Blasphemers! (or, is a house a liability rather than an asset?)

So, I read this article on yahoo news today, talking about how a house is actually (contrary to popular thinking) not so much an investment as a liability, or at best, not a very good investment.


Actually, not so much. While a house purchased as investment property that has positive cashflow is an investment (and oftentimes a very lucrative one over time), a single family home, purchased as a residence for one’s self (or one’s family), generates zero cashflow. With all of the money put into upkeep, taxes, insurance, mortgage interest, utilties, and the like, you’re not making nearly as much money on appreciation as you might think (under normal market conditions, anyway). According to the article, you might be better off investing in mutual funds:

The Fool has long advocated seeking investment vehicles with low expense ratios and transaction fees. The expense ratio is the cost of owning an investment as a percentage of its value over the course of a year. Shannon Zimmerman at the Motley Fool Champion Funds service searches for mutual funds with expense ratios of less than 1%.

How does this compare to housing? Costs vary significantly by location, but for urban areas, annual property taxes are typically between 1% and 2% of the current property value. Annual maintenance costs can add another 1% of the property value. If your down payment is less than 20%, you will also usually have to pay private mortgage insurance. Add property insurance, and the annual expense ratio associated with homeownership can easily reach 3% or more.

The big hit, however, arrives when you sell a property. Real estate agents will collect 6% of the selling price, while, lawyers, inspectors, title companies, and banks will collect additional fees. These fees appear as though they will remain stubbornly fixed for years to come. If you flip properties as though you are actively trading stocks, the only folks getting rich will be real estate agents. Meanwhile, transaction fees for stocks and mutual funds have plummeted in recent decades, to the point of falling below $10 per trade at several discount brokers.

Perhaps the best measure of housing-market appreciation is the S&P National Home Price Index. This index represents the actual appreciation of the same house over time, whereas a portion of overall housing-price increases occurs because new houses are generally much larger than old houses and people frequently spend substantial money upgrading and expanding their houses. Looking at the index, from 1987 to 2006, we see that the overall average appreciation in the U.S. was only 5.6%. Even cities showing huge gains during the final years of the housing bubble — including San Diego, Las Vegas, and Washington, D.C. — showed gains slightly above only 7% for the 19-year period. If we adjust these returns for inflation, we end up with real returns on housing in a range of 3%-5%. Subtract our annual expense ratio of 2%, and the return gets pretty thin.

This index is relatively new, and the data ends at the top of the final eight years of the biggest housing boom in U.S. history. Longer-term data paints an even less encouraging picture. Piet Eichholtz studied records on home sales in Amsterdam’s premier Herengracht neighborhood from 1628 to 1973 and found an inflation-adjusted return of 0.2%. There were periods of rising prices and periods of falling prices, but not a continuous march upward with spectacular returns.

All of this doesn’t really affect investment property, however — if you work out your deals so that you’re getting monthly positive cashflow (which would factor in all of those “extras” like maintenance, insurance, property taxes, etc.), appreciation is kind of a nice “extra” that gets thrown in — provided that your rent increases are keeping up with inflation and the rising costs of property taxes.

If you’re most people, however, not a real estate “investor,” but just a person looking for a place to live, you have a different set of math. Most people have been bamboozled into thinking that they were truly “throwing away” money on rent in the past few years, and have decided to go out and buy houses that they could barely afford, paying twice as much in mortgage/taxes/insurance than they were previously spending on rent. With this much disposable income being put out of service, a person may actually be “throwing away” their buying power (and “financial freedom,” a choice slogan for mortgage companies) on their mortgage.

Looking at it from another side, though, if you have the attitude that buying a house isn’t a way to make money, but more a way to save money, buying a house to live in does make sense. Mortgage payments (after the first few years, where most of your mortgage payments go directly to interest) become a forced savings plan, the money from which you’ll be able to tap into once you sell the house.

The bottom line, I suppose, is that articles like this can’t possibly speak to all people and all scenarios, and lay down a blanket “buying is better than renting” or “renting is better than buying” rule that works for everyone. It all depends on each individual person’s finances, requirements, timing, and a million other factors. This kind of article does certainly generate a lot of controversy, however (especially since everyone and their brother seems to have become a homeowner in the past five years). A few I found on the discussion of this article from the forums on

The person who wrote this article is either retarded or trying to defy conventional wisdom for the sake of being an attention whore.

The reason a house is a good investment is because you’re not throwing away money on rent. And as long as you don’t do something stupid, like paint your house hot pick or tear up all your hard would floor to put in shag carpet, the house will at least appreciate with inflation. The exception would be if your neighborhood really goes to shiat over the years.

Real estate speculation can be dicey depending on what the market is like, but owning a home is almost always better than renting.

/renter who would buy a house if he didn’t live in Miami

Houses are no longer family heirlooms. Who wants to buy a 40 year-old house anymore? I listened to a lady tell me “[our house] was a good deal because it’s older.” How old, I asked? “Thirteen years”.

Pay mortgage for a house for 30-50 years. End up with an unsellable house with rot, degraded electrical and plumbing materials, and a bad roof.

Buying a house means paying rent and 2xrent to the mortgage company in the form of interest and having an unsellable product after the fact. Equity is a fantasy.

I keep saying that a house is a home, not an investment. An office complex, strip malls, etc… are investments. Homes are not, even for the owner.

Worst investment ever? Only if you are a) retarded or b) Robert Kiyosaki.

Githerax: Who wants to buy a 40 year-old house anymore?

Every piece of property I’ve looked at in the past few months has been around 50-80 years old. My wife and I are looking at buying, probably a condo in a popular downtown area- when we’re done living there, it will become a rental property.

So, in my case- it’s both. I’m going to live there until I can refinance it to nice low payments, and rent it out for some small percentage over cost. Then, someday, when I have children looking to go to college, if they choose one of the schools near the condo, they can live there rent free.

There are advantages to owning.

i bought my house 9 years ago at low interest rate on a 15 year mortgage. i’ll have it paid off in 2 more years because i’ve been paying more than ‘required’ every month, without penalty. and my house has roughly doubled in value since i bought it. all in all, i’d say it’s been a great investment. ymmv

Name one other investment where someone will loan you virtually all the money for the investment, and only want 6-7% return on that, plus you get to keep ALL the profits scott free. Try starting a business on those terms.

Almost all wealther people got wealthy in real estate or from the labor of others.

People should quit thinking of a home as an investment. The sheer fact of the matter is that it is a liability. Period.

I’m not much of an active participant in forums, but they’re an interesting tool when you want to be a fly on the wall. You can read the rest of the forum at

Related Articles:

Leave a Reply

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