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BIZ Academy Podcast
Hosted By: Wyatt Yates

Money Myth: A Home is a Good Investment



In this episode, I discuss the benefits of homeownership that lead to the existence of this myth. What has home value appreciation been historically? What are the tax benefits of homeownership? Is your home really an investment? Listen to find out.

Action Steps:
Change your mindset about your home. View only things that generate income and cash flow as investments.

Episode Transcript:

Wyatt Yates Host 00:00 Money doesn't have to be complicated. You can achieve financial independence. This podcast gets to the truth behind the money. Miss you hear from your grandma, your broke uncle, the latest social media influencers and the so-called money experts. Welcome to Money Myths with your host, wyatt Yates. 00:23 The myth I'm going to talk about today is a home is a good investment. Now, this is something we've all heard. I mean, this is everywhere. Everyone's heard this one A home is a great investment. You should buy a home. It's a great investment. 00:39 Now, there is some good things about home ownership and owning a home that lead people to kind of think this or for this myth to exist. You know, when you make your monthly mortgage payment, you're paying principal, so you're building up equity, so that's good. You're getting more value in terms of your net worth and on paper, you don't realize that value until you sell it, but you are building up equity and that is a good thing. Another thing that's good about a home investment is when you go to retire, if you've paid off your mortgage, you have locked in your housing costs fairly fixed. I mean, you still have insurance and taxes that will continue to go up, but you've nailed down a big chunk of your budget in retirement in terms of housing and making sure that amount stays fixed when you're in your retirement years. That's another big benefit of home ownership. So there's definitely benefits to home ownership, which is why this myth exists, because there are a lot of good benefits of owning your own home that go along with it and that's why this myth exists. But let's look at why this myth is false. So when you say a home is an investment, anytime you look at an investment you need to look at what's the rate of return on that investment. 02:13 So let's just look at housing appreciation in the US. So I have three sources here and they all come to roughly the same figure. But first source the Federal Housing Finance Agency. This is a federal agency. They oversee Fannie and Freddie and the consumer lending with mortgages and housing and some other stuff, but that's their main thing. So home prices according to them since 1991, have a compound annual growth rate of 3.6% per year. Now let's look at CoreLogix case shiller, us National Home Price Index. This over the last 32 years. They show an average annual growth rate of 3.7% per year for housing prices in the United States. And then the third source is from the book Rational Exuberance by Robert Shiller, where he looked at 128 year period so from 1890 to 2018, housing prices had an annual growth rate of 3.2%. So somewhere around 3.5% roughly. 03:35 You can expect housing prices to appreciate over a long period of time. Yes, we are in a crazy environment right now where some specific markets are seeing huge increases. Us here in the Denver Metro area, I mean it's crazy right now with what prices are appreciating per year. But when you look at investment over a long period of time, those big blips in appreciation are going to level out and you're going to realize something closer to what historically has happened for the last 130 years of a 3.5% increase in housing price appreciation. Now that's not great. I mean, that's slightly better than inflation and it's significantly worse than a lot of other investments. So, in terms of investment and what's your rate of return, it's not great. With housing, now, we could get into. Well, if you're leveraging it with a mortgage, yeah, you get your returns up a little higher, but just in terms of housing appreciation, it is 3.5% roughly, not great. You can invest your money in all kinds of other asset classes and get significantly better returns. 04:56 Now let's look at another thing. A lot of people will always quote when looking at housing and home ownership. You'll hear people always rave about the tax benefits of owning your own home. Well, the Tax Cuts and Jobs Act of 2017 significantly increased the standard deductions, so now most people don't even itemize on their tax returns for your federal income taxes we're talking here. So to get any benefits related to federal income taxes for home ownership, you have to itemize your deductions on your federal tax return. But with this big increase in the standard deduction from the 2017 Tax Cuts and Jobs Act, most people don't itemize. It's less than 15% of taxpayers itemize their deductions on their federal income tax returns now, where before it was roughly 30,. 31% of people would itemize on their tax returns for federal income taxes to get the benefit of home ownership. 06:02 Another thing it did it limited how much you can deduct for state and local taxes you've paid, so now that's capped at $10,000, where before there was no cap. You see this in the news with a lot of the high tax states complaining and trying to get this reversed, like states like California and New York, because it hurt people there. But we can get a whole argument about whether low tax states should be subsidizing higher tax states taxpayers on the federal level, but it limited what you can deduct. So between your state income taxes and your real estate taxes, you're probably going to hit your limit If you're making any decent amount of money and not get the full benefit of deducting your real estate taxes, because you're limited to $10,000 now. And it also changed how, on higher dollar mortgages, on how much interest you could deduct. So if you have a mortgage over anything, it's $750,000 now you can only deduct the interest up to the $750,000. So there are limits that the Tax Cuts and Jobs Act changed where there's really no real tax benefit to home ownership anymore for the majority of people. So If you hear somebody say the tax benefit home ownership, calm out on it. It is basically non-existent anymore. 