Is Buying a Home Really a Wise Investment? Comments40 Comments

The following is a guest post about buying a home as an investment. If interested in submitting a guest post, please read my guest posting policy and then contact me.

Conventional wisdom says that buying a home is a smart investment. Instead of “throwing money away” on rent, you are building equity in a home that you own, which you can sell for a profit if you like or at least to recoup the money that you have put into it. If you manage to get a low enough interest rate, or if you stay in the home long enough that inflation effectively lowers the amount you are paying each month, then what you pay on a mortgage may be less than what you would pay in rent, making buying a house a smart investment. However, there are often many more reasons why buying a home is not a smart choice.

Here are just a few reasons why buying a home may not really be a wise investment:

You Plan to Move Around

Unless you’re planning to stay in your home for a minimum of 10 years — if not 15 or 20 — buying a home may not be a good investment. You pay so much of your monthly mortgage payment in interest, and so little in the principal, that it will take you that long to build up equity and to shift the balance to start paying more in principal. If you aren’t planning to stay in your home for the long run, it may not be worth buying. In fact, you could end up losing a lot of money if you move every 5 years or more.

Interest Rates are Too High

Your interest rate has a significant impact on whether or not buying a home is a good investment. The higher your interest rate, the more your mortgage will be and the longer it will take to for you to recoup the money that you have put into the home. If you are unable to get a low interest rate, it may not be worth it to buy a home — at least not for the time being.

The Cost of Repairs and Maintenance

When you buy a house, you don’t have a landlord to call when things break. You are the landlord. That means you have to buy new appliances when they break, you have to pay to have the air conditioning fixed, and you have to pay to get the roof repaired. These things can all add up very quickly. If you buy an older house, or you buy one that has a lot of problems, you may end up spending more on repairs than you are able to recoup when you sell the house.

The Value of Your Home Can Drop

If there’s anything you should have learned in the last housing bubble — and the one before that, and the one before that — it’s that there are no guarantees. The bottom can drop out of the housing market at any time. You can lose the equity that it has taken you years to build up in your home in a matter of months. The value of your house may even fall below what you paid for it in the first place. It may take years for the value of your home to bounce back — if it ever does.

Buying a house is not always a good investment. There are many things to consider to evaluate the investment of a home, including how much you will pay in interest, your tax bill, and how much you can expect to pay in maintenance and repairs. It is also worth analyzing the local market to understand what you may be able to expect in the coming years and whether prices are predicted to go up. Though buying may work out in your favor, it’s not a foregone conclusion. It’s important to research your options thoroughly to make the best investment for your personal situation.

Author Bio: Kelly Opferman is a seasoned writer who at this time focuses on her car loan calculator site. Her educational background includes finance, teaching, and economics.

If you enjoyed this post, please consider subscribing to the RSS feed or you are welcome to leave a comment below.
This entry was posted in Financial Advice, and tagged , , Comments40 Comments
By : Adam | 5 Dec 2013
Tweet this article :
Div line

40 thoughts on “Is Buying a Home Really a Wise Investment?

  1. Domestic Catlady

    I would also add that if you don’t have enough money for a down payment, right now that’s about 20%, or at least 3-8 months of an emergency funds, then you are likely not ready to buy. There are loans for people w/ no or bad credit, but just because you qualify for a loan, doesn’t mean you’re financially ready for a house. A house can be a great investment or your worst nightmare. Too many find themselves house poor. Just plan on making major repairs within 5 years of buying your home. Not to only focus on the negative, but the emotions related to buying a home can make you not focus on the realities that buying a home can become a huge debt!

    Reply
    1. Jeremy Biberdorf

      Great point. Some people focus too much on whether they bank approves them or not and overlook the big picture. Buying a home is not something that you want to rush into. It’s much better to be in a home that you can actually afford than to put yourself in too tight a situation.

      Reply
    1. Jeremy Biberdorf

      Personally I don’t think of mine as much of an investment either. To me it’s really more forced savings and a way to keep the money that I’d be paying to rent otherwise. Sure it would be nice if it increased in value, but it’s not something I’m relying on.

      Reply
  2. Darnell Jackson

    Not if you buy it with a mortgage. The problem is there is more debt available than actual money so that means there will always be more people “under water” than above it.

    If you can’t affortd to pay cash you can’t afford it.

