Is my House an Investment?
A house is the most expensive thing many people will buy during their lifetimes. But is the house you buy to live in an investment?
The answer: No.
For something to be an investment, it must have the potential to make you more money than it is going to cost you.
When you buy a house to live in, that house will usually cost a lot more in things like interest, maintenance and opportunity costs, than it will increase in value over time.
The house you buy to live in is an expense, not an investment.
Wanna live LARGE? Start by living in something small!
If you want to become financially free, my advice is that you start by buying a small and reasonably priced house to live in – just big enough for you and your family.
If you can afford to make the payments on a R1,000,000 bond, then buy a house for R500,000. Use the extra money to pay off your bond and other debts sooner.
Debt on the house you live in is a bad type of debt. You should pay it off as soon as possible.
Once you’re debt free – and especially when you start getting passive income from your investments, over and above your normal income – you’ll find it easy to save up for your dream home.
The Costs of House Ownership
When you buy any property, your main expenses are:
- transfer duties – the government’s initial finger in the pie
- attorney fees – the legal guys who do the registration
- interest – on your bond
- maintenance – the bigger the property, the more stuff there is to fix
- improvements – there’s always something that can be better
- rates and taxes – the government’s ongoing finger in the pie
When you buy a property to rent out, it is possible to buy a house that will bring you more money in the form of rent and the value appreciation of the property, than these expenses will cost you.
A rental property is an investment. However…
When you buy a house to live in, you have a few more expenses:
- opportunity costs – the money you could have earned from rent
- water and electricity – hot water, lights, etc.
- stuff – to fill up all the rooms
The bigger and more expensive the house you buy to live in, the more these costs will be. You will usually also spend a lot more money on improvements and maintenance, when you buy a house to live in, than if you buy the same house to rent out.
With all of these costs, your “live-in” house will have to increase in value by a very large percentage for you to break even. Most properties don’t increase in value fast enough to keep up with these expenses.
Lucky Exceptions
There are some exceptions. You’ll hear about them often. And you’ll hear about them often, because they are exceptions.
For example, a few lucky people owned properties in Cape Town, before the property prices there suddenly started to grow by enormous percentages. Most of these people made more money from their homes than it cost them.
However, the operative word here is lucky. Your chances of getting lucky like that, is not very good. And luck is never a good thing to bet on when making investments.
Remember, the house you live in is an expense, not an investment. It is best to start small, pay off your bond and save up for your dream home.
September 8th, 2008 at 09:57 pm
i think we made a good investment on our house because we plan to stay there forever and we were paying the same amount in renting.
we didn’t buy our home as an investment. we bought it to live in forever. so we will still have the same payment even in the future when we are making more money(because of cost of living increases)and we are not throwing our money away to landlords who don’t want to fix problems when they arise.
and our house is small. just big enough for our family. i think it is around 1100 square feet for 5 of us.when we were renting for the same price we didn’t even have that.
but i have seen people who get in over their heads and can’t afford what they get and end up losing everything.
September 8th, 2008 at 10:57 pm
Francois.
Wat jy sê is waar. Die meeste mense wil te gou en te vroeg in hulle lewe daardie droomhuis koop. Die realiteit is dat dit tot gevolg kan hê, dat hulle daardie droomhuis verloor en eers jare later as wat nodig is weer in staat sal kan wees om die droomhuis te bekostig.
Ek stem saam. Die huis wat jy in bly is ‘n uitgawe. Al groei dit in waarde, en die persoon verkoop dit later, het ander huise ook in waarde gegroei en is daar geen wins nie, want daar moet met daardie geld ‘n ander woonhuis gekoop word om in te woon.
Die uitsondering is natuurlik as die huis klein gekoop word, afbetaal word, dan verkoop word en die wins word as ‘n groot deposito aan die volgende huis wat ‘n stappie nader aan die droomhuis is betaal.
Goeie inskrywing wat baie sin maak.
September 8th, 2008 at 10:46 pm
for a while, just about everywhere in the USA was an “exception” and that lead people, who had no right buying, to buy real estate on 0% down loans and risking it all. they were playing more like some people try to time the stock market or play the lottery. it crashed sooner than most every body expected and left a mess.
i think jamiebatts has it right in that he was in it for the long term. things like houses and stocks should be long term. they can benefit people who are patient.
we have yet to buy our first house, but we are trying to learn as much as we can before we do!
September 9th, 2008 at 02:26 am
As a relatively new homeowner, I may be biased, but I certainly agree. Our house is a home, and that certainly comes with a constant cost, not just the mortgage payment.
But a cost we happily bear!
September 9th, 2008 at 03:11 am
We lucked out, for sure. We bought our home for $300,000 and it is now worth $600,000. (It was $700,000 two years ago, but real estate, like everywhere in U.S. has gone down).
I love the phrase “if you want to live large, start by living in something small”…what a concept!
September 9th, 2008 at 07:28 am
I agree with you 100%, but the question now is weather you should rent a small place until you can buy a house cash (very unlikely), or is it worth it to get into the property market as soon as possible?
September 9th, 2008 at 10:45 am
@jamie & mike:
It sounds like you guys bought well.
If you’re paying the same amount towards your bond, property-taxes and maintenance as you used to pay for rent, then you’re much better off!
@Riaan:
Yup Riaan jy’t ‘n goeie punt daar – betaal af voor jy groter gaan.
Die hoof punt van die artikel is net dat mens moet besef ‘n groter en duurder huis gaan jou meer kos maand na maand, en die groei in die huis se waarde is onwaarskynlik om by die kostes by te bly.
@Sharon:
Yup, in South Africa there is also a slump in house prices. It’s not as bad as in the US, but many properties are selling lower now than a year or two ago.
@Nate:
I agree with you. The way bonds were granted were based on an unrealistic growth projection for house prices. It was bound to lead to a collapse.
Property, just like anything else, is not a miracle investment. It can offer steady and good returns, but in the long-run it is very unlikely to beat inflation by more than two or three percentage points.
@Johan
I don’t think it really matters Johan, it’s up to you.
I prefer to rent, because it gives me the freedom to move around easily. I’m not “rooted” anywhere.
However, I also own property:
1. a share in a rental property, and
2. shares in a company that I bought especially for the real estate owned by them.
Buying shares in a company that owns real estate is an easy way to “get into the property market”, without having to make any debt. You can buy your shares bit by bit.
Property is an asset class, just like any other and it should be part of your complete investment portfolio.