Is it good or bad to invest heavily in your home? (1 Viewer)

[Otis]

Question for the finance and budget nerds. We all agree that it's bad to spend your income on things like cars or other consuming. Most agree the best way to achieving financial independence is to live well below your means, drive cheap cars, etc.

Is real estate an exception to that rule? Is it OK to spend a huge portion of your monthly nut on a mortgage payment?

My father's view was always that as long as you can afford the payments, it's not a dumb thing to spend a ton on a home. Of course he lived in an era in which he bought my childhood home for like 70 grand, and it's worth ten times that now.

So what say you? Is t smart, stupid, or neither to live below your means for most things but pay an extravagant mortgage?

I'll hang up and mow the giant lawn.

 

[ClownCausedChaos2]

Mornin', Otis.

 

[Patriotsfatboy1]

I would not rely on any one investment vehicle. Buy a home you like and has what you need. If you want to invest in that home and are sufficiently diversified, then pay down the mortgage a little. Some mortgage debt is good, but a lot is bad. Make sure that you can survive a job loss or other life event.

Oh, and buy low and sell high.

 

[FUBAR]

What happens if you lose your job?

 

[wilked]

Viewing a home as an investment is a common mistake.

Investment properties generate income, homes do not. Homes generate bills, such as utility bills, tax bills, insurance bills, plumber bills, etc

Buy within your means and invest the difference

 

[avoiding injuries]

I'd be happy if my portfolio grew between 7-10% on avg. This is money I have already earned and saved.

If I put 20% down on my house, but the total value of the house grows 3-5% annually, I'm making out.

 

[moleculo]

what's the point of having money if you can't enjoy it?

You could live in a trailer park and put all of your assets into mutual funds and retire early, or you could enjoy the next 20-30 years of your life in a nice house, but that may (or may not) have an overall lower return.

cars, clothes, stuff like that always depreciates so that's worse. At least a house has a chance to appreciate or break even at the very least.

 

[eoMMan]

No, definitely not a good idea to spend a huge portion of your monthly nut on your house. The basic rule of 25% or less of your monthly take home pay is great advice.

 

[belljr]

My mortgage including taxes and insurance is approximately 25% of our combined takehome income monthly. That is about as high as I feel comfortable with. I could afford more but in an emergency I should be ok, also it provides more income for vacations. family etc etc

 

[KCitons]

Viewing a home as an investment is a common mistake.

Investment properties generate income, homes do not. Homes generate bills, such as utility bills, tax bills, insurance bills, plumber bills, etc

Buy within your means and invest the difference

This.

 

[Patriotsfatboy1]

I'd be happy if my portfolio grew between 7-10% on avg. This is money I have already earned and saved.

If I put 20% down on my house, but the total value of the house grows 3-5% annually, I'm making out.

What if your house (which is a single asset) does not increase in value 3-5% annually? There was this little thing called a real estate bubble that messed with the plans of many people.

If you "invest heavily" in a single asset, then your risk is very high. That is not representative of a good "portfolio".

I am not saying that you should avoid a mortgage, because there are tax benefits to that, but overbuying on a home as part of an "investment" is a bad idea.

 

[wilked]

I'd be happy if my portfolio grew between 7-10% on avg. This is money I have already earned and saved.

If I put 20% down on my house, but the total value of the house grows 3-5% annually, I'm making out.

What if your house (which is a single asset) does not increase in value 3-5% annually?

I would say in that scenario, he is not 'making out'...

 

[Cjw_55106]

If I could start over again, Id make sure that my mortgage was a ten year note. Pay what you can afford, but make sure its paid off in ten years.

 

[Patriotsfatboy1]

If I could start over again, Id make sure that my mortgage was a ten year note. Pay what you can afford, but make sure its paid off in ten years.

Meh. While there is good piece of mind in doing that, I could pay off my mortgage right now, but I am not a fan of that given:

- Interest rate is low (4%)

- I get to write off the interest payments on my taxes

- I save/invest the other money

- It is good to have some liquidity

 

[FUBAR]

No, definitely not a good idea to spend a huge portion of your monthly nut on your house. The basic rule of 25% or less of your monthly take home pay is great advice.

