Lets say I offered you an investment that:

  • Is highly illiquid
  • If you do sell there are tremendous surrender charge like fees
  • At any time I can ask you to put more money into it that may or may not raise your principal investment, but if you don’t put that money your principal investment will go down QUICKLY
  • On going interest charges for 30 or so years
  • You will be taxed on the value of the investment every year
  • Will literally never throw off income
  • Every month/year you will have to give me more money and if you don’t you almost everything you put in
  • Taking everything into account above it is very likely you’ll have a negative internal rate of return…but don’t worry no one takes everything into account.

Every year the in-laws rent a house on the NJ Shore.  No it isn’t like the TV Show we are in a very nice area separated from the water by a small boardwalk.  I always have a good time, but this year was especially awesome since the boy is getting older and we can play more and man does he LOVE the beach.Anyway, it was after a few cocktails (read: my father in law is Irish it was more than a few) that home ownership became the topic of conversation and I said, “I am not convinced that home ownership should be the litmus test of a responsible adult nevertheless a good investment”  You would have thought I pissed on a bible!

It wasn’t worth bringing up the fact that I went through the very detailed calculations of buying and selling my previous home and while it seems to most I cleared $50,000…I know I didn’t.

The conversation was short and focused mainly on the internal rate of return portion.  If someone buys their house for $300,000, paid $150,000 in interest and put in $100,000 worth of work and then sells it net of fees and taxes for $500,000 – they didn’t make money despite “clearing $200,000” from purchase price.

Does it Matter Whether I Believe Owning Your Home is a Good Investment?

In a word. No.

There are intangible benefits of owning a home such as stability and there are some tangible benefits such as a forced savings mechanism.  Plus, everyone should strive to live not on the street, so I’d have to pay rent to someone at least this way I have the possibility of upside potential.