My House Was A Lousy Investment (Or Was It?)
As we get closer to moving into our new home (and selling our existing one) I decided to look back on the financial return of our home purchase. I wish I hadn’t. On first glance, I think my house was a lousy investment.
We haven’t put our house on the market yet, but we will soon and I expect it to sell for somewhere between $500,000 and $549,000 (the range of outcomes has widened, especially to the downside, as the housing market slows down).
If it sells for $524,000, we’ll make $100,000 over the $424,000 that we initially paid for the house back in 2011. That sounds okay, but it represents just a 1.94% compound annual growth rate. Oof.
But it gets even worse from there.
Phantom Costs of Home Ownership
The year after we bought our home we spent $7,500 on landscaping the front and back yard, and putting up 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 (unrecoverable) costs such as property taxes, insurance, and maintenance.
Thankfully, the brand new house didn’t cost much in terms of ongoing maintenance over the last 11 years. I’m going to be generously low and put this 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 for insurance ($17,600). That’s another $61,600 in total unrecoverable costs that we paid as homeowners.
We made mortgage payments, on average, of $1,600 per month. Over 11 years that adds up to roughly $211,200. I’d estimate $50,000 of that went to interest costs and $161,200 towards the principal.
Finally, there’s also the opportunity cost of capital – the $88,000 down payment we put towards the house purchase back in 2011.
What If We Rented and Invested the Difference?
If we had invested that amount in a globally diversified portfolio of stocks and earned 8% per year (not unrealistic, considering the S&P 500 gained 14.4% from 2011 to 2021) that $88,000 would turn into roughly $190,000. Call it a $100,000 opportunity cost.
Let’s say we rented a house for the last 11 years, paying the equivalent of our total mortgage payment each month in rent. We invested our initial $88,000 lump sum, plus another $550 per month that we saved from not having to pay property taxes, insurance, and maintenance. We’d end up with about $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 that in cash under our mattress. We’d have $335,000 in savings and investments today had we rented and invested / saved the difference.
Instead, we put that $88,000 towards a house. We put an additional $40,000 into the house to finish the basement and landscape the yards. And, we paid another $72,600 in phantom or unrecoverable costs over the past 11 years, plus another $50,000 in interest costs.
Not So Fast
To counter that, the majority of our mortgage payments went towards paying down the loan principal and so we have that $161,200, plus our initial downpayment of $88,000, built up in home equity. We can’t forget about that so-called forced savings.
Finally, we should include another expense – $20,000 in realtor fees after the sale of our house.
By my count, if we sell the house for $524,000, pay the realtor fees 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’d end up with about $335,000.
Related: Is Renting Throwing Money Away?
In other words, in both the buying and renting scenarios our starting position was $88,000 in 2011, plus another $40,000 of capital invested between 2012 and 2013. Our ending position in 2022 will be around $335,000 either way.
I’d say it’s pretty clear the difference is negligible between the two outcomes, 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 longer, particularly for those living in BC and Ontario. For some, it has been like winning the real estate lottery.
But for homeowners living in Alberta, Saskatchewan, or in Atlantic Canada, the math isn’t always as favourable. Home prices can stagnate for many years, and phantom costs eat into your returns over time.
Was my house a lousy investment? After a closer look at the numbers it hasn’t been that bad.
More importantly, I don’t actually consider my primary residence to be an investment. It’s a lifestyle decision, more than anything.
We didn’t win the real estate lottery, but we spent 11 years living in a house we loved and we’re leaving it richer in both wealth and memories. That’s good enough for me.
Home ownership did not yield a great return because I moved three times between vastly different markets when housing in the new location was rising while it was stagnant in the old. Not until I’ve been in the same house for 20 years has ownership looked good.
But wait! I’ve had the security of owning my own home and did not have to deal with landlords, rent increases, poor maintenance, “reno-victions”, etc.
I’ve had the pride of owning my own home and that is something you cannot put a price on.
Now as I move towards retirement, my house is paid off and is a solid asset that will contribute to my retirement in ways than cannot have a price estimated.
No regrets at all.