As a rule of thumb it makes a lot of sense but there are many exceptions.

If I make $10k / month in a secure job, have good savings and investments, have no car payments, no other debt, and don't spend a lot on vacations or other expenditures so my average monthly spending other than home is less than $4k, what's the harm in having a mortgage payment of $4k or slightly higher?

Obviously we'd need to triple that for Otis, but I kept the numbers meager for us poor folk in the FBG.

 

[avoiding injuries]

I'd be happy if my portfolio grew between 7-10% on avg. This is money I have already earned and saved.

If I put 20% down on my house, but the total value of the house grows 3-5% annually, I'm making out.

What if your house (which is a single asset) does not increase in value 3-5% annually?

I would say in that scenario, he is not 'making out'...

Of course not. Same can be said for other investments. Diversify and look at historical averages.

 

[ntz08]

Yes

 

[Dentist]

what's the point of having money if you can't enjoy it?

You could live in a trailer park and put all of your assets into mutual funds and retire early, or you could enjoy the next 20-30 years of your life in a nice house, but that may (or may not) have an overall lower return.

cars, clothes, stuff like that always depreciates so that's worse. At least a house has a chance to appreciate or break even at the very least.

House could also collapse...

Also your post implies that you could not achieve happiness in a trailer park and or lesser home... that the nice home is like trading dollars directly for happiness.

I agree that if you are a person lucky enough to be able to meet all the recommended financial goals and then still have enough left over to enjoy it, that is probably a worthwhile venture to pursue, but the pursuit of that through the acquisition of a large mortgage is misguided.

Not only does the larger home cost more, but it will require more maintenance, cost more in property taxes and insurance, and cost more to furnish and re-furnish when Mrs. Otis's tastes change.. I just haven't seen homes be that great of an investment if the owner honestly factors in all the money and time they spend maintaining it.

Money is far better spent if used to buy either experiences or freedom (and henceforth the freedom to enjoy more experiences).

The quicker one is able to achieve financial independence and then thus be able to choose if or if not to work, or if they continue to work at least it be on their terms and at the times of their choosing, the quicker peace and happiness are achieved... unless you are one of the 1/1000 that truly has a hobby they would do for nothing as their job, and that job allows a life free of stress and anxiety.

 

[Dentist]

If I could start over again, Id make sure that my mortgage was a ten year note. Pay what you can afford, but make sure its paid off in ten years.

pretty much agree with this. a 30 year mortgage is like being behind financial bars for 30 years.

15 years I can get behind.

1 house + 1 spouse + discipline and frugality = financial freedom on the quickest route possible.

 

[glvsav37]

If I could start over again, Id make sure that my mortgage was a ten year note. Pay what you can afford, but make sure its paid off in ten years.

Meh. While there is good piece of mind in doing that, I could pay off my mortgage right now, but I am not a fan of that given:

- Interest rate is low (4%)

- I get to write off the interest payments on my taxes

- I save/invest the other money

- It is good to have some liquidity

Its your money, but I agree with CJW

Carrying any mortgage has a risk that is paid for against your "Home" and I dont mean home just as a pile of wood and siding, but your "home" as in where your family counts on being there.

If god forbid something happens to you or a family member, ie loss of a job, major medical or dissablity issue, no one can take away your "Home" if it's paid for.

I understand the want to invest your money in other places, and have some scratch in the bank. But if you replace all of that savings and investing quicker if you had no mortgage payment. I have no idea what you make or what your mortgage vs investment payments are per month, but in my case I could invest 2-3x more per month w/o a house payment.

If I busted my butt and killed the mortgage, I rather have peace of mind knowing that my home-base was mine, and I could easily catch up to the lost time investing with larger chuncks.

thats just my $0.02

 

[glvsav37]

financial freedom on the quickest route possible.

This

 

[moleculo]

what's the point of having money if you can't enjoy it?

You could live in a trailer park and put all of your assets into mutual funds and retire early, or you could enjoy the next 20-30 years of your life in a nice house, but that may (or may not) have an overall lower return.

cars, clothes, stuff like that always depreciates so that's worse. At least a house has a chance to appreciate or break even at the very least.

