I have always heard that my future house will be the biggest investment I will ever make. But is a house really an investment? Consider the following:
- You have to pay property taxes on your home every year
- You must keep your home insured by homeowners insurance
- Your home requires maintenance
The above sounds like a lot of expenses to me. Let’s figure out the property tax for a typical house in a medium sized city. For the purposes of this post I will use the property tax rates for Springfield, MO.
$4.35 per $100 Valuation Property Tax Rate
Assessed value is 1/3 of true value of home
$150,000 x 1/3 = $50,000 assessed value
$50,000 / 100 = 500 taxable value
500 x $4.35 = $2175 in property taxes
There will always be something that needs fixing or replacing with your house. It can be new windows, a new roof, or a new furnace. You must include these expenses into the equation here to get an accurate picture. For this example, I’ll use $1200 per year.
Homeowners Insurance can vary greatly depending on a number of factors. But, let’s just say that it’ll run $600 a year to give us a ballpark value.
Here are the yearly expenses:
$2175 in property taxes
$1200 for house repairs
$600 for homeowners insurance
$3975 total yearly expenses
This comes out to be $331 per month just for the upkeep of your house. We haven’t even tackled the interest that you are paying on your mortgage. With a $150,000 30 year mortgage at 6.5% interest you will end up paying $191,316 over the life of the loan. Which comes to $6377 a year in interest.
This makes the total expenses:
$3975 yearly expenses
$6377 yearly mortgage interest
$10,352 total house expenses
Now that we have taken care of the expenses, let’s have a look at your gains.
Everyone has watched the real estate market sky rocket over the last few years. And a lot of people are leaping at the opportunity to cash in on those gains. I have news for you. The real estate market will not go up forever. Yes, housing prices do actually go down.
From 1991 to 1996 they dropped 21% in Los Angeles. From 1988 to 1995 they dropped 10% in New York. From 1989 to 1991 they dropped 7% in Boston.
The housing market and economy is different today than it was back then. But my point is, real estate values can and will drop in the future. You cannot automatically think that your home will always go up in value.
It will go up in value over the long haul however, which is how you should look at it. A good estimate would be an annual appreciate rate of 4% per year. So your $150,000 will increase in value approximately $6000 after the first year.
If you take the $6000 appreciation and subtract the $10,352 expenses, you will notice that your biggest investment is not making money. Therefore your house is actually an expense. It becomes an investment only after you have lived in your home for many years to benefit from the multiple annual appreciations.
So yes, you could say it is technically an investment because it makes money in the long run. However, it is a very poor investment at best. Obviously you need somewhere to live, and you can pass your home on to your children. So there are additional benefits to look at. But as a purely financial point of view, you should not be calling your house your biggest investment.