Most importantly, when the house you bought is finally paid up, you can live there with just maintenance cost and property taxes. Your rent would continue till the day you pass away, and most likely will increase year over year. And if your landlord gives you notice, you are scrambling to find something else at -hopefully- the same monthly rent.
Don’t entirely disagree, but in many markets there is a significant delta between what you pay in rent for a home and to purchase a home. In my market (Toronto) I choose to pay around 4k/month for the $2 million house My family lives in. I could choose to buy this house and lock in $400k of my capital (which has an opportunity cost) and pay close to $10,000 a month for the same house at a 5.5% mortgage. Assuming a 7% return the opportunity cost on the $400k is $28k per year, compounding. Baseline incremental cost for property taxes on this place is $8500. With maintenance, let’s say conservatively that’s $12k per year. So $12k each year up in smoke. Plus mortgage interest of approximately $87k per annum, conservatively, with amortization front loading the interest. So basically one hundred thousand each year up in smoke. Sure you own your own home 25 years later, but saving that $6k monthly delta and investing it for 25 years, you end up with quite a nice cushion. And while a landlord could kick me out, I do get compensated each time and I do also have a level of flexibility not available to homeowners. So I think my point is that the decision to own is multifaceted and is contingent on what you want out of life, which market you’re in, and what you’re looking for.
I am likely a bit older than the “wow’ folks – buying a house to make a home and not purchasing a home to be an investment…different mind set if you wish to discern between investing in real estate and being comfortable in a home. In my era folks did not buy a house to make money – they bought it to live in.
As a clinical social worker couples counsellor I am always encouraging my clients to add a emotional cost benefit line to their spreadsheet to help them make financial decisions that include their mental health as an important input; sometimes it seems financial planners miss this. It was nice to see this here. Mental health and quality of life may seem intangible, but they are actually critical.
You only invested your down payment, the house was a highly leveraged investment. You made 100,000 on 88,000, not bad. But it all depends on time and place. If you had put down 40K on a 140k house in Montreal in 2002 the house would be worth 1M now. A friend bought in Hamilton in 2015 for 120k, sold a year ago for 450k. Lesson: never generalize.
I think that was Rob’s point. Some people win the real estate lottery and others do not. On average real estate keeps pace with inflation plus about 1%. Because luck is not predictable, I think of owning a home from the point of view of the many intangible benefits, not as a great investment. And more to the good if you are lucky and win the real estate lottery as a bonus.
To be fair, Robb did acknowledge the “real estate lottery wins” experienced by homeowners in certain provinces, so I think that your characterization of his conclusion as a generalisation is incorrect.
If you invested, there would be a taxation problem too unless it was inside a TFSA.
Rob, don’t be so money oriented about everything. Just enjoy what you have!
Sorry Bill, I thought this was a money blog. My mistake.
Great article that is relevant to many of us! I would like to point out though that whatever profit you make on the sale of your principal residence would be tax-free, whereas money invested in the market would be subject to tax.
Yes, the money we make from the sale of our primary residence is tax free. And, yes, we wouldn’t have been able to shelter the entire $88k downpayment back in 2011. But that’s beside the point.
I used an absurdly low estimate of maintenance costs. Most analysis use 1% per year.
I used an 8% annual return when actual returns might have been an high as 12-14% during that time period.
And, I didn’t invest the additional $40k in capital in this example – it sat under my mattress for 10 years (also unlikely).
Indeed, real estate can seem like a lottery, but (almost) anyone can play. I strategically bought a house about a two hour drive east of Toronto in 2017 and sold it this year (and made no repairs during the 5-year stretch). Given how remote work has become standard in many industries (even before the pandemic), I made it my principal residence, ran my business out of there and made a $1.2M tax-free profit on the way out. For me home ownership as a lifestyle decision and generating a handsome profit from home ownership are not contradictory values. I focus on enjoying both!
You neglected to add in insurance cost for renting. As a renter, you may not need to insure the property but it is unwise to not get renters insurance for your belongings and some liability insurance.
Hi Mike, thanks for this – very fair point. What would you estimate the annual difference is between renters insurance and home insurance?