House could also collapse...

Also your post implies that you could not achieve happiness in a trailer park and or lesser home... that the nice home is like trading dollars directly for happiness.

I agree that if you are a person lucky enough to be able to meet all the recommended financial goals and then still have enough left over to enjoy it, that is probably a worthwhile venture to pursue, but the pursuit of that through the acquisition of a large mortgage is misguided.

Not only does the larger home cost more, but it will require more maintenance, cost more in property taxes and insurance, and cost more to furnish and re-furnish when Mrs. Otis's tastes change.. I just haven't seen homes be that great of an investment if the owner honestly factors in all the money and time they spend maintaining it.

Money is far better spent if used to buy either experiences or freedom (and henceforth the freedom to enjoy more experiences).

The quicker one is able to achieve financial independence and then thus be able to choose if or if not to work, or if they continue to work at least it be on their terms and at the times of their choosing, the quicker peace and happiness are achieved... unless you are one of the 1/1000 that truly has a hobby they would do for nothing as their job, and that job allows a life free of stress and anxiety.

re: house collapsing - that's why you have insurance. If the market goes bust, I have no insurance against that.

A more expensive house does not necessarily mean happiness, I agree with that. There are certainly more incremental expenses that come along with it that cannot be re-captured. But, we've all got to live somewhere. I'm of the opinion that I want to love where I live - that's where I sleep, spend my weekends, raise my kids, it's where my wife spends a majority of her time, etc. I don't believe a primary house should be considered an investment vehicle, but it's not the same thing as throwing money away either.

I'm not advocating breaking the bank to buy the most expensive house possible. I believe that a paid off house is a key aspect of retirement planning, I just don't think it's a good plan to retire with a mortgage. That's how i'm looking at it - I'm not interested in buying a house that I will be making payments on after I'm 55. I'm about to turn 40, so that's what I'm planning around right now.

 

[Dentist]

what's the point of having money if you can't enjoy it?

You could live in a trailer park and put all of your assets into mutual funds and retire early, or you could enjoy the next 20-30 years of your life in a nice house, but that may (or may not) have an overall lower return.

cars, clothes, stuff like that always depreciates so that's worse. At least a house has a chance to appreciate or break even at the very least.

House could also collapse...

Also your post implies that you could not achieve happiness in a trailer park and or lesser home... that the nice home is like trading dollars directly for happiness.

I agree that if you are a person lucky enough to be able to meet all the recommended financial goals and then still have enough left over to enjoy it, that is probably a worthwhile venture to pursue, but the pursuit of that through the acquisition of a large mortgage is misguided.

Not only does the larger home cost more, but it will require more maintenance, cost more in property taxes and insurance, and cost more to furnish and re-furnish when Mrs. Otis's tastes change.. I just haven't seen homes be that great of an investment if the owner honestly factors in all the money and time they spend maintaining it.

Money is far better spent if used to buy either experiences or freedom (and henceforth the freedom to enjoy more experiences).

The quicker one is able to achieve financial independence and then thus be able to choose if or if not to work, or if they continue to work at least it be on their terms and at the times of their choosing, the quicker peace and happiness are achieved... unless you are one of the 1/1000 that truly has a hobby they would do for nothing as their job, and that job allows a life free of stress and anxiety.

re: house collapsing - that's why you have insurance. If the market goes bust, I have no insurance against that.

fully good post.. once comment

when i meant collapse, i didn't mean physically though... i more meant along the lines of:

neighborhood could go downhill, city could go downhill, real estate values can get distressed at any time and there isn't insurance against that much like market losses.

 

[Thorn]

 

[Leroy Hoard]

Somewhat better than taking that money to the racetrack every month.

 

[culdeus]

If you have an old home and want to rehab it. Make sure that you don't rehab it to the point where you have more than 85% of what a new construction home has in your area.

That's a general rule of thumb.

Best upgrades are

kitchen

bath

landscape

flooring

for +EV

 

[NewlyRetired]

Otis,

In other threads you have continually mentioned wanting to retire early.

You will need to balance that expressed want with your house.

