Most people think that homeownership is a form of investment. We’re here to tell you that it is not. If you already own a home, there’s no reason to equip it with the latest amenities and renovate it every year to suit whatever paint color you want that year. If it provides shelter for you and your family, it is already serving its purpose.
No need to beautify it to compete with your neighbors. The adage “if it ain’t broke, don’t fix it” applies here. Seriously, if your home is fully functioning, you don’t have to spend tens of thousands of dollars to make it look better.
During the pandemic, plenty of people made the mistake of renovating their homes. After all, the whole family is bunkered there, so why not make it a great place to spend one year in, right? You even turned that extra room into your home office, spending a couple of thousands of dollars on it. Is that the smartest way to spend your money at this time of your life? Probably not.
Why Is It Not an Investment?
The argument most people have about homes being an investment is the fact that it appreciates. Yes, it is true. The home that your grandparents bought for $100,000 in the 70s is probably priced around $620,000 today. But here’s the thing: that is because of inflation since the value of real estate has only increased by an average of 1% in the past century. The only reason why real estate is more expensive now is because of inflation.
The rate of inflation may have quadrupled your grandparents’ home’s value, but guess what? The same can be said for the cost of living. It is also 400% to 500% (and sometimes more) expensive to live today than 50 years ago. As such, the value of that home is now equal to what it will cost you to live there and maintain it. Is that what you call appreciation?
That’s not even considering that you need to spend a lot to maintain your current home. The only upside is that there are more competitive homeowners insurance policies these days, so this particular “investment” is well-protected. Inflation often outpaces the appreciation of a real estate property. That’s why most financial advisors don’t consider homes as part of one’s investment portfolio. If anything, it is a liability.
Where Should You Invest Your Money?
So, if you have a windfall of money, do you not spend that on house renovation? The pandemic made people believe that they should focus more on their homes than anywhere else. Since they’re staying mostly at home, they want to build a deck, install a swimming pool, and do many other things. Isn’t that what people are supposed to be doing with what extra money they have now? Shouldn’t they be turning their home into a home office and entertainment center in one?
This is what’s been happening but shouldn’t be happening everywhere. People are spending their hard-earned money on a swimming pool instead of investing it in things that will create another source of income for them in the future. If you have a $3,000 tax refund right now, where should you put it? In a swimming pool that you have to maintain regularly? Or do you put it in the stock market because, yes, it always bounces back although the market is volatile?
When you talk about investment, it refers to something that will generate income now and maybe in the future. Houses don’t do that. Instead, you need to take care of it. You have to spend on it when something has to be fixed and replaced. Homes are not an investment because of this reason: they don’t generate money.
But that’s not to say they are unimportant. It just means that in the long run, you will waste money renovating and redesigning your home. A better use of that money would be investing in the stock market, mutual fund, retirement fund, small business, insurance policies, and other things. While a nice house is, well, nice to have, a source of a steady stream of income is even better.
The only way a house can be considered an investment is if you have plans to sell it in the near future. This means that every repair made on that house will add to its selling price. If you improve the amenities of the home because you will sell it already, then that’s an investment.
The point here is if you only have enough money to buy a home and not to invest in insurance, stock market, business, or any other thing that will generate income, forego the house. Rent an apartment and put your money in something that will generate enough money that you can use to buy a house in the future.