"Credit cards are all bad"?
"You should never have debt"?
and the best is "Buying a home is a great investment"
I know I'm going to rub a lot of people the wrong way with this post. If you're a religious believer of treating your house as an investment then you probably should stop right here.
And while I'll cover some of the terminology shortly, it's important to understand that I don't really care about the semantics that much. You shouldn't either. So eventually the question I'm going to answer is: "Is buying a house a great investment?" And we'll conclude that it's just a cheaper expense to its alternatives.
The distinction is important.
Almost everyone has some opinion about the topic. There's some great conversation on this old thread. Unfortunately some of the counterarguments have already been removed from Twitter.
— The Wealthy Finn (@TheWealthyFinn) April 14, 2019
So good discussion here. Sometimes it doesn't go so ... civilized.
In hindsight, I'm no longer even sure the question was fair. Reading different definitions for assets and liabilities, I'm no longer convinced the two are necessarily opposites of each other. For an accountant yes, but from the point of view that helps to get to the bottom of this, no.
Here's Rober Kiyosaki defining the two terms with crystal clear clarity. The fact that he's able to do such a convincing job at it doesn't make it any more correct though, but it's a very much supported view.
What is an asset?
According to Investopedia, anything that can be converted to cash with a fair price is an asset. With this definition your house definitely fits the bill. But so does your car, an airplane and your old iPhone 6.So why does Bob K. here say a house is not an asset?
Because Bob here has a different definition for an asset. Bob's definition is "putting money in your pocket". You can't find that definition anywhere else on the internet though. Bob made that up.
A better definition for asset would be something that "is money in your pocket", not something that generated more of it.
What is a liability?
A liability is an obligation you have to pay or forfeit something. Liability is something you owe, or something you are bound to pay.
If you ask an accountant, they would place your house as an asset and your potential mortgage as a liability. But what then, once your mortgage is paid off? Is an asset only that's left?
When you ask an accountant, probably yes. But when you are trying to get to the philosophical root of this problem - perhaps not entirely.
Yes, in accounting terms, the house is a deprecating asset and all the mandatory bills that come with just become expenses as they arrive. But is an asset automatically an investment? No.
Yes, in accounting terms, the house is a deprecating asset and all the mandatory bills that come with just become expenses as they arrive. But is an asset automatically an investment? No.
What is an investment?
Let's start this paragraph off with a great excerpt from investopedia:An investment is an asset or item acquired with the goal of generating income or appreciation.The short article goes on to make a difference between an investment in economic theory and an investment in finance.
We all know what investments are in finance. Stocks and bonds are great examples: you buy them in the hopes of benefiting financially - either in form of interest or dividends or by selling for profit.
In economic theory an investment is for example acquiring the machinery that you need for production or service. A house you rent is an investment. But is the house you live in?
The purpose of an investment
I think we can all agree that the purpose of an investment is to generate wealth. That doesn't mean that anything you do that generates wealth is an investment though. Going to work isn't an investment. Not buying a bag of chips/crisps also isn't an investment.
A lot of people get confused with this part. It's not an investment if it doesn't generate wealth. If it saves in costs, it's just cost savings.
When you consume something, you might say you are investing in yourself but you're in fact still simply consuming.
Why would a house be an investment?
The most common argument goes something like this:Your net salary is e.g. 2 000 €. You pay 900 € in rent, 400 € for food (you like food), 100 € for transportation and 400 € for other living expenses. 200 € you put on your savings account with 0% interest.
You then hear what a great investment it is to buy your home instead of renting. So you take a 180 000 € mortgage, invest 20 000 € your own money and buy an apartment for 200 000 €. The direct monthly expenses for the apartment is 300 €. You pay 250 € interest and 550 € to loan principal. That's a total of 1 100 €. There's nothing left for your savings account anymore.
"Wow", you think. "I'm earning like 350 € doing this. Isn't that a 21% ROI?"
It feels like an investment, doesn't it?
But hadn't you already earned that money once? How can you re-earn the same money?
And how easy is it to forget that a house requires renovating and irregular upkeep such as water pipes, roof, kitchen, bathrooms etc. Without these, the house will not even keep up with inflation. And with these costs included, the savings compared to renting become miniscule.
What else would be an investment?
So you have your apartment. Next you imagine you shouldn't be paying 100 € for commuting, so you buy a fancy cyclocross for 2 000 € and start biking to work. With the same false logic you're getting a 60 % ROI, right? Damn! There should be more such opportunities! Too bad you can't buy TEN CYCLOCROSSES!Because now you have 100 € free cash flow monthly and you're energized from all the biking, you decide to get a gym membership. For a couple of months you're more energized than you've ever been in your life. But the price of your gym membership starts to weigh on you. "100 € for this? I can't afford this. I wish there was a way to work out home."
And then it hits you, the ad you've seen on TV in the wee hours: the super workout machine that you can assemble in your garage that basically IS a gym in your home. And only costs 5 000 €! A 24% ROI, right?
So now your 100 € is free to be saved and invested. The 100 € that the home gym "returns". But also your cyclocross? Wait, which actually produces that 100 €?
You can't compare to another cost
The issue is comparing. It's human nature to become numb to your current situation. It's how lifestyle inflation creeps up on you, too. You think you need something more to be happy, and then you get used to it.
In a very similar manner we think that the apartment we are renting now is somehow the starting point. The origo. It's not!
What if you never rented. Instead, you started all from scratch. You buy the apartment, the cyclocross and the full body workout machine. How do you calculate your ROI?
Now some of you will say: "You can compare the apartment to an equal one that's rented on the market." Okay, if we do that, then most likely the smaller the apartment, the smaller the ROI. And vice versa: the larger the home, the better the ROI.
Which of course is insane. "You shouldn't maximize it like that", you protest, "but to use it to compare the alternatives". Sure, but that's not what I have a problem with.
When you do this, your starting point is a certain standard of living and you're just justifying yourself that you're supposed to have it. When you think of it as an investment, you no longer consider it as a cost and the end result will suffer. You'll make bad choices.
Did you know that the standard of living has 25-folded in 100 years. And even from the 1980s, it has doubled. Why would the 900 € apartment be any kind of starting point?
But the house appreciates in value
Heard that one before? How your old neighbor made a fortune buying that house 30 years ago and how it's now worth ten times?Do you know what happens to a house if you let it just sit for 30 years? Imagine what it will look like without maintenance after three decades. Imagine what it will be worth. Probably less than zero, since it is unlivable and needs to be demolished.
It is true, that properties appreciate in value, but it's not the structure, it's the land. And even this is of course only true in locations people want to move to.
If you were to calculate the total ownership cost of a property, you'd notice that while yes, it might have appreciated in value, but at the same time you will have paid taxes, maintenance and other fees enough to end severely in the red. Living costs money, always.
Not an investment let alone a good one
My opinion is clear. A property should not be considered as an investment.
A home is always a cost, rented or owned. When you own, you might end up saving more compared to renting. You might end up with a larger net wealth in comparison, but it's because it's forced saving, not because it's a good investment.
The conclusion is mostly important, since the alternative narrative leads to people buying too large homes. To say it's an investment will lead someone to maximize the wrong thing; to buy the largest possible home when interests are low and end up in distress when interests rise.