Spending as much as you can afford on your house is rarely a path to early retirement but if the pleasure you and your family get out of the house is worth it in the end, then that is a good trade off..

 

[moleculo]

I suppose it depends on what "invest heavily" means.

• >25% of your take-home?
• >50% of your net worth? (age dependant, I think. It's probably ok to spend a majority of your net worth as a down-payment when you are <30, probably not a good idea if you are over 40)
• are we talking about purchase price, or are we talking about money spent on re-model? value of remodel dollars spent would depend on lots of variables.
• have to consider incremental costs like utilities, insurance, repairs & upkeep, taxes, commute

 

[Patriotsfatboy1]

If I could start over again, Id make sure that my mortgage was a ten year note. Pay what you can afford, but make sure its paid off in ten years.

Meh. While there is good piece of mind in doing that, I could pay off my mortgage right now, but I am not a fan of that given:

- Interest rate is low (4%)

- I get to write off the interest payments on my taxes

- I save/invest the other money

- It is good to have some liquidity

Its your money, but I agree with CJW

Carrying any mortgage has a risk that is paid for against your "Home" and I dont mean home just as a pile of wood and siding, but your "home" as in where your family counts on being there.

If god forbid something happens to you or a family member, ie loss of a job, major medical or dissablity issue, no one can take away your "Home" if it's paid for.

I understand the want to invest your money in other places, and have some scratch in the bank. But if you replace all of that savings and investing quicker if you had no mortgage payment. I have no idea what you make or what your mortgage vs investment payments are per month, but in my case I could invest 2-3x more per month w/o a house payment.

If I busted my butt and killed the mortgage, I rather have peace of mind knowing that my home-base was mine, and I could easily catch up to the lost time investing with larger chuncks.

thats just my $0.02

Here is the problem with your thoughts. If something goes wrong in my life (god forbid) and I die or get disabled and can no longer bring in the money to pay for my house, I have that covered via insurance. If any of those things happen, then I am covered. If I lose my job, then I have money set aside to deal with that if it happens for an extended period of time.

The big issue with having a home eating up a "heavy investment" is that the asset is not liquid. If one of those bad things happens to you and you no longer have any cash floating around to pay the rest of the bills that you might have, then that paid off home is not going give you the cash to pay those bills.

The reality is that you shouldn't have your investments too heavily weighted in one vehicle. You should spread it around various vehicles, including (in no particular order):

- home

- savings

- stocks

- college savings

- retirement

The implied question here was having a larger home than necessary and using up funds for that instead of other areas and I still think that is a bad idea. However, having some debt, particularly in a home mortgage is not a bad idea. Heck. I even have debt on a new car because they offered up 0% financing. I did not make my decision on what car and how much to spend on the debt option, but once I knew what I was getting, I decided that it was easier for me to hang onto that cash and invest it rather than paying off a depreciating asset.

My case is probably a little different than most in that I have been saving for a long time and have always been diversified. I don't spend much money and don't live paycheck to paycheck. I have never had a problem in maxing out my retirement savings every year, paying my mortgage with an extra principal payment or two each year, saving for the kids college and investing a bunch of money. That is my peace of mind.

 

[matttyl]

Viewing a home as an investment is a common mistake.

Investment properties generate income, homes do not. Homes generate bills, such as utility bills, tax bills, insurance bills, plumber bills, etc

Buy within your means and invest the difference

They also give you a place to live, a large tax deduction, and they likely increase in value drastically over a long enough timeline.

 

[cstu]

Viewing a home as an investment is a common mistake.

Investment properties generate income, homes do not. Homes generate bills, such as utility bills, tax bills, insurance bills, plumber bills, etc

Buy within your means and invest the difference

With the mortgage deduction I'd argue it is an investment.

A penny saved is a penny earned.

 

[cstu]

My advice: buy the worst house in the best neighborhood and fix it up over time.

 

[Slapdash]

Really covering new ground here.

 

[mr roboto]

Oh for ####s sake...

 

[jamny]

Is there an average difference between mortgage interest paid each year vs. the value of a mortgage deduction? It seems like you're paying either way so might as well pay it off as fast as possible.

