Is Your Primary Residence the Best Investment?

“90% of all millionaires become so through owning real estate.”

This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago 1

Is real estate a great medium for someone to increase their net worth?

I believe it absolutely is! It has allowed me to take bigger bets on myself and pursue opportunities I otherwise wouldn’t.

Is Your Primary Residence the Best Investment?

I think this is where things get a little more blurry. Conventionally, if you ask most people, and especially our older citizens, you’d get a more homogenous response, that yes, your primary home is the best investment.

I am hoping to provide some more colour to this question. My aim is to leave you more confused and less certain about the gut reaction to say yes (that your home is the best investment) by the end of this article.

Just because it made sense in the past doesn’t guarantee it will continue to do so. Real estate ownership is one of those societal beliefs that even though it is a luxury, people consider it their right.

Getting back to the earlier quote about how real estate ownership has led to an overwhelming amount of millionaires, there are several reasons why it has. Let’s explore some of those reasons and then we’ll look at reasons why real estate ownership may be considered a sub-optimal investment (it is important to consider this article through the lens of primary home ownership and not a rental property)

Reasons Why Personal Home Ownership Can Be a Good Investment

1. Potential Appreciation: Real estate has historically appreciated over time. While there are short-term fluctuations, long-term trends have shown that property values tend to increase. By owning a primary residence, you can benefit from potential appreciation, building equity, and potentially profiting when you sell in the future.

2. Forced Savings: Owning a primary residence is a form of forced savings. When you make monthly mortgage payments, a portion goes towards reducing the principal balance, which builds equity over time. It can be a disciplined way to save and build wealth gradually.

3. Tax Advantages: Homeownership comes with certain tax benefits. Depending on your jurisdiction, you may be eligible to deduct mortgage interest payments and property taxes from your income taxes. These deductions can help lower your overall tax burden and increase your disposable income.

4. Stability and Control: Owning a primary residence provides stability and control over your living situation. Unlike renting, you are not subject to the whims of a landlord or the uncertainty of rising rental costs. This stability can be especially beneficial during retirement when fixed expenses become important for financial planning.

5. Potential Rental Income: In some cases, homeowners may choose to rent out their primary residence in the future. This can be a source of additional income or a means to cover mortgage payments or other expenses. By converting your primary residence into a rental property, you can benefit from both potential appreciation and rental income. This is what I’ve done with my home and the AirBnb I operate out of it.

6. Home Equity Loans: Homeowners with significant equity in their primary residence can leverage it through home equity loans or lines of credit. These financial tools allow you to borrow against your home's value for various purposes, such as home improvements, education, or debt consolidation. Access to home equity can provide financial flexibility and opportunities.

7. Emotional and Lifestyle Benefits: A primary residence offers intangible benefits, such as a sense of stability, community, and personalization. Owning a home allows you to create a living space tailored to your preferences, invest in upgrades and renovations, and establish roots in a community. These emotional and lifestyle benefits can greatly enhance your quality of life.

It's important to note that the housing market can experience fluctuations, and the returns on a primary residence investment can vary depending on factors like location, market conditions, and individual circumstances. Therefore, it's crucial to consider a variety of factors and consult with financial and real estate professionals before making any investment decisions.

Reasons Why Personal Home Ownership Can Be a Sub-Optimal Investment

1. Market Volatility: The real estate market is subject to fluctuations, and property values can experience periods of decline. If you need to sell your primary residence during a downturn, you may not recoup your initial investment or make a substantial profit. Market conditions can significantly impact the return on investment.

2. Illiquid Asset: A primary residence is a relatively illiquid asset compared to other investment options. It can take time to sell a property and convert it into cash, especially in a slow real estate market. If you require quick access to funds, a primary residence may not provide the necessary liquidity.

3. Costs of Ownership: Owning a primary residence entails various costs beyond the mortgage, such as property taxes, insurance, maintenance, and repairs. These expenses can add up over time and may offset any potential appreciation in the property's value. Additionally, unexpected repairs or maintenance can further strain finances.

