Every so often, I come across someone or something that claims your home is the best investment you will ever make. Now those claims might come from a home builder, mortgage broker, or realtor, so we will need to recognize the possible conflicts of interest in such claims. Is your primary residence really a great investment? The answer likely depends on how you measure it.
We have owned a few houses over the years. Owning certainly has its advantages. If I did not own my home, I probably could not be working on a two-year multiple bathroom renovation project. I am a self-professed jack of all trades, master of none. I have a fence that cannot currently contain my goats, a pathway extension that needs something between the fieldstone, some siding that needs caulk and paint, and a smashed driveway gutter downspout. Please do not ask my lovely wife for a list, as I am sure there is a much longer list of things I have started and not (yet) completed.
All those projects are memories and milestones within our family in some way. The upstairs bathroom renovation started when my younger son was locked in the bathroom and his older brother kicked down the door to rescue him. The siding was a “quarantine” project for a college age son that really needed something to do over winter break. That extended pathway connects to a driveway expansion project for a family of six, budding with multiple young drivers who sometimes smash new gutters three days after installed (cue parental eye roll).
Owning real estate protects me from rent increases that could be set by someone else. Once a mortgage has been satisfied, a home offers efficient housing, especially in retirement. But can I really make money on my primary residence? I guess the current period of ultra-low interest rates gives someone the best chance they might ever have. Borrowing money for 30 years at 3% or less is unheard of. Real estate can give you access to leverage, which is borrowing money at a fixed cost to buy something that can grow at a higher rate. Leverage can be good and bad (see 2008). Can the value of your home increase faster than your mortgage rate? Maybe, but if you sell you will have to buy something else. If property prices have been increasing in your area, you will sell and purchase at elevated prices.
The best financial investment you will make is unlikely to be your primary residence. It might be learning how to run a business, an education, developing a network, or investing in income producing real estate. It might be the discipline to save and invest into the world’s leading companies over multiple decades. It might be opening a donor-advised fund and investing some of your assets back into your community or church.
My personal assumption is that the real rate of return on my primary residence will be zero, at least in a quantitative sense. At the same time, it will be unmeasurable from a family enjoyment and memory producing perspective. At some point, my home will transfer to a younger generation of my family who will benefit from all my projects (assuming I finish them) and many years of disciplined payments. That likely will not help my wife and I, but we are not seeing ourselves as the only beneficiary in the equation. Will a home have been a good investment? Sure, but it really depends on how you measure it.
The opinions expressed are those of PYAW’s Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.
PYA Waltman Capital, LLC (“PYAW”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about PYAW’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. PYA-21-04