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  • Skribentens bildMolly's Money

Is buying a house a good investment?

Uppdaterat: 15 juli 2020

Photo by Kelly Sikkema on Unsplash
Photo by Kelly Sikkema on Unsplash

There are a few different things to consider here and I will do my best to explain it so that it makes sense.

When we talk about "investments" there is first a thing that we need to clarify. An investment can either go well and make us money or not go well and make us loose money. So the fact that it is an investment doesn't necessarily mean it will go well.

In order for an investment to be a smart choice, a good one, it needs to put money in our pockets. That can be done in two ways:

1. when you sell your house for a profit (you paid less than what you sold it for)

2. when you can have a positive cash flow which means that you have rented out your house to someone who pays you more rent in a year than what your costs are each year (for that house)

A lot of people buy a house as their only "investment" and keep paying the mortgage and the principal down for many years hoping to one day sell for a profit or to have it as something valuable to loan money against. This is not the best use of your money because of the following reasons:

  1. When we think that our house is an investment we usually end up buying a bigger house than needed which is not a good money move

  2. You pay your mortgage and all the ongoing costs yourself, not a tenant

  3. You cannot control the real estate market and how things will develop, if the value goes down

  4. You actually need a place to live in and that means you probably wont sell it to make a profit (if it's possible), which removes one of the two options to make money on your house

  5. Taking out "equity" of your house by borring against it, makes you vulnerable against market changes (if value goes down you still have to pay the loan) and takes out money from your pockets instead of adding to them.

  6. Having your biggest investment in a house makes you vulnerable to change, e.g. if you need to move because of a job or divorce which leads to selling at a specific time (unless you can rent it out). The time horizon is not 100% in your control.

  7. It is not a diversified way of investing which is one of the cornerstones of good investing. If something really bad happens to your house it could wipe you out financially.

  8. You loose out on passive income. For each XX thousand of dollars that you keep in your house, that is money that could probably work for your harder elsewhere. (unless you are lucky in a good real estate market + time period) E.g in the stock market or other investments.

A lot of people have made a lot of money on their house in good markets and in good periods of time. The opposite is also true which makes it difficult to invest unless you have very good knowledge of long term investing in housing.

That leads us to professional real estate investors. This is a completely different kind of approach which I think a lot of people can learn if they wanted to. It is historically one of the best ways to grow your money and build significant wealth.

Professional real estate investors:

1. They don't live in their own investment houses, they normally live in a more modest house/apartment in the beginning of their career

2. They calculate the chances of profit based on a lot of research: the neighbourhood, what other house in that area sell for, what other houses in that area rent for, what are the demographics of tenants (families, students?), costs of renovation, heating, water, garbage removal, taxes, maintenance fund etc. Most importantly, they do this BEFORE deciding to buy or not.

3. Once they have all the data they will put it in a spreadsheet and see how the numbers look. What they are looking for is a positive difference once everything is paid for. That way they create passive income for themselves.

4. They can also find other ways of value-creation like finding a run down house in a nice neighbourhood and "flip it" by renovating it, changing tenants etc.

I'm not a professional real estate investor so this is a simplified explanation just to give some insight to that world.

With any housing purchase you normally have a mortgage and that means that you use leverage on your money. That means that when things go well, they go very well and when they go bad, well then they go extra bad.

With all that said, buying a house is normally more of an emotional purchase than a rational one. It's so important to keep cool and do the numbers before buying, also for a house to live in. Since housing is one of our biggest expenses it is also one of our biggest opportunities to create more financial freedom in our lives. The smaller & cheaper you can live (in a good neighbourhood!), the better for your money situation.

Thanks for reading!

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