right, even if it is luck. I do agree that buying a home as an investment will not make sense for most people. Historically housing prices barely keep up with inflation. If you’re buying a home I think it’s important to focus on the intangibles of owning and not how much money “could” be made from appreciation. The real return in terms of appreciation is probably close to zero in most circumstances both short and long-term. I used to have a really cool chart that showed the long-term average of returns on home ownership but I’ve lost it… If anyone has something like this I would love to see it again. It showed that even over the long-term housing struggled to provide a return equal to inflation.

      • David @ says:

        Thanks for the insight. I don’t have the chart you’re referring to, but I’ve seen similar studies that concludes real estate as basically an investment tracking close to inflation over the long haul.

        But even so, real estate can work out because most people use leverage (via mortgages) to buy a home. For example, 20% down on an investment that earns 5% the first year is equivalent to 25% increase on cost.

  • Cindi says:

    Home ownership today is nothing like it used to be. I don’t think I would ever buy a house ever again. We sold at the top of the market and paid cash for our next home, which we live in currently. So, we’re not affected by anything. That was 13 years ago. I don’t think we could ever do it again. Tough to build up any equity or value nowadays. Plus all the storms and natural disasters, which were unheard of a few short years ago. Insurance covers less and less. More out of pocket costs and maintenance.
    I’m glad we have what we have. There’s probably a good chance our home will be passed down to our adult children because at the rate they are going, we don’t see home ownership anytime for them in the near and not too distant future.

    • David @ says:

      Think positive! It’s true that the financial crisis has knocked prices down, but it’s also helped many more people afford houses because they were able to buy at a lower price. Those who buy a home today with a solid down payment and consistently pay off the monthly mortgage amount will still be building equity for the long haul.

      • Cindi says:

        David, have you applied for a mortgage lately? I had to and it was a nightmare. Took months of agonizing effort. In the ‘before time’ our mortgagor told us he used to close 8 mortgages a day. Now? Barely 2. Because of all the new federal regulations, it’s a quagmire.

        Nope. I’d never buy a house ever again.

        A house is only worth what someone will pay for it. I used to be pro-home ownership. I no longer feel that way (and I have owned 8 homes in my lifetime). I’m done.

        • David @ says:

          My last refinance was in 2012 and mortgage 2010, so fairly recent. There were definitely a ton of hoops to go through and it was super annoying. At the time, I wanted to practically strangle the loan officer. But looking back, I shouldn’t have expected the process of getting a loan for what amounts to a sum that takes a typical family a life time to save to be a piece of cake, right?

          Good for you though to see home ownership for what it is, having a secure and comfortable place to stay. If everybody felt that way, real estate would actually be more affordable for the masses, and the country would be better off.

  • Retired by 40 says:

    Unfortunately, you’re in the position many Americans are. I don’t envy you :-(. But, it does make me grateful that we bought our house after the market crashed, which translated into about a 60% savings off of market value. When we go to buy another house, though, I’m going to be hard pressed to pay full price!

    • David @ says:

      Wah 60% savings is no joke. And it’s not just the purchase price too, as your property tax will forever be lower. Good timing there.

  • Kirsten @ Indebted and In Debt says:

    We are in the same boat – our third house that we will sell without having lived in it more than 5 years. We lose money (after closing costs) every time. It’s to he point that we won’t have money for a downpayment “next time”. But I’ve already decided there won’t be a next time for awhile – at least not until we are sure we want to stay in the area for awhile AND can actually afford all the maintenance, which is killing us with our current house.

    • David @ says:

      Good plan Kirsten.

      Transaction costs can definitely eat up quite a bit of money. 6% is a lot of money to give to the agents every time a house changes owners!

      And plus, you’ll likely want to get to know the different neighborhoods whenever you settle in a new area anyway.

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