My best investment ever: Homeownership?!

Sometimes folks ask me what has been my best investment ever. I normally answer that this is not the right question to ask. We didn’t have one lucky break that made us rich overnight. We never owned the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google/Alphabet) outright, only through index funds. No lottery winnings, neither literally nor figuratively (tech company stock options, IPOs, etc.). Building our Net Worth is mostly the result of many years of small and large contributions to brokerage accounts, never losing our nerves and staying the course through volatile periods.

But the other day, I ran the numbers on how well we did with the apartment we just sold in January (not pictured above!!!). Over a period of just under 10 years, the IRR was almost 16% and beat stocks pretty handily! Again, this did not single-handedly catapult us into Financial Independence, but in the ranking of good investments, it’s clearly way up there, probably even at the top!

Of course, all this assumes that we do the math right. And that’s what today’s post is all about…

Quick Recap: Why owning a home is an investment

This is already the second time I write about this topic, see my initial post on the topic, aptly titled “See that house over there? It’s an investment!” I also talked about this in the ChooseFI podcast last week. But the doubters keep at it. Most recently, in the ChooseFI Friday Roundup, Paul called in and left a voicemail to detail why he thinks a home isn’t an investment. Folks who claim that a primary residence isn’t an investment always use the same modus operandi: Conjure up arbitrary and, from an accounting and economic perspective, completely nonsensical requirements that an investment ought to have:

  1. “An investment has to pay a cash dividend or interest.” False. If a company owns its office building then that’s clearly an investment. Ask any accountant or economist. There is no cash dividend but only an implicit non-cash dividend in the form of not having to make lease/rental payments, analogous to the implicit rental income that a homeowner generates.
  2. “An investment has to be passive, hassle-free and maintenance-free.” False again. Commercial Real Estate requires maintenance, IT equipment requires electricity and maintenance by highly trained and highly-paid staff. Airplanes consume jet fuel and require extremely highly-paid pilots and cabin crew to operate. Pretty much every investment category that’s counted in GDP by the U.S. Census Bureau (see table below) violates this arbitrary requirement.
  3. “The (principal) value of an investment has to go up (at least in expected terms).” False. Most investments, like IT equipment, machines, vehicles, airplanes, etc. will decline in value and have mere scrap value after their useful span of life. In fact, even some financial investments will go down in value over time, e.g., a bond purchased at above-par value.
NIPA Table 535
$3+ Trillion of annual investments, including residential housing, commercial structures, equipment, etc. None of this would qualify as an investment under the strict requirements that some in the FI community put forward! Source:

I even have a theory for why there is so much pushback to considering a home an investment: People in the FI community have become so enamored with their VTSAX that everything that’s not a Vanguard mutual fund or ETF, everything that’s not a passive vehicle paying a dividend or interest can’t be an investment. I wouldn’t be surprised if someone comes up with the additional requirement that an investment has to start with the letter V. So, to the folks who think that only VTSAX is an investment, here’s some food for thought:

What do you think is behind the VTSAX?

The answer: corporations that own capital (both physical and intellectual) in the form of buildings, machines, vehicles, airplanes, patents, etc. All of those are investments even though they may not qualify under your very narrow definition of an investment!

But I digress! Let’s crunch the numbers of the San Francisco condo I bought in 2008 and recently sold and why this investment was quite a bit better than even an equity index fund!


  • A two bedroom, two bathroom condo in a large 269-unit complex. Walking distance to my office, two blocks away from the AT&T ballpark (home of the San Francisco Giants, World Series Champions in 2010, 2012 and 2014!!!), walking distance to the new UCSF Medical Campus.
  • Bought in August 2008 for $832,500. The seller (developer) offered a lot of incentives including covering all the closing costs on my side. So, my net out-of-pocket expense was pretty much exactly the purchase price net of the mortgage.
  • Sold in January 2018 for $1,350,000 gross. Broker fee 5%, SF City transfer tax of almost 1%, plus some other smaller miscellaneous fees for a total of about 6%. Net proceeds about $1,270,000 before paying off the mortgage.
  • Along the way, I had four different mortgages, using refis to walk down the interest rate from 6.125% (ouch!!!) in 2008 to only 3.25% (from 2013 until the end).
  • Property taxes started at just under $10,000 and kept rising to about $11,000 per year. Welcome to San Francisco, where your property taxes alone are as high as the entire housing payment of a nice single-family home in the Midwest!
  • HOA dues started at $474/month for the condo association and rose to about $600/month in 2018. In addition, there was a $35/month HOA fee for the neighborhood association for maintaining sidewalks, parks, etc.
  • Insurance is relatively cheap for a condo. The whole structure is already insured through the HOA, so we only needed insurance for our own personal effects and appliances. Just a few hundred dollars per year!
  • Maintenance and repairs were minimal. All the major repairs to the building (roof, boiler, etc.) were covered by the HOA dues. For a pretty nominal fee, we hired a maintenance service to check the major appliances twice a year. We had a few dishwasher repairs over the years and replaced the microwave. Total cost over the years about $8,000.

