This continues the series on homeownership and investing. Last week’s post The Difference Between Asset And Investment was fairly straight forward. We concluded that whether your home is an investment or not depends in part on whether your living in it rent-free is income or not.
In-Kind Subsidy = Income
A penny saved is a penny earned. With taxes, a penny saved is more like one-and-half or two pennies earned. Leaving taxes aside, if I get something for free, it’s the same as getting cash and paying for the same item with that cash.
Some employers subsidize the employee cafeteria or even let employees eat free. Economically it’s the same as giving the employees some extra income per month for them to buy lunch. Some employers give employees a free gym membership. You just buy it and then expense it. Except the sequence, it’s the same as getting paid and then buying the gym membership.
Only If You’d Buy It Anyway
A subsidy is worth the full market price only if you’d buy anyway when you get cash. Free lunch that costs the employer $10 is worth $10 to you only if you’d pay $10 for lunch when you get a corresponding bump in pay instead. If you would brown bag otherwise, then maybe it’s only worth $3.
Redeeming airline miles for a business class ticket to Europe isn’t worth $4,000 to you if you would just pay $800 for an Economy seat when you get $4,000 in cash. The added comfort is worth something but not nearly as much as the cash price tag.
You can also prepay expenses. Buying in bulk is one example. You can buy 48 rolls of toilet paper from Costco and use them over time, instead of buying one roll at a time at a convenience store.
If you ski you can buy a season pass or you can pay for each day individually. If expense savings are the same as income, is a season pass an investment that earns a dividend every day you ski?
By this standard every purchase is an investment. My car is an investment because it saves me the cost of renting a car from Hertz every day. My furniture are an investment because otherwise I’d have to rent them from CORT Furniture or Aaron’s.
Prepaying expenses is just a different way to buy stuff. In many cases it’s a better way, but in the end you are still buying stuff, whether you are paying upfront or paying over time.
Buying a Home To Save On Rent
How do you reconcile buying a home with all these? Again, if we only look at not having to pay rent, is it more like free lunch in the cafeteria or is it more like a season pass for skiing?
Whom do you get it from seems to make a difference. If I get a free or subsidized apartment from my employer, that’s non-cash income. If I have to buy the apartment myself, it feels like just prepaying rent.
Even if you see rent savings as income, you also have to consider whether you’d pay the full market rent if you didn’t buy. If a home similar to yours rents for $3,000 a month, would you pay $3,000 to rent your current home? I wouldn’t. I would rent a smaller place for less.
So is buying a home an investment? The expected appreciation part is an investment for sure. Home prices may only track inflation over the long term. That doesn’t make it not an investment. Over your holding period of say 10 years, your home’s value may go well above inflation or well below inflation or it may go down. Home prices going below inflation or going down makes buying a home a poor investment. A poor investment is still an investment.
The rent savings part isn’t an investment. It’s just a different way to pay for an expense. It may be more cost efficient, as in buying a car versus renting from Hertz every day. It’s still just paying for an expense. At best your “return” is only the rent you would actually pay when you rent, likely far lower than your home’s full market rent, as in the business class air fare example.
Note I didn’t introduce mortgage into any of these. A home would appreciate the same and it would save you the same amount in rent whether you buy it with a mortgage or not. We will look at mortgage in the next article — Having a Mortgage and Buying Stocks On Margin — to see whether it’s a negative bond and whether you are buying stocks on margin when you have a mortgage.
Refinance Your Mortgage
Mortgage rates hit new lows. I saw rates as low as 3.25% for 30-year fixed, 2.625% for 15-year fixed, with no points and low closing cost. Check mortgage rates in your state.