My house was a bad investment (or was it?)

As we approach moving into our new home (and selling our existing home), I decided to reflect on the financial return of buying our home. I wish I hadn’t. At first glance, I think my house was a bad investment.

We haven’t put our house on the market yet, but we will soon and I expect it to sell for between $500,000 and $549,000 (the range of results has widened, in especially on the downside as the housing market slows).

If it sells for $524,000, we’ll make $100,000 more than the $424,000 we originally paid for the house in 2011. That sounds right, but it’s only a compound annual growth rate of 1, 94%. Phew.

But it gets even worse from there.

Phantom costs of home ownership

The year after we bought our house, we spent $7,500 on landscaping the front and back yard and installing a fence. The following year, we spent $32,500 to renovate the unfinished basement.

That already puts us at $464,000 and I haven’t included phantom (sunk) costs such as property taxes, insurance, and maintenance.

Fortunately, the brand new home hasn’t cost much in terms of ongoing maintenance over the past 11 years. I’m going to be generously low and put that at $1,000 per year for a total of $11,000.

We paid an average of $4,000 per year in property taxes ($44,000 total) and an average of $1,600 per year in insurance ($17,600). That’s another $61,600 in total sunk costs that we paid as owners.

We made mortgage payments, on average, of $1,600 a month. Over 11 years, that’s about $211,200. I would estimate that $50,000 of that amount went to interest expense and $161,200 to principal.

Finally, there’s also the opportunity cost of capital – the $88,000 down payment we made to buy a house in 2011.

What if we rented and invested the difference?

If we had invested this amount in a globally diversified equity portfolio and earned 8% per year (which is not unrealistic, given that the S&P 500 has gained 14.4% from 2011 to 2021) , that $88,000 would turn into about $190,000. Call it a $100,000 opportunity cost.

Let’s say we’ve rented a house for the past 11 years, paying the equivalent of our total mortgage payment each month in rent. We invested our initial lump sum of $88,000, plus an additional $550 per month that we saved by avoiding property taxes, insurance and maintenance. We would end up with around $295,000 by the end of 2021.

Also don’t forget the extra $40,000 we spent on renovations and landscaping. Let’s say we just kept this in cash under our mattress. We would have $335,000 in savings and investments today if we had rented and invested/saved the difference.

Instead, we invested that $88,000 in a house. We invested an additional $40,000 in the house to finish the basement and landscaping the yards. And, we’ve paid an additional $72,600 in phantom or sunk costs over the past 11 years, plus an additional $50,000 in interest charges.

not so fast

To counter this, the majority of our mortgage payments have been used to pay off the principal of the loan and so we have that $161,200, plus our initial down payment of $88,000, accumulated in the equity in the home. We cannot forget this so-called forced saving.

Finally, we should include another expense – $20,000 in realtor fees after our house was sold.

By my calculations, if we sell the house for $524,000, pay the realtor’s fee of $20,000, and pay off the remaining mortgage of $170,000, we’ll end up with about $334,000.

In the rent and invest the difference scenario, we would end up with about $335,000.

Related: Does renting waste money?

In other words, in the buy and rent scenarios, our starting position was $88,000 in 2011, plus $40,000 of invested capital between 2012 and 2013. Our ending position in 2022 will be around 335 $000 both ways.

I would say it’s pretty clear that the difference is negligible between the two results, and most likely leans towards buying for some of the intangible benefits of home ownership.

Final Thoughts

Home ownership has been a clear winner for many Canadians over the past decade or more, especially for those living in British Columbia and Ontario. For some, it’s like winning the real estate lottery.

But for homeowners living in Alberta, Saskatchewan, or Atlantic Canada, the math isn’t always so favorable. Home prices can stagnate for many years, and ghost costs eat away at your returns over time.

Was my house a bad investment? Upon closer examination of the numbers, it wasn’t that bad.

More importantly, I don’t view my primary residence as an investment. It’s a lifestyle decision, more than anything.

We didn’t win the real estate lottery, but we lived 11 years in a house we loved and we come out of it richer in wealth and memories. It’s good enough for me.

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