Is the house you live in an investment? Should you even think of your house as an investment? The short answer is no, the house where you are living is not an investment because you aren't earning montly cash flow through a tenant paying rent.
Still though, the idea that your home is NOT an investment seems strange, and I thought so too before I read the book by David Crook: Complete Real-Estate Investing Guidebook.
But after a little bit of thinking and some closer examination, I realized this makes perfect sense. Only a property you don't live in can actually be an investment - again, what makes a property an investment is the cash flow you earn.
Time and time again, houses are bought and essentially used as credit cards, as homeowners use their equity to finance the purchase of vehicles, vacations, and other high dollar expenses. However, among the thriftier segment of the population, their equity is used as part of a retirement fund. Though both groups differ in the usage of their equity, they still perceive their home as an investment, which unfortunately is a false belief.
For one thing, when you sell your house, you have to find another house to live in. And if the value of your current home rises, the one you’re planning to buy will most likely have increased in value as well. (However, there are ways to get around this. Maybe you want to move into a smaller apartment after the kids have gone to college, or move into a condo downtown. You should evaluate how much space you really need so you can save money.)
Secondly, you pay for a host of expenses that make living in your house possible. Regular maintenance, renovations, insurance, property taxes, and interest on your mortgage all add up and in the end take up what most homeowners rely on for profit.
This means that over time a house will end up costing you much more than you realize and ultimately result in no cash flow. When most homeowners calculate their returns, they only subtract how much they paid from how much they received. And remember, if the value of the home goes up, so do the property taxes. Oh, and what about HOA fees for the neighborhood you live in, don't forget those.
This results in a huge return they mistake for a substantial “profit.” And if you decide to sell your house for another one, what little you may have earned as true profit will most likely be spent for the purchase of your new home. Plus, there are the expenses of selling the home - the fees to the real estate agent aren't small. If you plan on turning your home into an investment property, that's another story - there you might just come out ahead.
So you might be thinking that everyone needs to live somewhere and it’s better to pay a mortgage rather than rent, right? Well, that depends on when you buy and how long you own your home. For example, if you bought a home in Dallas in 1986 when the oil boom declined, your home would not have appreciated at all until 1998. In this case, maybe it would have been wiser to rent. This is why it’s important to have a plan and be knowledgeable—you will increase your chances to save money in the long run and avoid the disasters associated with various recessions.
The moral is not to place all your eggs in one basket. Stock brokers don’t put 60%-70% of a portfolio into just one stock. They scatter their investments across different stocks because the stock market, like real estate, has a reputation for fluctuation and especially crashes. Yet there are millions of people who place that much into the net worth of their house.
Just remember that a home is not always a good investment or an asset. This is a misconception Kiyosaki tried to dispel in Rich Dad, Poor Dad. It’s not that a house can never be an asset, it’s that you must sit down and figure out how to turn it into one, rather than just buy a house nonchalantly, assuming it will turn a profit for you in the long run.
With an investment property you are actually seeing cash flow via someone who rents the property and lives in it throughout the year. You're putting down money to buy a property so you can rent it out. With your home, you're there to live in it and pay the mortgage - there's no cash flow.
The lack of cash flow from a tenant is really the key, since you can't always rely on the value of the home to appreciate over time if you factor in inflation and the amount of money required to buy a new property if you sell the one you're living in. Plus, don't forget the ups and downs of the real estate market.