This lie might also be referred to as :”The Home I live in is an Investment”.
In the US American society, home ownership and certain beliefs about homes are drilled into our mind. I believe it comes from many angles. Have you heard yourself saying or thinking any of the following:
• The interest rates, are low, I need to get into a house before they go up.
• When I own my home, it’s an investment, so I’m paying myself when I live there.
• There is a tax deduction for mortgage interest and real estate taxes, so I better get a house so I can “save” money that way.
• I’m not really an adult (mature) until I own my own house.
• I’m throwing money away by renting.
• Home prices in my area are going up so quickly, I need to jump in now before they get even more expensive and I can’t afford one.
• Home supply in my area is so low that I have to jump quick or I’ll never be able to find a house.
**special note: this post is about the home we live in and not a rental house (conditions and value propositions are very different for rental homes)
Any of these sound familiar? Some of these beliefs (or pressures) come from the housing industry and their marketing (real estate agents, banks, and such). And still others come from our own government like the tax deductions. Why do you think they allow that deduction? Just to be nice? Yeah, right! I think one large reason is that they know home ownership stimulates the economy. After you buy a home, it now triggers a host of additional purchases and services you will now need/want. You’ll want furniture, lawn care, landscaping, drapes, rugs, etc. You get the idea.
Can real estate be a good investment though? Sure. The government even allows you to essentially avoid tax on the profits from selling your home (see the $500k limitation in the tax code), which is way better than the tax you have when you sell any other investment for a gain. Can a home appreciate in value? You bet. Does it always do that though? No way. So, if the house you live in isn’t an investment, what is it? It’s a consumption item, just like you would consume anything else like food, clothing, or other items that don’t appreciate in value.
Remember the housing crisis of 2008? Sadly many people got caught up in the lie of always-increasing home values and are now feeling the harsh reality that home prices can go down. When will the next nationwide dip in home prices come? Who knows? When will the next local dip in housing prices come? I doubt anyone knows that either. They may in fact go up for the next several decades, but nobody has that crystal ball to know for certain.
By now you’re probably thinking, wow this guy is pretty negative on homes. Not necessarily, but I’m definitely cautious and know that home ownership may not be right for everyone or at all times of their lives. Some of my financial coaching clients have such a large mortgage payment that they have very little discretionary income left to live on, and save, or to pay down the other debts they have. Did they get into their home thinking it would be an investment? It could very well be one of the factors or at least a factor that is keeping them in that house. If people think that their home will be appreciating in value they may be more likely to hang on to it and ride it out because they think there is a big payday down the road. Again, it could definitely happen this way, but it also could go the opposite way too.
A little over a third of the US lives in a paid off house. That’s a pretty good number if you ask me. Now also consider that the house is most often the single largest component of their net worth. So, if you did good and your home appreciated in value over the years you’ve lived there, high five! If you don’t also have other monetary or liquid assets (not tied up in your house), then you will have a decision to make at some point. The money tied up in your house can’t support you in your later years unless you sell your home. And quite honestly there is not much point of having an appreciating asset if it can’t be sold at some point to realize the gain and cash out. I really believe this is a piece of the equation that many people forget. If you truly plan to live in your home forever (actually until the day you die) then you have to take care to also save and invest in non-house assets. The reality for many though is that they will need to sell their home to be able to have money to live off of when they are older. There is nothing wrong with that and in that case, perhaps you home was an investment (and maybe a good one).
Selling for More than I Paid Means I Made a Profit, Right?
Another fallacy I think people have is that if they sell their home for a price that is higher than what they bought it for, that they made a profitable transaction. What some folks fail to realize is that there are other costs that have to be factored in when considering if you have a net profit from the sale. Some costs to consider are: sales transaction costs (Realtor fees if you choose to use one, inspections, closing costs, etc.), improvements you made to the house (like new appliances, flooring, etc.), repairs that you had to make to the house (like a new roof, plumbing repairs, new water heater, etc.). These costs really add up if you track them and are honest with yourself about the net result of the transaction. I got really excited when we bought our first home for $85,000 and we put some sweat equity and upgrades into it. Then 3 years later we decided we “needed” a newer/bigger home and we sold it for $115,000. Did I really profit $30,000? No, but I incorrectly felt that way a little and it started to cloud my judgment when we bought our next house…and the one after that.
Can the home you live in be an investment? Yes, there are myriad details to factor in and even ways
real estate purchases can be structured in order to help it be a good investment. One great example (that I wish I had done) is to purchase a duplex and live in one half while you rent out the other half. Often this can essentially pay your mortgage. If you’re serious about lowering your living expenses and are OK to be a landlord, this might be something to consider.
Because this current series is all about lies I have told myself (or maybe lies you have told yourself too) it can have the effect of bursting bubbles and pouring cold water on dreams. Like I remind many of my clients; I have to deal in truth. Telling myself or other people lies doesn’t help either of us. The truth with real estate has been a bit painful for me to swallow and I can relate if you are feeling uncomfortable right now. Our egos are always involved to some degree in our lives and it is a bitter pill to swallow to acknowledge that we are wrong…at least it was for me. Examine your life/situation and see if it is a lie that you’re telling yourself. If so, see what you can do to turn it around or change course to make it work better for your situation.