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I PURCHASED MY FIRST home in 2005. At the time, I was a Major League Baseball prospect with the New York Yankees organization. I had always been taught that homeownership was part of the American dream. Looking back, I’m now much more skeptical.
Purchasing a home on my salary was difficult. Minor leaguers don’t land big contracts like their counterparts in the major leagues. In fact, I had multiple years when I made less than $10,000 as a professional baseball player. I was only able to afford the house because I also worked other jobs.
I bought my first home for $106,000. It was a discounted foreclosure property and only required a 5% down payment. The house was relatively new and the bank had done some renovations while it was in foreclosure. It was 1,573 square feet, with three bedrooms and two bathrooms, and sat on a 0.28-acre lot.
I stayed in the house for almost 12 years and sold it in 2017 for $180,000. This might seem like a great investment. If we only look at price, the value of the property appreciated 4.51% a year. But we can’t judge the investment return by price alone. We also need to consider cash flow.
My original mortgage was for 30 years at 5.25%. I paid roughly $980 a month, including taxes, insurance, interest and principal. In 2011, I refinanced with another 30-year loan at 4.25%, cashing out $20,000 in the process. Even with the cash out, my monthly cost dropped to $870.
I also made home improvements. I bought new wood floors that cost $5,000 and built a patio that cost $3,000. These expenses need to be considered as well.
When I sold the house in 2017 and paid off the mortgage, I pocketed roughly $86,000. When I consider the total cash outflow during the time I owned the place, I calculate an internal rate of return of -5.08%—and the return would have been even worse if I adjusted it for inflation. That isn’t the sort of performance anyone would want on an investment.
At first, I wondered if I had done something wrong in my pursuit of the American dream. After all, conventional wisdom says that a home is a great investment. But I suspect my experience is pretty typical.
My contention: Many homeowners don’t realize how expensive owning a home can be from a cash flow perspective. To be sure, you get to live in the place, and that’s undoubtedly valuable. But what about a home’s value solely as an investment? Depending on how long you stay in the house, you could see cash flow returns that are flat or even negative.
I suggest that we rethink the notion that homes are investments. I would argue that they should instead be treated as places to live. Someone can build net worth in their primary home, but they shouldn’t view it as a growth asset, like they might view stocks or bonds.
I had an epiphany after selling my home in 2017. If I, the seller, didn’t make a positive return on the home—and if the buyer’s return was also uncertain—then who’s really benefiting from this version of the American dream? Cynically, I think we all know the answer to that one: the banks and the real estate industry.
Kevin Thompson is a former Major League Baseball player and now CEO of 9Innings Capital Group LLC. He is a Certified Financial Planner® and Retirement Income Certified Professional®. Kevin graduated from the University of Texas at Arlington in 2011 with a degree in finance. His previous article was Big League Lessons.
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You are spot on, in my experience and observation. Thank you.
You are right to point out how complicated this topic is. There is the value we derive from our living space, and there is the financial impact. Both are important to consider.
When including everything – all payments, taxes, maintenance, equivalent rent benefit, insurance, etc. our first house had an IRR around 20%. We bought while many homes were still feeling the California housing recession of the early 90’s, and sold in late 2004. Notably, the value has languished in the time since we sold.
Our subsequent house carried a breakeven IRR for a decade or so. Now it’s sitting around 7% thanks to the recent wild surge in home values.
I don’t claim any kind of credit for sussing out good deals… I think we mostly just had more than our fair share of good luck.
Unless we are still living rent free in our parents’ basement, we are paying for our housing, either in the form of rent or a mortgage.
I bought my first house in 1975 and the house in which I currently live is paid for and worth many more time than what I paid for my first home. Having said that, I’ve also invested a large amount of additional cash in various homes over the years in the form of taxes, repairs and improvements.
All of these expenses will no doubt reduce my ultimate rate of return on my investment, but when I eventually sell my house, I will receive cash. Had I rented, I would receive nothing.
It would be fun to figure out how much I would have if I had been able to invest my cost of housing in mutual funds over a long period of time, and no doubt, it would show a greater return than my house. However, as I needed a place to live, I bought a house instead. All things considered, it still looks like a reasonable investment to me.