Investing is the act of buying an asset with the intention of generating value through one of many means. Value may be via appreciation or income.

If you have read any of my posts on housing, I don’t view a personal residence as an investment. I’m not saying a house is a bad purchase, but there are far better options out there that satiate the objective of generating value.

Today we examine the investment side of a personal residence because…it exists. It isn’t the golden ticket many make it out to be, but with a few key factors, a personal residence can be a solid investment.

The following is not a comprehensive list of pros and cons for a personal residence as an investment. I have highlighted plenty of the downside in other posts. I’m looking at the investment from a different angle. And for those of you who have done well in this sector, please comment with other aspects that contributed to your financial win.

The most notable reasons are as follows:

Leverage

Minimum down payments are typically between 3 and 10 percent depending on the loan type. FHA loans require 3.5-5% down. Time.com states the average first time home buyers puts 6-7% down and repeat home buyers average 17% down. They go on to say home buyers in their 20s and 30 often have a down payment less than 10%.  

The average house sells for +/- $400,000. For every $1 a first-time home buyer puts down for their 3.5% minimum down payment, the lender provides $28.50. In the business world, it’s absolutely insane to leverage 28 to 1. The average down payment of  6-7% still creates massive leverage at 14 to 1.

Leverage is a blessing and a curse so tread lightly. In this instance, it allows the purchase of a major asset with minimal capital. This makes appreciation all that much more desirable.

Appreciation

Long term appreciation for residential houses is just under 4% annually, while the past 30 years have noted slightly higher appreciation at 5.3% annually. Geographically, these data vary, but this generalizes the United States as a whole.

Let’s go back to that $400,000 house. For the sake of easy math, a 10% down payment of $40,000 leaves the buyer with a mortgage of $360,000. If that $400,000 house appreciates 5% in 1 year, that’s a $20,000 unrealized gain.

That’s a 50% gain on a $40,000 investment in just 1 year. Pretty sweet! Even if the house is paid off, it’s an asset that typically returns 4-5% annually, which outpaces inflation.

Tangible Asset

Stocks, bonds, and currency are paper worth what others believe them to be worth. The gold standard no longer exists, so perception and belief are the only things separating the U.S. dollar from monopoly money.

Tangible assets will always be there. Buildings, houses, precious metals, vehicles, machinery, and furniture are all tangible assets. Not all investments, but assets. Some investors feel more comfortable with tangible assets as opposed to paper.

Zombie apocalypse hits… Money isn’t worth anything. The stock market goes to 0. Through all of this, you still have a house made of wood, concrete, and Ikea furniture. Well, until the zombies show up. Then we have bigger problems than assets.

Other notable reasons to buy as an investment include the following:

Equity

The biggest complaint I hear about renting is, “I’m just throwing away money every month.” Well, yes and no. Mortgages are amortized meaning each payment is part principal and part interest. Over time, a greater percentage of each payment goes towards the principal. There is a fancy formula to calculate amortization that I won’t waste your time with. There are plenty of free calculators that work just as well.

Our house payment including mortgage, taxes, insurance, and PMI totals $1,604. Each payment includes $284 towards the principal. So yeah, we gained equity each month. The rest of the $1,604 is pretty much like renting.

During year 17 of a 30-year mortgage, each payment would be half equity and half interest (not accounting for taxes and insurance). It’s slow to get rolling, so duration is your friend here.

Average Lenth of Stay

This is one of the factors that makes a personal residence a viable investment.

The average length of stay in a given house is 8 years. The median duration is 13.2 years. With interest rates rebounding from all-time lows, buyers are noting their diminished buying power. I could see the housing market slow as the nation adjusts to what are acutely high interest rates, but on par for the long term.

Many advise not buying a house if you don’t plan on living there for more than 5 years. That time is enough to spread out the closing costs to buy and sell a house. Here are the realtor costs we endured:

And the mortgage fees.

Sweat Equity

This is more for the investment property crowd and fixer-uppers, but it’s worth a mention here. We purchased our house at the appraised value knowing the roof would need to be replaced. After spending $12,000 on the roof and probably $10,000 on renovations, we almost broke even after 1.5 years.

The house was a couple decades out of date, so it didn’t take much to bring new life to the place. It turns out this is a big advantage as we are putting our house on the market.

