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Is Buying A Home A Good Investment? A Modern And Practical Take On The Question

Jamie Johnson6-minute read

January 13, 2021

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There are certain milestones most people want to achieve during their lives. Once they finish college, find a good job, or get married, many people expect that they’ll also buy a nice home and settle down.

Buying a home is often considered the American dream and is a standard many families strive for. And at some point, you’ve probably heard the conventional wisdom that a home is the best investment you can make.

But is this statement really accurate? Is buying a home a good investment and is buying a house even worth it?

The truth is, it may not be a good idea for you to think of your home as an investment in the traditional sense. But in spite of that fact, buying a house is still often worth the cost.

Reasons You May Want To Avoid Thinking Of A House As An Investment

For many people, buying a home is a wonderful decision that can lead to a sense of security and peace of mind. But that doesn’t mean you are creating an investment when you buy a home. Let’s look at a few reasons why.

It Takes Time To Break Even

Most people don’t factor in all of the additional expenses that come with purchasing a home. For instance, new homeowners have to cover closing costs, which are usually between 3% – 6% of the total loan amount.

So if your home is worth $250,000, closing costs could be an additional $7,500 if they fall on the lower end of this scale. If they fall on the upper range, you could end up paying $15,000 in closing costs.

It takes most homeowners 4 years to break even on their home after paying closing costs. If you’re interested in learning more about how long it will take to break even on your mortgage, feel free to try out this buy vs. rent calculator.

Maintenance Costs Are Substantial

Maintaining a home is expensive because there are ongoing maintenance costs you’re going to have to deal with. On average, you can expect to pay 1% – 4% of your home’s total value on routine maintenance.

So, if you own a $250,000 home, you can expect to spend $2,500 – $10,000 a year on maintenance costs. This includes things like:

  • Mowing and treating your lawn
  • Cleaning out vents and gutters
  • Having your furnace serviced twice a year
  • Changing out your filters
  • Having appliances serviced

And keep in mind, these costs are for general maintenance only. That doesn’t calculate the cost of major home repairs, like replacing your roof.

The Average Rate Of Appreciation Is Low

Appreciation is an important fact to consider when you’re trying to determine whether a home is an investment. If the appreciation rate is high enough, then the added value you’ll earn from the home will make the investment worth it within a certain period of time.

However, inflation-adjusted home prices have only increased an average of 1% per year since 1900. And keep in mind, this is a national average – the local rates could look very different depending on the state and county you live in.

Timing The Market Is Difficult

Many people believe that homes are a good investment because housing prices will continue to go up and increase in value. And in a good economy where there is a strong market demand, that’s true.

But it's difficult to time the market and sell your home in a way that maximizes profit. In order for it to work, you’d have to buy your home in a “buyer’s market,” which means there are more sellers than there are buyers.

In a buyer’s market, it’s more likely that you’ll get a better deal on your home. Conversely, you’d want to sell your home in a seller’s market, where there are more sellers than buyers.

In a seller’s market, you can command higher prices for your home and may even be able to get a bidding war going and drive up the price. However, it’s incredibly difficult to get both scenarios just right. Many people will either sell too soon or wait too long to sell.

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OK, But Is Buying A House Worth It?

Your home may not be an investment, but a house can still play an important role in building a sound financial future. And doing things like saving for a down payment is still worth the time and effort. Let’s look at some of the biggest advantages of homeownership.

You Can Save By Cutting Rent Out Of Your Budget

One of the biggest advantages of owning a home is that you save money on rent every month. When you pay rent every month, that money is lost to you forever. Whereas if you put that money toward your mortgage, you’re actually building your net worth.

Statistics show that when you factor in rent, the return on investment in your home is 8% – 10% per year. This rate of return is similar to what you’d earn investing in the stock market. Of course, this won’t be true in every situation and your return on investment will largely depend on the city you live in.

You Can Enjoy Greater Financial Stability

For many people, owning a home leads to greater financial stability. Over time, your housing costs become more predictable than what you’ll pay as a renter.

And studies have shown that homeowners often experience greater mental well-being than renters. For instance, homeowners are more likely to engage in their community and become friends with many of their neighbors.

There are also certain tax benefits to owning a home. If you itemize your deductions, you can deduct mortgage interest and property tax payments on your taxes every year.

You’ll Likely Have More Square Footage

Homeowners typically have more square footage than renters, which is more conducive to raising a family. The average new apartment in the U.S. is 941 square feet, which is 5% smaller than it was 10 years ago.

In comparison, the average new home in the U.S. is 2,500 square feet. So, if you’re looking for more space and room for a growing family, homeownership may be the better option for you.

You Can Make More Changes To Your Living Space

And finally, when you rent an apartment or home, you have limited options when it comes to decorating or making changes. For instance, some landlords won’t allow you to do things like paint or add solar panels. But when you own your home, you have control over all the decorating and landscaping decisions.

Making Your First Home An Investment Property

And finally, there is one way you can make your home an investment and that’s by renting it out. This is often referred to as “housing hacking” and is a different approach to buying an investment property.

The way this works is that you buy a home, use it as your primary residence, and then rent out one part of it. For instance, you could renovate the basement area or the bottom floor of your home. Then you rent that one area out to a tenant and live in the remainder of the house.

Or if you don’t want to live so close to your tenants, you could also purchase a multi-unit property and rent out the remaining units. In many cases, you can essentially earn back the money you’re spending on your mortgage by renting out a portion of your home.

Pros

  • Someone else makes the monthly mortgage payment for you.
  • House hacking is a good introduction to owning an investment property.
  • You can keep a closer eye on your investment and potentially catch problems more quickly.
  • You don’t have to spend the money to hire a property manager.

Cons

  • You have to share your home with strangers and will have less privacy.
  • The tenants could fall behind on their rent or damage your property.
  • If you have gaps in between tenants, you will lose out on rental income during those months.
  • You may find that you don’t like being a landlord.

Key Takeaways

Many people encourage homeownership by claiming that a house is the best investment you’ll ever make. In truth, unless you’re investing in a rental property that earns you income every month, a house is not truly an investment.

But for many people, investing in a home is still going to be the right choice for them. Homeownership can give you greater financial stability, more options, and can provide a substantial return on your investment.

And if you’re interested in trying your hand as a landlord, you can always look into house hacking. For some people, this can be a good introduction to owning a rental property.

If you’re interested in learning more about what it means to buy, sell, and maintain a home, be sure to check out the Learning Center from Rocket Mortgage®.

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Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider, and Bankrate.