Homes aren’t savings accounts

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Nick Foy, CFP®

Back in 2011, when we still had cable, my wife and I would waste time vegging out watching HGTV. We saw people searching for their first home, renovating their current home, and looking for the perfect vacation home, sometimes all in the same episode.

Experts would help them with their construction and/or transaction, and by the end of a thirty minute segment, everything would be clean and beautiful and ready for living their best life.

Before (and sometimes after) a renovation project was complete, they’d often show the homeowner how significant the improvements were from a financial perspective, revealing their estimates for how much could be expected to be recouped were the owner to sell.

And it was totally, entirely, misleading.

They weren’t actually showing how much the owner would stand to make after completing a project, large or small. They were really showing how much a homeowner might lose:

According to Remodeling Magazine you’re less likely to recoup your investment in a major kitchen or bathroom remodel than you are to get back what you spend on basic home maintenance such as new siding. Siding replacement recouped 92.8 percent of its cost, according to the study. The only home improvement likely to return more at resale was a minor (roughly $15,000) kitchen remodel, which returned 92.9 percent. Replacing roofs and windows were also high on the list, returning 80 percent or more at resale.

Said another way, there is no home improvement project that offers any positive return on investment. The best you can expect is to only lose 7.1% by remodeling your kitchen.

The Reality of Home Ownership

It’s been the policy of our federal government to encourage home ownership for many decades, but the reality of home ownership is much different from the idealistic framework laid out by policymakers. Homes make pretty terrible wealth-building tools, and the mortgage interest deduction hasn’t done anything to reduce inequality, it’s actually made it worse.

For those that treat a house as an investment, there’s a high likelihood that once they actually run the numbers, the return on investment will be more than mildly disappointing. In fact, over the long-term, once you factor in taxes, maintenance, realtor fees, closing and improvement costs, the expected real rate of return (that is, after being adjusted for inflation) is pretty close to zero.

That doesn’t mean you shouldn’t own a home

I’m not saying that home ownership is bad, or that it shouldn’t be a goal. But it should be done in light of what a home actually is: a consumption item.

We love the house we own. We love our neighbors and our yard, and we love having a place where people can congregate and enjoy. My wife even loves being able to paint the walls when the mood strikes.

But our home is not an investment with a significant expected rate of return.

Sure, the value of the home might have appreciated since we moved in, but that’s only because we got lucky and timed the purchase well. Plus, we have no intention to move anytime soon, so we may not actually see any benefit.

Renting is underrated

I frequently hear people disparage renting because they feel like they’re throwing away money every month. But if a home is viewed as a use asset and not an investment, it might actually be in your best interest to rent until a home is entirely attainable without having to stretch to make it work.

Because homeownership has become synonymous with the American dream, we often see people whose balance sheets are heavily weighted toward an illiquid asset with a low expected rate of return. My advice is often to start building assets in other places; those with higher expected rates of return, and more liquidity.

Still, remodel your home

Having said all of that, for the person who intends to be in their home for a long time (more than 7-10 years) and has a balance sheet that can handle the purchase or continued ownership of a home, and has the cash flow to afford to save into assets that we can assume will have a higher expected rate of return, remodel your home! Make it the place where you and your family can create lasting memories, build community, and enjoy meals and holidays under a consistent roof. Just don’t expect a giant payout at the end.

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