So, let’s do some number-crunching:

Incorrect calculation 1: Point-to-point return net of transaction costs

That would be 53% over 9.5 years ($1,270,000 vs. $832,500), or about 4.5% annualized. Not very impressive. The S&P500 easily beat that return despite the Global Financial Crisis in between. But this calculation is incorrect. We didn’t put down exactly $832,500 in 2008 and we didn’t receive $1,270,000 in 2018. We had a mortgage, that reduced the downpayment in 2008 and also reduced the net proceeds we got in 2018. There were also tons of expenses along the way (mortgage payments, property taxes, insurance, maintenance and repairs). So let’s try again:

Incorrect calculation 2: IRR of the exact cash flows

Taking into account all the exact cash flows we get the following picture, see chart below. Uhm, that doesn’t look like an attractive investment. The downpayment of just under $180k plus the ongoing expenses put us almost $700k in the hole over the 9.5 years, and only the net sales proceeds (after transaction costs and paying off the remaining mortgage) brought us just barely above zero. A measly 0.26% internal rate of return (IRR) and $11k in the bank after 9.5 years!

Homeownership Cash Flows Chart01
This calculation can’t be right. It appears as though we just about broke even with this investment!

The picture improves a little bit if we factor in the tax benefit of homeownership. Because I was subject to the Alternative Minimum Tax (AMT), the property tax was not allowed as a deduction. But the mortgage interest was entirely deductible under the AMT at a marginal tax rate of close to 50% (35% federal plus 10% California). Still only a gain of about $121,000 or a sub-3% IRR over the 10 years.

Homeownership Cash Flows Chart02
If we take into account the tax benefit of homeownership we see a slight improvement. But this still doesn’t look like a great investment!

What are we missing? Very simple: we are missing the fact that we lived in the unit for free. So, in other words, the calculation above is rigged to wildly underestimate the investment return. The calculation so far is analogous to an airline buying a plane, maintaining it, flying it around the country completely empty without any passengers (!), then selling it after 9.5 years. In other words, counting only the expenses along the way and none of the benefits. It’s a miracle that we even made $121k because the airline flying around with an empty airplane would have lost millions over the years!

So, let’s do the calculation the right way, factoring in the implicit rental income

Correct Calculation: IRR of the after-tax cash flows taking into account the implicit rental income

How much was it worth to live in San Francisco for free for almost 10 years? A lot! San Francisco is one of the most expensive metro areas in the country! So, let’s factor in the implicit rental income; I assume that the condo would have rented for $3,000 in 2008 and $5,000 in 2018, exponential growth in between. The $5k figure is actually the precise monthly rent we paid to the seller to stay for another two months after the closing and the $3k figure is what I remember was the going rate for comparable rental units I toured when I first moved to SF in 2008. So, we earned an implicit income of over $440,000 over the 9.5 years. Sounds like a lot but that’s still an insanely low 4.3-4.4% rental yield! But with a little bit of leverage that 4% rental yield makes all the difference in the IRR, see chart below. We now gained a total of $563,000 from this home investment and generated an IRR of just under 16%. Not even the S&P500 returned that much over the last 10 years (11.2% total return p.a. between 7/31/2008 and 1/31/2018).

Homeownership Cash Flows Chart03
Now we’re talking! The implicit rental income makes all the difference!

What if a renter had invested the differential cash flows in the stock market?

This is an interesting exercise that Brad suggested during the ChooseFI podcast. Instead of comparing the IRR of the home investment with the S&P500 return one can also do the following thought experiment: What if we had not bought the apartment? What if we had instead invested the downpayment in our portfolio and then also all the incremental cash flows. All the while paying rent, of course, to make this an apples-to-apples comparison! Early during my homeownership tenure owning was still more expensive than renting (see how the cumulative cash flow line drops from -180k to about -200k in the chart above). So, those additional savings would have also added to the investment portfolio. But around 2013, owning became cheaper because rents were increasing and the mortgage payments were now lower (thanks to a perfectly timed refi in January 2013). So those incremental payments would come out of the renter’s portfolio. And finally, the roughly $700 net proceeds of the home sale will come out of the renter’s portfolio in January 2018. Let’s see if the renter would have been able to stay ahead of the homeowner. See chart below:

Renter vs Homeowner Portfolio
What if a renter had invested the downpayment and all incremental cash flows in a 60/40, 80/20, 100/0 percent stock/bond portfolio? He/she would have fallen behind the homeowner by several $100k! Homeownership was a better investment than stocks and bonds!

Ouch! The renter would have fallen behind by several hundred thousand dollars! Depending on the equity share between $229,000 (all equities, no bonds) and $318,000 (60% equities, 40% bonds). Also, notice that this calculation is actually still way too optimistic for the renter:

  1. The renter would have to pay taxes on the dividends along the way (taxed at 15% federal, 10% California State, 3.8% Obamacare) and the full ordinary income tax on bond interest income (35% federal, 10% California, 3.8% Obamacare). The renter would also be responsible for paying capital gains taxes in 2018. As homeowners, we were able to generate the 16% return tax-free because none of the implicit rental income was taxed and our capital gain upon selling was below the $500k exemption for a married couple (both federal and CA that exemption value).
  2. As a homeowner, I had the advantage of keeping a Home Equity Line of Credit (HELOC) that we could use as a low-cost emergency fund and to smooth out cash flow spikes in general.

So, taking into account all the costs and benefits, owning an apartment had a pretty impressive return. The relatively low implicit rental yield, a home price appreciation slightly higher than the rate of inflation, relatively low maintenance and taxes (as % of the price) and a bit of leverage generate an IRR of almost 16%! Pretty good!