 

[avoiding injuries]

People worried about the value of the house collapsing might be overvaluing what their credit is worth. You're risking your down payment and 7 years of credit if something drastic happens.

 

[Patriotsfatboy1]

Is there an average difference between mortgage interest paid each year vs. the value of a mortgage deduction? It seems like you're paying either way so might as well pay it off as fast as possible.

It depends on your tax bracket. Here is an oversimplified example:

- Pay the bank interest payments of $10,000 during the course of the year, but you get to deduct that interest amount from your taxes. If you are in bracket that is 33%, then you save $3,300 in taxes. Your net cost is $6,700. If you are close to the standard deduction, your tax savings is less

- If you have no mortgage, you save the $10,000, but you pay $3,300 more in taxes without that deduction. Your net savings is $6,700.

The big question in all of this is whether you can make more in alternative investments than you are paying in mortgage interest and how you feel about the associated risks of each (liquidity of asset included).

 

[msommer]

The alternative to buying a place to live is renting one. When you rent and leave you get nothing, when you buy and leave there is the possibility of getting something.

If you move around a lot it is probably smarter to rent because the transaction costs are lower. If you don't move buying is probably better.

In essence you should accumulate all your post tax expenses (incl remodeling) for your stay, as well as calculate your loss/profit from a sale to calculate the 'rent' you have paid to stay in that place.

Sometimes, if the market is going your way the rent is negative. That is a great deal.

But that does not mean that you should buy above your means.

 

[cstu]

The maximum mortgage deduction is $1M so I would shoot for that as a loan amount. The sweet spot for houses is about $1.3M since after you put the 20% down it brings your mortgage in just about $1M.

 

[Baloney Sandwich]

I think it is fine to spend a lot on your home, you do end up spending a lot of time there. Up until the recent real estate crash, it was also a pretty good investment. However, if you want to spend a lot on your home, do it because you value having a nice place to live, raise your kids, etc.. If it ends up being a solid investment, all the better.

Right now my monthly mortgage payment is roughly 50% of my net take home pay. My wife works part-time as a consultant and her money goes to paying for everything she buys. We don't really have any monthly obligations beyond the house and house related costs (electric, gas, water, food, etc..) My bonus money has gone into renovations around the house and since we just moved in this past November we have been spending a lot of money on home improvements. Another 20K-30K or so and we will be content for several years (fingers crossed). I have a 30 year mortgage but make extra principal payments and plan to have it paid off within 15 years. it might not end up being a great investment (took a bath on my first house) but we will receive a lot of enjoyment out of the house before we ever think about selling it. Everyone is different but for us we would rather have that increased quality of home life in a nice place than an additional 10-15% of annual investment returns.

 

[eoMMan]

No, definitely not a good idea to spend a huge portion of your monthly nut on your house. The basic rule of 25% or less of your monthly take home pay is great advice.

As a rule of thumb it makes a lot of sense but there are many exceptions.

If I make $10k / month in a secure job, have good savings and investments, have no car payments, no other debt, and don't spend a lot on vacations or other expenditures so my average monthly spending other than home is less than $4k, what's the harm in having a mortgage payment of $4k or slightly higher?

Obviously we'd need to triple that for Otis, but I kept the numbers meager for us poor folk in the FBG.

How secure of a job?

If you're income went down, you could go through savings in a hurry paying 4k on a mortgage.

And the typical American doesn't just have a mortgage with no other debt and no other major financial obligations.

 

[pantagrapher]

My advice: buy the worst house in the best neighborhood and fix it up over time.

This is kind of what my wife and I are doing, although "worst" in this case means "the only bungalow that doesn't have a finished basement and attic." We're closing in a few weeks and hope to finish half of the basement by mid-October. Overall, we're adding 1 BR 1 BA and a family room to the house, which we think will bring it more in line with the neighborhood. And in the future there's room to expand into the attic.

We came very close to buying a house about a mile away that was the best house in a less desirable neighborhood, but that house also needed some upgrades. We would have paid less and could have done more, but it didn't make sense to us to do something like that and sit around hoping their neighborhood caught up.

This is our first home, and we plan to be there for 15-20 years, if not longer. So while it's not strictly an investment, it is nice feeling fairly confident that the money we're putting into it will show a good return.

