Homes, on average during good times, increase in value by the cost of living, so let’s say you might see your home value increase by 4-5% per year. So your money grows while putting a roof over your head, and the gains you make are not taxable. Sounds like an awesome investment right? Wrong, here’s why.
As a homeowner you also take care of repairs and maintenance, so things like leaky basements, renovations, broken appliances and landscape maintenance all cost money. Your return drops even further.
So now you are sitting on an “investment” that is generating you about 2-3% per year. You’re still ahead of the game right? Wrong, I’m not done yet.
You also have home and fire insurance to pay, and let’s not forget the lesson we learned from the US recently: homes do not always appreciate in value.
Now, here is the bomb I haven’t even touched on that totally erodes the “investment” myth about a home being a good investment. It’s called a mortgage. Have you ever looked at your mortgage amortization schedule? Even a relatively small $250,000 mortgage over 25 years will cost you just under $800,000 to pay off. At the end of the day, you will be lucky if you break even. That’s why a home isn’t an investment.
It’s true that buying a home is better than renting, but be smart about it and live well within your means. Even if you don’t need a mortgage, don’t go “all in” and buy too much house. That’s not what wealthy people do. Investing your money elsewhere can generate a considerably greater return. There are several investment options that will return you 10% on an annual basis with very little risk.
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