The Common Advice About Real Estate You Might Want to Ignore

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A version of this article first appeared on Business Insider

Short of bringing up politics, it seems there’s no surer way to start a fight with the people around you than to take a stance on real estate as an investment.

There are diehard believers on either side of that statement. Many people fervently believe that real estate is not just a good investment, but the best investment an average person can make.

Meanwhile, many others point out that real estate is an illiquid asset that typically requires taking on a massive debt load to acquire — and between inflation and housing markets that can boom or bust any time, earning a return on that purchase is anything but a sure bet.

As for me? I can see both sides of this debate; there is plenty of anecdotal evidence that will support whichever belief you want to promote.

Some people have reached financial independence via acquiring properties and running them as rentals. Other families have fallen into financial ruin, tugged under by underwater mortgages or fixed costs they could no longer afford.

That being said, I do have a definitive stance: single-family homes that you own and live in yourself and that produce no rental income are more like utilities than investments. Therefore, I tell my financial planning clients to ignore advice that suggests they consider their home an investment that will one day produce a meaningful return.

When it comes to the house you live in, think of it as a utility

Real estate can be an investment; flipping homes can provide a return, and owning rental properties can provide income streams.

However, homes are illiquid and require large cash outlays to maintain over time. They can pose higher risks than other investments, like a globally-diversified stock market portfolio. And a fixer-upper that you flip, or a home you rent out to tenants, is not the same as a single-family home that you live in.

Your primary residence serves as more of a utility than an investment. That means it’s something you use rather than invest in… and that’s not a bad thing.

A home can provide a sense of stability and security. That is worth something, even if it’s intangible. Over a period of decades, your home can also provide a financial benefit in that it shelters you from rent inflation (or the cost of rising rents over time).

Your primary residence is rarely a good investment

Utility? That’s certainly what a house is. Asset, even if illiquid? Yup. But an investment? Not really.

I advise my clients against thinking of their homes as such. At the very least, I remind them that primary residences aren’t very good investments if you hope to earn a return.

Even in booming real estate markets, the real return of a single-family home is about 1%. That 1% return doesn’t even factor in whatever money you spend on the house while you live in it.

In reality, for most people, the real return on “investment” of the purchase of a home is probably negative.

What’s important here is to distinguish between something that has value (both tangible and intangible) and something that produces a return.

Your house can have immense value, but between inflation, the cost of upkeep, and fees associated with the transaction of this asset, it can produce little to no return on the money you put into the property while you owned it.

When talking with my clients about this, I advise against making any assumptions that they’ll “make money” when they go to sell their home. It can feel like you made out ahead if you sell your house and receive a sum of cash after paying off the old mortgage… but again, you might not have earned anything between when you bought and sold thanks to inflation, fees, and other costs of ownership.

Seeing a net gain from the sale of a home is within the realm of possibility; it does happen. But it’s not wise to make the assumption that it’s a sure bet or guarantee.

It’s even less sensible to assume your home will one day produce a return comparable to what you are likely to see from a properly diversified and risk-adjusted investment portfolio.

Ultimately, this is where I see the biggest problem with any debate around whether or not homeownership is an “investment.” It’s a nuanced issue that is so dependent on countless factors in each individual, specific situation.

There are cases when it can work out that way. The numbers, however, indicate that for the majority of us our homes will not produce meaningful returns (and may even provide negative returns). And when it comes to financial planning, it’s important to consider what’s possible… but to give more weight to what is probable.

It’s possible your home provides you with a fantastic return one day. But the data says it probably won’t. Therefore, you may end up with a better outcome by focusing on other, more reliable investment strategies to grow your wealth over time.

Want more financial advice you can actually use? Beyond Your Hammock is a fee-only financial planning firm for motivated professionals who want to use their money as a tool to build wealth and enjoy life.

#FinancialPlanner helping 30 & 40-somethings build #wealth & think differently about #money • Top #FinancialAdvisor in #Boston • www.BeyondYourHammock.com

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