Can your primary house be an investment?
By Josh Bobrowsky
I hear a lot of debate about if home ownership is an investment. I wanted to give my thoughts, break down some math, and contrast it with a few other investments.
Like most things in investing there is not one clear answer but here are my thoughts.
I recently saw a post on X where a man bought a home in California for $40,000 in 1975 as his primary home and today the home is worth $3 million.
I had 2 initial thoughts:
This seems like a great investment
This is also an outlier for the value of a house because it is in a highly sought after location in California
Lets break down the math
Primary Home Investment $40,000: 1975
To look at this investment objectively we need to make a few assumptions on the property.
Assumptions
Purchased for: $40k
Tax/maintenance per month average: -$1,500
If sold, must pay 5% in transactional fees on asset
Quick Math
Sale price: $3,000,000
Maintenance and taxes over 50 years: -$900,000
Transactional sale costs: $150,000 (assuming home sells for $3m)
Net sale price after expenses: $1,950,000
This equates to a $1.91 million profit over 50 years which is roughly 8% IRR
Rental Property $40,000: 1975
Now lets take that exact house and assume it was bought as a rental.
Assumptions
Purchased for: $40k
Tax/maintenance per month average: -$1,500
Rental income per month average: $2,500
If sold, must pay 5% in transactional fees on asset
Quick Math
Sale price $3,000,000
Maintenance taxes and rental profits over 50 years: $600,000
Transactional sale costs: -$150,000 (assuming home sells for $3m)
Net sale price after expenses: $3,450,000
This equates to a $3.41 million profit over 50 years nearly double the $1.91m profit of the person living in the home. This equates to 9.3% IRR
$40,000 invested in S&P in 1975 and held
Quick Math
$40k of S&P 500 would be worth roughly $11 million today
This assumes re-investing the dividends from the stocks
This is roughly an IRR of 12%
As a side note, that same $40k if invested in Berkshire Hathaway in 1975 would be worth over $500 million today.
Conclusion
Yes, your primary home can be an investment, but it is likely far from an optimal investment. I tend to think of a primary home being an investment that is better than putting the money in a bank account but worse than investing in a broad market index or a rental property.
Owning a house has pros and cons, it likely ties you to the city in which you currently live. This is great if you think you will be there for 30 years, but if you move every few years transactional costs can easily put you at a loss.
Like any investment, there are pros and cons to home ownership and I don’t think that there is a single right answer for every person. There is no guarantee of profit in home ownership or index funds and it should be something you think about deeply before making a final decision.
Cheers
Josh Bobrowsky
P.S.
The above is a bit of an over-simplification of home ownership. It doesn’t factor in many variables including loan interest rates, leverage, re-investing in more rental properties, potential tax savings, time to do repairs and many other variables. The goal was to give an approximate overview of home ownership when things go well, but it is far from exact.