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With school loans diminishing and job salaries rising, there is constant pressure among family and friends to start looking for a home and stop renting.

"It's a great investment", they say, "and it sure beats throwing money away on rent and you'll make plenty of money when you sell."

While that indeed makes sense, what I fail to understand is how one actually makes money?

Let's say I had bought my first home in the later quarter of 2011 when the average price of homes in my area was $201K USD. In a little over six years, the average has gone up ~95% and sitting at about $391K USD. The national average has seen a rise in the same period of 44% ($151K USD to $217K USD).

While one may point out that my 95% gains compared to the nation 44% is proof that there is money to be made, there are two things that seem evident:

  1. One has to move to a neighborhood, be it another county or likely another state (in my case) in order to see any real net gains.
  2. The average home owner who sees their house raise 44% in value will really have to downgrade the area they live in, or house that they're use to, in order to see any real marginal gains.

If the market is doing well for you, it's likely doing well for everyone in your area too, no? So what's the point of selling a house that went up 44% in order to buy a house that also is valued 44% higher? Or hell, 95%! All I can think of is that the significance is behind the fact that it's all about your net worth. But it seems like the idea of using a single home as an investment strategy doesn't see too much money actually going into one's pocket.


[Data gathered from Zillow.]

[It's easy to see how property investors make money so this question is strictly for owners of one home.]

  • But consider if you didn’t buy a house back then, and you now feel the need for one, then you would need to take up a loan 95% larger than the one you did. When entering the housing market, you sort of hedge towards increases in prices, meaning that you will need to take up a much smaller loan in the future when buying something else. Where I live it is very difficult to find a rental, especially a house. I didn’t buy a house a few years back when most of my friends did, not meaning I need to take up a much bigger loan than them now if I want to move out of my apartment and into a house. – ssn Apr 19 '18 at 11:10
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    Consider a homeowner that bought their home for $X, 10 years later sells it for 1.5X, and moves to a different home that also costs them 1.5X. They're effectively getting that house 10 years later for the same price they paid 10 years ago. Now consider someone renting an apartment for Y, and 10 years later is paying 1.5Y in rent. Rising home values cost the renter money, as they continually have to pay more to stay in the same place. If the home you own appreciates at the same rate as everyone else, you've automatically kept pace. For a home you rent, it's your salary that needs to keep up. – Nuclear Wang Apr 19 '18 at 15:45
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In the scenario you describe your conclusions are correct and they really don't. A primary residence is a liability as much as an investment. If you include the costs of a mortgage and ongoing maintenance into your calculations the returns get even worse.

There are a few ways it works out profitably, such as if at retirement you decide to downsize and move into a cheaper property, and like you say this will probably be somewhere outside of your current area where costs are lower.

Or in some areas where the cost of renting might significantly exceed the cost of a mortgage on a similar property, so it might make more sense to buy in that case.

Additionally, purchasing a home can be a good forced savings programs for people who otherwise struggle to save money. If you are renting and not setting aside money to invest for your retirement buying can be a way to force you to build some equity in something. Personally I think this is where the "great investment" idea comes from, for many people their home is their only significant asset, so they see it as a great investment.

Ultimately a primary residence costs money, and the ideas that renting is "throwing money away" and primary residences are a "great investment" are common nonsense.

Full disclosure, I also choose to rent for these reasons, especially because in my local market my mortgage would be 3 times what I currently pay in rent, and because I am able to save and invest in securities, so I'm biased in favour of your arguments.

