Chances are, you’ve gotten some version of the following advice at some point: “You should buy a house because it’s a good investment.”
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Even if it seems like the next logical step in your financial plan or in your life, think twice before making the commitment. Owning a home isn’t always the sound investment it’s made out to be, maintains Eric Roberge, a CFP and founder of Beyond Your Hammock.
“A single family home is not an investment,” Roberge tells CNBC Make It. “It may gain money over time, but if you’re looking to invest, buying a single family home and then living in that home is not the place to do it.”
Before handing over a down payment, consider your priorities. Do you want a place to call your own that you can decorate and design as you wish? Are you planning to start a family and looking for a space you can grow into? Or are you mostly looking to boost your net worth?
There are plenty of excellent reasons to purchase in home, but if your priority is to grow your money, investing in the market is going to provide far more lucrative returns.
“[Residential housing returns are] not making anybody rich,” Roberge says. “You’re barely keeping up with inflation, not to mention all of the costs that go along with owning a home.”
Indeed, a study from London Business School and Credit Suisse found that, after adjusting for inflation, housing offered returns around 1.3 percent per year from 1900 to 2011. By contrast, the average annualized total return for the S&P 500 index over the past 90 years is 9.8 percent.
“Owning a home may help you save money, but it won’t help you make money,” concludes CNBC’s Diana Olick, citing another new study conducted by Florida Atlantic University, Florida International University and the University of Wyoming.
Investing is also far more hands-off than maintaining a property.
“What people then tend to say is that you’re building equity in the home,” Roberge says. “That is true. It’s forced savings. However, if you are stringent with yourself and you’re strict with your own savings, you don’t need to have forced savings into a home, you can save in an investment account.”
Likewise, buying a home because it feels like the next logical step in your life plan isn’t a good enough reason to take on all of the responsibility. It’s a commitment of both of your time and your finances.
“There’s no ‘right’ time to buy a house,” Roberge says. “It all depends on your lifestyle and what you need.”
However, other experts take the opposite view on home ownership. David Bach, co-founder of AE Wealth Management and self-made millionaire, calls not buying a home the single biggest mistake millennials are making.
You have to live somewhere for the rest of your live, Bach reasons, so you might as well invest in a home that you could own permanently.
“Let’s be honest: Renters make landlords rich,” Bachtells CNBC Make It. “I want you to make yourself rich, so start by saving money for a down payment now.”
At the end of the day, the decision to buy a house or not comes down to your goals and lifestyle. Make sure you’re making key choices for the right reasons.
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