Just to make sure, I’m not a spokesperson for the National Homebuilders Association, so, here are some important caveats:

  1. Owning a home can’t be a good investment every single time. If the rental yield and the home price appreciation are too low you will certainly get a sub-equity expected return. Homeownership also tends to be a bad investment when the holding period is too short. We need to spread the sizable transaction costs over a long enough time span, say 10 years, to make this work!
  2. “Don’t get high on your own (housing) supply.” I used this phrase in last year’s post to show that there is one subtle distinction between our good old VTSAX investment and a home: Investing in twice as many shares of an index fund is twice as good. “Investing” in a home twice the size of what you really need is bad. But that doesn’t preclude a home from being an investment any more than an airplane being an investment if an airline owns twice as many airplanes as they really need.
  3. So what, we made about $200k extra by owning rather than renting? It doesn’t make us much more affluent than we already are. We would have still been able to retire this year even had we been renters. The bulk of our net worth still comes from financial investments! Homeownership isn’t a requirement on the path to Early Retirementbut it may help at the margin!

We hope you enjoyed today’s post! Please leave your comments and suggestions below!

Picture credit: Pixabay (not actually our former home!)

105 thoughts on “My best investment ever: Homeownership?!

  1. How much of this do you attribute to lucky timing and bring able to ride the ever increasing housing/rental prices in the Bay Area?

    1. The timing was somewhat lucky. But not that lucky. We’re talking about 4% price appreciation per year, a little above the inflation rate. Much better timing would have been to buy in 2009 or 2010.

  2. @Dave
    As a Bay Area homeowner, it’s certainly lucky to a degree. Then again the Bay has had a combination of good jobs, good climate, and limiting geography (in terms of available land to build on) since at least the 60s, so as we did in 2004, one could look at the factors driving home values here and assume those trends would continue.
    Still goes back to location location location – where BigERN had his condos became one of the hottest areas in SF the past 10 years.

      1. Thank you for this post! I never thought about homeowner gets to live there, rent-free and that needs to be incorporated in the calculation.

        Where we live (Seattle) starts to resemble Bay Area’s trends. Housing/rents increase at a rapid pace. Not as expensive like SF yet, but riding home/rental ownership through the 2008 crash, we definitely see the difference.

        There’s always the fear of 2008 will happen all over, but over a long period of time, owning your home, along with the low mortgage rate, and have your PITI comparable to local rents (don’t go crazy overbuying your house), I think it’s a safe bet. After all, you will always need a place to live.

        I heard you on ChooseFI podcast, great episode! What do you think would be the good ratio for home ownership in early retirement? (based on net worth or take home passive income)

        1. Thanks! Yes, Seattle is definitely a mini-Silicon-Valley. No wonder prices go up there!
          I wouldn’t want to get pinned down on a specific home/Net-Worth ratio. Depends on the location. Also, if the home value appreciates and suddenly becomes 50% of the Net Worth, who cares? As long as the other 50% generate enough passive income to support your life and pay for maintenance and property taxes, even 50% should be OK. 🙂

  3. The way you have compared the home to an airplane is instructive. It is good to understand how corporations make money on expensive depreciated equipment.

    The 500K capital gains exemption can be a really nice incentive for owning vs renting. I wonder if it is worth the transaction costs to sell and purchase another home when your gain exceeds that amount. Just this year I helped 2 family members do taxes for the sales of homes in San Jose that were held for 30 and 50 years. In both cases the tax bill was horrendous. It made me think that the 500K (or 250K for singles) exemption favors a repurchase after a certain number of years.

    1. It depends on what you want to do with the money. You can do a 1031 exchange and realize bigger gains. You could also never sell the place and give it your heirs who will reset the cost basis at that time. Especially in CA there is an incentive to lock in the low property tax (Prop 13) and let the gains run.
      For us that wasn’t attractive because of the low rental yields, though…

  4. Big ERN (sorry, not able to address you with your “real” name just yet),
    Another great post!

    Every so often, some of the “experts” in DC float the idea of taxing “imputed income” or “imputed rents”. Interesting to see this concept applied to look at the issue from the homeowner’s point of view!

    The interrelated aspects of financial decisions are torturing me as of late. With respect to home ownership, there are other imputed cash flows that can further add value, but are dependent on an individual’s situation. In our case, as our our eldest child neared college age, we attempted to take advantage of stashing almost all of our taxable investments into a (rather large for us) home for a few years so that the assets would not have to be declared on the FAFSA when applying for financial aid for college. Since primary home equity is one of the types of assets not reported on the FAFSA, having lots of home equity substantially lowered our reportable assets and dramatically lowered our EFC (expected family contribution).

    We failed in our mission to get substantial financial aid, but for other reasons than our “cash stash dash”. Namely, our reportable income kept jumping up due to unavoidable windfalls from other investments (yep–a real first world problem!). Had we been “successful” (or “less successful” or “unsuccessful at capturing these windfalls” ?!?!?!?!) at lowering our income AND reportable assets, it could have added tens of thousands of dollars in imputed income to home ownership thereby providing a nice boost to the IRR!

    1. Thanks Dr!
      I’m also surprised that they haven’t floated that idea of taxing homeowner’s implicit rental income more seriously yet. One reason might be that some of the biggest class-warfarers have so many expensive luxory vacation homes… 🙂
      Good thinking about minimizing income before FAFSA kicks in (though it doesn’t always work as planned). It will be a few more years until we face that challenge, but it’s on my mind, for sure!

