The Best Investment You Can Make?

Has anyone ever told you that your house is the best investment you could ever make?  I’ve heard this several times in my life and was always skeptical about it.  For something that costs as much as it does, you’d hope that it would be a good investment, but to me it really isn’t.

I don’t look at my house as a great investment, or really as an investment of any kind.  I look at the significant money it is costing me to pay down a mortgage as a prepayment for housing that will hopefully take me through the rest of my life.  I have to live somewhere, whether it be some sort of rented room, an apartment or a box (which really isn’t an option if I want to live in Canada – unless it’s a really nice box).  All of these housing options are going to cost me money.  Renting a house or apartment will cost money forever – if I don’t pay my rent, I won’t be welcome to stay.  From a cash-flow perspective, a large upfront cost is much more palatable to me than payments to perpetuity.

In the same vain, buying a house will cost money in the form of property taxes and maintenance, but once a house is paid off, these costs are fairly low.   For me, monthly expenses would amount to approximately $300 per month (property tax and condo fees) to live.

My end goal is to have a house that is worth as much money as it cost me to attain it (up-front costs plus improvements and interest).  Part of the reason I have accelerated the payments on my mortgage is to significantly reduce this cost of ownership.  One year ago, I amortized my mortgage over 35 years, and so far have cut approximately 20% of these years out, with the intention of paying the entire house off in around 6 years.  If I paid regular payments over the entire 35 year amortization for this place, I would have to pay for the house twice.

I understand that I could invest the almost $200,000 I’m going to end up spending on my house and be making a reasonable return, but I’d much rather be debt-free after 6 years than shackled with an enormous debt.  Having no debt would provide a significant amount of freedom in my career and lifestyle that would not be afforded by having to pay my lender over a longer period of time.

With all this being said, after a year do I regret buying a house?  From a spending perspective it’s pretty crappy to be allocating 25% of our spending to paying down the mortgage every month, but when I look at it that over the past year, I have pre-paid approximately 2-3 years of rent in my city.

I’m wondering how you look at your house?  Do you utilize the tax-free capital gains afforded to your residence to gain on sales?  Is your house your best investment?

11 thoughts on “The Best Investment You Can Make?”

  1. I wouldn’t call my co-op apartment an investment the same way I consider my mutual funds investments. I bought this place to live here, and I have lived here for the last 21 years. However, once I paid off the mortgage on it 12 years ago, my total housing expenses (monthly maintenance charges + personal mortgage) dropped by 50%.

    This was the first big change in my expenses which enabled me to retire in 2008 at age 45.

    My current maintenance remains about 60% tax-deductible, so if you net it out I am paying less than the stated amount each month after taxes. If I were to rent a similar place it would be twice as much and none of it tax-deductible.

    In 2010, my health insurance passed my maintenance as my #1 monthly expense although HI is nearly all tax-deductible.

  2. Hi Dave,
    I can see your argument but respectfully. Home ownership has been shown to be an integral component of financial success. The 25% you are putting towards your house at a minimum is a forced savings plan building equity which can be accessed if necessary.
    For the last 10 years, homes in most parts of Canada have appreciated faster than the markets or most other types of investments.
    Yes, home ownership has some expenses attached to it but so do most other types of investments like MERs and other types of fees which also eat into growth.
    Lastly, don’t forget that any gains in your home (in Canada) grows tax free.
    Home ownership and real estate is a significant reason I am in the financial position I am in today. I encourage everyone to buy a home over rent if their circumstances allow it!
    Thanks for the post!
    Jim

  3. I look at my home so far as a secure place to live in the future when it’s paid off. I made a little spreadsheet today of someone renting or buying the same home and then living there all their lives for a post on another blog and figured I would link to it here. I consider owning a home a very huge step toward a comfortable retirement.

    Like every scenario it makes piles of assumptions, but this is generally laid out for a 35 year old who has a 30 year mortgage and retires at 65. His salary increases at 3% per year, and rent, property tax, or maintenance at 2% per year.

    https://spreadsheets.google.com/ccc?key=0Anp45XUK_YcbdGtyQVpraTA4NHd2MzRidUZ3V09KbWc&hl=en

  4. Traciatim, I see that your spreadsheet clearly shows that owning a house is better than renting. However, there are a few things to keep in mind, a house tied one down. One could make a dent on the savings as per your spreadsheet by moving 1-2 times in the 30 years period (real estate agent fees, tax, lawyer fees, etc).