Renters’ insurance can be had for under two hundred a year—a rounding error.
Great post Rob. There is no price on the mental well being
Of living in your own home. You were fortunate to have low
Interest rates the last 11 years. Today’s interest
Rates will change these numbers. What are you doing with your
New mortgage
Hi Joyce, thanks for the kind words. We’ll end up with a larger mortgage than we have now. Our situation is different than most, in that our cash flow and a growing number of cash and investments are held within our small business corporation. What that means is it’s likely more beneficial to take on a higher mortgage (even with higher interest rates) personally, rather than pull extra money out of the corporation to increase the down payment.
I acknowledge the variables and how you used them, or chose not to, but it seems you didn’t factor in annual rent increases. I think that could swing the argument towards ownership. I assume, at least for your 11 year period, mortgage rates were comparably smoother than annual increases to rentals. Maybe I’m wrong?
Hi James, I hear what you’re saying but you’re probably overthinking this 800-word blog post from a guy in Lethbridge, AB.
But let’s say I did compare this to market rent from 2011 to 2021.
According to a CMHC rental market survey, in Alberta the average 3-bedroom+ cost $1,129/month to rent. By 2021, rent increased to $1,372/month.
I used $1,600 per month in this example – keeping it consistent with my actual mortgage payments. It’s pretty clear that I could have rented something for much cheaper, tipping the scales in favour of renting.
Fair enough – thanks for the reply!
You’re lucky you made any gain at all.
Edmonton condo purchased in 2008 for $285K (I didn’t buy at the peak; peak was a year earlier at $350K), sold in 2021 for $190K.
Just a sampling of what Toronto and Vancouver area homeowners are in for. Real estate doesn’t always go up!
I ended up buying a house for $485K that, according to the deed, was originally built for $585K, so don’t feel too bad for my loss, heh.
Ouch! The one upside to selling at a loss is you’re typically buying your next house in the same declining market, which softens the blow somewhat. The real winners are those who win the real estate lottery and then move to a low cost of living area (i.e. Toronto to Atlantic Canada).
What a great post and VERY gutsy to open the Kimono and put all your numbers out there. One thing I thought of, in addition to what is written above re emotional happiness, peace of mind and having the mortgage paid off by retirement – what if this had happened during the “lost years” of the market, when the S&P basically went no where for ten years? I think it could paint a slightly different picture. In the end, we all make the best decisions we can with the information we have at the time. Thanks for this post (and all the others!)
Hi Marty, thanks for the kind words. There are endless possible outcomes. My intention wasn’t to declare a winner in the rent vs. buy debate. It’s important to run your own numbers for your unique situation, and even then there are intangible benefits to both renting (flexibility) and home ownership (security) that will shape our decisions.
Agree 100% that all we can do is make the best decisions we can with the information we have at the time.
What was the return on the initial equity used to purchase the home? This is the only metric I use.
Hi Clide, if I started with $88,000 and ended up with $335,000 11 years later that works out to a compound annual growth rate of 12.92%.
The point of the article is that I would have ended up in roughly the same financial position whether I rented or owned.
Thanks for doing such detailed math on this! I have to confess I’ve never taken the time to do that myself. At the same time, we never look at our house as an investment. Having a place to live is a required cost, and there are different ways to meet that requirement. We’ve rented and owned. Owning has, so far, likely been a little beneficial for us, but mostly due to a combination of dumb luck and consistently buying considerably less house than we could afford. We bought a house in Tampa for ~154K USD in 2011 and sold it in 2020 for $245K. We bought one in Nova Scotia for $254K CAD in 2020 and (based on neighborhood comps) it’s already appreciated considerably. Regardless, we’re staying put, and don’t factor in our home equity when calculating our net worth.
For us, I think the potential benefit of home ownership will be helping us take the leap on early retirement. I’m hoping to pay the house off when our mortgage comes due in 2.5 years. And if we’re able to do that, I think I’ll be a lot more comfortable and taking the plunge into early retirement.
