Questions about investing and homeownership bugged me for a long time. Is your home an investment or consumption or both? Is your mortgage a negative bond? If you invest while you have a mortgage, are you buying stocks on margin? If you don’t own a home, how should you prioritize between investing and saving for a down payment? What if you also throw paying off student loans into the mix?
Every time I tried to write down something cohesive about these questions, I always get myself confused. The only way to do it would be to go slow — take one small proposition at a time and build up from there.
Before we answer whether a home is an investment, we need to understand what is an investment. How is an investment different than an asset? Are all assets an investment? Are all investments an asset? If something goes down in value, is it still an investment? If something costs money while you hold it, is it still an investment?
Merriam-Webster dictionary defines asset as
an item of value owned
For our purpose we limit it to items of significant value. The shoes you are wearing are technically “items of value owned” but we don’t count them.
Clearly your home is an asset, because it’s an item of value owned. So is your car, money in your checking account, and so on.
The same dictionary defines investment as
the outlay of money usually for income or profit
I think limiting it to “outlay of money” is too narrow. It could be outlay of labor and other assets as well. The important part is “for income or profit.” If something isn’t expected to produce either income or profit, it isn’t an investment.
You need either income or the expectation of a profit, not necessarily both. If I buy a gold coin, even though it doesn’t produce income, I expect it to appreciate in value in the future, giving me a profit. It’s an investment. If I buy a bank CD, even though I just get my money back when it matures, I receive periodic income. It’s also an investment. My car isn’t an investment because it neither produces income nor appreciates in value.
So we see not all assets are investments. Are there investments that are not assets? My education cost money. It helps me earn a higher income. Because I can’t sell it or give it to others, one can argue it’s not an asset. It’s a rare exception. Most investments are assets. They don’t care who owns them.
An investment can be a good investment or a poor investment, depending on the outcome. The value of a gold coin or mutual fund shares can go down in value instead of up. They are still an investment. When TIPS yields were negative (yields are still negative on some short-term TIPS), they were guaranteed to lag inflation. Something that doesn’t beat inflation is still an investment. A poor investment by definition is an investment.
Having to pay a cost while holding something doesn’t make it not an investment. Mutual funds have expenses. You pay the expenses whether your funds make money or not. They are still an investment.
Your home is an asset. Is it also an investment? If it’s a rental home, it no doubt is an investment. It produces rental income. There’s also expectation of appreciation. What changes when you live in it versus someone else living in it? You still pay mortgage, property tax and maintenance. The rental income goes away. Suppose you don’t expect that the home’s value will go up after factoring in broker commissions. Is it still “for income or profit”?
That depends on whether your living there rent-free is income or not, which we will get into in the next article in this series: Is Imputed Rent Income?