Why I’m Buying a Home (Though I Know It’s a Bad Investment)

If this is your first time reading this site, you should know that I usually say buying a home is a bad investment. So, it comes as a huge surprise to many people that I just recently put a home under agreement.

Why?

Because owning a home is undoubtedly a bad investment and a huge liability!

So, what gives? Why am I breaking one of my cardinal rules?

I’ll get to that, but first…

Why Owning a Home is a Bad Investment

Some great economists once studied housing prices over the long term. When I say long-term, I’m not talking 10, 20 or even 50 years.

They studied it going back over 100 years. Their names were Case and Shiller and they invented what’s now called the Case-Shiller Index.

Before your eyes gloss over and you go up to the top corner of this screen and click “X” just read a few more lines.

Basically, they discovered that housing prices are STATIC over a very long term, once adjusted for inflation. They tend to not go up or down very much, and prices tend to move back to the average over time.

renting vs buying a home

Case Shiller Index when deciding to rent vs buy a home

As you can see, prices tend to fluctuate between the 100 and 120 range. They can dip lower for a couple decades and go up for a couple decades, but they tend to go back to the mean.

Stocks and rental property, on the other hand, are not so static in their prices and they tend to appreciate significantly over the long term.

If you want to read way more detail about this, check out my article on Renting vs Buying a home.

Buying Property as an Investment

We bought our first property in 2009 – it was a 3 family and we bought it entirely as an investment decision. It cost about $115,000. The rent for the two units ($1,150 when we bought it) paid for the entire mortgage and utilities and we lived entirely for free in the third unit. But, we lived in a not-so-great area in a very old house.

Then we bought a townhouse to do a flip. We picked it up for around $82k and it needed around $15k in repairs. But, around closing time, we discovered my wife was pregnant, so we fixed it up and moved in.

We got a Home Equity Line of Credit on it (HELOC) which gave all of our cash back then we rented the place I used to live in. The rent on the old apartment paid for the entire HELOC plus all the utilities. So, we took a move up but it was still mostly looked at as an investment. That townhouse is worth around $180,000 now.

But, we were in a city with pretty terrible schools, so, as our kids grew older, we had to send them to private school. We’ve been sending our daughter to a Montessori school at the cost of about $1,200 per month. So, while the townhouse was a decision was good at the time, it was not a good long-term solution.

It’s funny because people would ask us why we choose to live in apartments (when we travel) or in our cheap townhouse when we own so much property. It’s because it was always a financial decision.

But, it soon wasn’t going to be smart financially as my second child gets older. We will be stuck paying for TWO kids in private school so we needed to do something.

Why We Decided To Buy a Home

 

As I outlined in that article, buying a home should not be an investment decision – it is almost entirely an emotional decision based on the needs and wants of your family.

And to this point, we could rent an apartment nearby, have the same schools as the house will have, and spend $400-$500 less per month.

So why buy?

The kids, of course. Renting is inherently unstable and undoubtedly you have to move from time-to-time. The stability, in my mind, is a positive factor for our kids, so we thought it important to live in one place.

But, regardless of the emotions involved, it needs to make sense financially. If a home puts you in a very difficult financial situation, then you have to decide against it.

By stepping up slowly over time, we are able to leverage what we already own and what we were already paying for.

After thinking about this for well over a year, we realized that we could purchase a home in the $350-$400k range in a nice city with great schools and send our kids to excellent public schools, thus saving the cost of private school.

The rent we will earn on the townhouse ($1450) + the savings on the private school ($1,200) will cover the entire mortgage plus some. As the second kid gets older, this savings increases.

Though we could undoubtedly save more money and spend less by just renting in the area we want to kids to go to school, we are able to accomplish a dream without burdening our finances. THIS is why we decided to buy a home.

What do you think? Was it a good or bad move to buy a house?

 

By | 2018-01-12T10:53:36+00:00 January 12th, 2018|Categories: Personal Stories|4 Comments

About the Author:

An investor that reached financial independence at the age of 30, Eric has been seen on Forbes, Trulia, WiseBread, TheStreet, and other financial publications.

4 Comments

  1. Retiring On My Terms January 12, 2018 at 11:55 am - Reply

    Sounds like a good move to me, since you did not burden your finances and the value to you over time will increase as your second child enters the school system. There is definitely something to be said for stability. While the price of your home may not appreciate significantly over time, it sounds like you are in a good location, so hopefully you can at least break even in inflation-adjusted terms. Congratulations and best of luck!

    • Eric Bowlin January 12, 2018 at 2:13 pm - Reply

      I think the value (to me) definitely increases in a few years when the second child reaches kindergarten age.

      It’s definitely a great area, and I believe it may actually some inflation-adjusted appreciation because of the area. Even a 4% per year return (with 2% inflation) is still pretty terrible. Regardless, I think there is always some reservation because, of course, that money could be better invested. But, it’s hard to place a dollar amount on stability.

  2. Steveark January 12, 2018 at 4:20 pm - Reply

    I think you will enjoy it. My wife and I bought a small and inexpensive house decades ago and as we had kids and they grew we added on. We had separate additions of a screened porch, a garage, a family room and loft and eventually an entire second story with two bedrooms and two full bathrooms to give us a little space from the teenagers they had devolved into. We were able to do that because our house was the smallest in the neighborhood and because every lot was at least an acre or larger so expanding the footprint wasn’t a problem. Doing it this way we cash flowed most of the improvements and paid it all off very early. It wasn’t a good investment from a return standpoint but we never had to move and the kids had a stable home and good public schools. I think you made a wise call.

    • Eric Bowlin January 12, 2018 at 7:15 pm - Reply

      Wow! An acre! That definitely doesn’t exist in my neck of Texas…

      Though additions aren’t really an option for us, we are buying a large enough house to cover our needs for the foreseeable future.

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