Your House: Investment or Money Pit?

On my net worth posts I’ve been asked a few times how comfortable am I having so much of my net worth currently tied to my house.  I have always answered that I’m completely comfortable with it, but I thought perhaps a more detailed look on why could be useful.

Owning your house is not actually required for a retirement plan.  There is an assumption by a lot of people that you have to own one, but depending on your interests it could be a better fit to buy a RV or boat instead.  In my particular case, I do like to spend a fair bit of time at home so it would make sense to owe a home as a hedge on inflation for rental costs.

Actually as a hedge on rental cost my house is an excellent investment, I crossed checked rentals of similar houses and they currently list for $2200 to $2500 a month.  If I take the low value and deduct property taxes and insurance (since renters don’t pay those), based on I paid $190,000 for the place that means I’m getting a 11% return by not paying rent. Yikes, that’s good money.

Oh, but wait it gets better.  I also bought more house than I needed, but it allows my wife to run her daycare business. So on top of that her business transfer some cash back to the house, if you include that extra income that equals a 15% return on my initial investment.  It’s nice when you can convert part of your equity into something that provides a cash flow.

Given how much we like that idea, my wife and I were discussing that when we downsize houses we might actually buy a little bigger than we need again but with the idea of creating a rental suite in the house.  Yes that introduces all sorts of issues, but it provides a nice cash flow out of otherwise not very useful equity.

Yet after all that gushing about what’s good about my house as an investment, what are the downsides? Ah, that is a long list, but a few of the obvious ones are:

  • Illiquid – Good luck cashing out your house in a hurry. It can take months or even years in a slow market.  Selling and moving also trigger a lot of extra costs as well.
  • No Diversification – I’m stuck with a lot of money in one investment in one very local market.   If that market drops fast I could lose equity in seconds. It gets worse if you don’t have much equity, as you could end up owing more than the house is worth.
  • Upkeep – Houses don’t look after themselves and keeping the up is costly.  I’ve currently put in a new furnace, some flooring, paint and some bathroom renos in my place, but I also know I still need to invest more in new shingles on the roof soon and some windows.

So how do you make sure you house is an investment rather than a money pit?  Forget what the banks tell you about affordability since they often rely on low interest rates to give a huge number.  The only metric you need is your income to the house mortgage ratio.  I personally suggest keeping this number under 3 if at all possible.  So if you earned $80,000/year as a family, don’t get a mortgage beyond $240,000.  Low right?  Yep, but that ensure your house in really an investment, yes you can go higher, but the odds of your house turning into a money pit start to increase.

So in the end, your house can be an investment or a money pit.  It’s really about your choice on how much you put into it and your mortgage amount that drives the issue.  So how are you doing?  If your house an investment or a money pit?

12 thoughts on “Your House: Investment or Money Pit?”

  1. Well going by those standards our house is an investment for sure. It meets the 3x with my income alone. Something we were able to take advantage of. My husband has been able to go back to school full time for year. You do have a lot more possibilities when you keep your housing expenses low.

  2. You are on the right track! One of the best decisions we ever made was to buy our current house with the intent of renting out the huge basement apartment. It takes care of the entire mortgage payment and makes a large percentage of the house utilities, taxes and interest tax deductible. This has allowed us to leave our jobs this past June, ages 50 and 41 respectively. Although I can’t say I am permanently retired, we both can work as we choose, or not at all. Spending my summer with my 10 year old son instead of being the chauffeur to summer camps is good for us both!

  3. I have always thought of a house as a long term investment. What I would like to know is how to take your equity out of your house in retirement, so that you can live off the principal. Hope that you will do a posting on this soon. Thanks.

  4. A house is no more an ‘investment’ than the depreciating car in your driveway. I work on people’s houses every day, and home owners pay me thousands to renovate, upgrade, and maintain their ‘investment’. Simply put, an investment puts money in your pocket, a liability takes it out. Sure, if it’s your rental property and there’s a positive after tax cashflow it’s an investment. Values may have gone up dramatically in the last few years but based on a longer term, there’s typically a 1-2% gain over inflation… and that’s before you hire guys like me to fix them. I hear all the time that, “I own my home, it’s paid off.” Just go a couple of months without paying your municipal taxes, then you’ll see who really owns your house. Don’t get me wrong, houses are fun to live in, they’re forced savings, it’s pre-paid rent, but they’re not an investment… and thanks in advance for booking me and my crew to repair your roof or leaky basement. I’ll bet you don’t have to pay someone to look at your ETF portfolio and to put in a new furnace:)

  5. I don’t know where in Canada you can buy a house for 190K. In Vancouver it would be more like 1,900,000 for a half-decent house in Vancouver-West.
    Consider how much money is spent in interest to the bank as well.

  6. an investment for us. we do all the repairs ourselves (have built and renovated at least 6 homes) and our current home was bought new so everything should be just ducky for some years to come. We bought wisely, backing on parkland and ponds…many people stop and ask if we want to sell and that is a good feeling. We also live in a great town with a hospital, airport, and great summer weather and lotd of jobs in high paying mining industry. WE do have a basement suite (we built that too) and had our son live there while he went to school but i would only rent it if we really, really needed the money…We hate having someone live in our house!! Right now it makes fora great guest suite and exercise room.
    Yes, a definite investment for us….and we made money on all the homes we have sold in the past.

  7. There is No Investment for all seasons but there is a season for All Investments,and right now is not the time to be R.E heavy.
    Low rates have hyperfuelled property value, but go back to historical 8-10%,increasingly higher property and utility costs, a smaller generation of buyers than sellers,house pices beyond the reach of much of the next generation R.E prices can only go one way, DOWN.
    We spend half the year down south,$30K for a furnished home in good community,$500 a month to rent the land.
    Almost 70, we have sold our $700K ,bought in a small town for $250k, the differance is invested and will be our children’s estate when they face a world without company pensions and much higher income taxes.
    The next wave of higher rates is coming, not sure when, but it is coming, and every year your property taxes keep going higher, utilities will go higher, and Joe the plumber will want $100 an hour,if you can find one.?

  8. Please, please, please compare apples to apples folks. Appreciation of house values, while wonderful cocktail conversation, is a lot like gambling. Most people (particularly in a down market) sell when they have to sell, not when they want to. Who knows what the place will be worth on that day?

    Cost to you of owning:
    – property taxes
    – insurance
    – opportunity cost of money paid (interest forgone on sum of money down and all subsequent payments towards mortgage and/or renovations/maintenance)
    – interest costs on outstanding mortgage and/or line of credit
    – heat, hydro, water (many renters don’t pay or only partially pay these items)
    – maintenance and general upkeep

    Cost to you of renting:
    – rent
    – those utilities not included in above
    – BONUS – in our locale, you’re entitled to interest on last month’s rent

    In the interest of full disclosure, we own our place, but do so with eyes open to its full cost – perhaps why our house is smaller and provides multiple income streams (rent & solar).

  9. I think perhaps the question is that homes generally are a longer term investment than people think. I would think over time you would win, as long as you were taking care to not buy too much home, and to be strategic about paying down your home. Too many people don’t take advantage of their prepayment privileges.

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