 

[moleculo]

my wife and I weren't all that happy with the floorplan of our house. It was an open-concept type of deal, where all bedrooms opened up into a great room - family room and eat-in kitchen, open to second story. Basically, we had a real hard time with the kids leaving their toys all over down stairs, kids wanting to watch TV as the same time as me, things like that. As the kids got older, we decided we needed more separation between kids space and grown-up space.

So, we had some people come out and give us some quotes on building a loft in the 2nd story space above the great room. Including flooring and new windows, it would have run us ~$20-$30k. it would have been great, floor plan wise and functionally, but my house was already the largest floorplan in the neighborhood so we didn't feel like we would ever recapture that money. Further, there are several new construction neighborhoods in the area, including across the street, so I don't think there will be much appreciation over the next 5-10 years..

Instead of remodeling, we bought a new house in a nicer neighborhood, for $18k more than I'm expecting my house to sell for, just closed on Friday. New house needs some upgrades like better flooring, granite, SS appliances, etc, and I feel like the price I paid for it included a discount because it didn't have all that - it had been on the market for 6 months. But, it has the perfect layout, much better neighborhood, and an unfinished basement which I didn't have in old house. For comparison, a house with a finished basement 2 doors down is on the market for $87k more than I paid, and new construction in this neighborhood ranges from $10k more than I paid (with no basement) to >$200k, so I'm feeling good about this.

That all being said, I consider this house a quasi-investment. I feel good about it's future appreciation as there isn't downward pressure from new construction like my last house, but more importantly it's a place my family can be happy for at least the next 15 years. It's a place we can be happy as is, but can certainly justify putting money into and not feel like we are throwing it away.

 

[Cliff Clavin]

If you're moving every few years you can definitely look at it as an investment. Not so much if it is your 'forever' home.

 

[FUBAR]

No, definitely not a good idea to spend a huge portion of your monthly nut on your house. The basic rule of 25% or less of your monthly take home pay is great advice.

As a rule of thumb it makes a lot of sense but there are many exceptions.

If I make $10k / month in a secure job, have good savings and investments, have no car payments, no other debt, and don't spend a lot on vacations or other expenditures so my average monthly spending other than home is less than $4k, what's the harm in having a mortgage payment of $4k or slightly higher?

Obviously we'd need to triple that for Otis, but I kept the numbers meager for us poor folk in the FBG.

How secure of a job?

If you're income went down, you could go through savings in a hurry paying 4k on a mortgage.

And the typical American doesn't just have a mortgage with no other debt and no other major financial obligations.

How secure is always a question isn't it. For the sake of argument, assume you're tenured and for many reasons you're not at risk of losing your job without you doing something criminal.

Agreed about the typical American. But we're talking exceptions here, not the average / norm.

 

[NewlyRetired]

The maximum mortgage deduction is $1M so I would shoot for that as a loan amount. The sweet spot for houses is about $1.3M since after you put the 20% down it brings your mortgage in just about $1M.

I seem to remember the full affect of the mortgage deduction being reduced in some way if your AGI was over a certain threshold..

That was ages ago so I am unsure if that is still in play (or if I am remembering incorrectly) but if someone can afford a mortgage of $1.3M, they are likely going to bang into what I talked about in the previous sentence (if that ever or still exists).

 

[George Jefferson Airplane]

Make the home a little better than it was the previous year, and maintain it well. If you plan to live there for 40 years, use three racks on a mother-in-law house that doubles as a card/pr0n space.

 

[bagger]

Viewing a home as an investment is a common mistake.

Investment properties generate income, homes do not. Homes generate bills, such as utility bills, tax bills, insurance bills, plumber bills, etc

Buy within your means and invest the difference

this.Also during spans of downturns you are "trapped" in your home limiting potential moves if they come up.

Really depends on the house, location and life circumstances.

Overall, the less debt the better as the freedom it gives you provides way more happiness than an incrementally larger home.

 

[Thorn]

If you're moving every few years you can definitely look at it as an investment. Not so much if it is your 'forever' home.

 

[Fennis]

My PITI is just over 10% of our monthly gross income