Why Your Own Home is NOT Your Best Investment

By Anna Johnson

Many of us - particularly those of us living in places like Australia and the United States - are raised to believe that our own home is our greatest asset or investment.

I don't agree. In fact, for many, if not most, people, their own home is not an asset at all.

Now, let me absolutely clear:

-- I'm not against home ownership.

-- Nor do I question real estate as a legitimate investment. Real estate can be a TERRIFIC investment.

But with two - somewhat non-obvious - exceptions, your own home is NOT an income or profit generating asset.

Imagine the following. I'll use a "best case scenario" - a rising property market, no capital gains tax on the profit from selling your home, and an interest rate that stays well below the annual returns on property.

Let's say you decide to buy a $500,000 home with $100,000 saved for the down payment or deposit...

Here are the other key numbers:

Home price = $500,000
Deposit / down payment = $100,000
Loan = $400,000
Interest rate = 7.50%
Loan period = 30 years

Plug these numbers into one of the numerous loan calculators on the Net, and you'll discover the following:

Monthly repayments (interest and principal) = $2,796.86
Total interest payable over 30 years = $606,869
Total amount payable over 30 years = $1,006,869

So if you stay in this house for 30 years you'll end up paying $2,796.86 each month for 30 years...

Hmmm... but if the property market is rising, can't you sell the house and make a profit?

Yes... but you still need to live somewhere!

Let's say you sell in 5 years time and the property market has risen by 10% p.a.

Sell existing home for $805,255
Pay off remainder (approx. 94.6%) of principal = $378,470
Profit = $426,785 (no capital gain tax)

Now, if you're like most people, when it comes to buying your next home, you'll want to upgrade. So let's say you now buy a home for $900,000, using your profit from the sale of your previous home as the down payment / deposit...

Home price = $900,000
Deposit = $426,785
Loan = $473,215
Interest rate = 7.50%
Loan period = 30 years
Monthly repayment (interest and principal) = $3,308.79
Total interest payable = $717,949
Total amount payable over 30 years = $1,191,164
Renovations / Maintenance over 30 years = $100,000
Grand total over 30 years: $1,291,164

So if your own home is such a great investment, how much money do you actually make from owning it?

How about... NOTHING.

All the profit you make on the sale of your first home goes into your second home... and now you're making even bigger monthly payments.

In fact, the only way you can make money from your own home is by DOWNGRADING instead of upgrading when it comes to buying your second home.

In other words, you need to sell at a profit AND buy something CHEAPER, so you can take the difference and invest it in something that generates income or profits.

But most people don't do this!

So, while you may well profit when you sell your first home... if you subsequently reinvest that money in a more expensive home... you'll never actually realise any profits.

Of course, there IS another way in which your own home can be an "asset": where you use the equity to borrow money to invest in profit generating assets (e.g. investment property, a business,
stocks / shares, etc).

However, in this case, it's not the presence of any profits or income that makes your home an "asset" to you... it's the willingness of lenders to take your home as security in return for a loan.

Okay, so I've simplified things, and there's no doubt that you could crunch the numbers and end up with different results. But the point is, your own home is NOT necessarily an asset.

It doesn't give you a capital gain you can invest UNLESS you downgrade. And it certainly doesn't generate any rental income for you (because you're living in it).

Sure, unlike renting, when you've paid off your mortgage you'll own your home and have no more payments to make...

...but you could equally rent for the rest of your life, invest the difference between the rent you pay and what you'd otherwise pay in mortgage repayments, and actually enjoy a higher standard
of living. (Assuming you do in fact invest the difference and not spend it all!)

Of course, if you have your own home, you'll be able to leave it to your children or other beneficiaries. That's worthwhile and admirable, but it still doesn't make your home an investment for your purposes.

By all means, buy a home because you can afford it and want a nice place to call your own... because you want to be able to live in it as you please... because you want to leave it to your
children... or because you want to eventually downgrade and invest the difference, or use the equity as security for an investment loan...

But not because of the myth that your own home is inherently your best investment!