Retire from 8 to 5 

In January 2015, the landlord we had been renting from for a few years, sold the property (two blocks of four apartments each) to another individual, and the new landlord ripped apart both blocks, in his attempt to renovate it. At the onset, we were enthused since he didn’t raise the rent and seemed to be truly invested in fixing up the property. But by June, when used toilets were strewn across the parking lot for weeks and new celling in the common areas was still not installed, we were out. Having rented for a few years, we decided to purchase and very very hesitantly purchased a small 1100 sq. ft ranch bungalow on a gorgeous street for $165,000 in October 2015. It was the cheapest house we saw – that is how scared we were to buy a house, while on a visa. We’ve griped enough about the visa topic in another article, so here read about why we were hesitant.

Nevertheless, our neighbors, the wonderful A & D, had lived on the street since the mid-1980s, and had purchased the house for $82,000 back then. Coincidentally, both of us sold our houses in June 2022 (they downsized to a retirement property, while we moved to the UK). Their house sold for $295,000 and ours sold for $285,000. Using these two data points, let’s check if we would consider a house to be an investment or not.

Over 40 years, A & D’s home improvements included a new in-ground pool, a fenced yard, all new hardwood floors and three sets of roof replacement. D ran a construction firm, and did all the improvements himself, and borrowed equipment from the firm. So their total cost of upgrades sat around $35,000 since it was primarily materials only. This does not include any ongoing normal maintenance costs. Property values in our area do not appreciate significantly year-over-year, and despite all this, A & D only realized their gains of $178,000 when they sold their house. Had they invested their $82,000 in S&P index fund, growth at 10.6% since 1980s, they would’ve had a whopping $4.6M. They would’ve needed to pay rent for the last 40 years, but they would still be ahead. So clearly for A & D, the home was a bad investment. However, for that generation, the house represented a sense of achievement and pride and I would suspect they would say, their sentimental gains are worth well over $4.6M.

Let’s switch to our situation – had we invested $165,000 in S&P 500 index fund in October 2015, we would’ve had approximately $387,000 in June 2022. After purchasing our house for $165,000, we invested $40,000 in various upgrades, and made a net profit of $80,000 when we sold our house. Over 7 years of home ownership, we also saved roughly $126,000 in rent (assuming $1,500 a month), while paying total of $56,000 in various school, local and state property taxes. Taking all of our numbers together, had we invested in S&P, instead of buying a house, we would’ve been ahead by $72,000.

A & D’s house increased 259% in nearly 40 years, and our property increased 72% in 7 years, but none of these gains can be realized until the property is sold. However, neither property ended up being an investment and compared to other available investment opportunities, we both lost money buying a house. And the “gains” are fictional at best. Everyone needs to live somewhere, and instead of paying rent, it could be better to invest in your own home. But the math is quite tricky to figure out – there are plenty of rent-vs-buy calculators but they may not account for your specific scenario. If above numbers are for geographical locations where properties appreciate significantly, or rent is extremely high, then a property could end up being a very good long-term investment.

With the number of house flipping shows on TV, and each one making insane profits, it easy to see why viewing a house as an investment is attractive option. How to the flippers make money with a house as their investment? Well, firstly this is not their primary home that they live-in. This is an investment and they are good at choosing ugly houses in a good neighborhood that needs a lot of work. And they flip and sell quickly, allowing them to reduce any property taxes owed. Secondly, they deal with cash, which allows them to get a better purchase price and no money lost on mortgage interest or mortgage application costs. Finally, they have sufficient back-up funds to tolerate holding the property for awhile if they do not get the sale price they need to see.

Buying a house (or any form of second property) as a rental investment property, while can be very lucrative if done correctly, can be fraught with pitfalls as well. One of our friends, who lived in upstate New York, were renters themselves but choose to buy a 3 bedroom property near the University of Buffalo, where they studied, for $285,000. The area was filled with student renters, and seemingly guaranteed a steady income. They put 25% down-payment and took a 15 year mortgage at 4.1% interest rate for the remaining $213,750. Their monthly mortgage payment was $1,581. At the onset, the monthly rent from the house was circa $1,800, with a projection of 10% year-over-year increase, and renters paid all utilities. They paid $200 a month for insurance, taxes and a maintenance person on-call. With the constant stream of students to study at the University, their renter pool is a given, and risk of a vacant property is low. For the first few years, their projections show break-even, unless there is an emergency house repairs, and long-term this is a fairly decent return on investment. The reason we know the math so well, is because our friends asked us to verify their numbers to ensure they were making a good decision. The downsides we found were largely around their inability to secure a second mortgage, should they choose to buy a house themselves, since they did not have sufficient savings for a second deposit. They also had a fairly high property related cash-flow with 40% of their total take-home pay being spent on their own rent and rental property mortgage. To de-risk both of these, they decided to invest in 401k only upto the employer match (not the full tax deductible amount a year), and make over-payments on the mortgage to turn the cash-flow curve. Four years later, they have paid off their rental property, now seeing only income from it and they themselves are still renting and not yet thinking about buying a property for themselves.

Basic lesson – Do the math for your situation based on historical property data and your projected duration of house or rental ownership and check if its the right decision.