Finally, personally, I’ve never been a “pride of home ownership” guy. It doesn’t give me any pride, and I honestly consider owning a home to be kind of a pain. That said, I think it’s nice as a family to have a house and a yard. Once our daughter is grown, though, I’d love to downsize to a condo, but I’m not sure I’ll be able to convince my wife. 🙂
Thanks! As Canada’s Worst Handyman I agree with your comment about pride of ownership. More like, pain of ownership!
Thoughtful article. Definitely a good issue to examine. I appreciate the effort you put into looking at all of the metrics. A couple of key elements that need to be considered as well: Alberta went through a very difficult period during the years you are assessing and as a result house prices dropped when in other parts of the country they did not. As a result, if you were homeowner in Vancouver, Toronto or many other cities, the increase in the value of your home would be much higher, I believe. Also to be considered is the stress of being a renter. You never know from one year to the next if you have to move your kids and all of your belongings. Few renters stay in one house for 11 years. Each move is expensive and stressful. Your kids may have to change schools multiple times. Make new friends. You may have transportation issues. Today you most likely will not be able to find a comparable house at the same monthly cost. (It boggles my mind to think that in your city I could rent a house like your current one for less than double the $1600 you suggest!) You have no say over home improvements. You would not have the right to increase your usable square footage by finishing the basement to your taste. Yes landlords have to make sure basic maintenance is done, but if your wife hates the 25-year-old kitchen with old basic appliances, you will be living with it. As a logical financial guy you can confidently state you are not house proud, but I’d like to check in with your wife….why else did you invest in landscaping…why else are you now buying a larger house? And I agree with your concluding statement – its the “soft issues” that likely make us choose to commit to ownership. Enjoy your new house. Cheers!
Hi Beata, thanks for your comment. That’s the point – Canada is a big country and our real estate markets vastly differ from province to province and city to city. This is my experience as a homeowner for the past 11 years. Toronto, too, has experienced a decade of stagnate home prices (early 90s) and I think homeowners there are fooling themselves if they believe their properties will rise by 20% a year indefinitely.
Also, why do you assume it’s my wife’s decision to move? I never said that I’m indifferent to where I live. Our situation today is much different than it was even 3-4 years ago. We work from home full-time and don’t have a dedicated office space. Our kids have moved on from the elementary school nearby. We pieced together a home gym but I can’t lift my arms over my head without hitting the ceiling.
If we chose to rent, we could literally move anywhere in the country that has a stable internet connection and carry on with our lives.
Instead, we chose to stay in the same city and purchase a new home that we can customize to fit our unique situation. It’s likely a 10-year purchase, and I’ll expect a similar-to-worse financial outcome.
But, to my final point in the article, I don’t consider this to be an investment. We’ll go into this purchase with eyes wide-open to the financial side of things and understand that we are buying for other intangible reasons.
Another intangible you are missing is the flexibility of renting. I moved from Calgary to Edmonton for an opportunity that was rather risky. I absolutely wouldn’t have went through the hassle of selling my home and buying a new one to try this, but since I was month-month in my rental we figured “Why not?”.
Well, that opportunity turned out to be a more than 100% raise (I did piece work) and it allowed us to retire 10 years later (at 40 years old)
I prefer to start by comparing cash flows of renting vs owning, assuming no leverage. If I own my $1 million home outright, my implied rent is about $50K per year, representing the 6% YTM of global IG bonds less 1% for potential defaults. Add $20K for long term maintenance, being 2% of the value, and $5K for property taxes and extra insurance required for the building, insurance a tenant doesn’t need. So, about $75K per annum on average is the cost of ownership. Compare that against rent to determine which is preferred on a cash flow basis.
Once that is done, then determine whether you think returns from an undiversified, usually levered investment in real estate is likely to outperform on a risk adjusted basis the alternatives. Factor in tax implications of rent vs owning in assessing this. Also consider whether it is fair to compare a levered investment, such as a home, with an unlevered investment in a diversified portfolio. If you’ve going to lever one, arguably, you should for comparison purposes lever the other.
