Is a House an Investment?

The debate rages on. I’ve debated this question at backyard barbecues and on Reddit threads. There are various competing answers to the question “is a house a good investment” (or, as a next step, is a house a good investment). In my view neither opinion is wrong, per se. It’s a philosophical, almost ontological question. What is an “investment”… what is a “good investment”… hell, what is a “house”?

I’ll explain further below, but let’s take it the question “is a house an investment” at face value first.

Yes. Yes of course it is. I’ve heard it said that “owning a home is not an investment because it doesn’t pay you money.”

Bullshit!

A) Not all investments need to pay you, the investor, on a regular basis to be considered an investment (or even to be considered a “good investment.”) Consider, for example, a ground-up development real estate deal. Or an equity crowdfunding investment into a pre-IPO startup. These investments won’t pay you a thing (generally) until exit. The total return potential should be juicy to compensate for lack of cash flow and overall risk and uncertainty of the investment. If you buy a house and own it for some time, you have a similar dynamic — you are going to commit to the asset for some time and expect to harvest returns at exit, when market conditions are favorable.

B) It very well could pay you money… airbnb is a thing. So is old school renting the thing to another, you know, human. Even if you aren’t flipping or going full BRRR Method. You can buy a house, live in it, wait for the rental market to catch up (if it isn’t there from day 1) and go live in Costa Rica or whatever with your laptop while earning monthly cashflow. Then you can come back. This is, perhaps, a mindset of “owning a home” and “owning a rental property” not being mutually exclusive concepts.

Is a House an Investment — a Personal Perspective

Our first house was in Bellingham, Washington. A lovely town about 90 minutes up I-5 from Seattle. We couldn’t afford a house in Seattle (perhaps the hottest market in the country at the time). I had at least a fuzzy investment thesis: Bellingham is a college town, routinely ranked among the best places to retire in the country. So even without a particularly humming local economy, we felt there was downside protection.

Despite not being able to get to 20% down at purchase (and having to pay PMI) our all-in monthly payments were still lower than our rent in Seattle. This is one overlooked aspect of the question “is a house an investment.” It’s a benefit of buying versus renting: you’re accruing equity in an asset while living in the asset; while not shitting money down the drain on rent. In our case, this also allowed us to refinance our way our way out of PMI after the house’s value had climbed.

For a time we travelled and lived elsewhere for months at a time. We were able to rent to traveling nurses (there’s always a hospital nearby, unless you really live in the boonies). We didn’t get too much more than our all-in monthly payments, but it was beer money every month.

When we eventually moved out of the area, I calculated the IRR of the investment (yes, investment) at 57%, accounting for initial closing costs, improvements, rental cashflow, and selling costs. True, some of this was owed to favorable interest rates throughout the period and to a generally frothy market. But looking back over the decades, there’s virtually no period when the average home in the U.S. didn’t roughly double in value after 20 years at most. The total profits (multiple on invested capital) for our investment was roughly double what it would have been if we had invested our initial downpayment in the stock market.

So, effectively, we used an FHA loan as a stepping stone to building a decent amount of wealth as a family. We were able to roll profits from that first home sale into another home purchase (which has, according to Redfin, appreciated over 20% in 2.5 years) while putting aside the balance as a decent nest egg that’s been earning interest since.

Yay…

FHA… segue…

Is a House an Investment — an Historical Perspective

When consider a home purchase, and weather a house is an investment, remember that the federal government is basically backstopping you. The subprime mortgage crises aside, mortgage industry regulations basically keep homebuyers from signing anything that will doom them. If your income is a healthy enough multiple of all-in monthly costs, Uncle Sam will underwrite a bunch of money coming your way to buy a thing that’s constantly in demand and constantly undersupplied. That’s a pretty good recipe for an appreciating asset and good potential levered returns over time. It’s never hard to refinance if you find yourself in a favorable interest rate environment. Meanwhile, the tax code confers huge benefits on homeowners. Any homeowner can deduct interest; sale of a primary residence does not result in capital gains tax below a certain threshold; and secondary or investment homes can be liquidated at a tax advantaged manner through a 1031 or QOZ investment. The mortgage industry lobby is hard at work, as you read this, to make sure all of this remains the case.

This configuration has a pretty deliberate history in the U.S. The Federal Housing Administration and the modern convention of the federal government participating in home lending dates to the term of Woodrow Wilson as a bulwark against socialism and ideas espoused in Bolshevik Russia. The “Own Your Own Home” state-sponsored PR campaign sought to keep American’s invested in America (literally) and in the capitalist system. The creation of the FHA following the Great Depression as part of New Deal legislation (Roosevelt the Younger) further codified the in-bedness of realtors’ associations and federal finance. (So, ironically, the central planning of current mortgage policies grew out of a campaign against socialism.)

From the creation of the FHA until now, these benefits haven’t been conferred upon everyone. Lending practices were explicitly sexist and racist for decades (black GIs couldn’t buy homes even as they received the capital to do so from the GI Bill; women were barred from being the sole signatories of mortgages until the seventies). While redlining is no longer du jour, it’s spirit continues in neighborhood association meetings across the country. While the YIMBY movement has some legs, NIMBY organizations and homeowners will continue to have the upper hand. In our precarious capitalist society, where rich people still feel anxious, we hold a tremendous amount of our collective wealth in the homes we own (propped up by this system). It’s hard to blame any one person for clinging dearly to their predictably appreciating asset, even if the outcome is tacitly racist.

So, to conclude: yes, a house is an investment. Generally, it is a very good investment. Should you feel good, morally, about that investment? That is another story. I wonder this each time I check Redfin’s latest assessment of my home’s value. We need a better politics around homeownership, inclusive housing, affordable housing, and so forth. Your house is an investment, and a good one. But it’s set up as a zero-sum game. Our homeownership is profitable precisely because other people can’t afford it, or are legally excluded from or hindered in buying a house.

This post represents the views of Righteous Money, is purely informational, and should not be regarded as financial advice.