    2. But FAFSA only works for public schools…private schools use CSS which captures home equity, retirement account balances, equity in private businesses, etc. (i.e. no hiding assets from the CSS)

      You could always tell your kid to sign up for the Army on a 2-year contract. 🙂

      As a veteran, they’d be independent under CSS/FAFSA and qualify for in-state tuition at any public school in the U.S. (not sure how GI Bill works on only a 2-year contract)

  5. Two other ways to consider this investment are:

    — Buying stocks on margin at the same leverage as your mortgage (not likely to be permitted under margin rules).
    — Buying stocks at the risk parity to your house (leveraging them only as much as required to get the same volatility of principal).


    1. You can buy stocks on margin at the same leverage as your mortgage. My broker lets me margin up to ~5.3x, which would be the equivalent of an 18% down payment. Of course, that would put you right at the limit and facing a margin call if the market drops 2%.

      Comparing housing to stocks is always hard to do apples-to-oranges. It is sort of unfair to use tons of leverage for one and then compare it to unleveraged returns for the other. On the other hand, the reality is that basically no one applies mortgage-levels of leverage to their portfolio so it isn’t exactly realistic to model it that way. So you’re being unfair no matter which way you run the numbers.

      Plus the leverage on a mortgage isn’t remotely like the leverage from a margin account.

      (You don’t need to run the numbers to guess that using 5x margin on the S&P 500 from 2008 to 2018 would have crushed housing.)

        1. On the other hand, maybe one lesson is that people should be more willing to use (reasonable; what is “reasonable”? 25%?) amounts of leverage with equity if they’re so willing to use it with housing? I dunno. It is something I’ve been pondering more recently.

          (I live in Vietnam where the vast majority of people don’t use leverage to buy a house; it is all cash all the time or perhaps the builder offers a 2- or 3-year instalment plan. So “have a mortgage to buy property” is definitely not some universal constant.)

    2. Well, I would be careful about buying stocks on margin with the same leverage ratio as a home. Stocks have built-in leverage already and tend to be more volatile than home prices. The exchanges are also much stricter with margin calls. You can have a home that’s temporarily underwater but no bank will foreclose on you as long as you make the monthly payments

  6. Big ERN, (I’m so used to this acronym:-))

    This is a great piece to challenge others who are dead set against the home ownership. I liked that it was emotion-free. Owning a home is not for everyone and the return on this investment will be drastically different depending on location and timing of the purchase. I don’t think we will make a return on our house because we bought an ordinary new construction house in an ordinary part of our city in 2003. We got a small mortgage that was paid off within 5.5 years. Was it a good decision to pay off early? Probably not considering that our mortgage was 4.75%, but we were also new to saving for retirement and knew little to nothing about stock market or how it works. So, the spare money went against mortgage. Also, we came from Europe, where majority of people think stock market equals gambling. Since we paid the mortgage off, the spare money has been ‘spent’ in the stock market :-).

    However, OTOH, one of my acquaintances who bought a more expensive house but in a very desirable old neighborhood when its prices were way down (I think they bought during the dot com collapse) will perhaps come out as nicely as you, Karsten, when they sell it many years later even after accounting for the renovations, taxes, and other expenses. For them, even the 30-year mortgage makes sense and she’s told me on a few occasions that the house is a big part of their retirement savings seeing how it has already appreciated. If I’m not mistaken, the house was bought for $250-270k in 2000-2001 and now it should be worth around a million if not more. Again, fantastic location, very desirable old neighborhood, and great timing of purchase when the house market was quite down here.

    1. Thanks! I noticed that everybody who volunteered for the case studies was a homeowner. There is an advantage to getting that implicit tax-free income!
      Wow, turning 250K into a million and living in that neighborhood for free would be an astronomical return! Probably North of 20%! But that’s luck. Most people can get a pretty decent return on their home with just 2% appreciation (=inflation) and a high enough rental yield!

  7. Puts a smile on my face. I never looked as my own house as investment. It is true that in normal conditions it should bring some gains ( we had no down payment, only transaction costs of about 10 pct)

    1. Thanks, ATL! If the holding period is long enough this should still work. Though I’m not sure about how the rental yield looks in Europe. So many years of zero and below zero interest rates might have done a trick on the rental arithmetic. 🙂

  8. This is the best breakdown I’ve seen yet of the home ownership question. The biggest part is the buy and hold aspect (it’s hard to find a home that’s not a good investment if you hang on for 20+ years), but drilling down into the what if it had a renter aspect was something I hadn’t considered. Thanks for taking the time on this one.

  9. Great post. I listened to that voicemail you mentioned on Choose FI and I must say my experience has also been very different. I tracked down your Google sheet on real estate investing and punched in my numbers. Holy moly, our home of 19 years in Arlington Virginia has pumped out a 33.03% IRR using your spreadsheet. The sheets calculations work well. I put in the original purchase price and the home value and mortgage balances track close to current mortgage balances, area rents, and home value on Zillow. I’ve included a link to my calculations below. The two biggest things that jumped out at me when it comes to real estate are time and location. Like San Francisco, we’ve been very lucky with property value appreciation in Arlington Virginia. I’m glad you used a more traditional US example in your sample spreadsheet. The other element is time. Over 19 years, I’ve run a business and raised two kids in this house and it’s hard to put a value on that. Once both of my kids are out of the house will probably put this one on the market buy another one.

  10. You say you didn’t get lucky by getting Facebook stock early on, but you used leverage to invest in SF real estate in one of the biggest price booms. Compare SF house prices since 2008 to various other cities ( You’ll see that SF was really an anomaly. You got really lucky!