4. Opportunity Cost: The funds tied up in a primary residence could potentially be invested in other assets that offer higher returns. If the return on investment in the housing market is lower compared to other investment options, you might miss out on better opportunities to grow your wealth.

5. Limited Diversification: Investing a significant portion of your wealth in a primary residence can lead to a lack of diversification in your overall investment portfolio. Relying heavily on real estate exposes you to the specific risks associated with the housing market. Diversifying across different asset classes can help mitigate risk.

6. Mobility and Flexibility: Owning a primary residence can limit your mobility and flexibility. If you need to relocate for job opportunities or personal reasons, selling a property and buying a new one can be time-consuming, costly, and inconvenient. Renting provides more flexibility to adjust your living situation as needed.

7. Economic Factors: Economic factors, such as inflation, interest rates, and local job markets, can impact the value of real estate. Changes in these factors can affect property values, making it difficult to predict the long-term performance of a primary residence as an investment.

Now let’s explore some scenarios to help muddy the waters of conventional thinking. But before we begin let me define a few terms and provide some assumptions.

I subscribe to the definition; an asset is an entity that provides you with income (cash flow). Principal residences, unless used in conjunction with a secondary suite, or an Air BnB, do not provide you with monthly income or cash flow. Instead, it actually costs you money and takes money out of your pocket monthly.

Toronto Home Assumptions: 

• Cost of Home: $ 900 000

• Mortgage Amount Per Month: $ 4731.45 (20% Down Payment, 25Amortization, 6.29% , 5-Year Fixed)

• Mortgage Amount Per Year: $ 56 777.40

• Property Tax: ~ $ 6000 per year

• Utilities (Electric, Water, Heat, Cable/Internet): $ 4000 year

• Property Insurance: $1500

• Miscellaneous: $2000

• Total: ~$70 277.40

Yearly Income Generated: $0

Vancouver Home Assumptions: 

• Cost of Home: $ 1 000 000

• Mortgage Amount Per Month: $ 5257.16 (20% Down Payment, 25Amortization, 6.29% , 5-Year Fixed)

• Mortgage Amount Per Year: $ 63 085.92

• Property Tax: ~ $ 6500 per year

• Utilities (Electric, Water, Heat, Cable/Internet): $ 4000 year

• Property Insurance: $1500

• Miscellaneous: $2000

• Total: ~$77 085.92

Yearly Income Generated: $0

That’s correct,  every year you own your home you can expect to spend close to $70 277.4 (In Toronto) and $77 085.92 (In Vancouver) just to maintain it, this does NOT include large ticket items: new roof, furnace, AC unit. However, real estate has had a very very very nice tailwind of annual appreciation. Let’s see below how appreciation can affect your primary residence

Scenario 1a: Using 10-year Toronto Real Estate Appreciation Values (90.58% or 9.58%/year)

$900K Purchase Price at year 1, if we compound that for 10 years at 9.58% annually you’d have

$2 246 753 after year 10 But don’t forget about the yearly costs of maintaining a home , which will be ~$702 774.00 ($70 277.4 * 10 years)

Total: $1 543 979 (after 10 years of appreciation and factoring in the yearly cost of owning the home)

Scenario 1b: Using 10-year Vancouver Real Estate Appreciation Values (120% or 12%/year)

$1 000 000 Purchase Price at year 1, if we compound that for 10 years at 12% annually you’d have $3 105 848 after year 10. But don’t forget about the yearly costs of maintaining a home

- $770 859.2 ($77 085.92 * 10 years)

Total: $2 334 988 (after 10 years of appreciation and factoring in the yearly cost of owning the home)

Scenario 2: Using 10 year S & P Historical Returns (9.2%/year- net of fees)

$900K Initial Contribution at year 1. Compounding that $900K in the S & P500 for 10 years at 9.2% plus an annual contribution of $ 70 277.4 (because you are not spending it maintaining the home)

You’ll have $3 247 928 after year 10.