Investopedia.com gives a great breakdown of cost recovery for renovations stating most fall between 60 and 80%. This means unless the house was in shambles when you moved in, most renovations and remodels are a losing investment, but hey, I’m being optimistic.

Tax Benefits

Again, game changing as an investment rental property. Much of the expenses of owning and operating rental property are classified as business expenses. Not so much for a personal residence. However, mortgage interest is deductible up to $750,000 for joint filers. Down from the old limit of $1M.

These tax benefits are only applicable for those who itemize. Other deductions include mortgage points, PMI, and some taxes. In the Southwest, there are deductions for things like solar panels. The cost is often wrapped into the mortgage. The average break even point for solar panels is 6-12 years.

The standard deduction for joint filers in 2023 is $27,700. With current interest rates, a mortgage around the $350,000 mark would be your breakeven point. I don’t advise buying more house than you need just for tax deductions.

And this being your primary residence, you will save capital gains taxes on the back end. Long-term capital gains rates aren’t bad, but they only apply to capital gains over $500,000 (joint filers) when you decide to sell.

Fixed Expenses

A major consideration for those looking to retire. A mortgage locks in housing costs for 30 years. I don’t recommend retiring with a mortgage, but you get the idea. It’s significantly easier to determine the cost of living with more predictability. This may be an indirect reason to treat a personal residence as an investment.

Forced Savings

Some people just spend everything that comes in. Pay the bills and spend the rest. If this is you, then an unnecessarily expensive house may be the way to go. Your personal residence is now the heavy lifter in your portfolio. You are banking on as many items in this list to work in your favor.

No shame, just be honest with yourself and how you manage money. If you need a bill collector to help you save and invest, go for it.

Sense of Home

Nothing compares to the feeling of home. Mrs. TFC was excited to decorate our place as it is the first time either of us has owned a home. We pained everything. Redid some flooring. Changed the kitchen. The entire aesthetic changed. Sure, it required research, effort, and money, but it’s a feeling that is tough to duplicate in a rental.

This is a non-monetary factor that produces internal rewards. No different than paying off a 0% interest free loan. It isn’t about math or money – it’s all about how it makes you feel. I understand the integration of emotions and investing is probably the worst possible combination, which is why this isn’t higher on the list.

Regardless, stability for the family is priceless.

Rental Potential

Rent out a bedroom to SRNAs. Foks with extra bedrooms may look to capitalize on unused space and make a buck doing it. Plus, you would be helping a student.

When you are moving out, consider keeping the place as a short or long-term rental. Being a landlord isn’t for everyone. This isn’t my forte by any means, but something I hear many people talk about. I have run the numbers on plenty of houses and it takes a certain type to fit the mold for a good rental.

For a quick assessment, I use the 1% rule. Rent needs to be 1% of the value of the house. Our $250,000 house would need to generate $2,500 monthly to cover the $1,604 mortgage payment, plus maintenance, capital expenditures, property management, and vacancies. Not only cover these expenses, but cash flow on top of it.

The house is valued at $275,000 after the work we put in, so an investor would need closer to $2,750 per month by my spreadsheet to cashflow from day 1.

We could talk all day about varying aspects of renting, but I don’t feel comfortable managing from afar, nor do I want to bleed money for a couple years waiting for rent to increase. They suspect we could get $2,200 per month fully furnished, but that’s generous.

In my area, single family homes aren’t great unless you buy them in shambles in go for the sweat equity route. Money is made on the buy, so it often takes dozens of inquiries to secure a home that cashflows. Single family homes of any quality don’t do well unless the purchase was years ago.

Without turning this into a discussion on rental properties, just know every market is different, so run the numbers (conservatively). They always cost more to fix and rent for less than you expect.

The TFC Fam

Because we are moving after 1.5 years, our house wasn’t a great investment. I have many relatives that have lived in a single house for 30+ years. Their house was a great investment. Time made all the difference.

Early in my anesthesia career, I’m expecting to do a fair bit of moving around. It’s financially advantageous to change jobs every couple of years. This applies to every profession, not just anesthesia. We are taking advantage of the financial opportunity before we have kids in school or have reason to settle. Working hard and saving for a future where work becomes optional.

If you want to see the specific numbers on our house, I made a page here.

I know the recent increase in home prices did well for many homeowners. I hope each of you did well during this time. Thanks for reading.