Could buying a home be the worst financial decision you’ll ever make?
11th September 2017
When it comes to the decision between buying and renting your home, owning a house usually comes out on top as the best investment in the long-term. From a financial perspective, renting is typically considered to be wasteful: you’re simply paying every month with no return on the money. Buying a house, on the other hand, gives you a valuable asset which may lead to financial gain in the years to come.
However, Chris Reining, an American self-made millionaire who retired at 37, has recently described purchasing a house in his mid-twenties as ‘probably the worst financial decision’ he has made in his life. Reining bought a $200,000 house in Madison, Wisconsin, paying a deposit of $40,000, but now says that, thanks to not making the right financial decision, he’ll ‘realise two losses’ from the purchase. The first, he says, will come from selling the property for less than what he paid for it. The second is ‘the opportunity cost’ – choosing to use his money in one way rather than another, in this case using $40,000 for a deposit rather than investing it elsewhere.
To explain his reasoning, Reining looked at the inflation-adjusted return on both a house and the stock market for the period from 1890 to 2012. The return on a house in America was just 0.17%, meaning that a house bought for $5,000 in 1890 would only be worth $6,150 in 2012. Alternatively, the stock market return in the same 113-year period was 6.27%. As such, an investment of $5,000 on the stock market in 1890 would now be worth $8 million.
Reining concedes that buying property to rent is a different matter, as you can, within reason, set your rent at a price which allows you to make a profit on your investment. But he feels if you’re buying a house primarily to get a return on your money, rather than as a home for you and your family to live and grow up in, you could be better off looking at investing elsewhere. Your family home is likely to be one of the least profitable investments you’ll ever make, so he recommends not thinking of it in those terms.