Last time we observed that the home you live in is a great consumer purchase, but a lousy investment. Now let me completely frustrate you by talking about why a house might be a reasonable investment choice. The idea that a house is a poor investment assumes that you are going to invest in superior investment vehicles. The two superior opportunities most investors gravitate toward are investment real estate and the stock market.
Obviously, I’m a big believer in real estate investing. Real estate investing is defined by real estate you buy to rent to somebody else, in contrast to a home you live in. While it’s a great opportunity, it’s not for everyone. Exploring all the nuances of real estate investing is beyond the scope of this post, but not everyone wants to deal with tenants or appreciates the illiquidity of real estate investing.
For those that find real estate investing unappealing, stock markets are usually the next consideration. But there’s no easy money here either. Stock market investing is also beyond the scope of this post, but I’ll share some key ideas.
Stock market investing can be a real gut check. You have to learn to love the small loss. For example, say you buy a stake in Acme Company. Acme pays a good dividend and it seems poised for a bright future. Naturally, as soon as you buy in, Acme declines 10% in value. What do you do now?
At a minimum, you have to unemotionally reevaluate your commitment to Acme. Maybe you should sell. This is where loving the small loss comes in. You’ve just sustained a relatively small loss. If you had $1,000 invested in Acme, you’ve now got only $900. The good news is that your 10% loss can be recovered if you are able to invest the $900 of remaining capital at a 11% annual return. But what happens if you ride Acme all the way down to a 50% loss? Now your $1,000 is only worth $500. In order to restore the $1000, you need to reinvest the remaining $500 at a 100% annual return! A 100% annual return is very hard to achieve.
Knowing all this, you decide to take the small loss of 10%. Whereupon Acme regains the 10% and you’re left fuming. Gut check time.
In short, stock market investing will torture your soul. It is very humbling. It requires you to admit to being wrong. For those that master these conundrums, there is a lot of money to be made. But it’s obviously not for everyone.
So back to our owner-occupied single-family home as an investment vehicle. Maybe you’re the type that’s handy with tools and have a flair for decorating on a budget. You may be able to increase the value of your home by far more than the cost of the improvements.
Carrying a mortgage is like a forced savings plan. If your mortgage is 6%, accelerating the prepayment of your mortgage (paying it down faster) is a guaranteed 6% return on your cash. A 6% guaranteed rate of return can be hard to beat sometimes.
Here’s another thing that’s hard to beat – a free trip to the Super Bowl. I went. My team won. It was pretty special, even more so since it was free. Click on the red email button below to get on the list for my next book coming in August of 2025, How to go to the Super Bowl for Free and Other Lessons from a Lifetime in Business.