    Also, many apartments in SF are rent controlled. My rent is basically the same in real dollars as it was when I moved in 8 years ago. At this point, buying a house would probably not be a great investment … for me. It just seems like you cherry-picked an example that worked out very well. This is just as misleading as Millennial Revolution comparing buying a house to renting a small apartment and saying home ownership is a scam.

    Anyway, I am in favor of owning when you plan to be in the house for several years and other factors (e.g. rent/price ratio) are reasonable. But this post just feels like hindsight is 20/20. Maybe you’ll follow up with a post discussing the different factors and the regimes where home ownership is likely to be a good investment and regimes where its better to keep renting.

  11. “Didn’t have any lucky breaks…”

    You’re so full of it. Bought a house in SF in 2008. That’s about as lucky as one can get. Renders the whole article useless.

    Just get lucky kids, that’s the secret.

    1. That’s the worst comments I have read in a long time. I said “We didn’t have one lucky break that made us rich overnight.” 9.5 years is not overnight.

      ALso, if you had read the article until the end you would have noticed that I stressed that this lucky break is responsible for only a small share of our net worth.
      Besides, buying in 2008 was not ideal. The trough in the SF real estate market was 2010. In fact, moving from a safe government job at the Federal Reserve job to go work in finance in SF in 2008 was not lucky but gutsy. Do you know how many firms in finance failed that year or laid off workers? If I made $200k extra on the real estate investment I certainly deserved every last penny of it.
      Also, check my other article and the Google Sheet. You can get double-digit returns with a basic starter home in the Midwest with only 2% annual appreciation. Just though the rental “dividend.”

    2. I don’t think it’s lucky, and certainly not lucky overnight, plus the gains are a small part of the author’s net worth.

      I bought foreclosed Bay Area properties in 2012, that are now worth 350% their purchase price, now that’s lucky!! 2008 wasn’t anywhere near the bottom.

  12. Honestly the reason I don’t consider my home and investment is I have no plans to sell it to survive.

    Instead I view it as a hedge on housing costs. It keeps my costs in that area fixed, which holds other values.

  13. As mentioned above, I would love to see the “horse race” use a reasonably leveraged margin portfolio to make an apples-to-apples comparison.

  14. Housing can certainly work but as with all things – it depends on location and the market you’re in. In my state, houses are pretty much flat since 2008 and I’m in a state with huge property taxes so most people were probably better off renting given the stock market returns in that time frame.

    1. True. But in a lot places where real estate has been flat the rental yields are quite high. It doesn’t matter whether you get the return through appreciation or implicit rental yields. Thanks for sharing!

  15. I bought my two bedroom condo at a point where the carrying costs with 20% down were the same as renting a one bedroom apartment and I paid zero closing costs. That was six years ago and the place is now worth 2x what I paid for it. Your spreadsheet shows I have seen about a 31% IRR, which just seems insane though I supposed the value doubling in six years also is. No plans to sell at the moment – it’s in a well-valued area of town and we don’t need more space. I’ve now refinanced twice further with no closing costs the first time and $295 this second time. We have ten years left on the mortgage and will probably pay it off in five years when the rate adjusts again. My husband and I were talking last night that buying this place was probably one of the best financial decisions I’ve made, with contributing early to retirement accounts second. Thanks for sharing!

  16. Love the detailed assessment for your housing example, you seem to have got it right (by accident?) on this one. Glad you added the caveat at the end too, those are quite critical to put this post into the right context.
    On this side of the pond, this example might have also worked in Amsterdam or Utrecht, but for the majority of the rest of the country it would not have applied over the same period (some houses are still not, or only marginally, higher than the levels around 2008). Unless you are in a massive growth market, it’s likely better to not see your house as an investment and put your money elsewhere.
    That being said, it’s not a bad thing to invest your money in various different assets (ready stocks, bond, real estate and more). You did give me some ideas for future posts and assessment on real estate, thanks for that!

    1. It’s dependent on factors that simply don’t exist in the rest of the U.S.:

      1. Significant geographic limitations.
      2. Stringent land use limitations (“multi-family, higher-density housing? NIMBY!”)
      3. In California first mortgage loans are non-recourse, so one can toss the keys on the kitchen counter and walk away without worrying about a deficiency judgment (can’t do that in most of the U.S., or anywhere in Europe IIRC)

    2. Thanks!!!
      Well, if the rental yield is high enough then I wouldn’t need appreciation. But as I have surmised above, I wouldn’t be surprised if in Europe rental yields have also been pushed down due to low policy rates for so long. So, the homeownership=good investment equation may not hold everywhere in the world. Very true!

  17. Great and thought provoking post ERN. I reposted your post in the London FI Facebook group – lots of healthy debate going on as a result! I also sent it to my boyfriend who is an Aussie. I have been trying to get him to read the various FI blogs I follow for ages with no success. I got him with this one though because the Aussies LOVE their property – see Sydney for details 😀

  18. I think buying a home is a terrific investment. It’s a form of forced saving. You’re very lucky too. The Bay Area has been a great for real estate owner over the last 10 years. Our condo hasn’t fared as well. We purchased in 2007 and the value just recovered recently. At least we built some equity. If we rented over the last 10 years, we’d seen a pretty crazy hike in rent.

    1. Very True! I appreciate that forced savings aspect, too! Helps both the FIRE and non-FIRE crowd!
      Even if the property doesn’t appreciate much, the home equity increases because the mortgage principal is paid down! And then the saved rent is the cherry on top!
      Thanks for stopping by, Joe!!!

