In a previous article, we discussed why your home (a.k.a., your primary residence) is not an investment. That was a high-level overview. Here, we present you with calculations and numbers, showing you the math behind the logic, in support of that article.
As we said before in the above linked article, the appreciation in real estate over the last 100 years is on average 1% per year. But that is an average. What if we made an exception to the rule and calculated the appreciation on two houses in the Bay Area?
| Year bought | Paid (K USD) | In 2022 Money (K USD) | Value Now According to Zillow (K USD) | Appreciation (%/yr) |
| 1986 | 600 | 1560 | 2700 | 3.45 |
| 1986 | 165 | 430 | 1300 | 5.62 |
All of a sudden, it looks like your house–even the one you live in full-time–can be an investment.
How the Math Is Done
Here are how the calculations are done for the percentage increase:
New number (value) - Original number (value) = Difference Difference / Original Number (value) X 100 = Percentage Delta
I adjusted for inflation by going to an online inflation calculator. For instance, I entered $600 000 in 1986 dollars to figure out what it’s really worth in 2022 dollars, some 36 years later. That value is $1 560 000.
Next, I hopped onto Zillow and looked at the purchase history of a couple of houses in the Bay Area. One house was bought in 1986 for $600 K. In today’s money, this is really $1.56 million. Once again, using the inflation calculator, we see that $600 K back in 1986 is $1.56 million in 2022 money.
Next, we find what that same house is worth today, according to Zillow estimates. The percentage delta then is as follows:
3 500 000 – 1 560 000 = 1 940 000
1 940 000 / 1 560 000 x 100 = 73.08%
Note that we use the inflation-adjusted value of $600,000. This was the value of the property back in 1986, which when adjusted for inflation to 2022 dollars is $1,560,000. So, the percentage increase per year–after accounting for inflation–for the last 36 years is:
73.08% / 36 years = 2.03 %/year
So, if you had owned a house in the Bay Area for the past 36 years, then at least you’ve kept up with inflation and even walked away with some appreciation.
Be Careful of Averages
Take the above data with a grain of salt. This data was taken from two houses in the Bay Area, one in San Francisco and another in San Jose. The Bay Area is an abberation when it comes to housing prices.
For example, if you had purchased a house in 1996 in San Jose, it would have appreciated by some 392% in 2020. After adjusting for inflation, the appreciation is 191.5%. The per-year appreciation is 7.98%. This makes buying in San Jose a more lucative deal than in other parts of the country, where house prices actually depreciated in the same time frame.
The preceding example was for housing in the Bay Area. Let’s look at US averages now, shall we?
The US average after accounting for inflation from 1996 to 2020 is 1.87%. This is according to data that I grabbed from the embedded Tableau below. I looked at the US average back in 1996, which was $107 296. The value of this money is $177 044 in 2020 money, which is how recent their data is. Using the percentage increase formula outlined earlier, this adjusted appreciated value is 45% over the last 24 years. Once again, we adjusted for inflation. The appreciation per year is 1.87%.
If you hover your mouse over the Tableau graph, you’ll see that the percentage increase is a whopping but misleading 139.2% for the US average since 1996. It’s a generous 139.2% because they did not adjust for inflation.
The Cost of Owning
There are other expenses to consider, besides the mortgage. For example, most experts suggest the general rule of thumb of setting aside 1% of the purchase price of your house every year for repairs and maintenance. That doesn’t necessarily mean you should expect to pay that 1% every year. What it could mean is some years you can expect to pull out most of the accrued funds to pay for high-ticket items, like new windows or a new roof.
Then there’s the yearly property tax bill. Depending on where you live, this can be quite high. For instance, some states like Texas reassess property values every year, which means you’re not paying the same amount year after year. Likely, you’re paying more and more each year as the property tax is in part based on the yearly property reassessment. (The average property tax in Texas is 1.69%, the seventh highest in the United States.) This means you can expect your property taxes to eat a substantial part of your appreciation.