    Good news is you can still buy a good house for cash in most areas for less than a years salary.

    #SaveYoMoney

    Reply
    1. Jeremy Biberdorf

      Darnell I really don’t understand your obsession with hating on any kind of debt. There is such thing as good debt. The vast majority of people would never be able to afford to buy a house with cash. Does that mean we should all move to places that have had real estate collapses. If you took the approach of just saving for decades, think of how much money you would pour into rent in the meantime. That is all money that you’d never see again and would be far more than the mortgage interest.

      Reply
  3. Michelle @fitisthenewpoor

    We are anti-buy a house even though everyone tells me that it’s time for us to do it. We want to travel extensively, so we would rather rent. Plus, we live in an area where mortgage and rent values are about equal, but home values are still dipping. There’s no point in buying until mortgages are cheaper than renting.

    Reply
    1. Jeremy Biberdorf

      In my case I’d much rather pay a higher mortgage than a lower rent. Sure your monthly expenses will be higher, but where does the money go when renting? When it’s going towards a mortgage at least it is building up an asset. Sure you could try to time the market low point, but in the meantime you are burning money.

      Reply
      1. Andrew@LivingRichCheaply

        I’ve been looking into buying a place but I know how Michelle feels. When my wife and I first got married, everyone was shocked that we decided to rent (after not really finding a place worth buying). It is a different market here in NYC…so buy vs rent might be a little different. I think if you plan on traveling, or unsure whether you will stay at that location, renting makes sense. You’re not building equity when renting, true, but most of the money you put towards your mortgage…especially in the beginning goes towards interest. Money going towards interest is “burning money” as well. Plus, when you add up closing costs, selling costs, etc…buying is not always the right decision.

        Reply
        1. Jeremy Biberdorf

          Even with all the costs involved, I’d still prefer to buy a place. True a lot of money goes to interest early on, but that won’t change if you wait years to buy while renting. In time at least money is going towards equity. Reasons like wanting to travel or uncertainty of where you want to live are solid reasons to not buy though.

          Reply
  4. moneycone

    The answer will depend on whom you ask! Renters will endorse this as much, homeowners not as much! :)

    But yes, the correct answer is unfortunately much more complicated and depends upon a lot of ‘knowns and unknowns’!

    Reply
  5. Scott @ HomeBuyer Nation

    100% agreed. Homeownership isn’t for everyone…and that’s perfectly ok. It’s funny how often people question you when you tell them you’re a renter. It’s always, “Oh wow – you rent? When are you going to buy?!”.

    Isn’t it interesting how you’ve never heard (in the mainstream) that it’s a bad time to buy? Our culture is obsessed with owning a house.

    My answer to the question, “Should I buy?” is always: it depends. Depends on your WHY.

    Reply
    1. Jeremy Biberdorf

      It definitely is ingrained in our culture. Everyone just thinks that they are supposed to buy at some point. Personally I think that in most cases where the person can afford it, it is a good idea to buy. If you overlook the other factors you could end up losing a lot of money though.

      Reply
  6. Shannon @ Financially Blonde

    I think that the value of homeownership has been redefined over the past ten years. And for the reasons you mention, it is not as “appealing” as it used to be. I actually frequently advise clients NOT to buy homes based on their lifestyle, lack of predictability in their job market and long term goals.

    Reply
    1. Jeremy Biberdorf

      Yes the perception of the value of home ownership has changed a lot. It’s been shown to not be as secure an investment as it was in the past. Individual circumstances could make that investment make even less sense.

      Reply
  7. Christine @ ThePursuitofGreen

    It’s definitely a different choice for everyone. Even more so when you live in a city with high price of living and high real estate value. I just recently took the jump and it’s been an eye opener. I’m going to love it but at the same time there is so much more to know and do. I plan to stay at that house for as long as possible though!

    Reply
  8. Elroy

    I just bought my 3rd house in 5 years. I’ve gone from having $0 in equity to over $250k. Obviously, we move a lot, but generous corporate relocation packages help.

    One thing to think about….you have to have shelter. It’s one thing to talk about the “balance point” of interest paid and principal paid, but you have some cost to renting.