  19. I find major issues with the dealing of the Home-ownership-investment-problem.
    The author of the article starts by presenting the usual arguments for why home ownership is not an investment. He then continues very satisfactory to disprove them one by one, showing that they are indeed arbitrary and could be easily dismissed with.

    The problem I find lays in the fact that the author fails to present a case, or a definition, for what is, or why is home ownership an investment. Now, this wouldn’t be of any importance either for me or for the rest the article if it were not for the fact that after rejecting the former criteria for what is an investment, he just continues to use that term without answering the question “So what is an investment?”.

    Disproving the arguments of the “Not Investment Side” does not in anyway prove that home ownership is indeed an investment.

    Reading the linked articles and the present one can give a few hints to what the authors think counts as an investment:
    1. It needs to at least hold its value through time.
    2. It needs to pay out either implicit or plain old dividends, i.e, pay for alternative cost of not buying it and renting instead.

    I wrote the first one because I truly think that were the house to decline in value, no one would ever call it an investment. It would be much easier to present it to oneself as consumption. There is no need to disprove the statement, just thinking about stocks makes it look ridiculous.

    The latter is harder to tackle. At first sight this indeed makes sense. One could say “by buying the house I am paying myself rent. Had I not bought it, I would pay somebody else.”
    The problem is that this could be applied to just about everything.
    Let’s say I am in need of someone to guard my estate. I could either employ (rent) a guard, or I could buy a dog. Assuming both can preform the same job to my satisfaction and would cost the same for the guarding period, I could say that the dog is an investment because it pays me the wage of the guard. Had I not bought the dog, I would pay the guard his wage and at the end of the period would be left with nothing. It is also possible to assume that the dog will have babies which I could sell to someone else.
    So is the dog an investment?

    No! If we recall what is consumption and what is saving, we could very easily see why.
    Consumption is satisfying present needs. Saving is the forgoing of present satisfaction for future satisfaction. Investment is just that mode of saving in which capital is being employed in (hopefully) productive enterprise. Neither does home ownership nor a dog count as an investment with the above given definition. It is present consumption. By buying a house one does not forgo present satisfaction. Had one a mortgage on the house, it is even possible to say that one is consuming at the expense of future self.
    What do you think?

    1. Thanks for stopping by.
      I don’t have to “prove” that a house in an investment. Single-family homes are considered an investment by the U.S. Census Bureau. The implicit rental income is considered income by the U.S. Census Bureau. If you don’t accept that then I wish you best of luck and “bless your heart” as I always said when I used to live in the South.
      I’m sorry but the example with the guard dog is too whacky for me to even address.

      1. Thank you for the answer.
        I completely accept that the U.S government labels single-family homes as investments.
        But this was in no way the underling question. Were the FI community to discuss the bureaucratic definition of an investment and a home in that regard, it would be only a matter of checking against the state’s laws. If you don’t have to “prove” that it is indeed an investment because we have a state given definition, you also didn’t have to disprove those arguments at the beginning of the article, you would only point to regulator and conclude from there that they are completely missing the point.
        I just wanted to show that the place you live in is not an investment but consumption in the economic sense, what the state thinks of it is of no importance.

        I love reading your blog. You are doing a fantastic work, keep it up!

        1. Thanks! But again, the fact that I consume housing services does not invalidate the housing investment. The U.S. Census Bureau treats owner-occupied housing as an investment and the dividend is consumed by the same person who holds the property. So one does not rule out the other. So, the level variable (house) is an investment and the flow variable (housing services) is consumption. All according to the U.S. bean counters.

  20. Excellent article, as always big ERN 🙂

    one question: in a city like SF, with such a hot market and smart people able to buy/sell houses on their own, why the hell one has to pay 5% broker fee? We’re talking of 65k USD, what’s the service offered? Can’t one sell a house without brokers?

    1. The broker fee definitely stings. I was thinking about going the “for sale by owner” route or some other lower cost alternatives. But in the end, we succumbed to the pressure. It was my impression that if the buyer uses a broker we’d still have to pay the 2.5% share of the buyer side.

  21. “I even have a theory for why there is so much pushback to considering a home an investment:”
    Let’s assume housing is a 100% pure expense, not an investment (it’s actually hybrid of the two). Many in the FIRE community conveniently choose to ignore the risk of their largest cost-of-living expense doubling over time (even as a percentage of their rising retirement portfolio). The mere act of fixing and guaranteeing one’s largest living expense represents a huge reduction in the risk profile of the overall pre-AND-post FIRE financial position. Yes, moving to a cheaper location is an option – as long as you are not too old and too sick.

    1. Great point! Right now, rental inflation is one of the strongest components in the CPI, regularly outpacing overall CPI by a percentage point or two! Not having to pay rent is a huge advantage!

  22. Good analysis, Big Ern!

    I’ve done a rough-in on my house using your methodology in a fast-growing city in “flyover country” and it has not been a bad investment either, and I agree that rent saved is part of your return.

