A Wharton professor explains why you shouldn't consider buying a home an investment
It's an age-old dilemma nearly every American adult wrestles with at some point. No one wants to throw their hard-earned cash away on rent payments they'll never see again when they could be investing in a home that will grow in value and potentially provide nice return one day.
If that line of thinking sounds familiar, Todd Sinai, a real estate professor at the Wharton School of the University of Pennsylvania, would like to stop you right there. A number of crucial factors go into the rent-vs.-buy equation - myriad calculators exist for just this purpose - but a house's potential return on investment shouldn't be your focus. In fact, you shouldn't think of it as an investment at all, according to Sinai.
"People get caught up in this notion of 'Oh, if I buy a house it's an investment, so I can do it at any time,' but it's not," Sinai told Business Insider.
Housing is a consumption decision, not an investment decision, Sinai explains. The amount of housing you pay for should comport with your needs, goals, and budget, regardless of housing market trends and potential growth in home value.
If what you're spending each month on housing jumps when you move from renting to owning, that's not necessarily a wise financial move just because you're getting equity. You need to make sure the additional space and amenities you're consuming are worthwhile expenditures on their own merits, not for the theoretical payout they might afford later.
"If you spend twice as much on a house, you're not making twice as big an investment, you're spending twice as much on housing," Sinai said. "That's a mistaken way to approach it."
Let's say you do time your local market correctly and home prices rise after you buy. If you decide to sell that home you'll still need a place to live, and you're buying in that same market with expensive home prices unless you go back to renting.
Moreover, the process of buying and selling a house is expensive. The taxes, fees, and closing costs you'll pay when you buy and sell that home eat into any profits you reap.
"Buying that house cheap and selling it once it's gotten expensive is an expensive way to make money, because the roundtrip [cost to you] is about 10%, so you take a huge hit," Sinai said.
If you want to make an investment in housing, Sinai says you're better off doing it in the markets - like buying shares in a Real Estate Investment Trust or an ETF. For buying your own home, just ensure it will match your needs for many years to come, independent of what happens in the markets.