Many times I get into a conversation with someone about what is the best investment to make. More often than not the topic turns towards housing and homeownership. When someone talks to me about owning a home I hesitate to mention that owning a home isn't exactly an "investment," not in the same way that owning an apartment building, a dividend paying stock or your own business is an investment. A home is only an investment if it isn't your primary residence. A home is an investment only if it will generate income beyond the cost of holding the property, typically this takes place in the form of a second property that does not act as a primary residence. The cost of holding the property includes taxes, utilities, repairs, interest minus government incentives.
To be sure that we're in agreement of the term investment, I went online to the Oxford English Dictionary. I typed in the word investment and was pleasantly referred to the word income. It is no surprise that the first attempt to gain the definition of the word investment should refer us to income. But we need to focus on what exactly the definition of investment is. According to the Oxford English Dictionary, the term investment is characterized as:
b. gen. The conversion of money or circulating capital into some species of property from which an income or profit is expected to be derived in the ordinary course of trade or business. Distinguished from speculation, in which the object is the chance of reaping a rapid advantage by a sudden rise in the market price of something which is bought merely in order to be held till it can be thus advantageously sold again. (Second Edition.1989.)Let's take a look at this definition and see if this fits with what many people often call "investments." As we can see, we first need to convert our available capital (cash) into some other form of property. This property is then supposed to generate INCOME or PROFIT in the ordinary course of trade or business. What this means is that while going about your daily activities (work and family life) you need to derive first income and possibly a profit will follow.
Does owning a home that you are currently living in derive income for you? Absolutely not. It should be stated that if you're not deriving income from your "investment" then you're not investing. Instead, you're probably speculating or gambling. In fact, it is costing you to retain this "ownership" interest in the property. Therefore, a home that you live in isn't an investment. It is merely a forced savings account at best and a liability at worst.
To further the idea of what an investment isn't, the definition goes on to describe what speculation is. Speculation is the attempt to benefit from the (rapid) rise in the price at which point the item would be sold. This is hardly the case with a home. Rational individuals don't decide to move simply because the price of the property has gone up in value.
Some homeowners might rationalize that owning is better than renting and the potential rise in the value of the property when they decide to sell will reward them for their decision. History has proven that if you bought at the right time and live in the right region of the country and have the ideal location then you'll be rewarded handsomely for your patience. This, however, becomes problematic if you bought at the wrong time and wrong location.
This does not mean that I wouldn't advocate buying a home. Instead, I'd rather suggest that those who are interested in buying a first home put the purchase into perspective. The view that should be taken is that buying the first home is a method to avoid paying rent and passively saving money through the buildup of equity over time. Touc