What if you didn’t even contribute the $70 277.4 yearly amount and only contributed the initial $900K Investment?

You’d have $2 170 045 after the 10th year.

What if you paid ($2500/mo rent for 10 years) so, $300 000, and didn’t contribute the $70 277 annually?

You’d have $1 870 045 after the 10th year.

Scenario 3: Using 10 year S & P Historical Returns (9.2%/year- net of fees) without Leverage/Mortgage

$180K Initial Contribution at year 1 (considering you are only using the downpayment). Remember real estate can be an attractive investment because of the ability to use leverage.

Annual Contribution of $ 70 277.4 (because you are not spending it maintaining the home). You’d have $1 511 891 after year 10.

Remember that in Scenario 1a/b Using 10 year Toronto/Vancouver Real Estate Appreciation Values and after factoring in the cost of living, after 10 years you’d have

Total: $1 543 979 (Toronto) vs $1 511 891 after year 10 in Scenario 3.

Total $ $2 334 988 (Vancouver) vs $1 511 891 after year 10 in Scenario 3.

Now that’s not the entire picture, it’s important to consider some other aspects of the decision-making tree. Let’s review a few of them below.

1. Comparing Real Estate to Other Investments

When it comes to growing your wealth, the age-old debate of real estate versus stocks continues. While both have their merits, they cater to different risk appetites and investment strategies. For example, consider the case of an investor with $100,000 to invest. If they put this money into a rental property, they might enjoy steady rental income and potential appreciation. On the other hand, if they invested the same amount in a diversified portfolio of stocks, historical data suggests they could achieve an average annual return of around 7-10%. Which option is better for you depends on factors such as your risk tolerance, need for liquidity, and investment horizon. Let’s delve into a detailed comparison to help you make an informed decision.

2. The Impact of Leverage

Leverage can be a powerful tool in real estate investment, but it comes with its own set of risks. For example, imagine purchasing a $500,000 property with a 20% down payment of $100,000. By leveraging the remaining $400,000 through a mortgage, you can control a more valuable asset with less initial capital. If the property appreciates by 5% annually, your return on the $100,000 down payment can be significantly higher compared to investing the same amount in stocks without leverage. However, leverage also amplifies losses if the market turns. This article will explore the benefits and risks of using mortgages to leverage your real estate investments and compare it to unleveraged investments in other asset classes.

3. Regional Real Estate Trends

Real estate is all about location, location, location. For instance, the property market in Austin, Texas, has seen tremendous growth due to its booming tech industry and influx of new residents. In contrast, some Rust Belt cities have struggled with declining populations and stagnant home prices. Understanding these regional trends can make a significant difference in your investment outcomes. This article will analyze the factors driving real estate trends in various regions, such as employment rates, population growth, and local economic policies, and offer insights into the best markets for real estate investment in the current climate.

4. Psychological and Emotional Factors

Buying a home is not just a financial transaction; it’s an emotional journey. For many, owning a home brings a sense of stability, community, and pride that renting simply cannot match. Take Sarah and John, for instance. They chose to buy a house in a quaint neighborhood, valuing the sense of permanence and the ability to personalize their living space. Despite the higher costs compared to renting, the emotional and lifestyle benefits were invaluable to them. This article will explore the psychological and emotional factors that influence the decision to buy a home and how these intangible benefits can play a crucial role in your overall quality of life.

5. Future Real Estate Market Predictions

Predicting the future of the real estate market is challenging, but understanding potential trends can guide your investment decisions. Experts suggest that remote work, demographic shifts, and evolving lifestyle preferences will shape the housing market in the coming years. For instance, the demand for suburban homes with home office spaces might continue to rise as remote work becomes a permanent fixture. Additionally, younger generations may prioritize flexibility, leading to increased interest in rental properties over homeownership. This article will delve into expert predictions and economic indicators to provide a forecast of the real estate market over the next decade, helping you stay ahead of the curve.

Home Ownership is not for everybody. Just because it is the way we’ve always done it. That does not mean it makes actual sense.