    Reply
  9. Micro

    I think sometimes we can get a little too caught up on wanting a low interest rate that we forget the fact high interest doesn’t happen in a vacuum. A high interest rate means home prices are going to be pressured downward. If you can only afford $xxxx a month for payment and interest rates rise, your overall purchasing power is lowered. Over the course of 30 years, chances are good you will have a time of lower interest rates and can refinance at a lower rate. You can never go back to buy your house at a cheaper price.

    Reply
    1. Jeremy Biberdorf

      Very true. In the end, a lower purchase price can matter a lot more than the initial interest rate. Often when we are ready to buy we aren’t willing to wait for prices to possibly go down.

      Reply
  10. Krista

    These are many of the reasons we recently switched our priorities toward kids first and then consider whether buying is something we want to do. In our peer group this seems a little counter cultural because logic says ‘house then baby’ but we disagree.

    Reply
    1. Jeremy Biberdorf

      In today’s economy it can be challenging to balance the cost of both home ownership and parenthood. So I’d think it would become a more common trend for people to have to choose between the two. In my case I had to accept that we’d have to settle for condo ownership for now and later see if owning a house is in the cards.

      Reply
    1. Jeremy Biberdorf

      That is definitely one of the major factors to consider. Unless you can make money from renting out the home, you’d usually want to stay living there for a while. It’s just too unlikely that the home value will increase enough to cover all the fees involved with selling.

      Reply
  11. Nick

    I’m a big fan of home ownership. I do think a lot of people buy without thinking if it’s good for them at their current place in life.

    Just like everything other than pumpkin pie, sometimes it’s not a good thing.

    :)

    Reply
    1. Jeremy Biberdorf

      Mmm pumpkin pie :)
      When home ownership is such a big part of what society tells us what we are supposed to do, it’s only natural that some people would rush that decision. Then some of those people would be bound to overlook some of the extra expenses or any of the other factors that could make it an unwise decision.

      Reply
  12. Jonathan @ True Financial Planning

    These are all great points… especially the mention of interest rates and the cost of maintenance and repairs. Additionally, It’s important to understand that making the decision to buy versus rent is not as clear as “throwing money away” on rent. I say this because in the first decade into the mortgage you’ll be “throwing money away” in the form of interest payments. However, real estate investments can provide significant supplemental income over the long run.

    Reply
  13. Martin

    I’d always like to buy my house just so I have that home feeling however I agree that it is not always the best idea to jump straight in. Although the loss of value does not really bother me, the risk and the cost stop me bothering right now. I think that there are a lot of good schemes in the UK to help new home owners though which is good for me.

    Reply
    1. Jeremy Biberdorf

      Those new home owner schemes may actually be leading more people to rush into home buying. Getting tax breaks or other benefits can give people a false sense of security. Then they overlook big reasons why they should be waiting.

      Reply
    1. Jeremy Biberdorf

      I found that I had far more trashy neighbors when renting. When the people aren’t fully committed to where they live, they can be a lot more disrespectful knowing that they can just move if necessary. When you own a home you realize that you have to suck it up a bit more and make the effort to be nice to neighbors.

      Reply
  14. Steve Burgess

    Good post must admit, it is true that we must judge our instincts better before buying a home, as it is evident that interest rates are getting higher with time, with further burden of renovation can put much stress on financial factor then expected.

    Reply
    1. Jeremy Biberdorf

      You definitely do need to buffer room to be able to still comfortably afford a mortgage if interest rates go up. The same goes with affording renovations. As much as owning a home can be a smart financial move in the long run, that’s only the case if you can truly afford it.

      Reply
  15. Mike Goodman

    Buying a home is a good investment in the long run but you need to be financially capable to own it. That would include before you buy it, when you already own it and when you sell it in the future. Factor in maintenance, repairs, etc. If you even have a doubt you can manage the expenses then better rent one or work harder to get one.

    Reply
  16. Trish F

    Very good article. I have lived in my current owned home for over 30 years and although I could say I always had a roof over my head my home still feels like the proverbial albatross about my neck. The property taxes alone makes me want to buy an RV and cut all ties. I shudder to think of the repairs that will need to be done on this house before some sucker can obtain a mortgage from a bank with the nit picky way they are about a property before they will sign off. If I were to go back in time, I probably would have bought the house anyway but I probably would have done the upgrades back then when things were cheaper, now I’m not so sure I will recoup what I have put in to it.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>