    I’ve generally avoided the brain damage of going down the rabbit hole of investment vs consumption, but aren’t they just a continuum? You save and invest to consume later. If you don’t consume it, your heirs will. I’m a CPA, and I’ve always just put items on my balance sheet if they have a useful life beyond year end, and can be easily valued. So I include my car and other major depreciable assets. If your car gets you reliably to work, and you save on uber or taxi costs (no good public transportation here), then it should be an investment because it reduces your cash outlay for future consumption. Plus, you can always monetize it by selling. The same can be said of many other assets. I just stick them on my balance sheet, and the annual depreciation will tell you whether or not they are a good investment. So a Honda Accord is probably a good investment. A BMW, may not be. But if someone really enjoys driving their BMW and understands the annual depreciation cost, it may still be good consumption for them. People talk about paying for experiences and go on exotic vacations, but I know some people that really enjoy paying for the experience of driving a top end car, and I can’t be critical if I’m going on a nice trip to Europe. Different strokes.

    On another topic, there was a post above talking about some Washington types proposing taxing imputed rents. I recall reading articles about that in graduate school written by Treasury Department theorists. Those articles used to both anger and frighten me, because where would they stop? If I cut my grass, do I have income equal to the fair market value of a lawn cutting service? What about house cleaning? What about DIY home improvement projects? Imagining how they might enforce that can become quite dystopian. Luckily, I think administering it would be a nightmare (everyone would be fighting with the IRS over fair rental value of their unique home, and an already resource-strapped agency would probably implode). Plus, the sound byte would so be terrible (“taxing seniors living on a fixed income on phantom income just for living in a house they worked so hard to pay for”) that it probably won’t fly for a long time. Your point about legislators having expensive homes is a good one too.

    Keep all the great posts coming! Congrats on finally retiring and enjoy the first weeks of a spectacular second act!

    1. Thanks! Great analysis! I doubt that Washington will ever tax owner-occupied housing rents. As you said, the sound bytes and optics of this would be horrible. Too many sob stories! So, homeowners should be safe for the foreseeable future. 🙂

        1. Oh wow! I didn’t know that. So, there is a precedent out there, folks. Maybe this could come here too if the government gets really desperate for money!?
          Thanks for sharing!

  23. ERN/Karsten

    Thank you for another awesome and thought provoking post. I am very happy to hear that your home purchase turned out to be a great investment.

    I think one of the problems that many have with this type of investment is that it is so hard to generalize your experience to other times/markets. One reason you did well is imputed rent. Another may be (housing) market timing. A third may be the due diligence you did correctly predicting the future market for your home based on your location. Finally, the issue of leverage which has already been raised – levered investments should magnify losses or gains.

    In the rest of your planning, you do extensive modeling with cohorts of various retirement months and the S&P and bond market averages to test the 4% rule.
    What would be useful (but probably impossible) would be to look at various buy/sell holding periods in one or more markets over many months and see what IRR would look like on average for different cohorts. I’m not sure your IRR would hold up – I bet it would be above average for many time periods even within the SF market for 2BR apartments.
    I think the main problem is that real estate is a much more inefficient market than equities, and that things like experience, local knowledge, local tax rules carry a lot of weight and make people nervous.

    So your readers can benefit from your points about housing being a possible investment (if you choose to buy) but have no real way to decide if any of the results could apply to their own situation without having to gain a lot of local knowledge, apply personal circumstances, figure out their tolerance to having debt which must be paid, etc.

    1. Good point! Unfortunately, I don’t have enough time-series data to do the exercise with different cohorts. But I think there are two reasons why I can actually generalize this finding to the broader economy and over other time periods:
      1: Research from the San Francisco FRB, though, claims that in the U.S., indicates that Real Estate is a pretty good investment over the long-haul:
      2: The attractiveness of RE is not necessarily coming from the price return but from the rental yield. So, if you can get a 10% rental yield in the Midwest you need zero appreciation and still get a phenomenal IRR on your investment.

  24. Best investment I ever made was a summer home in the Utah mountains. IRR practically nothing. The Real Return was in enjoyment and peace of mind. While the RR may not be quantifiable, it was huge.

  25. Interesting analysis, but how do the numbers work out if you assume the renter was in a rent-controlled apartment, as is the case for many residents of SF?

    1. If you’re in a rent-controlled apartment and you stay there long enough you’ll probably beat the home “investment”
      But I don’t know many people SF who live in rent-controlled places.

  26. Another classic Karsten. I think your impartiality makes you the authority on this topic. I think you are right not to use leverage in comparing the equity portfolio. I think people taking on leverage specifically to invest in the markets are in the minority. Congrats on your successful investment.

  27. One question for you: In your example of how you came out ahead of the renter, you are now effectively homeless.

    Unless you work into the equation that you can now live for free? You would have to come up with another down payment on an equal house which is now worth 1.3 million.

    If you state that you will buy a cheaper house, are you not comparing apples to oranges now?

    I don’t get how something can be considered an investment if you can’t sell it and continue to live. I have a business that I can sell and not have to buy another business. You can’t say the same for my house (which I own, so I’m not anti-homeownership). I think that is where you plane example or even investment property breaks down.

    1. The calculation uses the differential cash flows between a renter and a homeowner. After selling my condo I am just as homeless as the renter.
      Or I would have to come up with a down payment for a new house (in a cheaper locale) just like the renter.
      But for the duration of owning a home I can calculate the IRR on that investment.

      “I don’t get how something can be considered an investment if you can’t sell it and continue to live.”
      That’s another false definition of an investment. If Delta airlines sold all its airplanes it would be out of business. Does that mean than an airplane is not an investment?

      1. But the renter has a place to live with $450,000 in the bank. You are homeless with $120,000 in the bank.

        What is the point of implicit income if you can’t actually do anything with that money? The implicit rental income is just imaginary money. At least Delta can make real money with their planes and use that money to buy new planes in the future.