A Home Could Be a Good Investment
Buying a house, even if it’s as your primary residence, could be a good…dare I say it?…investment. It does depend on where you buy your house. Even in California, there are differences in the appreciation, depending on location. For example, Bakersfield remains below the US average. Other places, like Sacramento and Fresno, experienced an increase but not before hitting a low in 2012, during the housing bubble.
Just like stocks, you should frame the purchase of a home as a long-term investment. Back in 2020, when people decided to shut down the world because of COVID-19, the stock market plumetted. I lost almost 6-figures. I rode out the loss because I knew that people often made decisions based on emotions. Of course, when it comes to personal finance, people often get personal and emotional. I also knew that it was just a loss on paper, as long as I do not realize the stocks. As soon as I decide to pull out of the market, that’s when the loss is realized. I also knew that much of the gain comes after apparent losses. So, I rode it out. The market recovered some 9 months later, recuping all the losses. It even soared past that point.
Had I gotten emotional and pulled all my money out, I would have missed capturing all the gains after the first 9 months. In essence, just like stocks you have to look at your home as a long-term investment. Who would have known that the huge dip in 2012 would be pivot point when house prices finally start rebounding?
Decide the House Is an Asset
You can have ten houses sitting empty with a hefty mortgage on each. Or you can decide to rent out those ten houses, which now generates revenue for you. How you decide to invest often determines whether you have an asset or a liability. An asset is something that brings in revenue (positive cashflow) whereas a liability costs you more than it’s worth (negative cashflow).
You can certainly purchase a home with an attached or alternative dwelling unit that you rent to a tenant. As an alternative, you can live in the dwelling unit and rent out the main house. In either case, your home just became a revenue-generating machine that covers part of your mortgage.
Another reason why a house is an investment is you can carry over your appreciation as you upgrade houses. The house you live in isn’t your forever home. Dissatisfaction is the driving force for many of us to get even better things than what we have now. The appreciation your build in your current home can be used to buy an even better home. Of course, you pay less with each house that you buy.
A Home Is an Investment Only If You Make It Out to Be
It may seem that I have given you two different perspectives. I started by saying buying a home is not an investment. Then, I say it is. Which is it?
I would prefer to leave that judgment up to you. What I want to give are several different perspectives. They could all be right. Certainly, there are people who have built up their wealth investing in real estate. There have also been people who did the same thing through stocks alone. Then there are others who have a mixed portfolio containing both stocks and real estate.
Decide for yourself if a home makes financial sense but understand, too, that owning may be the least right of all options. It may take you far away from the financial freedom you desire because any gained equity (appreciation) is locked to the house. The large down payment will also cost you other opportunities, like being able to invest in the stock market, businesses, P2P lending opportunities, or REITs.
Bottom Line: Decide for Yourself
The important takeaway is to stop listening to other people who insist renting is just throwing away money. (Don’t you just hate those know-it-alls?) These same people insist that a home is a good investment.
This is terrible advice, given what we’ve discussed so far. One good barometer on whether you should even listen to their advice is to look at their financial health.
Chances are they don’t know what they are talking about. They are just regurgiating what other people have told them. Of course, they like to put you into a fear and doubt mode by saying that you should buy before interest rates go up or before a home exceeds your reach. The other thing, too, is people who tend to do this kind of thing really don’t believe in it themselves. By convincing you, they are buying rationale and merit into their own beliefs. Put it another way: If what they believed in truly works, then why would they need to fight you hard to convince you?
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The best financial advice in the world will fail you if you have bad mindsets around money. What are some examples of bad money mindsets? Investing is only for the rich. I can never afford that. Money is the root of all evil.
I had many of the same money mindsets that you may now have. Through a concentrated effort, I was able to change most of these around. In the process, I transformed from a clueless guy–feeling like he’s barely making it–to someone who’s achieved a measure of financial freedom.
I invite you to get your free gift, 7 Money Mindsets Preventing You From a Positive Cashflow, today.
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