Why your home isn't an investment

[UNITED STATES] When it comes to personal finance, there's one topic that always sparks heated debates: real estate as an investment. While many people view homeownership as the ultimate investment, financial planner Eric Roberge of Beyond Your Hammock disagrees. Roberge explains why your home isn’t the financial asset many believe it to be.

According to Roberge, “Single-family homes that you own and live in yourself and that produce no rental income are more like utilities than investments.” He argues that while real estate can be a viable investment if managed properly—such as through rental properties or flipping homes—your primary residence is not likely to generate substantial returns. In fact, the real return on a single-family home is often around 1% or less. “Even in booming markets, the real return on a single-family home is about 1%,” Roberge adds.

This perspective might surprise many who see their home as a surefire way to build wealth. However, owning a home is more about providing a place to live, offering security, and protecting against rent inflation, rather than a financial strategy for high returns.

In this article, we'll delve deeper into why your home shouldn't be considered an investment, and how viewing it as a utility instead can better align with your financial goals. We’ll also explore alternatives to homeownership that could offer greater financial benefits over time.

The Misconception: Homes as Investments

The myth of the home as an investment has been perpetuated for decades. Many homeowners believe that their property will appreciate significantly over time, eventually leading to substantial profits when sold. However, Roberge challenges this view, pointing out that the costs associated with homeownership—mortgage payments, property taxes, maintenance, and other expenses—often outweigh the returns. "Your house can have immense value, but between inflation, the cost of upkeep, and fees associated with the transaction of this asset, it can produce little to no return on the money you put into the property while you own it," he explains.

Unlike stocks or bonds, homes are illiquid assets. This means that the value of a home doesn’t fluctuate as easily or as predictably as more liquid investments. Selling a home often involves a lengthy process, and market conditions can change unexpectedly, leaving you stuck with a property that may not offer the returns you anticipate. Furthermore, homes come with hidden costs—maintenance, repairs, and the occasional renovation—that can quickly eat into any potential profit.

The True Costs of Homeownership

Owning a home can seem like a financial commitment that is worth making, but the true costs are often underestimated. Even if property values rise, those gains are typically offset by the significant costs of homeownership. Roberge points out that many homeowners forget to account for maintenance expenses, insurance, and taxes. Over time, these costs can add up, making the “return” on your home much smaller than anticipated.

Consider the typical maintenance costs associated with owning a home. The roof needs replacing after a decade or so, plumbing systems may require repairs, and appliances have lifespans that must be considered. When you add up the costs of necessary upkeep, the supposed financial benefit of owning a home begins to shrink.

In addition to the maintenance costs, there are other financial considerations that must be factored in, including closing costs when purchasing the home, real estate agent fees, and the cost of selling the property when it comes time to move. Roberge emphasizes, “The real return on 'investment' of the purchase of a home is probably negative” for many homeowners when these costs are taken into account.

A Home as a Utility

Roberge suggests that the more accurate way to view homeownership is not as an investment, but as a utility. A home provides you with a place to live, shelter, and stability. These are invaluable benefits, particularly when you consider the rising costs of rent in many areas. Owning a home can shelter you from rent inflation, which, in some cities, can increase significantly year over year.

However, this stability doesn’t equate to a financial windfall. While renting can expose you to fluctuating rental rates, owning a home locks in your monthly mortgage payment, potentially offering a sense of long-term financial predictability. Yet, Roberge cautions that this benefit should not be confused with investment growth. “A home can provide a sense of stability and security. That is worth something, even if it's intangible,” he explains.

The Value of Homeownership Beyond Financial Returns

Even though Roberge argues against viewing a home as a financial investment, he acknowledges the value of owning property. Homeownership offers psychological benefits, such as a sense of pride and control over your living space. It also provides a sense of permanence and community. Additionally, there’s the social aspect—many people enjoy having the freedom to make changes to their home, whether through remodeling or landscaping.

But these benefits should be seen for what they are: intangible assets that enhance quality of life, rather than financial ones. Owning a home also gives you the opportunity to accumulate equity, which can later be accessed through refinancing or selling the property. However, the equity you accumulate often comes at the expense of high interest payments on your mortgage, making it a slower and more expensive way to build wealth compared to other financial vehicles like investing in the stock market.

The Reality of Home Appreciation

While home values can appreciate over time, they are subject to various factors, including market conditions, interest rates, and local economic factors. Even in periods of strong market growth, it’s difficult to predict with certainty whether your home will appreciate enough to generate meaningful returns. In fact, many homeowners find that they’ve spent years paying off their mortgage without seeing a significant return on their investment.

Roberge points out that even during housing booms, the real return on a home is often minimal. “The real return on a single-family home is around 1%,” he states. Considering the associated costs of owning a home, this return is often negligible. For example, if a home appreciates in value by 5% over several years, the homeowner may still face thousands of dollars in transaction costs when selling the property, which could significantly reduce the net gain.

Alternatives to Homeownership

For those looking to build wealth, Roberge recommends exploring other investment opportunities that offer better returns. The stock market, for example, tends to generate higher returns over the long term, especially with a diversified portfolio. Additionally, investing in bonds, mutual funds, or index funds can provide steady returns with lower risks than owning a home.

Furthermore, rental properties or real estate investment trusts (REITs) can be better options for those looking to invest in real estate without the risks and responsibilities of owning a home. These alternatives offer the potential for passive income and appreciation without the heavy financial burden of homeownership.

While owning a home can provide personal benefits such as stability, security, and a sense of belonging, it is not a sound financial investment for most people. Roberge’s perspective on homeownership serves as a reminder to differentiate between something that provides value and something that generates financial returns. "Think of your home as a utility," he advises. "It's something you use rather than invest in."

For those focused on building wealth, it may be wiser to consider other investment options that offer higher returns and greater financial flexibility. By rethinking homeownership as a utility rather than an investment, you can align your financial goals with smarter strategies for long-term wealth building.