Is Buying a Home a Bad Investment?

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Owning a home is one of the cornerstones of the American Dream. It's right up there with running a small business and touting the importance of a robust middle class. But what if buying and owning a home isn't as good of an investment as we were led to believe? It turns out that might be the case. We see buying as a mark of independence, and we tend to put a lot of moral qualifiers on it.

For years, I myself thought that I was "throwing money away" by renting. It wasn't until I started to seriously consider buying a condo that I realized that there's actually a ton of grey area in the Rent vs. Buy debate. In strictly financial terms, they're much closer than we think, which also means that you may want to reexamine your motives for buying before you sign the deed to a house.

How long are you planning to live there?

This is one of the most important questions to ask when you're considering the financial benefits of purchasing property. If this will be your primary residence and you plan on keeping it for an extended period of time (more than a couple of years), then you shouldn't view it as a financial "investment." Over time, the real estate market barely keeps up with inflation, so you're going to end up with about the same money that you'd be putting in (minus the expenses of upkeep, repairs, and improvements).

The opportunity to turn a profit in real estate often comes from flipping homes, or buying and selling again in a short period. Many people are drawn to the idea of quick profit like moths to a flame. For that reason, it is easy to get burned. Know that the largest profits usually come for construction companies who already have the infrastructure to make home improvements at a low cost. For those who plan independent projects, most of the profit will come from sweat equity, which means you want to be ready to rip up that linoleum flooring yourself.

How much money do you have?

For any mortgage, you will want to have a down payment of at least 20%. (And that's not all you need.) If you're purchasing a place that costs $200,000, you'll need $40,000. If your dream home costs $500,000, that sums adds up to $100,000. That's a lot of dough.

When it comes to investing, especially a sum that sizable, you have to consider something called opportunity cost. Opportunity cost basically boils down to the lost money from other alternatives when one alternative is chosen. As we have already addressed, your money is going to stay relatively stagnant when invested in a house. In order to figure out the financial merits of home ownership, you'll want to consider the cost of your mortgage versus the cost of rent in the area. If you can get rent for the same price as your mortgage, you may be better suited renting. That way you can invest the same sum you'd put towards a down payment into something with higher returns.

The New York Times has a wonderful calculator that can help you to figure out these costs. You can adjust the home cost and how long you plan to stay there in order to figure out if buying or renting is a better choice for you.

What are the benefits of buying?

So, if buying a home will not give you passive income, what's the point of buying? The answer is that there can be a great many merits, as there can be with any purchase. The key is to understand that buying a home is a purchase and not an investment.

If you just want a place to call your own, or if you want to avoid getting priced out of a neighborhood, buying is a great solution for you. If you're looking to grow your money, it might be better served through different means, like stocks, mutual funds, or your own retirement.