Is A House A Good Investment?

From 1900 - 2012 house prices increased 3.1% annually while inflation averaged 3%(1). Historically, housing has appreciated just about 0.1% above inflation. Unfortunately, the average property tax rate is around 1.3% across the nation(2), approximately 1% annually is used for house maintenance(3) while around 0.35% annually is spent on home insurance(4). The net result of this is that housing costs approximately 2.64% per year. It actually makes economic sense to minimize housing costs.

Currently, mortgages are set such that a maximum of around 28% of your income before tax goes toward housing. An income of $100K can afford around a $360K house on a 30-year mortgage at 4.5%(5). At the end of 30 years the house would be worth around $900K using a 3.1% annual return. Total property tax, maintenance and insurance would be $485K yielding a net housing return before inflation of $54K.

Alternatively, suppose a $250K house was purchased instead with the balance of the housing payment going into an investment account earning 6% annually. At the end of 30 years the house would be worth around $625K using a 3.1% annual return. Total property tax, maintenance and insurance would be $337K yielding a net housing return before inflation of $38K. The investment account, before tax, would have approximately $691K. A $675K improvement in net worth over the person with the more expensive house.

Conclusion: It is easy to wind up house poor by having too much of your cash flow tied up into your house. It is important for your long term financial well being to have enough cash flow to support an investment account in addition to your house.

1) http://observationsandnotes.blogspot.com/2011/06/us-housing-prices-since-1900.html

2) http://realtormag.realtor.org/daily-news/2016/04/28/who-pays-highest-property-taxes

3) https://www.thebalance.com/home-maintenance-budget-453820

4) http://homeguides.sfgate.com/average-cost-homeowners-insurance-3020.html

5) http://www.bankrate.com/calculators/mortgages/new-house-calculator.aspx?wages=8333.00&investment=0&alimony=0&other=0&downPayment=0&term=30&interestRate=4.5&homeownerInsurance=1080&realstateTax=4900&carPayment=0&alimonyPaid=0&creditcardPayment=0&otherDebts=0&show=true

 

Disclosure:

The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice. All material presented in this article are compiled from sources believed to be reliable, however accuracy cannot be guaranteed. No person should make an investment decision in reliance on the information presented here.

The information presented here is distributed for education purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or participate in any particular trading strategy.

Performance data showing past performance results is no guarantee of future returns.

Performance data showing past performance results is no guarantee of future returns.

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