Originally published at: https://www.personalfinanceclub.com/buying-is-throwing-money-away-plus-a-mediocre-investment/
There are many older people who will tell you their home is the best investment they ever made. That’s because it’s the only investment they ever made. A mediocre investment, when compared to nothing, looks pretty darn good.
But make no mistake, wherever you live is going to cost you a lot of money. When you buy your primary home, most of your money isn’t going towards your investment. It’s going towards totally sunk costs. Those costs are:
- Mortgage Interest: That bank gonna get PAID. For the first decade or so, MOST of your payment is going to interest.
- Property Tax: Uncle Sam gonna get PAID.
- Maintenance: Those plumbers, electricians, contractors, landscapers, and handymen gonna get PAID. And don’t forget to count the cost of that remodel you did. Plus the new roof. And the driveway.
- Insurance: That damn gecko gonna get PAID.
- Realtor Fees: That realtor, escrow agent, title agent and broker all gonna get PAID. Add another $20K or so to this bucket each time you move.
And with the part of the cash left that DOES go towards the actual house, it turns out that’s just a mediocre investment. Home prices have gone up about 4% per year over the last 100 years. (And yeah, I know, your uncle bought a shack in silicon valley in the 80s for $500 and a goat and now it’s worth $2 billion. If you know where the next silicon valley is please let me know). Compare 4% in real estate appreciation to the 10% the stock market has gone up on average and you’ll see why parking your money there long term isn’t a great idea.
The moral of the story isn’t to rent your whole life. It’s to move into home ownership with your eyes wide open. If you buy 3x the house that you were renting, you’re gonna end up poorer than living modestly and investing the difference.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
– Jeremy
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