Then overlay qualitative issues. Much has been made of the qualitative benefits of ownership over rental. But I offer a counterpoint, applicable to those who are considering a condo. I have been the president of our Vancouver condo association for years. It’s a huge, uncompensated burden. Running a large RE complex well is extremely difficult, which is why most are not well run. I’m sixty, retired securities lawyer, living in a condo in Vancouver, and I’ve started looking to sell and rent from a quality landlord (one that will not sell out from under me), because I suspect doing so will, on balance, represent a qualitative improvement in my life. I get to cut a cheque monthly and worry about nothing, relatively speaking. And the cost of doing so will, at least in Vancouver for someone who owns their home mortgage-free, be cheaper than owning. Cheaper and less hassle. No guarantees I’m right, but that’s the way it appears from my vantage.
Robb, the opportunity cost of buying vs renting is murkier if you factored in the Smith Manoeuvre into your calculations. Drawing from your HELOC to invest, and thus also making the loan interest tax deductible, would have made the home ownership option come out further ahead.
Do you think that assuming the cost of rent is the same as your mortgage payment is an appropriate assumption? That would mean if you were renting you would be living in a much smaller house and/or living in a much less desirable neighbourhood, especially considering you put an $88,000 down payment on the house. I think if you found a house for rent that was the same size as yours in the same neighbourhood, the cost of rent would be MUCH more than your current mortgage payment.
Hi Timarie, not only is it reasonable to assume the rent and mortgage payment would be the same, it’s probably too generous of an assumption given that you could rent the average 3+ bedroom for between $1,129/month to $1,372/month over that time. The extra $228 to $471 that I assumed would have gone towards renting a nicer than average place.
For anyone reading the comments who are renters still on the fence I wanted to share my anecdotal response to some of the justifications of home ownership over renting:
– Rising rent: I have been a renter in Calgary for over ten years, not once did my rent rise. If you rent from people who own homes (not corporations) most of them just want someone to continue paying rent and not ruin the place. Actually twice I had my rent lowered so as to keep me in the home, and at one point got twice as much property for the same rent.
-Mental well being: Not once has anyone kicked me out, remember this just my experience. Being a renter though it doesn’t matter for me. I live with less so grabbing a small truck for $100 and moving is no big deal for me. Also I have done zero maintenance, upgrades, repairs etc. Crappy neighbors? Just move 🙂
– I don’t have a family so I cant talk to the “yard for my kids” sentiment but we live in Canada and literally every neighborhood has some sort of park and millions of hectares of explorable free land here….
– I don’t know if I’m ahead financially but at the end of it all I can’t take it to the grave. I don’t think people talk enough about cashflow vs net worth. I have a ton of left over money each month to make my life funner, easier, more enjoyable than if I make myself mortgage poor.
Buying a house is just not available or attainable to all of us, so don’t feel bad if you have to rent or choose to rent. Millions of people worldwide rent for life.
Thanks for reading! There is no right answer here for everyone, just one for yourself at different points in life. 🙂
Alex, I really appreciate you taking the time to share your experience as a renter. Our media focuses so much on home ownership in Toronto that we forget we are in a huge country with vastly different experiences from coast to coast.
Calgary was recently ranked the #1 most livable city in North America and has a population of 1.6M. It has many happy renters, like you, who have not seen any meaningful increases in rental expenses or been reno-victed. We need to hear more stories like yours.
Thank you for being so open with your experience. I’m at a point in life where I’m definitely feeling the “pressure” of home ownership and each and every day it seems harder to justify or argue for renting. But I like renting (right now 🙂 ). You’re post has definitely helped lift a weight off of my shoulders today and I’m very grateful and thankful you wrote this post!
Absolutely love this! A friend of mine forwarded me your blog post because I posted a similar case study on my own blog. It’s really nice to see another number crunching. The more number publishing there is, the more it shows that these outcomes are not outliers but are very common. We just rarely have the data to actually show historic opportunity costs that we missed. For anyone wondering “but, this is an outlier” feel free to check out my numbers as well: https://www.theaspiringadult.com/blog/buying-vs-renting-housing-which-is-the-better-financial-choice-a-case-study