        You can do what ever accounting tricks you want, but in what way is the home owner in better shape then the renter?

        1. No, the renter has $450k in the bank. The homeowner has about $680k in the bank. Not $120k. Not sure where this $120,000 number came from. I prefer $680k tax-free cash over $450k with taxable capital gains. The homeowner comes out ahead of the renter by between $229k and $318k, depending on the asset allocation.
          Look this is my example. I put the numbers together. They are consistent and comparable. You are the one with the accounting tricks, voodoo economics, confounding and confusing the different capital gain amounts.
          And again: Income is income. A dollar saved is a dollar earned. In fact, the implicit rental income I generated from the apartment is even better than earned income because it’s not taxed.

  28. Really interesting article! I agree with the math wholeheartedly. The only issue I take with it is the logic devoids the use of the word expense. By this logic everything is an investment instead of an expense. Every meal I eat is now an investment in a non-cash dividend of my health or am I missing something and there is a distinction between an investment and an expense??

  29. Maybe I am missing something, what is the significance of subtracting 700K at the end of the rental period? Isnt this just a total net worth comparison using the 350Kish numbers vs 563K?

    1. Again, I’m doing an analysis where I look at the differential cash flows between renting and owning. The renter gets ahead in the beginning by not having to fork over a large six-figure down payment. But you’ll also have to subtract the home equity of the homeowner at the end. Otherwise, it’s comparing apples and oranges. 🙂

  30. This is such a well written article! Thanks so much for the time and energy you took to put it all together. The only way I would have liked it more would be for you to have written it with a Texas slant! Great post!

  31. Reblogged this on Denton County and commented:
    Well done! Follow the trail of breadcrumbs and homeownership IS a great investment. It takes effort. Check out this post to examine your own situation! Thanks so much to Karsten for blogging at Early Retirement Now!

  32. Hi. I agree with you. I live in Australia and write on about our journey towards financial independence. I would like to share here why for us was our residence best investment ever.

    *House is on 3 levels with bottom level is old laundry converted to nice 30sqm studio. Middle level used to be inhabited by previous owner daughter and is completely self contained. So we lived on the top in 2 bedrooms duplex like space, let out bottom 2 levels and collected about USD700 weekly rent while living there in own 100sqm selfcontained flat.
    *Property value more than doubled in last 10 years.
    *Currently we are not living there, so all 3 levels are separately let out.
    *On the top of it we are enjoying depreciation tax benefits decreasing our tax bill
    *We have line of credit against this house which allowed us to buy our current small acreage property on Sunshine Coast , Queensland
    *This line of credit is only partially drawn so we do not have to keep any emergency funds as we could theoretically use it.
    *We loved living there as in our own place. Renting in Australia is not generally nice experience. You are not allowed to change anything in the house and your have agents coming for inspection every 3 months snooping around your living space.
    *Did I mention it is only 10min to the beach?!

    These are my 2 cents.


    Mr Why925?

  33. Great Article! I think the leverage conversation in the comments is really important and not quite resolved. It seems both true that you can’t leverage into equities like a house (“what is reasonable leverage?”, “what about difference in margin call exposure?”) but also that it’s not quite apples to apples to compare levered and un-levered assets. Maybe another approach would be to risk-adjust the housing returns given the leverage? Take an average (or integrated average or whatever) leverage multiplier throughout ownership and combine with e.g. volatility of Shiller housing index, or an SF specific index, or whatever you think is appropriate, then compare that to the volatility of the relevant stock/bond portfolios. Then we could say something like “levered housing return including implicit rent beat stock/bond portfolio return with less leverage-adjusted risk” ?

    1. Thanks!
      Corporate equities are already leveraged as well. All corporations I am aware of use debt to juice up their ROE. Indeed for the same reason you want to use leverage in housing: the ROA is low with low volatility, and to get to an acceptable ROE with a still acceptable risk, you simply lever up.
      So the leveraged real estate vs. S&P500 is indeed an apples to apples comparison.

      1. Great (and granted!) points on ROE v ROA and existing leverage in corporate equities. So is it correct to say you’re making an implied statement that individual real estate levered at regular mortgage amounts is comparable risk to sp500, and thus the returns can be compared apples to apples (or at least that this was the case for your particular situation)? If so, is there an argument for the equality of the risk?

        If the risk isn’t the same, then the sharpe ratio discussion in seems pretty relevant. Reading that I wondered about justification for “But even then the Sharpe Ratios for housing are still really attractive in most countries [for an idiosyncratic single house],” – do we actually have any idea about the shape of the idiosyncratic risk/can we otherwise bound it? Also, I think the sharpe ratio assumes you can lever at the risk free rate… if you can’t (like with a mortgate which is more expensive than the risk free rate), the sharpe ratio will actually decrease with leverage I think?

        1. All good points. One would use the Sharpe Ratio calculations loosely, because you don’t get leverage quite at the cash rate. But the general idea still works.
          And it’s also useful to lock in borrowing rates for longer than a few days/weeks/months. Even if that costs a bit more.

          House price volatility is not easily observable, because you don’t observe the price of your individual house regularly. Only when you sell. There are some researchers that estimated 8-10% annual idiosyncratic volatility:

          See reference 4 in my paper: ] Calhoun, Charles A., (1996): “OFHEO House Price Indexes: HPI Technical Description.”
          OFHEO paper.

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