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    There is something implicit in your answer which may be worth making explicit. Home ownership comes with an opportunity cost which many people don't consider: if you don't have your capital tied up in a $200k home you can have that $200k in the stock market making, say, $10k+ a year. That along with savings in property tax, maintenance, etc. may cover your rent. – James Fennell Apr 19 '18 at 19:40
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I consider home ownership to be a hedge against inflation rather than an investment. In your example homes increased by 95%. How much has rent increased in the same amount of time? If you owned a home you'd be paying the same mortgage while renters were paying more in rent. But even that isn't a 100% guarantee. House values can and do drop. And the costs of owning a home also increase. An increase in home values is likely to include an increase in property taxes and insurance. For example I paid off my condo but with increases in insurance, taxes and the condo fee I'm paying more annually now than when I bought it. I'm still paying a lot less than the family renting the unit next door. There's also maintenance, repairs etc...

The first 10+ years of home ownership most of your payments go to the bank as interest. And over the life of the loan you'll be paying more than half the cost of the house in interest. So a $200,000 loan will cost you more than $300,000 to pay back.

One other thing people seem to forget is the cost of selling your home. Most realtors get 5-6% of the sale price. That means the minute you buy your home it has already lost 6% of it's value. And as the value goes up so does the commission.

Years ago we transitioned to dual income families from the nuclear family, where the father worked and the mom stayed at home. This fueled home purchasing and during that period home values continued to rise making them a reasonably safe investment. Which is why so many people still think of owning a home as an investment.

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what I fail to understand is how one actually makes money?

The other answers do a good job of explaining the economics of buying vs renting. But let's address your actual question. How do you make any money?

I live near a university; I've rented a room in my house to a student or coworker for the last twenty years. I charge below-market rates, because I'm super nice, which the students like. I get to live with interesting, friendly people who feed the cat when I'm traveling. I use their rent to pay down the principal of my mortgage.

Thus I'm transforming an under-used resource -- an extra room -- directly into equity, and shortening the term of my mortgage, which vastly decreases the compounded interest. Or I could invest that money elsewhere, or I could spend it.

Your question, more generally, seems to be the observation that "you can eat cash by spending it on food but you can't eat your house". No, you can't. But you can monetize real estate via rents, and you can eat the resulting cash.

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"One has to move to a neighborhood, be it another county or likely another state (in my case) in order to see any real net gains."

Alternately, you can compare prevailing rent when you bought to the current rent; if rents have gone up, you have enjoyed staying in place for a constant mortgage payment and should deem the difference in rent as a gain (or acknowledge you would have moved away much sooner).

Also, the situation you have decried is actually a solid way to get a largish lump sum of cash into the hands of retirees. You don't have the same space needs throughout your life, so a change from a large space to a smaller space in the same area is exactly a way to capture real gains. By anecdote this worked out particularly well for my mother, after my youngest sibling moved out and my parents divorced: she moved half a mile away into a much smaller house, paid cash from proceeds of her share of the sale of my childhood home, and also had six figures in cash left over.

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It all depends on what you compare.

You could compare A: Beginning of 2011, you rent your home. By the end of 2018, you move to another location and rent again. And B: Beginning of 2011, you buy a house. By the end of 2018, you sell your house, move to another location, and rent. Now the profit that you made by owning a house is in your pocket.

Or could compare A: Beginning of 2011, you rent your home. By the end of 2018, you buy a home in a different location. And B: Beginning of 2011, you buy a house. By the end of 2018, you sell your house, and buy a home in a different location. The increased house prices in case B don't put money in your pocket, but in case A you have a much, much larger mortgage.

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Re "One has to move...", the presumption is that one will WANT to move.

Even if you don't move to a lower cost of living area and/or downsize your dwelling, you presumably still have accumulated equity (from payments & appreciation) in that first dwelling. Assuming you buy a similiarly-priced (or even more expensive) dwelling, you can apply this equity to the new dwelling to have a lower mortage payment, or you can take it as cash.

For example, say you bought a house some years ago for $150K, putting 20% down. Now the house will sell for $300K (after real estate commissions &c), and your outstanding mortgage balance is $80K. Thus you have $70K in equity, plus $150K in appreciation, or $220K net. Now you could buy a different house for $300K, putting 20% down - $60K - and have $160K cash. (And of course a higher mortgage payment...)

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