07:32 The last thing I wanted to cover on why this is false is because it has the wrong mindset of what an investment is. So an Investment is something that generates income and cash flow. Your home does not do that. Your home only takes money from you. You're paying your mortgage, you're paying your homeowners insurance, you're paying your real estate taxes, you're paying for repairs. All it does is take money out of your pocket the whole time. You own it. The only time you get benefit is when you go to sell it. I mean you could take a mortgage out for more, but you got to pay that mortgage back, so it's not like that's putting money in your pocket. Because you got to pay it, you miss one payment. You miss a real estate tax payment. You can lose your home. 08:26 So when you view investments as things that generate income, cash flow, a home does not meet that criteria. Things that meet that type of criteria are like rental, real estate, mutual funds, stocks, bonds, money you lend to somebody with an interest that you're getting, private equity investments, a business you don't operate but you own. Those are all things that can generate income and cash flow and are all Investments. Your home is not an investment, it is not an asset, it's a liability. It only takes money from you until the day you sell it. And when you sell it you still have to have a place to live. And if you're like most people, you take all of that equity you built up and you throw it Into a bigger home. So You're back to earning your three and a half percent Rate of return, but with no income or cash flow in your pocket and only money going out. So you need to change your mindset. Your home is not an asset. It's a liability to you. 09:36 So let's recap this real quick here Home ownership is good. There are a lot of benefits to owning your own home, but in terms of this myth it being a good investment in what an investment really is it does not qualify. So first thing we were talking about is the appreciation of home values. Home values, in terms of rate of return, are not great. They're more than inflation, but way less than other asset classes that you can invest in. The second thing that people point out is the tax benefits of home ownership, and that's why it's such a great investment, because you get all these tax benefits. But that is basically non-existent anymore after the Tax Cuts and Jobs Act of 2017. So there really is for the majority of people. 80 plus percent of people are taking the standard deduction and not getting any tax benefit with owning their own home. 10:39 The third thing was you need to view investments as something that generate income and cash flow, which your home does not. You need to view your home as a liability. When you view your home as a liability, you're gonna make smarter decisions when it comes to home ownership, you're not gonna stretch your budget for that dream home until you can actually afford it. You will view that home remodel project differently, you're gonna make a smarter home buying decision and then you're gonna have more money to be able to invest into assets that actually generate income and cash flow and lead you to financial independence. Because to reach financial independence, you need to generate passive income, and your home does not generate passive income. Passive income is income you're earning without having to work. It's income your money is earning for you. So it's your dividends from your stock investments or your mutual fund investments, it's your interest from your bonds or your loans that you give out, or it's your cash flow from the business or that rental real estate you own. Those are types of passive income generating investments that will lead you to financial independence. So you need to view your home as a liability and realize what investments really are. They generate income and cash flow. 12:11 So for the action step this week, it's real simple. It's change your mindset about your home and view only investments that generate income and cash flow as investments. If something doesn't generate income and cash flow, it's not an investment or it's a really bad investment and your home falls in that category as a, not an investment. It's something you need. It's you need a roof over your head. It's great to fix your housing costs once you pay off your mortgage. There are definitely benefits to home ownership, but just change your mindset and view it for what it is. It's a liability. You get some benefits with fixed housing costs once you pay off your mortgage, or if you have a fixed interest rate mortgage, you don't have to worry about your rents going up. But it is a liability. So change your mindset. 13:12 Thanks for listening. Want to achieve financial independence? Go to ruggedfinancialcom where you can download my free PDF of the 12 Things to Do to Win with Money, and you can also sign up for my weekly money tips emails, where I cover the same tips and tricks and advice I walk all my clients through so you can begin your journey to financial independence. Thank you for watching and listening to this episode of the Money Myths podcast. Please do me a favor and, if you found this episode interesting, subscribe to the podcast so you can make sure you get all the future episodes. Also, leave a rating and review so you can help us grow this podcast so we can lead more people to financial independence. And, lastly, please take a screenshot of the episode, share it on your social media channels and tag us using at ruggedfinancial. We will see you later.

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