    Having said that, I own a house and recently paid it off (I’m turning 35 soon). Now my housing costs are down to property tax and maintenance (which could run from 6000-10000 a year — property tax is about $5K/yr and increasing every year). It sure beats the old days of allocating 65% of our household net income toward the mortgage. But I still do not feel the freedom others claim once mortgage free 🙂 Cheers. Enjoy this blog.

  5. B foot, yes i make lots of assumptions, but if you move to a similar house in the new area in general the math still works out. So you may have 2 years in to your retirement with mortgage payments still thanks to the fees that have eaten some of your equity, but it still ends up the same in the end. It’s only if you expand your home that you get in to trouble. Of course, if you did that then when you retire you can downsize or sell and move somewhere cheap too . . . which is why there are so many correct answers to the housing questions.

    There are lots of situations where you would be better off renting, and lots you’re better off buying, and even individual deals in the same city and area can both have the opposite answers. However, I still think for a large majority of the population owning a home is an essential ingredient to a comfortable retirement.

  6. Do to some luck with the internet I am mortgage free. But I have friends who have a mortgage, yet still borrow money from the bank to top up their RRSPs each year.

    Is that wise? Wouldn’t that service load on those loans be better spent on the mortgage to get that paid off sooner?

    To me I think its just the bank salesman at work and my friends are falling for it.

  7. Jason, it totally depends on the return your friends can get on their RRSP vs. the mortgage interest rate. If the RRSP is paying a low rate of interest (like a GIC), they’re making a mistake. If they invested in the stock market in Feb. 2009, they’ve made out like bandits.

  8. @ deegee – I’m hoping to achieve the same reduction in living expenses when my home is paid off.

    @ WealthWebGuru – If I were to sell my home, I would have to live somewhere, where I would either have to use the equity to purchase a new place or be paying rent with the gains off of my home.

    The forced savings is not really a factor in my financial plan as if I wasn’t paying down this massive debt, I would be saving at least as much for retirement.

    Although houses have appreciated faster than markets, that means that if you don’t plan to get out of the market, you’d be selling say a $250,000 house that you paid $200,000 for, just to turn around and pay for a similar house somewhere else. I think that houses are different, unless you’re moving to a different area where prices are depressed, the gain really isn’t going to get used.

    @b foot – it depends on what you want to do. I plan (for now anyways) to stay where I’m at for at least 5 years after the mortgage is paid off. If you feel tied down, than maybe taking the equity you’ve gained and renting somewhere would be a better idea?

    @ Jason – I’m risk averse enough not to leverage for returns. I can’t see myself engaging in a Smith Maneuver at any point – I prefer no money owed vs. having debt even if there is a return there. I don’t think many people foresaw the returns available from February 2009 as Robert discussed.

    Depending on your friend’s risk profile and knowledge, they could be making a wise decision, or they could be taking on unnecessary debt that their bank salesmen are adding to their bonus at year end.

  9. A house you live in is just that… a shelter. I’ve also managed to make it a financial instrument by borrowing at 3.85% and investing for 7% returns (dividends, royalties, & partnership distributions).

    However, this is the setup only while I’m employed. Once I transition to no employment, then the risk of an unpaid mortgage overwhelms the return from investment, so I’ll be paying that mortgage off.

  10. A house is an investment, not a great growth investment that some people seem to think it is, but still an investment.
    Yes there are costs involved like property tax, maintainance and interest on the mortgage, but if you compare the cost of buying a home and ending up with an asset at the end which you could sell for a tax free profit and compare that to the cost of renting, you are going to end up further ahead by buying. If you really want to know whichh would get you further ahead you could calculate how much more you pay per month compared to renting and figure out if you would end up with more in savings or buy selling the house in X number of years if you were to invest the difference.

  11. Ok, I’ll give. Yes both houses that I’ve ever owned were the hands down best investments I’ve ever made. Profit on #1 was $60,000, while I still own #2 its property value would result in at least a $150,000 gain.

    Too bad I just roll profits into the next house. So its somewhat of an illusion, but paying it off does make a good backup plan when you retire.

    Tim

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