A Bigger House Is Not an Investment

I just wrote a A Simple Guide to Financial Freedom based on my experiences with Financial Freedom. Consider giving it a read if you are interested in this topic.

The house you are living in is a liability. Not an investment. This is especially true if you have a mortgage.

I first learned this lesson a few years ago and it changed my views on what investing in productive assets means. Up until that point I had accepted the norm that most of my wealth would be in a house I would someday own. This is what my peers did and so I assumed this was the logical, “correct” goal.

But it’s not. Like so many “normal” things we take for granted, this advice is worth closer inspection.

Buying a big house to live in is not an investment. At best it is speculation. Most likely it is just a big purchase with lots of long term expenses.

Investing vs speculating

The difference between investing and speculation can be a bit blurry. Buying stocks is usually seen as an investment, but if you are buying them with the intent of selling soon you are speculating. If you plan to hold for a long period you are investing — but some may still argue there is an element of speculation involved if you ever plan on selling.¹

Here is how I view it (with some help from Investopedia):

An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.

What Is an Investment?

It is quite clear that the house you are living in does not qualify as an investment according to this definition.

• Is is acquired with the goal of generating income? No.
• What about appreciation? Maybe.
• Is the intent to consume the good? Yes, you are living in it.

A house you are living in does not generate any income. Instead, it generates expenses. Maintenance, taxes, mortgage payments, insurance, heating, etc.

The only way to make money off the purchase is if you can sell it for more than what you pay for it + any money you have put into improving the house.

And that equation is (in my view) quite speculative.

If you have the skills, time, and energy, you may be able to convert your hard work into improvements to your house that increase its value. But if you don’t, there is no big reason why your house should be worth more over time.

Compare that to the stock market. When you invest in a company you get an army of skilled workers going to work every day trying to improve their product — trying to increase the value of your investment. With that in mind, a stock has a good reason to appreciate (and to produce income from dividends).

Productive assets

Buying a house and renting it out is a different story. Now you have a productive asset — each month you’ll collect income in the form of rent. If the house goes up in value, great. If not you still have a monthly income.

It is absolutely possible to lose money on any investment into a productive asset. A rental house has lots of risks. What if nobody wants to live there? Or only at a lower rent than you expected? And the housing market may crash just as you have to sell.

Investing always carries risk. But when you invest in a house for rental purposes you are buying a productive asset that will bring you a monthly income.

Let’s just compare the two scenarios:

Clearly, the rental property is the better investment (of course). Which means: if you are trying to build up wealth, you should not buy a bigger house for yourself. Instead the money should go to productive assets. Like a rental property or stocks.

“But I need a place to live?!”

Yes. Yes, you do.

But if you want to build wealth you need to decide: do you want the big house now or do you want wealth?

If you are already rich, go ahead and buy your big dream house. If not, consider what the best use of your money is right now. A big part of building wealth is about postponing — or even better: completely eliminating — luxurious and unnecessary purchases.

The case for buying a house

There are of course plenty of reasons why you may want to buy a house.

Owning a house for you and your family may be a goal of yours. That is a valid and great reason for purchasing one, granted your financial situation affords it. In that case you are doing it for the right reason.

Renting forever is expensive. So you may think buying a house will save you money over time. And you may be right. But buying a house can have hidden costs making it more expensive than you think. This post provides some points to consider.