Why you shouldn’t see your house as an investment

Most people consider buying property to be an investment. This explains why so many people want to enter the property market, to purchase a product that will grow in value and appreciate over time. And the expectation, or at least desire, is that this appreciation will mean seeing property as an investment.

With house prices in the U.S. and globally rising so quickly (according to Zillow, the average value of a home in the U.S. went up 20.6% in just a year), such thinking on surface makes sense. Indeed, if you bought your house for $350,000 last year, this year it’s worth around $422,100. That’s quite a bit! It’s also why so many people want to buy a second property for the purposes of turning it into a rental property.

But here’s why you should not consider your house to be an investment. Most likely, you would lose money if you held such thinking. Here are two reasons why.

Your property will never give you extra cash even if you sell and buy new. What happens when you sell your home for $422,100? You most probably would buy another one worth around that since you can afford to buy a more expensive home. But that other house, assuming it cost you $422,100, was also worth $350,000 last year–the same as your property. Meaning, you never really made a profit. Unless, of course, you downgrade to a less expensive house, which most likely you would not.

You ignore costs with both owning and selling. Congrats on your $350,000 home. You sell it for $422,100. Congrats again because you made a 20.6% profit! But did you really? If the house cost you $1,500 per month for principal, interest, taxes, and insurance, you would have spent $18,000 on top of the $350,000. It may seem like you still made some money ($422,100 – $350,000 = $54,100 profit), but what about capital gains? The commission you pay to your selling agent will likely eat 5%. Don’t forget the amount you also spent on repairs and maintenance. Maybe you got a new roof and flooring. Ask yourself, selling your house for $422,100, how much money did you really make? All of this doesn’t include utilities. I don’t include utilities such as electricity and water because you need to pay these services wherever you live (even if you rent). But if you live in a condo, your monthly HOA fees can eat up a lot of the “profit” you make.

So, what should you do? Consider your house as just that. It’s a place to live in. Ultimately, that’s the main purpose of your house. You most likely can do better investing your money in the stock market (in the long-term), because there are none of the hidden costs that come with property ownership.